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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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** **

**FORM 10-K**

 

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| (Mark One) | ** **                                                                                           |
|------------|------------------------------------------------------------------------------------------------------|
|       | ** **                                                                                           |
| x          | **Annual Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.** |

 

**For the fiscal year ended:  December 31, 2008**

 

| 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:  000-51731**

** **

**NATIONAL HEALTH PARTNERS, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Indiana**                                                       | ** ** | **04-3786176**                        |
|-------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction

of Incorporation or  Organization) |       | (I.R.S. Employer  Identification No.) |
|                                                              |       |                                  |
| **120 Gibraltar Road, Suite 107**

**Horsham, PA**           | ** ** | **19044**                             |
| (Address of Principal  Executive Offices)                         |       | (Zip Code)                            |

 

**(215) 682-7114**

(Registrant’s TelephoneNumber, Including Area Code)

 

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

 

| **Title of Each Class** | ** ** | **Name of Each Exchange  On Which Registered** |
|-------------------------|------------|------------------------------------------------|
| None                    |       | None                                           |

 

Securitiesregistered under Section 12(g) of the Act:

 

|             | **Common  Stock, $.001 par value per share** |   |
|------------------|----------------------------------------------|--------|
| (Title of Class) |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  o  Yes   x  No

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Act.  o  Yes   x  No

 

**Note** – Checking the box above will not relieve anyregistrant required to file reports pursuant to Section 13 or 15(d) ofthe Exchange Act from their obligations under those Sections.

 

                Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes  x    No  o

 

Indicateby check mark if the disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will notbe contained herein, to the best of registrant’s knowledge, in definitive proxyor information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

 

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

** **

| Large accelerated filer o                                         |   | Accelerated filer o    |
|------------------------------------------------------------------------|--------|-----------------------------|
| Non-accelerated filer (Do  not check if a smaller reporting company) o |   | Smaller reporting company x |

 

                Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).  Yes  o    No  x

 

                The aggregate market value ofthe voting common equity held by non-affiliates of the registrant computed byreference to the price at which the common equity was sold as of the lastbusiness day of the registrant’s most recently completed second fiscal quarter,which was June 30, 2008, was $10,528,662.

 

                As of March 19, 2009,53,186,281 shares of the registrant’s common stock were outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

None.

 

 

 

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**TABLE OF CONTENTS**

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| ** **                    | ** **                                                                                                          | **Page** |
|-------------------------------|---------------------------------------------------------------------------------------------------------------------|----------|
|                          |                                                                                                                |     |
| PART I                   |                                                                                                                |     |
|                          |                                                                                                                |     |
| Item 1.                       | Business                                                                                                            | 2        |
|                          |                                                                                                                |     |
| Item 1A.                      | Risk Factors                                                                                                        | 21       |
|                          |                                                                                                                |     |
| Item 2.                       | Properties                                                                                                          | 36       |
|                          |                                                                                                                |     |
| Item 3.                       | Legal Proceedings                                                                                                   | 36       |
|                          |                                                                                                                |     |
| Item 4.                       | Submission of  Matters to a Vote of Security Holders                                                                | 36       |
|                          |                                                                                                                |     |
| PART II                  |                                                                                                                |     |
|                          |                                                                                                                |     |
| Item 5.                       | Market For  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 36       |
|                          |                                                                                                                |     |
| Item 7.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 37       |
|                          |                                                                                                                |     |
| Item 8.                       | Financial  Statements and Supplementary Data                                                                        | 50       |
|                          |                                                                                                                |     |
| Item 9.                       | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure                               | 50       |
|                          |                                                                                                                |     |
| Item 9(T).                    | Controls and  Procedures                                                                                            | 51       |
|                          |                                                                                                                |     |
| Item 9B.                      | Other Information                                                                                                   | 53       |
|                          |                                                                                                                |     |
| PART III                 |                                                                                                                |     |
|                          |                                                                                                                |     |
| Item 10.                      | Directors,  Executive Officers and Corporate Governance                                                             | 54       |
|                          |                                                                                                                |     |
| Item 11.                      | Executive  Compensation                                                                                             | 57       |
|                          |                                                                                                                |     |
| Item 12.                      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 62       |
|                          |                                                                                                                |     |
| Item 13.                      | Certain  Relationships and Related Transactions, and Director Independence                                          | 65       |
|                          |                                                                                                                |     |
| Item 14.                      | Principal  Accountant Fees and Services                                                                             | 65       |
|                          |                                                                                                                |     |
| Item 15.                      | Exhibits and Financial Statement  Schedules                                                                         | 66       |
|                          |                                                                                                                |     |
| Index to Financial Statements | F-1                                                                                                                 |

 

 

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**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

 

This reportcontains “forward-looking statements” within the meaning of Section 27A ofthe Securities Act of 1933, as amended (the “Securities Act”) and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  All statements other than statements ofhistorical facts included or incorporated by reference in this report,including, without limitation, statements regarding our future financialposition, business strategy, budgets, projected revenue and costs, and plansand objectives of management for future operations, are forward-lookingstatements.  In addition, forward-lookingstatements generally can be identified by the use of forward-lookingterminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,”“anticipates,” or “believes” or the negative thereof or any variation thereonor similar terminology or expressions.

 

Theseforward-looking statements are subject to risks and uncertainties that couldcause actual results to differ materially from results proposed in suchstatements.  Although we believe that theexpectations reflected in such forward-looking statements are reasonable, wecan give no assurance that such expectations will prove to have beencorrect.  Important factors that couldcause actual results to differ materially from our expectations include, but arenot limited to:

 

·                  our ability to fund futuregrowth and implement our business strategy;

 

·                  our dependence on a limitednumber of preferred provider organizations (“PPOs”) and other healthcareprovider networks;

 

·                  our dependence on a singleinsurance company for the insurance benefits offered as part of our CARExpressPlusÔ programs;

 

·                  our dependence upon alimited number of marketing and distribution partners for substantially all ofour revenue;

 

·                  our ability to market ourmembership programs and develop and expand the market for our membershipprograms;

 

·                  demand for and acceptance ofour membership programs;

 

·                  competition in the healthdiscount membership market;

 

·                  our ability to attract andretain qualified personnel;

 

·                  legislative or regulatorychanges in the healthcare industry;

 

·                  the condition of thesecurities and capital markets;

 

·                  general economic andbusiness conditions, either nationally or internationally or in thejurisdictions in which we are doing business;

 

and statements of assumption underlying any of theforegoing, as well as any other factors set forth herein under *“Item 1A.  Risk Factors”*and *“Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”* below.  Allsubsequent written and oral forward-looking statements attributable to us, orpersons acting on our behalf, are expressly qualified in their entirety by theforegoing.  Except as required by law, weassume no duty to update or revise our forward-looking statements.

 

 

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**Item1.  Business.**

 

**Overview**

 

NationalHealth Partners, Inc. is a national healthcare membership organizationthat was formed to address the need for affordable healthcare nationwide.  We create, market and sellmembership programs targeted toward underserved markets in the healthcareindustry through a national healthcare savings network called CARExpressÔ.  CARExpressÔ is a network of over 1,000,000 participatinghospitals, doctors, dentists, pharmacists and other healthcare providers thathave agreed to render their services and products to our members at discountedprices.  CARExpressÔ enables our members to engage in point-of-servicetransactions directly with participating healthcare providers and paydiscounted prices.

 

**Background**

 

We were incorporated inIndiana on March 10, 1989 as “Spectrum Vision Systems of Indiana, Inc.”  In 2001, we changed our name to “NationalHealth Partners, Inc.” and entered the health discount membership industryto address the need for affordable healthcare nationwide.  From 2001 to 2004, we engaged in limitedoperations due to our lack of available capital.  During that time, our employees performedrelatively limited duties and our operations were focused almost exclusively onbuilding CARExpressÔ.  In early 2004, we took a number of steps toincrease our business and generate revenue, including raising capital throughprivate placements of our equity securities and marketing our membershipprograms to the public through mail, print ad, television and internetcampaigns.  We also moved into a largerfacility that provides us with 17 offices, a fully equipped state-of-the-artcomputer and telecommunications room, and the capacity to expand our customerservice base to approximately 80 customer service representatives.  Since 2004, we have actively pursuedopportunities to sell our membership programs. During this period, we engaged in our first test marketing campaign andentered into agreements with several marketing and distribution partners tomarket and sell our membership programs. During 2007, we completed the development of our CARExpress PlusÔ programs andhave been actively marketing and selling these programs to the public.

 

Our strategy is tosustain and expand our position as a provider of unique healthcare membershipprograms.  We are currently activelyengaged in marketing our membership programs to the public and are focused ongenerating increased sales of our membership programs.  Through product design, competitivemembership pricing and a variety of marketing and distribution partners, weintend to pursue opportunities in the healthcare market that health insurancecompanies have not addressed.

 

**Healthcare Industry**

 

The U.S.Department of Commerce estimates that 15.3% of all Americans, or 45.7 millionindividuals, were without health insurance coverage in 2006.  The Kaiser Commission estimates that thenumber of people who are underinsured increased 60% between 2003 and 2007.  According to the National Coalition onHealthcare (the “NHC”), the primary reason for this 

 

 

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increase is that rapidlyrising health insurance premiums have caused many employers to reduce ordiscontinue health insurance coverage. The NHC stated that health care spending in the United States reached$2.4 trillion in 2008 and is expected to reach $4.3 trillion by 2016.  The NHC also stated that the average cost of familycoverage is now nearly $12,700 per year, including worker contributions ofnearly $3,400.

 

Several factors havecontributed to the increase in the cost of healthcare, including the following:

 

*OverUtilization of the Healthcare System*.  Over-utilizationof the healthcare system is one of the factors behind these trends. Americansare utilizing healthcare services at an ever-increasing rate. Behind thisphenomenon is the fact that insurance plans and healthcare management organizations (“HMOs”) arestructured to encourage usage.  Smallco-payments, generally from $10 or $25 per office visit, encourage insuredconsumers to use the healthcare system more frequently because they do notperceive themselves ultimately as having to pay the full costs of the medicalservices received.

 

*Strict State Insurance Regulations*.  Another factor is that a number of insurancecompanies have pulled out of certain states due to state regulations that nolonger provide a viable operating environment. As a result of these health coverage cancellations, those formerlyinsured individuals and families are required to pay more for their insurancecoverage, cannot obtain any coverage because of pre-existing conditions, orsimply remain uninsured.

 

These increasing costshave led to limitations on reimbursement from insurance companies, healthmaintenance organizations (“HMOs”) and government sources.  Many employers have responded to theincreased cost of providing health insurance to their employees by reducing oreliminating available insurance coverage and/or by requiring employees tocontribute heavily in cost sharing through higher premiums, deductibles andpayment.  As a result, more Americans arebeing forced to self-insure and pay a growing portion of the cost of theirhealthcare.  Some are entirelyuninsured.  Others can only afford orchoose only a high deductible or limited benefit health insurance policy.  In either case, this patient populationincreasingly forgoes medical procedures or relies on emergency care for itshealthcare needs and often incurs prohibitive expenses.  Additionally, costs of healthcare for thispatient population are often far higher than the amount an insurance companywould pay for the same healthcare services for its insureds because theuninsured and underinsured patients have had no one to negotiate healthcarecosts on their behalf.

 

Webelieve market demand is significant for any product that can accomplish one ormore of the following:

 

·                  provide a low-costalternative to health insurance for the millions of Americans who have eitherno insurance or only catastrophic insurance coverage;

 

·                  provide small businesseswith an affordable way to provide benefits to their employees;

 

·                  provide quality healthcareto consumers at a price that is both affordable to consumers and that will payhealthcare providers a reasonable fee for their services; and

 

 

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·                  provide supplementalbenefits, such as dental, vision, elective surgery, chiropractic andalternative care, that are not covered by insurance plans.

 

We believe that our membership programs accomplisheach of these tasks.

 

**Our CARExpress****Ô********Healthcare Solution**

 

Overview

 

We offer membershipprograms to uninsured and underinsured people through a national healthcaresavings network called “CARExpressÔ”. We designed our programs in response to the growing number of people whocan no longer obtain adequate health insurance. Our programs provide a lower-cost alternative to individuals who areseeking to reduce their out-of-pocket healthcare costs not covered by insuranceor who are unable to obtain healthcare insurance due to their medical history,age or occupation.  Acceptance into ourhealth programs is unrestricted and our programs may be utilized by the member’sentire household.

 

OurCARExpressÔ Membership Programs

 

Wehave designed membership programs that range from our traditional healthdiscount programs that provide access to networks of providers that have agreedto provide our members with a reduced rate for services, to membership programsthat include limited liability insurance benefits.** **We currently offer two families ofCARExpressÔ membership programs to our members: (i) our CARExpressÔ health discount programs, and (ii) our CARExpress PlusÔ membership programs.

 

OurCARExpressÔ health discount programs encompass all aspects ofhealthcare, including physicians, hospitals, ancillary services, dentists,prescription drugs, vision care, hearing aids, chiropractic services,alternative care, 24-hour nurseline, medical supplies and equipment, andlong-term care facilities which include skilled nursing facilities, assistedliving facilities, respite care and home health care.  We provide our members with access to over1,000,000 healthcare providers through our agreements with CareMark, Aetna,Optum, Outlook Vision, Integrated Health, Three Rivers, International Med-Careand HealthFi International, which are some of the largest and most prestigiousnational medical networks in the country.

 

Our CARExpressÔ health discount programs are not insurance. There is no undertaking byus to pay a portion of any fee for services or prescriptions purchased using ourCARExpressÔmembership cards.  Rather, our health discount programs provide consumers with access tohealthcare providers who, through their affiliations with PPOs, have agreed inadvance to honor our membership cards and accept the discounted fees set by thePPOs.  Our health discount programsrequire members to pay the provider at the time of service, thereby eliminatingthe need to file any insurance claims.  Our members simply present theirmembership card to the participating provider at the time of the service toreceive the discounted price.

 

Our CARExpress PlusÔ programs are membership programs comprised of our CARExpressÔ health discount programs and limited liability insurancebenefits underwritten by The United States Life Insurance Company in the Cityof New York, a member company of 

 

 

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American International Group, Inc.  Examples of the limited liability insurancebenefits included in these programs are accidental death and dismembermentcoverage (“AD&D”), accident medical expense coverage (“AME”), accidentdisability coverage, a daily hospital and intensive care unit (“ICU”) benefit,doctor visit benefits, inpatient/outpatient surgical visit benefits, as well asemergency room and ambulance benefits. With CARExpress PlusÔ,our health discount programs provide our members with a “point of service”discount on their healthcare expenses at the time of service.  Then, the limited liability insurancebenefits reimburse our members for some, if not all, of the remaining portionof their healthcare expenses.

 

We believe that millionsof Americans can benefit in some manner from joining CARExpressÔ,whether they have health insurance or not. We believe that our membership programs are most attractive to thefollowing people and organizations:

 

·                  people without insurancecoverage, including self-employed individuals and part-time or temporaryemployees;

 

·                  people with gaps in theirinsurance coverage;

 

·                  people who have been turneddown for insurance because of age, occupation, medical history, a pre-existingcondition, lifestyle or other reasons;

 

·                  people who have reached theyearly and/or lifetime benefit limits of their insurance policy;

 

·                  people who choosealternative healthcare solutions that are often not covered by HMOs, PPOs, orother insurance, or who seek providers not covered by their present healthplans;

 

·                  employers that want toprovide their employees with a low-cost healthcare program;

 

·                  employees whose employershave terminated or curtailed their health benefits;

 

·                  people who may beunderinsured because of restrictions or provisions in their managed care plans,such as limited coverage, high deductibles or co-insurance limits;

 

·                  small businesses, chambersof commerce, employers of temporary or part-time personnel and other businessesseeking affordable health benefits for their employees in order to promoteemployee loyalty and differentiate their companies in the marketplace; and

 

·                  unions, associations, tradegroups and other organizations seeking to increase membership and promotemember/customer loyalty by providing or offering a health discount benefit.

 

How CARExpressÔWorks

 

People gain access to ournetwork of healthcare providers by paying us monthly membership fees.  Most members pay for our programs on amonthly basis, either through automatic bank drafts or credit cards.  People who do not wish to use either of thesepayment methods are required to pay annually at the time of enrollment.  Members may cancel their membership at anytime.  We also offer a 30-day money-backguarantee so that if a member is

 

 

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not completely satisfiedwith the program the purchased, the member may cancel their membership andreceive a refund of the membership fees paid.

 

Upon enrollment, newmembers receive a membership kit that includes their CARExpressÔmembership card(s) along with instructions on how to use theprograms purchased and how to access providers in their area.  Except with respect to hospitals, membersselect a participating provider, make an appointment with the provider, presenttheir membership card to the provider at the time of service and receive theirdiscount at the time of service.  Theprovider may verify an individual’s membership status by calling a phone numberimprinted on the membership card or reviewing electronic files that we havesubmitted to the provider.  There are noclaim forms or bills to be processed.

 

With regard to hospitals,we utilize the services of a hospital savings company to negotiate discountswith the providers and arrange financing with the members for the payment ofthe hospital services.  Members may useany accredited hospital in the United States.  Members make no payments to the hospital atthe time services are rendered.  Instead,they simply present their membership card to the provider at the hospital atthe time of service.  The members contactthe hospital savings company prior to or after their hospital stay and thehospital savings company negotiates a discounted rate for the hospitalservices.  The hospital savings companythen pays the bill in full for the member and arranges financing with themember directly.

 

In theevent a member purchases one of our CARExpress PlusÔ programs, the process is similar.  The member presents his or her CARExpressÔmembership card at any of the one millionparticipating providers nationwide to receive their discount in the mannerspecified above.  After they have received their discount, the membercontacts our in-house customer service staff to request a claim form.  We provide a claim form to the member thatthe member completes and submits directly to the insurance company. Reimbursement is made directly to the member by the insurance company inaccordance with the benefits schedule of their plan.

 

Benefits of UsingCARExpressÔ

 

Our membership programsprovide benefits to our members, unions, associations and businesses, andhealthcare providers and provider networks.

 

*Benefitsto Members*.  Our membership programs areattractive to our members because our programs provide them with access to avariety of healthcare products and services at discounted prices and, in thecase of our CARExpress PlusÔ programs, reimbursementfor some, if not all, of the remaining portion of their healthcareexpenses.  Membership in our membershipprograms is unrestricted and provides benefits to individuals who, because oftheir medical history, age, occupation or financial condition, are unable toobtain traditional health insurance. Our membership programs cover each personin the member’s household and can be used as often as they wish.

 

 

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* *

*Benefitsto Unions, Associations and Businesses*.  Our membershipprograms are attractive to unions, associations, businesses and otherorganizations with large numbers of members or employees because our programscan assist these organizations in their efforts to attract and retain membersand employees by enabling them to offer a more complete healthcare benefitspackage.

 

*Benefitsto Healthcare Providers and Provider Networks*.  Our membershipprograms are attractive to physicians, hospitals and other healthcare providersbecause our programs help healthcare providers and provider networks increasetheir customer base. Our membership programs are also attractive to providernetworks because they increase the likelihood that healthcare providers willaffiliate with them to gain access to a greater number of potential customersand patients.

 

**Strategy**

 

Our strategy is tosustain and expand our position as a provider of unique healthcare membershipprograms.  We intend to focuspredominantly in underserved markets where individuals either have limited orno healthcare benefits. We have developed healthcare membership programs thatenable people to access healthcare providers throughout the country for a lowercost.  Through product design,competitive membership pricing and strong distribution channel partners, weplan to fill a significant void in the healthcare market that insurancecompanies have not addressed.

 

Key elements of ourstrategy are as follows:

 

*Continueto Develop Unique Healthcare Programs For Broad Markets. *Our focus is on the continued development andintroduction of unique programs that address the health and lifestyle needs oftargeted consumer groups.  By varying the features of ourprograms, including discounts (medical, consumer and business services) andlimited liability insurance benefits, we are able to meet the product andpricing needs of a broad market.  Weanticipate that this will allow us to capture a larger share of the healthcaremarket through existing marketing channels and through establishment of newclient relationships.  We intend tocontinue developing programs for affinity groups, such as unions, smallbusinesses, trade associations and charitable organizations, and intend to enhance our program offeringsby combining variations of our current programs with such otherhealthcare-related programs as health savings accounts and health reimbursementarrangements.

 

*Recruitand Retain Marketing and Distribution Partners*.  Growth insales of our membership programs is dependent upon our marketing anddistribution partners continuing to market our membership programs toprospective customers and recruit additional marketing and distributionpartners to market our membership programs to prospective customers.  We intend to continue to focus our efforts onretaining our existing marketing and distribution partners and obtaining newmarketing and distribution partners by expanding our in-house sales andmarketing staff.  We also plan to improvethe productivity of our marketing and distribution partners through leaddevelopment, marketing support, sales assistance and training.

 

 

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*Leverageour PPOs and Provider Networks. *While we currently havecontractual relationships with several large, well-recognized and fullydeveloped PPO and provider networks, we intend to continuously assess the capabilities ofour PPOs and provider networks and work towards making alternative healthcaresolutions available to our members.  Webelieve that our large provider base enhances our membership programs withmarket credibility, and we intend to leverage this credibility to further ourmarket penetration.

 

*ProvideHigh Quality Customer Service*.  In order toachieve our anticipated growth and to ensure member, healthcare provider andmarketing and distribution partner loyalty, we intend to continue to develop andinvest significantly in our customer service systems.  Our in-house customer service staff providesmembers, healthcare providers and marketing and distribution partners withprompt, courteous, and complete information about all aspects of our membershipprograms.  We have also developed aproprietary computer database system that provides customer servicerepresentatives with immediate access to provider demographic data and memberinformation, including the components of each member program or plan and thedetails a member requires to properly utilize the program.

 

*Develop Private-Label ProductOfferings**. *To complement individual and group sales and leadgeneration accomplished through our marketing and distribution partners, we areattempting to promote sales of our membership programs to groups andself-funded employers.  We have implemented a number ofprivate-label program offerings for specific markets and entities.  We plan to leverage off our currentadministrative and product development systems to continue to provideprivate-label availability to organizations that can commit to significantlevels of sales of these programs.

 

**Customers**

 

Ourprimary target customer group is comprised of the 46 million Americans who haveno health insurance of any kind.  Thisgroup includes self-employed individuals and part-time or temporary employees,and people who have been turned down for insurance because of age, occupation,medical history, lifestyle or other reasons. Our secondary target customergroup is comprised of Americans who lack complete health insurance coverage.This group includes people with gaps in their insurance coverage, employeespaying large deductibles or premiums, and employees who do not receive adequateinsurance coverage through their employers. It also includes people who areunderinsured because of restrictions or provisions in their managed care plans,such as limited coverage, high deductibles or co-insurance limits, people whohave been turned down for insurance coverage for a medical procedure due to apre-existing condition clause, and people who have been turned down forinsurance because of age, occupation, medical history, lifestyle or otherreasons.

 

**OurCARExpress****Ô********Membership Programs**

 

We have designed two distinct groups of membershipprograms that we currently offer to our members: (i) our CARExpressÔ health discount programs, and (ii) ourCARExpress PlusÔ membershipprograms.  Our CARExpressÔ health discount programs enable our members toengage in point-of-service transactions directly with participating healthcareproviders and pay 

 

 

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discounted prices that are similar in amountto those paid by insurance companies on behalf of their insureds.  Our CARExpress PlusÔ programs are comprised of variations ofour comprehensive CARExpressÔhealth discount program and limitedliability insurance benefits underwritten by The United States Life InsuranceCompany in the City of New York, a member company of American InternationalGroup, Inc.  With CARExpress PlusÔ, ourhealth discount programs provide our members with a point-of-service discounton their medical expenses at the time of service.  Then, the limited liability insurancebenefits reimburse our members for some, if not all, of the remaining portionof their medical expenses.

 

CARExpressÔHealth Discount Programs

 

Wesell our CARExpressÔ healthdiscount programs directly and indirectly through a variety of marketing anddistribution partners.  Our programstypically range in price from $9.95 to $39.95 per month, depending upon theprogram selected. We also offer features to encourage potential members to tryout our CARExpressÔ health discountprograms, including refund guarantees and “trial” periods of free or discountedmembership.  Healthcare products andservices are bundled, priced and marketed using relationship marketingstrategies or direct marketing to target the profiled needs of our customers.The discounted prices paid by our members typically range from 10% to 50% offproviders’ usual and customary fees. These discounts are designed to save the individual substantially morethan the cost of the program itself.

 

We currently offer sixstandard CARExpressÔhealth discount programs that providebenefits that range from prescription drug and vision care to comprehensivephysician, hospital, vision, dental and other care.  A description of each of our six standardprograms is provided below.

 

*Comprehensive Care Program. *This program is designed forindividuals and families with no health insurance.  It provides members with access to almost allof the products and services accessible through our PPOs and provider networks,including physician, hospital and ancillary care, dental and vision care,retail and mail order pharmacy, 24-hour nurseline, hearing care, chiropracticand complementary alternative care, medical supplies and equipment, andlong-term care facilities.  Our comprehensivecare program targets those with little or no insurance, or those with onlycatastrophic coverage.  We believe thatour comprehensive care program is of particular interest to consumers who arenot covered by group health or individual benefit plans.  The monthly retail price for this membershipprogram is $39.95 per household.

 

*Supplemental Care Program. *This program is designed forindividuals and families who are underinsured and offers everything ourcomprehensive care program offers, except for access to doctors andhospitals.  Our supplemental care programgenerally presumes the member has some level of basic health insurancecoverage.  It offers services that aretypically not covered under a traditional health insurance plan or an insuranceplan that may have certain coverage limits. This program typically is marketed as an add-on service alongside anexisting health insurance plan or as a stand-alone product for those who havehealth insurance but with minimal benefits for prescription or other ancillaryservices.  The monthly retail price forthis membership program is $29.95 per household.

 

 

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*Preferred Program.*  This program is designed for individuals andfamilies who are underinsured and need to save on the basic health services notcovered under a traditional health insurance plan.  It offers savings on prescriptions, visionand dental care, and a 24-hour nurseline. The monthly retail price for this membership program is $19.95 perhousehold.

 

*Dental & Vision CareProgram.*  This programis designed for individuals and families who typically have health insurance,but who do not have either dental care or vision care.  The monthly retail price for this membershipprogram is $14.95 per household.

 

*Prescription & VisionCare Program.*** **This program isdesigned to offer members an inexpensive way to save money on prescriptions andvision care.  This program is ourlow-cost entry program.  The monthlyretail price for this program is $9.95 per household.

 

*TieredPharmacy Discount Program.*  This programis designed to provide members with access to discounts on brand name andgeneric prescription drugs and features a formulary that organizes both brandname and generic prescription drugs into four pricing tiers.  Tiers1, 2 and 3 includes all brand and generic drugs that have a maximum allowablecost of up to $10, $20 and $40, respectively. Tier 4 consists of all brand and generic drugs above $40.  This program is offered as a stand aloneprogram as well as an add-on program to our existing CARExpressÔhealth discount programs and CARExpress PlusÔmembership programs.  The monthly retailprice for this program is $19.95 per household.

 

CARExpress PlusÔ MembershipPrograms

 

We sell our CARExpressÔhealth discount programs in combination with limited liabilityinsurance benefits underwritten by The United States Life Insurance Company inthe City of New York, a member company of American International Group, Inc.,as part of our CARExpress PlusÔ membership programs.  Limited insurance benefit policies are lessexpensive than traditional comprehensive healthcare insurance and do notrequire the member to undergo any medical underwriting.  As a result, they are generally available toeveryone, regardless of their health conditions.  The policies usually operate on an indemnitybasis, reimbursing the member for certain of his or her incurred healthcarecosts.  These policies pay a certainamount for designated healthcare services. For instance, a member could choose a program entitling him or her to$250, $500 or $1,000 per day of hospitalization, with additional scheduledbenefits for intensive care stays and surgery, for up to 180 days in acalendar year.

 

Our CARExpress PlusÔ programs typically range in price from $99 to $498per month, depending upon the program selected. We market these programs directly and indirectlythrough insurance companies and independent third parties.  Our CARExpress PlusÔprograms provide an innovative and affordable solution to individuals whopreviously could not afford a comprehensive medical plan.  These programs are bundled, priced andmarketed utilizing relationship marketing strategies to target the profiledneeds of the clients’ particular member base.

 

 

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We currently offer threestandard CARExpress PlusÔprograms.  A description of each of theseprograms is provided below.

 

*CARExpress Plus**Ô**Platinum Program. *This program is our premium CARExpress PlusÔprogram.  It is comprised of a variationof our CARExpressÔComprehensive Care Program that includeson-line physician and psychologist services, and limited liability insurancebenefits consisting of AD&D coverage of $50,000, AME coverage of $2,500,accident disability coverage of $400 per month for up to 12 months, a dailyhospital benefit of $1,000 for up to 180 days, a daily ICU benefit of $1,000for up to 14 days, $75 for up to eight doctor visits, inpatient/outpatientsurgical visits of up to $20,000 per year, $100 for emergency room visits forup to three visits per person per year and $100 for ambulance services for upto three times per person per year.  Themonthly retail price for this membership program is $228 for an individual and$498 for a family.

 

*CARExpress Plus**Ô**GoldProgram. *This program is our mid-level CARExpress PlusÔprogram.  It is comprised of a variationof our CARExpressÔComprehensive Care Program that includeson-line physician services, and limited liability insurance benefits consistingof AD&D coverage of $25,000, AME coverage of $2,500, accident disabilitycoverage of $400 per month for up to 12 months, a daily hospital benefit of$500 for up to 180 days, a daily ICU benefit of $500 for up to 14 days, $50 forup to six doctor visits, inpatient/outpatient surgical visits of up to $20,000per year, $75 for emergency room visits for up to three visits per person peryear and $100 for ambulance services for up to three times per person per year.  The monthly retail price for this membershipprogram is $137 for an individual and $285 for a family.

 

*CARExpress Plus**Ô**SilverProgram. *This program is our low-cost entry CARExpress PlusÔprogram.  It is comprised of our CARExpressÔComprehensive Care Program and limited liability insurance benefitsconsisting of AD&D coverage of $10,000, AME coverage of $1,000, a dailyhospital benefit of $250 for up to 180 days, a daily ICU benefit of $250 for upto 14 days, $50 for up to five doctor’s visits, inpatient/outpatient surgicalvisits of up to $20,000 per year, $50 for emergency room visits for up to threevisits per person per year and $100 for ambulance services for up to threetimes per person per year.  The monthlyretail price for this membership program is $99 for an individual and $225 fora family.

 

**Healthcare Providers**

 

                We do not contract directly with any of thephysicians, dentists, hearing care specialists, eye care specialists or otherhealthcare providers that participate in our CARExpressÔhealth savings network.  Instead,we contract with PPOs or their affiliates and other provider networks foraccess to the discounted rates they have negotiated with their healthcareproviders.  We select and utilize onlythose provider networks that we believe can deliver adequate savings to ourmembers while providing adequate support for our membership programs with thehealthcare providers.  We typically pay aper member per month fee for use of a provider network that is determined inpart based on the number of providers participating in the network, the numberof our members accessing the network, and the particular products and servicesutilized by our members.  We only payfees for those members authorized to utilize the network.  The agreements through which we havecontracted for access to the PPO or other provider networks

 

 

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are generally for a term ofbetween one and two years, may be terminated by either party on between 45 and180 days’ prior written notice, and renew automatically for additional termsunless so terminated.  Most of theseagreements are not exclusive as it is not customary in the health membershipindustry for PPOs to agree to work exclusively with a single healthcare savingsorganization, and most contain provisions maintaining the confidentiality ofthe terms of the agreement.

 

                The principal suppliers of the over 1,000,000 healthcareproviders that comprise CARExpressÔare CareMark, Aetna, Optum, Outlook Vision, Integrated Health, ThreeRivers and HealthFi.  Under our variousagreements with these PPOs or their respective affiliates, our members areprovided with access to their network of healthcare providers in varyingcombinations of specialties and at varying discounts from the scheduled pricesfor covered products and services. Although we have arrangements in place with several secondary networks,these PPOs currently supply the provider commitments for almost all of ourmembers.  If we lose our arrangement withany of these PPOs for any reason, we would attempt to establish a primaryrelationship with one of our secondary suppliers.  If we are unable to replace the lost arrangementwith a similar arrangement with another provider network, however, our businessmay be adversely affected.

 

                We can provide no assurance that our contracts withthese PPOs and their affiliates will not expire or be terminated by us or them,nor can we provide any assurance that we will be able to replace the servicesavailable to our members under these agreements in the event they do expire orare terminated.  In addition, we canprovide no assurance that these organizations will refrain from partnering withone of our competitors or competing directly with our membership programs.  Accordingly, the expiration or termination ofthese relationships, or the decision by any of these organizations to partnerwith one of our competitors or compete directly with us, may have a materialadverse effect on our business, financial performance and results ofoperations.

 

**Marketing and Distribution**

 

We market our membershipprograms directly to individual consumers through our direct sales force,television, radio, newspapers, magazines and the Internet.  We also market and support our membershipprograms through our CARExpressÔWeb site at www.carexpresshealth.com.  Our CARExpressÔWeb site enables consumers to review our membership programs, ourhealthcare providers and their locations, the products and services availablethrough our healthcare providers, and the discounts and special promotionsavailable to members for their products and services.  Consumers can also purchase our membershipprograms through our CARExpressÔWeb site by filling out an applicationonline.  Direct sales to consumersprovide us with higher long-term margins on sales because we do not have to paycommissions to any intermediary organization. In addition, the advertising and marketing campaigns that we engage into target consumers provide us with increased market awareness and support forthe brokers, agents, small businesses, unions and associations comprising ourother marketing and distribution channels.

 

 

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                We also market our membership programs indirectlythrough brokers and agents, small businesses and trade associations, unions andassociations, and marketing companies.

 

*                Brokersand Agents*.  We sell our membership programs throughlicensed insurance brokers and agents by entering into commission-sharingarrangements with them under which they market and sell our membership programsto individual consumers through large employer groups, life insurance companiesand associations.  Our membershipprograms are not competitive with the insurance products they sell, but insteadare complementary program offerings. Brokers and agents typically offer our membership programs as acomplementary value-added program to the traditional insurance products thatthey sell.  We estimate that a total ofbetween 250 and 300 such brokers and agents currently market our membershipprograms to prospective customers.  Thebrokers and agents that we utilize typically offer and sell our membershipprograms on a part-time basis and may engage in other related or unrelatedbusiness activities, including selling the products or services of ourcompetitors.  Most of the prospectivecustomers to whom brokers and agents market our programs are current clients ofthe brokers and agents who have purchased products orservices through the brokers and agents in the past.  The other prospective customers are newclients that the brokers and agents have identified through their own efforts.

 

                *Small Businesses and TradeAssociations*.  We use smallbusinesses, trade associations, charitable organizations and similarorganizations to market our membership programs to their members andemployees.  Under these types ofarrangements, we customize our health membership cards by adding the sponsoringorganization name and/or logo on the card and provide access to our networks aswell as all required fulfillment services. We believe that these private label cards are attractive to theseorganizations because the cards will enable them to more closely identifythemselves with the benefits provided to their members.  Moreover, we believe that the preexistingrelationship between the sponsor and its employees or members will enhance thelikelihood that the employee or member will purchase our health membershipcards.  These organizations may purchaseour membership programs for their employees or members, or subsidize a portionof the monthly membership fees of our programs for their employees ormembers.  No fee will typically be paidby us to such organizations if the organizations opt to purchase or subsidizeour programs.  Alternatively, theseorganizations may simply offer their employees or members the opportunity topurchase our programs directly from us or through a payroll deductionplan.  In this event, we will typicallypay such organizations a marketing fee for each membership sold.

 

                *Unions andAssociations. *We market ourmembership programs to unions, associations, corporations and similarorganizations.  Theseorganizations provide us with the opportunity to acquire a large group ofmembers.  Group accounts provide us withhigher retention rates for memberships because of factors such as organizationsponsorship of its members or employees, subsidizing of monthly membership feesby such organizations, and lower cost memberships to members or employeesresulting from significantly lower prices charged to the organization.  These organizations may purchase our membershipprograms for their employees or members, or subsidize a portion of the monthlymembership fees of our programs for their employees or members.  We do not typically pay a marketing fee tothe organizations if the organizations opt to purchase or subsidize ourprograms.  Alternatively, theseorganizations may simply offer their

 

 

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employees or members theopportunity to purchase our programs directly from us or through a payrolldeduction plan.  In this case, wetypically pay the organizations a marketing fee for each membership sold.

 

*MarketingCompanies*.  We utilize the services of marketingcompanies to market our membership programs to prospective customers, such asindividual consumers and employers typically having less than 50employees.  Marketing companies aregroups of sales persons that market our membership programs directly toprospective customers through face-to-face contact and such media astelevision, radio, internet and print ads. We pay our marketing companies fees that are typically comprised of acommission on the sale price of the membership program and/or an up-front feeper member generated.  The amount of thecommissions and up-front fees that we pay to marketing companies are determinedbased on the type of membership programs being sold by the marketing companies andthe number of members being generated over a set period of time by themarketing companies.

 

**Customer Service, Training andSupport**

 

                We believe that providing superior customer supportis critical to our business.  Currently,we maintain an in-house customer service center at our corporate headquartersin Horsham, Pennsylvania, where we employ full-time customer servicerepresentatives and utilize the services of temporary customer servicerepresentatives on an as-needed basis. Our customer service center is available to members and may be accessedvia e-mail or toll-free numbers, Monday through Friday, from 8:00 a.m. to11:00 p.m. Eastern Standard Time. We also utilize an outside call center for after-hours calls so that weare able to provide full 24-hour toll-free coverage for our members.  Our customer service center providesdependable and timely resolution of customer technical inquiries and isavailable to customers by telephone and e-mail. Our customer service center staff delivers education, training andpre-sales support to our members, employers and other sponsoring organizations,and healthcare providers and provider networks. We also offer online training to our customers and resellers to providethem with the knowledge and skills to successfully deploy, use and maintain ourproducts.  Our customer service staff isresponsible for handling general customer inquires, answering questions aboutthe ordering process, updating and maintaining customer account information,investigating the status of orders and payments, as well as processing customerorders.  In addition, our customerservice staff proactively updates customers on a variety of topics, includingrelease dates of new products and updates to existing products.

 

                We operate in a fully-equipped facilitywith a state-of-the-art computer and telecommunications room that is wired tohandle our growing needs and provides us with the capacity to expand ourcustomer service base to approximately 80 customer service agents.** **Our proprietary computer database systemprovides our customer service representatives with immediate access to providerdemographic data and member information, including the components of eachmember program or plan and the details a member requires to properly utilizethe program.  All new customer service representativesare required to complete a training course before beginning to take calls andattend on-the-job training thereafter. Through our training programs, systems and software, we seek to providemembers with friendly, rapid and effective answers to questions.  We continue to work closely with ourhealthcare providers and

 

 

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organizations to ensurethat their representatives are knowledgeable about our membership programs.

 

                We provide extensive training to our marketing anddistribution partners to assure that they accurately represent our products andservices.  This training is available ina variety of forms, including a training manual, audiotapes and videotapes,local and regional training meetings and weekly conference calls.  The training encompasses both producttraining as well as marketing training and sales techniques.  We have also implemented policies andprocedures in place to control any advertising or promotions that are utilizedby our marketing and distribution partners. We believe these policies and procedures are necessary to assure theproper representation of the program at all times and include the pre-approvalof all advertising, adherence to anti-spamming and anti-fax blasting rules, andlimits where the representatives can advertise our programs.  The failure of a representative to followthese rules can result in termination of the representative’s relationshipwith us.

 

**Technology**

 

     We have made substantial investments in ourproprietary technology and management information systems.  We have a state-of-the-art telecommunication networkand computer system for our executive officers and customer service staff. Ourmanagement information systems were designed in-house and are used in mostaspects of our business, including maintaining member eligibility anddemographic information maintaining representative information paying commissions,maintaining a database of all healthcare providers and providing healthcareprovider locator services, drafting members’ accounts on a monthly basis, andtracking of cash receipts and revenue.  We have also created an extensive CARExpressÔ Web site for our membership programs atwww.carexpresshealth.com that provides information about the various healthcareproducts and services available, allows for healthcare provider searches,answers questions, provides savings schedules, and allows new members andrepresentatives to enroll online.  Italso allows our marketing and distribution partners to access support andtraining files and to view their genealogy and commission information through apassword-protected area.  Our CARExpressÔWeb site is set up as a “self-replicating” websiteto allow our marketing and distribution partners to obtain a copy of thewebsite under a unique web address.

 

**Competition**

 

The health membershipindustry is rapidly evolving and competition for members is becomingincreasingly intense.  Competitors varyin size and in scope and breadth of the products and services they offer.  We offer membership programs that provideproducts and services similar to or directly in competition with products andservices offered by PPOs, HMOs, healthcare membership programs, retailpharmacies, mail order prescription companies, and other ancillary healthcareinsurance organizations.  Competition fornew representatives is also intense, as these individuals have a variety ofproducts that they can choose to market, whether competing with us in thehealthcare market or not.

 

 

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We believe that successin the health membership industry is dependent upon the ability of companiesto:

 

·                  identify retailmarkets and outlets, unions and associations, and consumers that may benefitfrom healthcare membership programs;

 

·                  maintaincontracts with reputable PPO and provider networks that offer substantialhealthcare savings and reputable insurance companies that offer affordablehealth insurance policies;

 

·                  develop andimplement effective marketing and advertising campaigns;

 

·                  provideprograms comparable or superior to those of competitors at competitive prices;

 

·                  enhance thequality and breadth of the membership programs offered;

 

·                  provide highquality customer service;

 

·                  offersubstantial savings on the major-medical costs such as hospital and surgicalcosts;

 

·                  combine theprograms with affordable insurance policies that have high deductibles or setpre-defined payment for hospitalization;

 

·                  adapt quicklyto evolving industry trends or changing market requirements;

 

·                  satisfyinvestigations on the part of state attorney generals, insurance commissionersand other regulatory bodies; and

 

·                  hire and retainmarketing and distribution partners and finance promotions for the recruitingof new members and marketing and distribution partners.

 

Our principal competitorsinclude Access Plans USA, AmeriPlan, Best Benefits, Careington International,Family Care, Full Access Medical, International Association of Businesses, NewBenefits, Inc. and People’s Benefit Services.  People’s Benefit Services focuses generallyon the provision of retail and mail order pharmacy services and vision anddental care, and thus competes with only a portion of our membershipprograms.  Access Plans USA, AmeriPlan,Best Benefits, Careington International, Family Care, Full Access Medical andNew Benefits provide a broader range of products and services includinghospital, physician, 24-hour nurseline, chiropractic and nursing home care, andthus compete with our full range of membership programs.  Our principal competitors generally offertheir membership programs at a monthly or annual fee that is equal to orgreater than the monthly fees that we charge for comparable membershipprograms, and offer cancellation privileges, refund guarantees, and trialperiods of free or discounted memberships similar in nature and amount to thosethat we offer.

 

Wealso face current and potential competition from insurance carriers,third-party administrators, retail pharmacies, financial institutions, federaland state governments, PPOs, HMOs and other healthcare networks.  We face additional competition due to a trend amonghealthcare providers and insurance companies to combine and form networks inorder to contract directly with small businesses and other prospectivecustomers to provide healthcare services. A number ofcompanies offer health membership programs that are localized geographically,or specialized in certain service categories such as dental, chiropractic, orpharmacy only.  Recently, 

 

 

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several of the major drugmanufacturers have begun, or announced plans to begin, offering prescriptiondiscount cards for their own drug brands.

 

Some of our current andpotential competitors have longer operating histories and significantly greaterfinancial, technical, marketing, administrative and other resources than wedo.  They may have significantly greatername recognition, established marketing relationships and access to a largerinstalled base of customers.  Inaddition, current and potential competitors have established or may establishcooperative relationships among themselves or with third parties to designcustomized products to better address customer needs.  Accordingly, new competitors or alliancesamong competitors may emerge and rapidly acquire significant market share.  Increased competition may result in pricereductions, reduced gross margins and loss of market share, any of which couldhave a material adverse affect on our business, financial condition and resultsof operations.

 

**Regulatory and Legislative Issues**

 

                We are subject to a variety of laws and regulationsapplicable to companies engaged in the healthcare industry.  Because the nature of our services isrelatively new and the health membership industry is rapidly evolving, we maynot be able to accurately predict which regulations will be applied to ourbusiness and we may become subject to new or amended regulations.

 

*State Discount Health ProgramRegulations.*  In recent years, more than 20 states have enactedlegislation that specifically addresses the operation and marketing of discounthealth programs like ours.  Additionalstates are expected to enact such legislation in the future.  The laws vary in scope.  Some apply to discounts on all health carepurchases.  Some regulate onlyprescription discounts.  Some excludeprescription discounts but regulate other services.  The laws also vary in operation.  Some contain only provisions that relate tothe operation and marketing of discount health plans and some require licensingand registration.  Because suchlegislation and regulations are newly enacted or adopted, we do not know thescope and full effect on our operations. There is also the risk that a state will adopt regulations or enactlegislation restricting or prohibiting the sale of our health discount programsin the state.  Compliance with these lawsand regulations on a state-by-state basis is costly and cumbersome and may havea material adverse effect on our financial position in the future.

 

Compliancewith federal and state regulations is generally our responsibility.  The health discount program industry isespecially susceptible to charges by the media of regulatory noncompliance andunfair dealing.  As is often the case,the media may publicize perceived non-compliance with consumer protectionregulations and violations of notions of fair dealing with consumers.  Our failure to comply with current, as wellas newly enacted or adopted, federal and state regulations could have amaterial adverse effect upon our business, financial condition and results ofoperations in addition to the following:

 

 

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·                  non-compliance may cause us tobecome the subject of a variety of enforcement or private actions;

 

·                  compliance with changes inapplicable regulations could materially increase the associated operatingcosts;

 

·                  non-compliance with any rules andregulations enforced by a federal or state consumer protection authority maysubject us or our management personnel to fines or various forms of civil orcriminal prosecution; and

 

·                  non-compliance or allegednon-compliance may result in negative publicity potentially damaging ourreputation and the relationships we have with our members, provider networksand consumers in general.

 

                *Insurance Regulations*.  Our membership programs are not insurance programs andwe are not subject to regulation as an insurance company or as a seller ofinsurance in connection with the sale of our membership programs. Occasionally, we receive inquires from insurance commissioners invarious states that require us to supply them with information about our membership programs.  To date, these agencies have concurred withour view that our health discount programs are not a form of insurance.  We can provide no assurance that thissituation will not change in the future, or that an insurance commissioner willnot successfully challenge our ability to offer our membership programs without compliance with stateinsurance regulations in the future. Furthermore, states may adopt regulations or enact legislation that mayaffect the manner by which we sell our membership programs or restrict or prohibit the saleof our membershipprograms.  If we do not comply with theregulations or legislation of these states, we may be prevented from sellingour programs in these states or may be subject to fines and penalties thatcould have a material adverse affect on our operations and financial condition.

 

Governmentregulation of health insurance, healthcare coverage and health membership plansis a changing area of law and varies from state to state.  The sale of insurance products and the licensing ofinsurance brokers and agents are subject to regulation and supervision,predominantly by state authorities. While the scope of regulation and form of supervision may vary fromstate to state, insurance laws relating to the sale of insurance products andlicensing of insurance brokers and agents are often complex and generally grantbroad discretion to supervisory authorities in adopting regulations.  These regulations extensively cover operations,including scope of benefits, rate formula, delivery systems, utilization reviewprocedures, quality assurance, enrollment requirements, claim payments,marketing and advertising.  States have broad powers overthe granting, renewing and revoking of licenses and approvals, marketingactivities and the receipt of commissions. Althoughwe are not an insurance company, the insurance companies from which we obtainthe limited insurance benefits included in our CARExpress PlusÔ membership programs are subject to various federal and stateregulations applicable to their operations. We must rely on the insurance companies that provide the limitedinsurance benefits that we offer as part of our CARExpress PlusÔ membership programs to carefully monitor state and federal legislativeand regulatory activity as it affects their insurance products andservices.  These insurance companies mustcomply with constantly evolving regulations and make changes occasionally toservices, products, structure or operations in accordance with the requirementsof those regulations.  We may also belimited in how we market and distribute our CARExpress PlusÔ membership programs as a result of these laws and

 

 

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regulations.  Additional governmental regulation or futureinterpretation of existing regulations may increase the cost of compliance ormaterially affect the insurance products and services offered by us and, as aresult, our results of operations.

 

We market our CARExpress PlusÔmembership programs through an association that has been formed to providevarious consumer benefits to its members. This association may include in its benefit packages insurance productsthat are issued under group or blanket policies covering the association’smembers.  Our ability to offer limitedinsurance benefits for inclusion in these benefit packages may be affected bygovernmental regulation or future interpretation of existing regulations thatmay increase the cost of regulatory compliance or affect the nature and scopeof products that we may make available to such associations.  In addition, most states allow these programsto be sold under certain circumstances without a licensed insurance agentmaking each sale.  If a state laterdetermines that our sales of these programs do not comply with its regulations,our ability to continue selling these programs would be affected and we mightbe subject to fines and penalties and may have to issue refunds or providerestitution to the association and its members.

 

*ProductClaims and Advertising Laws.*  The FederalTrade Commission and certain states regulate advertising, product claims, andother consumer matters.  The FederalTrade Commission may institute enforcement actions against companies for falseand misleading advertising of consumer products.  In addition, the Federal Trade Commission hasincreased its scrutiny of the use of testimonials, similar to those used by usand the marketing companies, brokers and agents marketing our membershipprograms.  While we have not been thetarget of any Federal Trade Commission enforcement actions, we can provide noassurance that:

 

·                  the FederalTrade Commission will not question our advertising or other operations in thefuture;

 

·                  a state willnot interpret product claims presumptively valid under federal law as illegalunder that state’s regulations; or

 

·                  future FederalTrade Commission regulations or decisions will not restrict the permissiblescope of such claims.

 

                We are also subject to the risk of claims by brokersand agents and their respective customers who may file actions on their ownbehalf, as a class or otherwise, and may file complaints with the Federal TradeCommission or state or local consumer affairs offices.  These agencies may take action on their owninitiative against us for alleged advertising or product claim violations, oron a referral from brokers, agents, customers or others.  Remedies sought in these actions may includeconsent decrees and the refund of amounts paid by the complaining brokers,agents or consumer, refunds to an entire class of brokers, agents or customers,client refunds, or other damages, as well as changes in our method of doingbusiness.  A complaint based on thepractice of one broker or agent, whether or not we authorized the practice,could result in an order affecting some or all of the brokers and agents thatwe use in a particular state.  Also, anorder in one state could influence courts or government agencies in otherstates considering similar matters. Proceedings resulting from these complaints could result in significantdefense costs, settlement payments or judgments and could have a materialadverse effect on us.

 

 

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*Healthcare Regulation and Reform.*  Government regulationand reform of the healthcare industry may also affect the manner in which weconduct our business in the future. There continues to be diverse legislativeand regulatory initiatives at both the federal and state levels to affectaspects of the nation’s health care system. Many states have enacted, or are considering, various healthcare reformstatutes.  These reforms relate to, amongother things, managed care practices, prompt pay payment practices, healthinsurer liability and mandated benefits. Most states have also enacted patient confidentiality laws that prohibitthe disclosure of confidential information. As with all areas of legislation, the federal regulations establishminimum standards and preempt conflicting state laws that are less restrictivebut will allow state laws that are more restrictive.  We expect this trend of increased legislationto continue. We are unable to predict what state reforms will be enacted or howthey would affect our business.

 

*Legislative Developments.*  Numerous proposals toreform the current healthcare system have been introduced in theU.S. Congress and in various state legislatures.  Proposals have included, among other things,modifications to the existing employer-based insurance system, aquasi-regulated system of “managed competition” among health insurers, and asingle-payer, public program. Legislation has been introduced from time to time in theU.S. Congress that could result in the federal government assuming a moredirect role in regulating insurance companies. We are unable to evaluate newlegislation that may be proposed and when or whether any legislation will beenacted and implemented.  However, manyof the proposals, if adopted, could have a material adverse effect on ourbusiness, financial condition or results of operations.

 

**Intellectual Property Rights**

 

                Our intellectual property rights are important to ourbusiness.  We rely upon confidentiality procedures and contractual provisions toprotect our business, proprietary technology and CARExpressÔbrand. Our generalpolicy is to enter into confidentiality agreements with our employees andconsultants, and nondisclosure agreements with all other parties to whom wedisclose confidential information.  Wehave obtained registered trademarks from the United States Patent and TrademarkOffice for the words “CARExpress” and “CARExpress Plus” as well as our CARExpressÔbrand.  We may apply for legal protection for certain ofour other intellectual property in the future. We can provide no assurance, however, that we will receive such legalprotection or that, if received, such legal protection will be adequateto protect our intellectual property rights.

 

**Employees**

 

                As of March 19, 2009 we had 20 employees.  Of this number, 15 were full-time employeesand five were part-time employees.  Weutilize the services of approximately 15 consultants and advisors as well asafter-hours call center representatives and temporary customer servicerepresentatives.  We do not employ theindividuals working for our after-hours call center or the temporary customerservice representatives.  None of ouremployees are represented by a labor union, and we have never experienced awork stoppage.  We believe that ourrelations with our employees are good.

 

 

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**Item1A.  Risk Factors**

 

An investment inour common stock involves a high degree of risk.  You should carefully consider the followingrisk factors in addition to other information in this report before purchasingour common stock.  The risks anduncertainties described below are those that we currently deem to be materialand that we believe are specific to our company, our industry and ourstock.   In addition to these risks, ourbusiness may be subject to risks currently unknown to us.  If any of these or other risks actuallyoccurs, our business may be adversely affected, the trading price of our commonstock may decline and you may lose all or part of your investment.

 

Risks Associated With OurBusiness

 

*We are an early-stage companywith an unproven business model, which makes it difficult for us to evaluateour current business and future prospects.*

 

While we are activelyengaged in marketing our membership programs to the public and are experiencingrapid growth in sales of our membership programs, we have generated only asmall amount of revenue to date.  Inaddition, since we have only been offering our membership programs to thepublic since 2003, we have very limited historical data with respect to salesof our health membership cards.  As aresult of these factors, the revenue and income potential of our business isunproven, and we have only a limited operating history upon which to base anevaluation of our current business and future prospects.  Because of our limited operating history andbecause the health membership industry is rapidly evolving, we have limitedinsight into trends that may emerge and affect our business.  We may make errors in predicting and reactingto relevant business trends, which could harm our business.

 

Before purchasing ourcommon stock, you should consider an investment in our common stock in light ofthe risks, uncertainties and difficulties frequently encountered by early-stagecompanies in new and rapidly evolving markets such as ours, including thosedescribed herein.  We may not be able tosuccessfully address any or all of these risks. Failure to adequately address such risks could cause our business,financial condition and results of operations to suffer.

 

*We have a history of losses andthe report of our independent accountants issued in connection with the auditof our financial statements contained a qualification raising a substantialdoubt about our ability to continue as a going concern.*

 

We have experienced netlosses in each fiscal quarter since our inception and as of December 31,2008, had an accumulated deficit of approximately $24.5 million.  We incurred net losses to common stockholders ofapproximately $3.0million for the year ended December 31, 2008 and approximately $3.5million for the year ended December 31, 2007.  As a result of these conditions, the reportof our independent accountants issued in connection with the audit of ourfinancial statements as of and for our fiscal year ended December 31, 2008contained a qualification raising a substantial doubt about our ability tocontinue as a going concern.  While weexpect to begin generating net profits from operations during 2009, we canprovide no assurance that this expectation will be met.  As a result, we may continue to generatelosses for the foreseeable future.

 

 

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*We will need to raise additionalfunds in the future to cover our long-term contractual obligations andoperating expenses, which funds may not be available or, if available, may notbe available on acceptable terms.*

 

Wehave significant long-term contractual obligations that we must satisfy overthe next several years.  We are a partyto employment agreements with David M. Daniels, Alex Soufflas and Patricia S.Bathurst pursuant to which they are currently entitled to receive annualizedbase salaries of $382,800, $319,440 and $175,692, respectively.  We must also make payments under theoperating lease for our office space in Horsham, Pennsylvania in the aggregateamount of approximately $173,000 over the next 12 months.  A summary of the material terms of these employmentagreements and the lease and our financial obligations thereunder is providedherein under *“Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations — Contractual Obligations.”*  If we are unable to satisfythese obligations as they become due, our business may be materially andadversely affected.

 

We also expect tocontinue to incur significant operating expenses over the next 12 months as we:

 

·                  develop new membership programs;

 

·                  recruit additional marketing and distribution partnersand hire additional personnel, including sales personnel, customer servicestaff and support staff;

 

·                  leverage and develop relationships with additionalPPOs and provider networks;

 

·                  upgrade our operational and financial systems,procedures and controls; and

 

·                  comply with state and federal laws governing ourbusiness operations, comply with Securities and Exchange Commission (“SEC”)reporting requirements and fulfill the other responsibilities that we have as apublic company.

 

We may also experience amaterial decrease in liquidity due to unforeseen capital requirements or otherevents and uncertainties.

 

We believe that ourcurrent cash resources will not be sufficient to sustain our current operationsfor the next 12 months.  As a result, wewill need to raise additional funds during the next 12 months.  We have not made arrangements to obtainadditional financing and we can provide no assurance that additional financingwill be available in an amount or on terms acceptable to us, if at all.  If we cannot raise funds when they are neededor if such funds cannot be obtained on acceptable terms, we may not be able topay our costs and expenses as they are incurred, sell or create new membershipprograms, execute our business plan, take advantage of future opportunities orrespond to competitive pressures or unanticipated requirements.  This may seriously harm our business,financial condition and results of operations.

 

 

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*We currently generate almost allof our revenue through a limited number of marketing and distribution partners.*

 

A limited number ofmarketing and distribution partners currently generate almost all of ourrevenue for us.  Although we are in theprocess of expanding the number of marketing and distribution partners sellingour membership programs, we can provide no assurance that we will be successfulin adequately doing so.  In the event anyof our significant marketing and distribution partners stops selling ourprograms to prospective members, or if prospective members do not purchase ourprograms through these marketing and distribution partners, our business,financial condition and results of operations could be materially and adverselyaffected.

 

*We must develop and expand ouruse of marketing and distribution partners to increase revenue and improve ouroperating results.*

 

Our success will dependin large part upon our ability to attract, retain and motivate the marketingand distribution partners that market our membership programs.   We will need to expand our existingrelationships and enter into new relationships with marketing and distributionpartners in order to increase our current and future market share andrevenue.  We compete with all types ofhealthcare companies throughout the United States for marketing anddistribution partners.  We can provide noassurance that we will be able to maintain and expand our existingrelationships or enter into new relationships, or that any new relationshipswill be available on commercially reasonable terms.  If we are unable to maintain and expand ourexisting relationships or enter into new relationships with marketing anddistribution partners, we may lose customer introductions, co-marketingbenefits and sales, and our operating results may suffer.

 

***Ourreliance on brokers, agents, unions, associations and other organizations forsales of our membership programs could result in reduced revenue growth becausewe have little control over them.***

** **

Brokers, agents, unions,associations and other organizationscurrently account for most of our revenue. None of these parties is obligated to continue selling our membershipprograms.  Our ability to generate increased revenuedepends significantly upon the ability and willingness of these parties tomarket and sell our membership programs throughout the United States.  Ifthey are unsuccessful in their efforts or are unwilling or unable to market andsell our programs, our operating results may suffer.

 

Wecannot control the level of effort these parties expend or the extent to whichany of them will be successful in marketing and selling our membership programs.  These parties typicallyoffer and sell our programs on a part-time basis, and may engage in otherbusiness activities.  They also may givehigher priority to the products or services of our competitors andreduce the amount of effort they devote to marketing our programs.  Wemay not be able to prevent these parties from devoting greater resources tosupport our competitors’ products and reducing or eliminating their efforts tosell our programs.

 

 

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*We are dependent upon insurancebrokers and agents to offer and sell our**CARExpress****Plus**TM** programs.*

 

Werely primarily upon insurance brokers and agents to offer and sell our CARExpress PlusTM programs. These insurance brokers and agents may offer and sell membershipprograms that are competitive with ours and may give higher priority and greaterincentives (financial or otherwise) to other membership programs, reducingtheir efforts devoted to the marketing and distribution of our CARExpress PlusTM programs. Also, our ability to attract andretain independent insurance agencies could be negatively affected by adversepublicity relating to our products and services or our operations.  Development and maintenance of therelationships with insurance brokers and agents may in part be based onprofessional relationships and the reputation of our management and marketingpersonnel.  Consequently, theserelationships may be adversely affected by events beyond our control, includingdepartures of key personnel and alterations in professional relationships.  The loss of a significant number of insurancebrokers and agents or the loss of a key insurance broker or agent for anyreason could adversely affect our revenue and operating results, or couldimpair our ability to establish new relationships or continue strategicrelationships with other insurance brokers and agents.

 

*We currently rely on a smallnumber of PPOs and other provider networks, the loss of any one of which or thechange in our relationship with any one of which could have a material adverseeffect on our business.*

 

CareMark,Aetna, Optum, OutlookVision, Integrated Health, Three Rivers and HealthFi are the principal PPOs andprovider networks through which our members receive savings on healthcareproducts and services through our membership programs.  Our agreements with these parties are notexclusive, so they may choose to partner with one of our competitors or competedirectly with our programs.  In addition,these agreements may be terminated by either party on between 45 and 180 days’prior written notice.  While we currentlyhave a good relationship with each of these parties, we can provide noassurance that we will continue to have a good relationship with any of them inthe future.  If these organizationschoose to partner with our competitors or compete directly with our programs,our business could be adversely affected. In addition, if, for any reason, we should lose a provider relationshipand be unable to promptly replace it with a new one, we may be unable to offercertain benefits to members, which could have a negative impact on our sales.

 

We must develop andmaintain relationships with PPOs and other provider networks within each marketarea that our services are offered. Developing and maintaining relationships with PPOs and provider networksis based in part on professional relationships and the reputation of ourmanagement and marketing personnel.  OurPPO and provider network relationships may be adversely affected by eventsbeyond our control, including departures of key personnel and alterations inprofessional relationships.  The loss ofa PPO or provider network within a geographic market area that is not bereplaced on a timely basis, or at all, could have a material adverse effect onour business, financial condition, and results of operations.

 

 

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*We must develop and maintainrelationships with insurance companies**for the insurance benefits included in ourCARExpress****Plus**TM** programs.*

 

Weare not an insurance company.  Theinsurance benefits that we offer as part of our CARExpress PlusTM programs are developed and offered by athird-party insurance company.  We currently relyupon TheUnited States Life Insurance Company in the City of New York, a member companyof American International Group, Inc., for all of the insurance benefitsthat we include in our CARExpressPlusTM programs. The loss or termination of this strategic relationship could adverselyaffect our revenues and operating results and may also impair our ability tomaintain and attract new insurance brokers and agents to offer our CARExpress PlusTM programs to the public.

 

Wemust develop and maintain relationships with several insurance companies so that we can continue offeringinsurance benefits as part of our CARExpressPlusTM programs.  Development and maintenance of relationshipswith insurance companies may in part be based on professional relationships andthe reputation of our management and marketing personnel.  Consequently, the relationships withinsurance companies may be adversely affected by events beyond our control,including departures of key personnel and alterations in professionalrelationships.  Our success and growthwill depend in large part upon our ability to establish and maintain thesestrategic relationships, contractual or otherwise, with various insurancecompanies to provide their products and services.

 

*Because we expect to derivesubstantially all of our future revenue from our membership programs, anyfailure of these programs to satisfy customer demands or to achieve meaningfulmarket acceptance may seriously harm our business.*

 

Substantially all of ourrevenue comes from monthly membership fees that we receive from the sale of ourmembership programs.  We expect ourmembership programs to continue to account for substantially all of our revenuefor the foreseeable future.  If, for anyreason, revenue derived from sales of our membership programs declines or doesnot grow as rapidly as we anticipate, our operating results and our businessmay be significantly impaired.  If ourmembership programs fail to meet the needs of our target customers, or if theydo not compare favorably in breadth and price to competing products, our growthmay be limited.  We cannot assure youthat our membership programs will achieve meaningful market acceptance.  If we cannot develop a market for theseprograms, or if a market develops more slowly than expected, our business,financial condition and results of operations may suffer.

 

*We may not be able to develop newmembership programs at a rate required by our rapidly changing market.*

 

Our future successdepends on our ability to develop new membership programs that keep pace withthe rapidly evolving health membership industry and that address the changingneeds of our customers.  We may not besuccessful in either developing such programs or achieving market acceptance ofany new programs that we develop. Uncertainties about the timing and nature of changes to healthcareregulations and the evolution of the health membership industry could delay ourdevelopment of new programs or increase the expenses in 

 

 

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developing them.  The failure of our membership programs tosatisfy the needs of our customers may limit or reduce the market for theseprograms, result in customer dissatisfaction, and seriously harm our business,financial condition and results of operations.

 

*Government regulation mayadversely affect our financial position and operations.*

 

We marketand sell our membership programs without the need for an insurance license byany federal, state or local regulatory licensing agency or commission.  By contrast, companies that provide insurancebenefits and operate HMOs and PPOs are regulated by state licensing agenciesand commissions. These regulations extensively cover operations, includingscope of benefits, rate formula, delivery systems, utilization reviewprocedures, quality assurance, enrollment requirements, claim payments,marketing and advertising.  Severalstates have enacted laws and regulations governing membership programs such asours and additionalstates may, in the future, determine that our membership programs are subjectto governmental regulation, which may adversely affect or limit our futureoperations.  Compliance with thesestatutes and regulations is costly and may limit our operations.  The cost of complying with these laws andregulations has and will likely continue to have a material effect on ourfinancial position.

 

Governmentregulation of health insurance, healthcare coverage and health membership plansis a changing area of law and varies from state to state.  The sale of insurance products and the licensing ofinsurance brokers and agents are subject to regulation and supervision,predominantly by state authorities. While the scope of regulation and form of supervision may vary fromstate to state, insurance laws relating to the sale of insurance products andlicensing of insurance brokers and agents are often complex and generally grantbroad discretion to supervisory authorities in adopting regulations.  States have broad powers over the granting,renewing and revoking of licenses and approvals, marketing activities and thereceipt of commissions.  Although we are not an insurancecompany, the insurance company from which we obtain the limited insurancebenefits included in our CARExpressPlusTM membership programs is subject tovarious federal and state regulations applicable to its operations.  This insurance company must comply withconstantly evolving regulations and make changes occasionally to services,products, structure or operations in accordance with the requirements of thoseregulations.  We may also be limited inhow we market and distribute our CARExpressPlusTM membership programs as a resultof these laws and regulations.

 

We marketour CARExpressPlusTM membership programs through anassociation that has been formed to provide various consumer benefits to itsmembers.  This association may include inits benefit packages insurance products that are issued under group or blanketpolicies covering the association’s members. Most states allow these programs to be sold under certain circumstanceswithout a licensed insurance agent making each sale.  If a state later determines that our sales ofthese programs do not comply with their regulations, our ability to continueselling these programs would be affected and we might be subject to fines andpenalties and may have to issue refunds or provide restitution to theassociation and its members.

 

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** **

***Ourcontinued growth could strain our personnel and infrastructure resources, andif we are unable to implement appropriate controls and procedures to manage ourgrowth, we may not be able to successfully implement our business plan.***

** **

**Weare experiencing rapid growth in our operations which is placing, and willcontinue to place, a significant strain on our management, administrative,operational and financial infrastructure. Our future success will depend in part upon the ability of ourmanagement to manage growth effectively. This may require us to hire and train additional personnel to manage ourexpanding operations.  In addition, wewill be required to continue to improve our operational, financial andmanagement controls and our reporting systems and procedures.  If we fail to successfully manage our growth,we may be unable to execute upon our business plan.**

** **

*We face increasing competitionfrom more established companies that have significantly greater resources thanwe do that may place pressure on our pricing and that could prevent us fromincreasing revenue or attaining profitability.*

 

The health membershipindustry is rapidly evolving and competition for members is becoming increasinglyintense.  Our membership programs aresimilar to or directly in competition with products and services offered bymany of our direct and potential competitors. Some of our healthcare providers may provide, either directly or throughthird parties, programs that directly compete with our programs.  If healthcare membership programs becomestandard features of healthcare companies, the demand for our membershipprograms may decrease.  In addition, thePPOs and provider networks that we use may decide to develop or sell competingproducts instead of our membership programs. Moreover, even if our membership programs provide a greater breadth ofproducts and services and greater price discounts than programs offered byother companies operating in the health membership industry, potentialcustomers might accept this limited offering in lieu of purchasing ourmembership programs due to their lack of familiarity with our programs.

 

Some of our competitorsenjoy substantial competitive advantages, such as:

 

·                  programs that are functionally similar or superior toour membership programs;

 

·                  established reputations relating to membershipprograms;

 

·                  greater name recognition and larger marketing budgetsand resources;

 

·                  established marketing relationships and access tolarger customer bases; and

 

·                  substantially greater financial, personal and otherresources.

 

We compete with numerouswell-established companies that design, market and sell healthcare membershipprograms.  Our current principalcompetitors include companies that offer healthcare products and servicesthrough membership programs, as well as insurance companies, PPOs, providernetworks and other organizations that offer health benefit programs to theircustomers.  Some of our competitors maybe companies that have programs that are functionally similar or superior toour membership programs.  Most of ourcompetitors possess substantially greater financial, marketing, personnel andother resources than us.

 

 

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We can provide noassurance that our current or future competitors will not:

 

·                  provide healthcaremembership programs comparable or superior to our programs at lower membershipprices;

 

·                  adapt more quickly toevolving healthcare industry trends or changing industry requirements;

 

·                  respond more quickly andeffectively to new or changing opportunities, technologies, standards orcustomer requirements;

 

·                  increase their emphasis onprograms similar to ours to more effectively compete with us; or

 

·                  successfully recruitmarketing companies, brokers and agents by offering more attractivecompensation plans.

 

For these and other reasons, we may not be able tocompete successfully against our current and future competitors.  Increased competition may result in pricereductions, reduced gross margins, and loss of market share, any of which couldhave a material, adverse effect on our business, financial condition andresults of operations.

 

***We aredependent on our management team, and the loss of any key member of this teammay prevent us from implementing our business plan in a timely manner.***

** **

**Oursuccess depends largely upon the continued services of our executive officersand other key management and development personnel.  While we have entered into employmentagreements with**each of our executive officers,they may each terminate their employment with us at any time withoutpenalty.  We do not maintain key personlife insurance policies on any of our employees.  The loss of one or more of our key employeescould seriously harm our business, financial condition or results ofoperations.  In such an event we may beunable to recruit personnel to replace these individuals in a timely manner, orat all, on acceptable terms.

** **

*We have experienced periodsduring which we were unable to bill our members due to service interruptionsfrom our merchant processors.*

 

Our ability to collectmonthly membership fees from our members is largely dependent upon our abilityto charge our monthly membership fees to our members’ credit cards.  Substantially all of our members pay theirmonthly membership fees to us through monthly debits to their creditcards.  We utilize the services ofmerchant processors to process these credit card transactions for us.  In the past, we have been subject to servicedisruptions as the result of our merchant processors terminating theiragreements with us.  While we have takenseveral precautions to prevent such actions from disrupting our ability toprocess credit cards in the future, it is possible that we may experienceadditional service interruptions by the merchant processors that we use.  Any such disruptions may result in our lossof a significant number of members and a significant amount of revenue, eitherof which would have a material adverse affect on our results of operations.

 

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** **

***Oursystems may be vulnerable to security risks or service disruptions that couldharm our business.***

** **

Although we have takenmeasures to secure our systems against security risks and other causes ofdisruption of electronic services, our servers are vulnerable to physical orelectronic break-ins and service disruptions, which could lead tointerruptions, delays, loss of data or the inability to process customerrequests.  In addition, certain of our services are basedupon the collection, distribution, and protection of sensitive privatedata.  Unauthorized users might accessthat data, and human error or technological failures might cause the wrongfuldissemination of that data.  If weexperience a security breach, the integrity of certain of our services may beaffected and such a breach could violate certain of our marketing partneragreements, which could give our marketing and distribution partners the rightto terminate their agreements with us. We have incurred, and may incur in the future, significant costs toprotect against the threat of a security breach.  We may also incur significant costs to solveproblems that may be caused by future breaches or to prevent such breaches.  Any breach or perceived breach could subjectus to legal claims from our marketing and distribution partners or customersand/or regulatory or law enforcement authorities under laws that govern theprotection of non-public personal information.  Moreover, any public perception that we have engaged in the unauthorizedrelease of, or have failed to adequately protect, private information couldadversely affect our ability to attract and retain members and customers.  Such events could be very expensive to remedy, coulddamage our reputation and could discourage existing and potential customersfrom purchasing our membership programs. Any such events could substantially harm our business, results ofoperations and financial condition.

 

***Ourfailure to adequately protect our****CARExpress**TM** **brand and other intellectualproperty could have an adverse effect on our business.*

** **

Intellectualproperty is important to our success.  Werely upon confidentiality procedures and contractual provisions to protect ourbusiness, proprietary technology and CARExpressTM brand.  Our general policy is to enter into confidentialityagreements with our employees and consultants, and nondisclosure agreementswith all other parties to whom we disclose confidential information.  We have obtained registered trademarks fromthe United States Patent and Trademark Office for the words “CARExpress” and “CARExpressPlus” as well as our CARExpressTM brand. We may apply for legalprotection for certain of our other intellectual property in the future.   These trademarks and any additional legalprotection we may obtain in the future may be challenged by others or invalidatedthrough administrative process or litigation. As a result, our means of protecting our proprietary technology andbrands may be inadequate.  Furthermore,despite our efforts, we may be unable to prevent third parties from infringingupon or misappropriating our intellectual property.  Any such infringement or misappropriationcould have a material adverse effect on our business, financial condition andresults of operations.

 

***Becausecompetition for our target employees is intense, we may not be able to attractand retain the highly-skilled employees that we need to support our plannedgrowth.***

** **

**Toexecute our growth plan, we must attract and retain highly-qualifiedpersonnel.  We need to hire additionalpersonnel in virtually all operational areas, including selling and**

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** **

**marketing, operations andtechnical support, customer service and administration.  Competition for these personnel remainsintense, especially for individuals with high levels of experience in designingand developing health membership programs. We may not be successful in attracting and retaining qualifiedpersonnel.  Many of the companies withwhich we compete for experienced personnel have greater resources than wehave.  If we fail to attract newpersonnel or retain and motivate our current personnel, our business and futuregrowth prospects could be severely harmed.**

** **

*If we acquire any healthcarecompanies or products in the future, such companies and products could provedifficult to integrate, disrupt our business, dilute stockholder value andadversely affect our operating results.*

 

We may acquire or makeinvestments in complementary healthcare companies, businesses, assets, productsand services in the future.  We have notmade any such acquisitions or investments to date, and therefore, our abilityto make acquisitions or investments is unproven.  Acquisitions and investments involve numerousrisks, including:

 

·                  difficulties in integrating operations, technologies,services and personnel;

 

·                  the diversion of financial and management resourcesfrom existing operations;

 

·                  the risk of entering new markets;

 

·                  the potential loss of key employees; and

 

·                  the inability to generate sufficient revenue to offsetacquisition or investment costs.

 

In addition, if wefinance any acquisitions by issuing convertible debt or equity securities, ourexisting stockholders may be diluted which could affect the market price of ourstock.  As a result, if we fail toproperly evaluate and execute any acquisitions or investments, our business andprospects may be seriously harmed.

 

Risks Associated With OurIndustry

 

*The health discount membershipindustry is rapidly evolving and if we are not successful in promoting thebenefits of our membership programs and CARExpress**TM** **brand, our growth may be limited.*

 

Based on our experiencewith consumers, we believe that many consumers are not familiar with the healthdiscount membership industry and the benefits provided by these membershipprograms.  In addition, there may be alimited-time opportunity to achieve and maintain a significant share of themarket for these membership programs due in part to the rapidly evolving natureof the health membership industry and the substantial resources available toour existing and potential competitors. If people do not recognize or acknowledge these benefits, the market forour CARExpressTM membership programs may develop more slowly than weexpect, which could adversely affect our operating results.

 

Developing andmaintaining consumer awareness of our CARExpressTM brand is critical to achieving widespreadacceptance of our membership programs. Furthermore, we believe that 

 

 

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the importance of brandrecognition will increase as competition in our market develops.  Successful promotion of our CARExpressTM brand will depend largely on the effectiveness of ourmarketing efforts and on our ability to develop reliable and useful membershipprograms at competitive prices.  If wefail to successfully promote our CARExpressTM brand, or if our expenses to promote andmaintain our CARExpressTM brand are greater than anticipated, our financialcondition and results of operations could suffer.

 

*The success of our businessdepends upon the continued growth and acceptance of health discount membershipprograms as a suitable alternative or supplement to traditional healthinsurance.*

 

Growth in sales of ourmembership programs will depend on the acceptance of membership programs as asuitable alternative or supplement to traditional health insurance.  Health discount membership programs couldlose their viability as an alternative to health insurance due to changes inhealthcare laws and regulations, an inadequate number of healthcare providersparticipating in the programs, customer dissatisfaction with the method of makingpayments and receiving discounts, and new alternative healthcaresolutions.  If health discount membershipprograms do not gain widespread market acceptance, the demand for ourmembership programs could be significantly reduced, which could have a materialadverse effect on our business, financial condition and results of operations.

 

***Evolvingregulation of the health membership industry may affect us adversely.***

** **

Asthe health discount membership industry continues to evolve, increasingregulation by federal and state agencies becomes more likely.  The marketing and sale ofhealth discount membership programs is subject to federal, state and localregulation, including the prohibition of business corporations from providingmedical care, the fraud and abuse provisions of the Medicare and Medicaidstatutes, state laws that prohibit referral fees and fee splitting, andregulations applicable to insurance companies and organizations that providehealthcare services.  Compliance withchanges in applicable laws and regulations could materially increase theassociated operating costs. Non-compliance with these laws and regulations could cause us to becomethe subject of a variety of enforcement or private actions, subject us or ourmanagement personnel to fines or various forms of civil or criminalprosecution, and result in negative publicity potentially damaging ourreputation, our PPO and network relationships, and our relationships withmembers and consumers in general.  Ourfailure to comply with current, as well as newly enacted or adopted, federaland state regulations could have a material adverse effect upon our business,financial condition and results of operations.

 

Risks Associated With OurStock

 

*Future sales of our common stockmay cause our stock price to decline.*

 

As of March 19,2009, we had 53,186,281 shares of common stock outstanding.  Of this amount, 33,808,958 shares were freelytradable without restriction, unless the shares are purchased by ouraffiliates.  The remaining 19,377,323****shares were “restricted securities” as that term is definedunder Rule 144 of the Securities Act. None of our directors, executive officers or employees is subject tolock-up agreements or market stand-off provisions that limit their ability 

 

 

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to sell shares of ourcommon stock.  The sale of a large numberof shares of our common stock, or the belief that such sales may occur, couldcause a drop in the market price of our common stock.

 

*We intend to raise additionalfunds in the future through issuances of securities and such additional fundingmay be dilutive to stockholders or impose operational restrictions.*

 

We intend to raiseadditional capital in the future to help fund our operations through sales ofshares of our common stock or securities convertible into shares of our commonstock, as well as issuances of debt. Such additional financing may be dilutive to our stockholders, and debtfinancing, if available, may involve restrictive covenants which may limit ouroperating flexibility.  If additionalcapital is raised through the issuances of shares of our common stock orsecurities convertible into shares of our common stock, the percentageownership of existing stockholders will be reduced.  These stockholders may experience additionaldilution in net book value per share and any additional equity securities mayhave rights, preferences and privileges senior to those of the holders of ourcommon stock.

 

*We identified material weaknessesin our internal control over financial reporting during the initial assessmentof our internal controls that we performed**inconnection with the preparation of the audited consolidated financialstatements included in this report**.*

 

Rules adopted by theSEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 requiremanagement to complete an annual assessment of our internal control overfinancial reporting.  The first annualassessment of our internal controls that our management was required to preparewas completed in connection with the preparation of our audited consolidatedfinancial statements for the year ended December 31, 2007.  During the preparation of our audited consolidatedfinancial statements for the year ended December 31, 2008, we identifiedcontrol deficiencies that have been classified as material weaknesses in ourinternal control over financial reporting. A material weakness is a control deficiency that results in a more thanremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected on a timely basis byemployees in the normal course of their assigned functions.  Based on the material weaknesses identified,management concluded that our internal control over financial reporting was noteffective as of December 31, 2008.

 

The standards that mustbe met for management to assess the internal control over financial reportingare new and complex, and require significant documentation, testing andpossible remediation to meet the detailed standards.  We may encounter problems or delays incompleting the activities necessary to make future assessments of our internalcontrol over financial reporting and completing the implementation of anynecessary improvements.  Futureassessments may require us to incur substantial costs and may require asignificant amount of time and attention of management, which could seriouslyharm our business, financial condition and results of operations.  If we are unable to assess our internalcontrol over financial reporting as effective in the future, investors may loseconfidence in us and our stock may be negatively impacted.

 

 

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*If ourindependent registered public accounting firm is unable to provide anunqualified attestation report on our assessment**of ourinternal control over financial reporting**, investors may lose confidence in us and our stockmay be negatively impacted.*

 

Rules adopted by the SEC pursuant to Section 404 of theSarbanes-Oxley Act of 2002 will require our independent registered publicaccounting firm to complete an attestation report on our assessment of ourinternal control over financial reporting.  The firstattestation report of our assessment that our independent registered publicaccounting firm must complete will be required in connection with thepreparation of our annual report for our fiscal year ending December 31,2009, unless extended further by the SEC. The attestation process that must be performed by our independentregistered public accounting firm is also new and complex.  We may encounter problems or delays inreceiving an unqualified attestation of our assessment by our independentregistered public accountants. Compliance with these new rules could require us to incursubstantial costs and may require a significant amount of time and attention ofmanagement, which could seriously harm our business, financial condition andresults of operations.  If ourindependent registered public accounting firm is unable to provide anunqualified attestation report on our assessment, investors may lose confidencein us and our stock may be negatively impacted.

* *

*We arenot subject to certain of the corporate governance provisions of theSarbanes-Oxley Act of 2002 and, without voluntary compliance with suchprovisions, will not receive the benefits and protections they were enacted toprovide.*

 

Since our common stock is not listed for trading on anational securities exchange, we are not subject to certain of the corporategovernance rules established by the national securities exchanges pursuantto the Sarbanes-Oxley Act of 2002.  Theserules relate to independent director standards, director nominationprocedures, audit and compensation committees standards, the use of an auditcommittee financial expert and the adoption of a code of ethics.

 

Our board of directors currently consists of David M.Daniels, who is our President and Chief Executive Officer.  Mr. Daniels is not an “independentdirector” as such term is defined by any of the national securities exchangesor inter-dealer quotation systems.  Ourboard of directors has not created a separately-designated standing auditcommittee and Mr. Daniels does not qualify as an “audit committeefinancial expert” as that term is defined in Item 407(d)(5)(ii) ofRegulation S-K promulgated under the Securities Act.  Unless we voluntarily elect to fully complywith all of these rules, we will not receive the benefits and protections theywere enacted to provide.

 

While we intend to file an application to have oursecurities listed for trading on a national securities exchange in the futurewhich would require us to fully comply with those obligations, we cannot assureyou that we will file such an application, that we will be able to satisfyapplicable listing standards, or, if we do satisfy such standards, that we willbe successful in receiving approval of our application by the governing body ofthe applicable national securities exchange.

 

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*The market price of our common stock is likely tobe highly volatile and subject to wide fluctuations.*

 

The market price of our common stock is likely to behighly volatile and could be subject to wide fluctuations in response to anumber of factors that are beyond our control, including:

 

·                  announcements of new programs or services by ourcompetitors;

 

·                  demand for our membership programs, includingfluctuations in membership renewals; and

 

·                  fluctuations in revenue from the marketing anddistribution partners that we use.

 

In addition, the market price of our common stockcould be subject to wide fluctuations in response to:

 

·                  quarterly variations in our revenues andoperating expenses;

 

·                  announcements of new programs or servicesby us; and

 

·                  our ability to accommodate future growthin our operations.

 

In addition, the stockmarket has experienced significant price and volume fluctuations that haveparticularly affected the market price of the stock of many early-stagecompanies and that often have been unrelated or disproportionate to theoperating performance of these companies. Market fluctuations such as these may seriously harm the market price ofour common stock.  Further, securitiesclass action suits have been filed against companies following periods ofmarket volatility in the price of their securities.  If such an action is instituted against us,we may incur substantial costs and a diversion of management attention andresources, which would seriously harm our business, financial condition andresults of operations.

 

*Our operating results may fluctuate significantly,and these fluctuations may cause our stock price to fall.*

 

Our operating results will likely vary in the futureprimarily as the result of fluctuations in our billings, revenue and operatingexpenses.  We expect to continue to incurincreases in operating expenses in the future as we continue engaging inselling and marketing activities, develop new membership programs, hireadditional personnel and comply with state and federal laws applicable to ourbusiness and SEC reporting requirements. If our results of operations do not meet the expectations of ourshareholders or the investment community, the price of our common stock maydecline.

 

*Our shares of common stock arenot listed for trading on a national securities exchange or the Nasdaq StockMarket.*

 

Our common stock currently trades on the OTC BulletinBoard and is not listed for trading on any national securities exchange or theNasdaq Stock Market.  Investments insecurities trading on the OTC Bulletin Board are generally less liquid thaninvestments in securities trading on a national securities exchange or theNasdaq Stock Market.  While we 

 

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intend to submitan application to a national securities exchange or the Nasdaq Stock Market tolist our shares of common stock for trading thereon, we can provide noassurance that we will submit such an application, that such application will be accepted, or that our shares of commonstock will be approved for trading thereon. The failure of our shares to be approved for trading on anational securities exchange or the Nasdaq Stock Market may have the effect of limiting the trading activity of our common stockand reducing the liquidity of an investment in our common stock.

 

*We have never paid any dividends on our common stock and donot intend to pay any dividends on our common stock in the foreseeable future.*

 

We have never paid anydividends on our common stock and do not intend to pay any dividends on ourcommon stock in the foreseeable future. We intend to use any cash generated from our operations for reinvestmentin the growth of our business.  Anydetermination to pay dividends in the future will be made by our board ofdirectors and will depend upon our results of operations, financial condition,contractual restrictions, restrictions imposed by applicable law and otherfactors deemed relevant by our board of directors.  Accordingly, realization of a gain onstockholders’ investments will depend on the appreciation of the price of ourcommon stock.  We can provide noassurance that our common stock will appreciate in value or even maintain theprice at which stockholders purchased their shares.

 

*If our executive officers,directors and principal stockholders choose to act together, they may be ableto control our management and operations, which may prevent us from takingactions that may be favorable to you.*

 

Our executive officers, directors and principalstockholders, and their respective affiliates, beneficially own approximately35% of our outstanding common stock. These stockholders, acting together, have the ability to exert substantialinfluence over any matters requiring approval by our stockholders, includingthe election and removal of directors and any proposed merger, consolidation orsale of all or substantially all of our assets. In addition, they could dictate the management of our business andaffairs.  This concentration of ownershipcould have the effect of delaying, deferring or preventing a change in controlof us or impeding a merger or consolidation, takeover or other businesscombination that could be favorable to you.

 

***ApplicableSEC rules governing the trading of “penny stocks” may limit the tradingand liquidity of our common stock which may affect the trading price of ourcommon stock.***

** **

Our common stock is a “penny stock” as defined under Rule 3a51-1of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and isaccordingly subject to SEC rules and regulations that impose limitationsupon the manner in which our common stock can be publicly traded.  These regulations require the delivery, priorto any transaction involving a penny stock, of a disclosure schedule explainingthe penny stock market and the associated risks.  Under these regulations, certain brokers whorecommend such securities to persons other than established customers or certainaccredited investors must make a special written suitability determinationregarding such a purchaser and receive such purchaser’s written agreement to a 

 

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transaction prior to sale.  These regulations may have the effect oflimiting the trading activity of our common stock and reducing the liquidity ofan investment in our common stock.

 

**Item 2.****          ****Properties.**

 

Our corporateheadquarters and sole business office is located at 120 Gibraltar Road, Suite 107,Horsham, Pennsylvania 19044, where we lease approximately 7,100 square feet ofspace for an initial monthly rent payment of approximately $13,500.  This lease has a term of three years andexpires on May 30, 2010.  We believethat our office space is adequate to support our current operations and thatadequate additional space is available to support projected growth in ouroperations over the next 12 months.

 

**Item 3.****          ****Legal Proceedings.**

 

We are not currently aparty to any material legal proceedings.

 

**Item 4.****          ****Submission of Matters to a Voteof Security Holders.**

 

None.

 

**PART II**

 

**Item 5.****          ****Market For Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities.**

 

**Market Information**

 

Ourcommon stock currently trades on the OTC Bulletin Board under the symbol “NHPR”.  The following table sets forth the range ofhigh and low closing prices for shares of our common stockon the OTC Bulletin Board for the periods indicated, as reported by Nasdaq.  The quotations represent inter-dealer prices,without retail mark-up, markdown or commission, and may not represent actualtransactions.

 

| **Fiscal Year Ended  December 31, 2007** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended March 31, 2007             |       | $        | 0.98       |    | $          | 0.59 |   |
| Quarter ended June 30, 2007              |       | $        | 0.98       |    | $          | 0.63 |   |
| Quarter ended September 30, 2007         |       | $        | 0.79       |    | $          | 0.45 |   |
| Quarter ended December 31, 2007          |       | $        | 0.55       |    | $          | 0.205 |   |

 

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| **Fiscal Year Ended  December 31, 2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended March 31, 2008             |       | $        | 0.37       |    | $          | 0.20 |   |
| Quarter ended June 30, 2008              |       | $        | 0.60       |    | $          | 0.245 |   |
| Quarter ended September 30, 2008         |       | $        | 0.25       |    | $          | 0.11 |   |
| Quarter ended December 31, 2008          |       | $        | 0.14       |    | $          | 0.05 |   |

 

The last reported trading price of our commonstock as reported on the OTC Bulletin Board on March 19, 2009 was $0.088per share.

 

**Holders**

 

As of March 19,2009, the number of stockholders of record of our common stock was 81.

 

**Dividends**

 

We have not paidany dividends on our common stock to date, nor do we intend to pay anydividends on our common stock in the foreseeable future.  We intend to retain future earnings, if any,to finance the growth of our business.

 

**RecentSales of Unregistered Securities**

 

During our fiscalquarter ended December 31, 2008, we sold the following securities withoutregistration under the Securities Act:

 

In December 2008, we issued shares of ourcommon stock to David M. Daniels and Alex Soufflas and issued an option toacquire shares of our common stock to Patricia S. Bathurst.  A description of theseshares and the option is set forth under *“Item 11.  Executive Compensation”*of thisreport.  The securities were issued to alimited number of accredited investors in private placement transactions exemptfrom the registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind and without payment of underwriting discountsor commissions to any person.

 

**Item 7.****          ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

This Management’sDiscussion and Analysis and other parts of this report contain forward-lookingstatements that involve risks and uncertainties.  All forward-looking statements included inthis report are based on information available to us on the date hereof, and,except as required by law, we assume no obligation to update any suchforward-looking statements.  Our actualresults may differ materially from those anticipated in these forward-lookingstatements as a result of a number of factors, including those set forth underthe caption *“Item 1A. Risk*

 

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*Factors”* of this report and elsewhere in this report.  The following should be read in conjunctionwith our audited consolidated financial statements beginning on page F-1of this report.

 

**Overview**

 

We are a nationalhealthcare membership organization that was formed to address the need foraffordable healthcare nationwide.  Wecreate, market and sell membership programs to predominantly underservedmarkets in the healthcare industry through a national healthcare savingsnetwork called CARExpressTM.  CARExpressTM is a network of hospitals, doctors, dentists,pharmacists and other healthcare providers comprised of over 1,000,000healthcare providers that render their services and products to CARExpressTM members atdiscounted prices.  CARExpressTM enables peopleto engage in point-of-service transactions directly with these healthcareproviders and pay discounted prices to the providers.

 

Our membership programsoffer savings on healthcare services to persons who are uninsured orunderinsured by providing them with access to the same PPOs that are utilizedby employers that self-fund at least a portion of their employees’ healthcarecosts.  Our membership programs are alsoused to supplement benefit plans and fill in the gaps created by the need toreduce health benefits to keep the costs of health insurance reasonable.  We sell our membership programs directlythrough our sales force and indirectly through brokers and agents, unions andassociations, small businesses and other organizations.

 

We are actively engagedin marketing our membership programs to the public.  Our primary objective is to generateincreased sales of our membership programs while expanding our position as aprovider of unique healthcare membership service programs.  The target market for our membership programsis comprised of individuals who have either limited health benefits or nohealth benefits.  Our share of thismarket is currently less than one percent and has been less than one percentsince our inception.  Since we are notcurrently large enough to pursue and support the entire market, we intend tocontinue to pursue specific opportunities that we identify in this marketthrough our various marketing and distribution channels.  Through product design, competitivemembership pricing, and a variety of marketing and distribution partners, weare pursuing opportunities in the healthcare market that insurance companieshave not addressed.

 

**Operational Metrics**

 

Our revenue consistsalmost exclusively of recurring monthly membership fees that we receive frommembers of our membership programs.  Ourmembers pay us membership fees each month for the duration of their membership.  The average membership fee per member permonth that we receive for our CARExpressTM health discount programs is approximately$35.  Approximately 95% of the CARExpressTM health discountprograms that we have sold to our current members consist of our ComprehensiveCare Program which is currently sold at a monthly retail price of $39.95.  The remaining CARExpressTM health discountprograms that we have sold to our current members consist of a mix of our lessexpensive programs.  Approximately 90% ofthe CARExpress PlusTM membership programs that we have sold to ourcurrent members consist of our CARExpress PlusTM Gold Program which is currently sold at amonthly retail price of $137.  Theremaining CARExpress PlusTM membership programs that we have sold to ourcurrent members consist of a mix of our other programs.

 

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We receive each member’sinitial monthly payment and billing information at the beginning of the firstmonthly membership period.  Monthlypayments for subsequent periods are received at the beginning of the applicableperiod.  The monthly membership fees thatwe receive are recognized as revenue evenly over the applicable monthly membershipperiod.  As a result, there is a delay offour weeks between the date we receive a monthly membership fee and the date werecognize the entire fee as revenue.

 

A key metric that we useto evaluate our success is our member retention rates.  Member retention rates represent thepercentage of new members that we acquire that we are able to retain for aspecified period of time.  Since we incura large portion of our costs up front and receive recurring membership feesthroughout the term of the membership, the longer we are able to retain themembers we acquire, the greater the revenue potential of the membershipprograms that we sell.  We believe thatthe key to obtaining a high member retention rate is to target our marketingcampaigns towards those individuals and organizations that are most in need ofour programs, most capable of paying for our programs, and most loyal to us andour programs.  Member retention rates canbe influenced by a variety of factors, including:

 

·                  the type of membership programs beingsold;

 

·                  the marketing campaign being used to sellour membership programs;

 

·                  the financial condition and loyalty ofour members;

 

·                  the distribution channel selling ourmembership programs; and

 

·                  the type and amount of compensation beingpaid to our marketing and distribution partners to sell our membershipprograms.

 

We have obtained valuableinformation regarding member demographics through the marketing and advertisingcampaigns that we have conducted and are focusing our marketing and advertisingcampaigns on members and member groups that we have identified as being mostsuitable for our membership programs.  Asa result, we expect our retention rates to continue to improve over the next 12months as we pursue these opportunities through our various marketing anddistribution channels.

 

**Financial Results and Outlook**

 

Our strategy is tocontinue to expand our position as a provider of unique discount healthcaremembership programs.  We have implementedseveral strategic growth initiatives during the past 12 months through which weachieved new contracts and strategic partnerships with a number oforganizations, the most profound of which involved a shift in our salesstrategy from sales through marketing companies to sales through employers and “affinitygroups.”  An “affinity group” is a groupof people who share interests, issues, and a common bond or background, andoffer support for each other.  Examplesof the types of affinity groups that we are working with include unions,associations, chambers of commerce and small business networks.  These organizations typically have a largenumber of members and thus, each one provides us with the opportunity to obtaina large number of sales.  In addition, itis far less costly for us to sell our CARExpressTM programs through these organizations than itis for us to engage in expensive, nation-wide marketing and advertisingcampaigns through marketing 

 

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companies, and themembers that we obtain through these sources tend to remain members for a muchlonger period of time.

 

We experienced a decreasein revenue for the year ended December 31, 2008 compared to the year endedDecember 31, 2007 as a result of the shift in our sales strategy fromsales through marketing companies to sales through employers and affinitygroups.  However, the shift in our salesstrategy, coupled with cost-cutting initiatives that we implemented over thepast few quarters in response to deteriorating economic conditions, haveresulted in substantially lower direct costs. As a result, our gross profit and gross profit margins for the yearended December 31, 2008 were substantially higher than our gross profitand gross profit margins for the corresponding periods in 2007.  Similarly, our net losses and net losses pershare for the year ended December 31, 2008 were substantially lower thanour net losses and net losses per share for the year ended December 31,2007.  The shift in our sales strategyand the implementation of cost-cutting initiatives also resulted in asubstantial decrease in net cash used by operating activities during the yearended December 31, 2008 compared to the year ended December 31, 2007and a net increase in cash for the year ended December 31, 2008 comparedto a net decrease in cash for the year ended December 31, 2007.

 

We generated revenue of$2,671,420 for the year ended December 31, 2008 compared to revenue of$3,724,204 for the year ended December 31, 2007.  We achieved a gross profit of $1,635,344 andgross profit percentage of 61% for the year ended December 31, 2008,compared to a gross profit of $982,075 and gross profit margin of 26% for theyear ended December 31, 2007.  Werecognized a net loss of $(3,050,902), or $(0.07) per share, for the year endedDecember 31, 2008, compared to a net loss of $(3,531,970), or $(0.10) pershare, for the year ended December 31, 2007.  Net cash used by operating activities was$(1,339,716) for the year ended December 31, 2008 compared to $(2,923,963)for the year ended December 31, 2007 representing a decrease of 54%.  This was the primary reason that we generateda net increase in cash of $145,339 for the year ended December 31, 2008compared to a net decrease in cash of $(1,564,763) for the year ended December 31,2007.

 

We will generate futurerevenue and members primarily through sales of our CARExpressTM health discountprograms and our CARExpress PlusTM membership programs to employees and membersof affinity groups through our direct sales force, our marketing anddistribution partners, and various marketing and advertising campaigns.  We have entered into agreements with severalaffinity groups through which we are generating sales of our CARExpressTM membershipprograms and are currently in discussions with several other organizationsregarding the sale of our CARExpressTM membership programs.  We intend to finance each of these projectsthrough cash on hand, internally generated cash flows from operating activitiesand, if necessary, proceeds from the issuance of debt and equitysecurities.  We will use any additionalinvestments that we receive to accelerate the expansion of each of ouradvertising campaigns and programs and increase sales of our membershipprograms.

 

We expect the number of CARExpressTM membersgenerated each month to increase substantially during the quarter ended June 30,2009 as a number of deals that we have either recently closed or are about toclose begin to generate members for us, and expect the number of CARExpressTM membersgenerated each month to continue increasing thereafter.  We also expect 

 

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ourretention rates to improve over the next 12 months since members generatedthrough affinity groups have historically remained members of CARExpressTM for a muchlonger period of time than members generated through marketing companies.  As a result, we expect to generate revenue ofbetween $1 million and $2 million for the quarter ended June 30, 2009 andbetween $8 million and $12 million for the year ended December 31, 2009.  As a result of this increase in revenue andthe various cost-cutting initiatives that we implemented over the past fewquarters, we expect to generate positive cash flows from operating activitiesof between $100,000 and $300,000 for the quarter ended June 30, 2009 andbetween $1 million and $2 million for the year ended December 31, 2009 asthe recurring membership fees from our increasing membership base overtake thecosts associated with retaining these members and obtaining new members.  We can provide no assurance, however, thatour membership base will increase as projected, that our member retention rateswill improve over the next 12 months, that we will generate the aforementionedprojected revenue, or that we will generate positive cash flows from operatingactivities during the quarter ended June 30, 2009 or the year ended December 31,2009.

 

**CriticalAccounting Policies**

 

Our Management’sDiscussion and Analysis contained herein is based upon our consolidatedfinancial statements and accompanying notes, which have been prepared inaccordance with United States generally accepted accounting principles (“GAAP”).  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue and expenses, and related disclosure ofcontingent assets and liabilities.  Whenmaking these estimates and assumptions, we consider our historical experience,our knowledge of economic and market factors and various other factors that webelieve to be reasonable under the circumstances.  Actual results may differ under differentestimates and assumptions.

 

Theaccounting estimates and assumptions discussed in this section are those thatwe consider to be the most critical to an understanding of our financialstatements because they inherently involve significant judgments anduncertainties.

 

RevenueRecognition

 

Our revenue consists of the monthly membership feesthat we receive from the sale of our membership programs as well as anyshipping and handling fees that we may receive for the shipment of membershippackages to new members.  The date a monthlymembership begins varies for each individual member depending upon when theparticular member purchased the membership. Members have the right toterminate their membership at any time and may do so at the end of each monthbefore they pay the membership fee for the next month.  Werecognize the membership fees and shipping and handling fees as revenue whenpersuasive evidence of an arrangement exists, delivery or performance hasoccurred, the sales price is fixed and determinable, and collectibility isreasonably assured in accordance withStaff Accounting Bulletin Topic 13.A (“SAB Topic 13.A”).

 

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The membership fees are paid by members repeatedlyeach month.  The contractual term for themembership fees is equal to the monthly membership period.  The expected period during which the serviceswill be performed in return for the membership fees will never extend beyondthe one-month membership period since the members will pay another monthlymembership fee before the next monthly membership period begins.  As aresult, we recognize the membership fees on a straight-line basis over thecontract term since the relationship with the member is not expected to extendbeyond the contractual term and the member is not expected to continue to benefitfrom the payment of the membership fee after the contractual term has expired.

 

The shipping and handling fees are one-time paymentsreceived by us from the applicable members when they first become amember.  These fees are not paid repeatedly each month.  The monthlycontract term is, therefore, not necessarily equal to the expected periodduring which services will be performed since the period during which serviceswill be performed is the average period during which each person is expected tobe a member.  We calculate the expected period during which we expect ourmembers to remain members as of the end of each fiscal quarter.  We do soby determining the total number of members that we had on such date, thendividing the total number of months for which all of such members had been amember as of that date by the number of such members.  This provides theaverage number of months each member has been a member.  The expectedperiod during which services will be performed (i.e., the expected period duringwhich each member will remain a member) has always exceeded the initial monthlymembership period.  Therefore, we recognize shipping and handling fees ona straight-line basis over the expected period during which the services willbe performed since the relationship with our members is expected to extendbeyond the initial contractual term and our members are expected to continue tobenefit from the payment of the shipping and handling fees after the initialcontractual term has expired.

 

Atthe beginning of each membership period, the monthly membership fee is paid bythe member and recorded as deferred revenue. We then recognize revenue as the services are rendered.  Shipping and handling fees that we receivefor the shipment of membership packages to new members are included in ourmembership fees and recorded as deferred revenue.  We typically receive cash within five days ofthe date the membership fee is charged to a member’s credit card.

 

We offer a free trial to some of our members.  We do not recognize any revenue during thefree-trial period.  In the event themember continues the membership after the free-trial period expires, the memberpays the monthly membership fee and we recognize revenue as services arerendered.

 

Wealso offer a 30-day money-back guarantee to our members.  Members can cancel their membership duringthe first 30 days of their initial membership period and receive a fullrefund.  After that, members can canceltheir membership at the end of any subsequent monthly membership period.  If a member cancels his or her membership andthe member’s credit card has already been processed for the next monthlymembership period, a refund check will be issued to the member and no revenuewill be recognized for that period.

 

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We recognize refunds as expense in accordance with SAB Topic 13.A.4.aand Statement of Financial Accounting Standards No. 48, *“Revenue Recognition When Right of Return Exists,”* whichpermit companies to recognize refundable membership fees, net of estimatedrefunds, as earned revenue over the membership term in limited circumstances ifthe following criteria are met: (i) the estimate of cancellations andrefunded revenue are being made for a large pool of homogeneous items(membership transactions with the same characteristics, such as terms, periods,class of customers, nature of services, etc.), (ii) reliable estimates ofthe expected refunds can be made on a timely basis and it is remote thatmaterial adjustments to previously recognized revenue would be required, (iii) thereis a sufficient company-specific historical basis upon which to estimate therefunds and such historical basis is predictive of future events, and (iv) theamount of the membership fees specified in the agreement at the outset of thearrangement is fixed, other than the customer’s right to request a refund.

 

Stock-Based Compensation

 

We account for employee stock-based compensation inaccordance with the fair value recognition provisions of Financial Statement ofFinancial Accounting Standards No. 123 (revised 2004), *“Share-Based Payment”* (“SFAS 123R”) using the modifiedprospective transition method.  Underthis method, compensation expense includes: (a) compensation expense forall share-based payments granted, but not yet vested, as of January 1,2006 based on the grant-date fair value estimated in accordance with theoriginal provisions of Statement of Financial Accounting Standards No. 123,*“Accounting For Stock-Based Compensation”*(“SFAS123”), and (b) compensation expense for all share-based payments grantedsubsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS 123R.  Such amounts have been reduced by ourestimate of forfeitures of all unvested awards.

 

Weaccount for non-employee stock-based compensation in accordance with SFAS 123and Emerging Issues Task Force No. 96-18 *“Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring orin Conjunction with Selling Goods or Services”* (“EITF 96-18”).  SFAS 123 and EITF 96-18 require that werecognize compensation expense based on the estimated fair value of stock-basedcompensation granted to non-employees over the vesting period, which isgenerally the period during which services are rendered by the non-employees.

 

Weuse the Black-Scholes pricing model to determine the fair value of thestock-based compensation that we grant to employees and non-employees.  We are required to make certain assumptionsin connection withthis determination, the most important of which involves the calculation ofvolatility with respect to the price of our common stock.  The computation of volatility is intended toproduce a volatility value that is representative of our expectations about thefuture volatility of the price of our common stock over an expected term.  We used our share price history to determinevolatility and cannot predict how the price of our shares of common stock willreact on the open market in the future since our common stock has only beentrading on the OTC Bulletin Board since March 30, 2006.  As a result, the volatility value that wecalculated may differ from the future volatility of the price of our shares ofcommon stock.

 

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For a morecomplete discussion of our accounting policies and procedures, see our notes toconsolidated financial statements beginning on page F-7.

 

**Recent Accounting Pronouncements**

 

InDecember 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 141(R), “*Business Combinations*” (“SFAS 141R”), which changesaccounting for business acquisitions.  SFAS No. 141(R) requiresthe acquiring entity in a business combination to recognize all (and only) theassets acquired and liabilities assumed in the transaction and establishes theacquisition-date fair value as the measurement objective for all assetsacquired and liabilities assumed in a business combination.  Certainprovisions of this standard will, among other things, impact the determinationof acquisition-date fair value of consideration paid in a business combination(including contingent consideration), exclude transaction costs fromacquisition accounting, and change accounting practices for acquiredcontingencies, acquisition-related restructuring costs, in-process research anddevelopment, indemnification assets and tax benefits.  SFAS 141R iseffective for fiscal years and periods beginning after December 15,2008.  We do not expect this newstatement to have a material impact on our financial condition and results ofoperations.

 

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 160, “*Non-controlling Interests in ConsolidatedFinancial Statements — an Amendment of Accounting Research Bulletin No. 51*”(“SFAS 160”).  The objective of SFAS 160is to improve the relevance, comparability and transparency of the financialinformation that a reporting entity provides in its consolidated financialstatements.  SFAS 160 applies to allentities that prepare consolidated financial statements, except not-for-profitorganizations, but will affect only those entities that have an outstandingnon-controlling interest in one or more subsidiaries or that deconsolidate asubsidiary.  SFAS No. 160 iseffective for fiscal years and periods beginning after December 15, 2008,and early adoption is prohibited.  We donot expect this new statement to have a material impact on our financialcondition and results of operations.

 

In February 2008, the FASBissued FASB Staff Position No. 157-2, “*EffectiveDate of FASB Statement No. 157,*” (“FSP 157-2”) which delayedthe effective date for adoption of fair value measurements for non-financialassets and liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis (at least annually),until fiscal years beginning after November 15, 2008.  These non-financial items include assets andliabilities such as reporting units measured at fair value in a goodwillimpairment test and non-financial assets acquired and liabilities assumed in abusiness combination.  FSP 157-2 iseffective for fiscal years beginning after December 15, 2008.  We do not expect this new staff position tohave a material impact on our financial condition and results of operations.

 

In March 2008, the FASB issued Statement of Financial AccountingStandards No. 161, “*Disclosures AboutDerivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 13*”(“SFAS 161”).  SFAS 161 amendsand expands the disclosure requirements of FASB Statement No. 133,requiring enhanced disclosures about our hedging activities.  We are required to provide enhanceddisclosures about (a) how and why it uses derivative instruments, (b) howderivative instruments and relatedhedged items are accounted for under FASB 

 

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StatementNo. 133 and its related interpretations, and (c) how derivativeinstruments and related hedged items affect our financial position, results ofoperations, and cash flows.  SFAS No. 161is effective for fiscal years and periods beginning after December 15,2008, with comparative disclosures of earlier periods encouraged upon initialadoption.  We do not expect this new statementto have a material impact on our financial condition and results of operations.

 

In May 2008, the FASB issuedFASB Staff Position No. 14-1, “*Accountingfor Convertible Debt Instruments That May Be Settled in Cash uponConversion (Including Partial Cash Settlement)*” (“FSP 14-1”).  FSP 14-1 specifies that issuers ofconvertible debt instruments should separately account for the liability (debt)and equity (conversion option) components of such instruments in a manner thatreflects the issuer’s non-convertible debt borrowing rate.  Previousguidance provided for accounting for this type of convertible debt instrumententirely as debt.  FSP 14-1 is effectivefor fiscal years beginning after December 15, 2008.  We are currently evaluating the impact thatthis new staff position will have on our financial condition and results ofoperations.

 

In June 2008, the FASB issuedEmerging Issues Task Force Issue No. 07-5, “*Determining Whether an Instrument (or Embedded Feature) Is Indexed toan Entity’s Own Stock”* (“EITF 07-5”).  EITF 07-5 provides guidance in assessingwhether an equity-linked financial instrument (or embedded feature) is indexedto an entity’s own stock for purposes of determining whether the appropriateaccounting treatment falls under the scope of Statement of Financial AccountingStandards No. 133, “*Accounting ForDerivative Instruments and Hedging Activities”* and/or EmergingIssues Task Force Issue No. 00-19, “*AccountingFor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock*.”  EITF07-5 provides that an entity should use a two step approach to evaluate whetheran equity-linked financial instrument (or embedded feature) is indexed to itsown stock, including evaluating the instrument’s contingent exercise provisionsand settlement provisions.  It alsoclarifies the impact of foreign currency denominated strike prices andmarket-based employee stock option valuation instruments on the evaluation.  EITF 07-5 is effective for fiscal yearsand periods beginning after December 15, 2008, and early adoption isprohibited.  We are currently evaluatingthe impact that this new issue will have on our financial condition and resultsof operations.

 

**Comparisonof the Years Ended December 31, 2008****and 2007**

 

Revenue

 

                Revenue consists almostexclusively of the monthly membership fees that we receive from members of ourmembership programs.  Revenue decreased$1,052,784 to $2,671,420 for the year ended December 31, 2008 from$3,724,204 for the year ended December 31, 2007.  The decrease of $1,052,784 resulted primarilyfrom a decrease in sales of our membership programs through marketing companiesin connection with the shift in our sales strategy from sales through marketingcompanies to sales through employers and affinity groups.  Approximately 20% of the revenue that wegenerated during the year ended December 31, 2008 was derived from salesof our membership programs to first-time members, compared to approximately 65%during the year ended December 31, 2007. The remainder of the revenue that we generated 

 

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during these yearswas derived from existing members.  Weexpect revenue to increase over the next 12 months as a result of increasedsales of our membership programs to employees and members of affinity groupsthrough our direct sales force, our marketing and distribution partners and ourvarious marketing and advertising campaigns.

 

DirectCosts

 

Direct costsconsist of sales commissions that we pay to our marketing and distributionpartners and fees that we pay to our PPOs and provider networks for access totheir networks.  Direct costs decreased$1,706,053 to $1,036,076 for the year ended December 31, 2008, from$2,742,129 for the year ended December 31, 2007.  The decrease of $1,706,053 was due todecreases of $1,599,009 for sales commissions and $107,044 for PPO and networkprovider costs resulting from the decrease in sales of our membershipprograms.  We expect cost of sales toincrease over the next 12 months as increased sales of our membership programsresult in higher overall sales commission expenses and network provider costs.

 

Sellingand Marketing Expenses

 

Selling andmarketing expenses consist of advertising expenses, marketing expenses,salaries and other compensation paid to employees selling and marketing ourmembership programs, rent expense allocated to our selling and marketing activities,depreciation and amortization expense allocated to our selling and marketingactivities, and all other selling and marketing expenses incurred by us.  Selling and marketing expenses decreased $470to $224,546 for the year ended December 31, 2008, from $225,016 for theyear ended December 31, 2007.  Thedecrease of $470 was due primarily to decreases of $40,183 for marketingprograms and $33,095 for website amortization, partially offset by an increaseof $73,282 for salaries and other compensation paid to employees selling andmarketing our membership programs.  Weexpect selling and marketing expenses to increase during the next 12 months aswe grow our direct sales force and engage in larger and more frequent marketingand advertising campaigns and activities.

 

Generaland Administrative Expenses

 

General andadministrative expenses consist primarily of employee compensation expense,professional fees and other general and administrative expenses.

 

*EmployeeCompensation Expense*.  Employee compensation expense consists of allsalaries and other cash compensation, equity-based compensation, 401(k) contributionsand other compensation that we pay to our employees and the related payrolltaxes that are not associated with our selling and marketing activities.  Employee compensation expense increased$101,593 to $2,185,230 for the year ended December 31, 2008, from$2,083,637 for the year ended December 31, 2008.  The increase of $101,593 was due primarily toincreases of $175,786 for stock option expense, $8,657 for 401(k) contributionsand increases in other employee compensation expenses, partially offset bydecreases of $94,530 in salary expense and related taxes.  We expect employee compensation expense toincrease over the next 12 months as we continue to retain additional executivemanagement personnel and other employees in connection with the growth of ourbusiness.

 

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*ProfessionalFees*.  Professional fees consist of fees paid to ourindependent accountants, lawyers, technology consultants and otherprofessionals and consultants. Professional fees increased $573,774 to $1,229,258 for the year ended December 31,2008 from $655,484 for the year ended December 31, 2007.  The increase of $573,774 was due primarily toan increase of $575,481 for the amount of expense recognized in connection withequity-based compensation paid to service providers and consultants for variousservices, partially offset by decreases in other professional fees.  We expect professional fees to increase overthe next 12 months as we incur additional legal, accounting and technology feesin connection with the general expansion of our business and operations.

 

*Other General and Administrative Expenses*. Other general and administrative expenses consist of office suppliesexpense, computer hardware and system costs, bank service charges, filing feesand dues, non-employee customer service representative expense, rent expense,health insurance and other related benefit costs, financial printer costs,transfer agent costs, the costs of investor relations campaigns and activities,postage and delivery expenses, severance expenses, general business expensesand miscellaneous general and administrative expenses that are not associatedwith our selling and marketing activities. Other general and administrative expenses decreased $545,898 to$1,019,442 for the year ended December 31, 2008 from $1,565,340 for theyear ended December 31, 2007.  Thedecrease of $545,898 resulted primarily from decreases of $263,416 for bankservice charges associated with new and recurring member transactions, $147,632for office supplies, $88,583 for postage and delivery costs, $43,568 fortemporary staffing services, $14,558 for printing and reproduction costs,$14,026 for corporate filing fees and $10,998 for telephone, partially offsetby an increase of $15,397 for health insurance and other employee benefits andincreases in other miscellaneous general and administrative expenses.  We expect other general and administrativeexpenses to increase over the next 12 months as we continue to incur expensesfor bank service charges, financial printer services, investor relationscampaigns and activities, transfer agent fees, health insurance, rent,non-employee customer service representatives, supplies, computer hardware andsystems, and other miscellaneous items associated with the general operationand growth of our business.

 

Loss on the Extinguishment of Debt

 

Loss on theextinguishment of debt consists of the loss that we recognized in connectionwith the payment of $20,000 and the issuance of 240,000 shares of common stockto a debt holder in full payment of all principal and interest that was due andpayable under a $50,000 promissory note and a mutual release from any and allclaims arising out of the promissory note. We recognized a loss on the extinguishment of debt of $30,000 during theyear ended December 31, 2008 in connection with the issuance of theseshares.  We did not recognize any suchloss during the year ended December 31, 2007.  We do not expect to recognize any additionalgains or losses on the extinguishment of debt in the foreseeable future.

 

NetLoss

 

Ournet loss decreased $481,068 to $3,050,902 for the year ended December 31,2008, from $3,531,970 for the year ended December 31, 2007.  The decrease of $481,068 was 

 

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primarily due to decreases of $1,706,053 for directcosts incurred in connection with the sale of our membership programs and$545,898 for other general and administrative expenses, partially offset by adecrease of $1,052,784 in revenue and increases of $573,774 for professionalfees, $101,593 for employee compensation expense and $30,000 for loss on theextinguishment of debt.  We expect tobegin generating a net profit from operations during 2009 as the recurringmembership fees from our increasing membership base overtake the costsassociated with obtaining and retaining members.

 

**Liquidityand Capital Resources**

 

Since our inception, wehave funded our operations primarily through private sales of equity securitiesand the use of short-term debt.  As of December 31,2008, we had cash and cash equivalents of approximately $177,545.

 

Net cash used byoperating activities was $1,339,716 for the year ended December 31, 2008compared to $2,923,963 for the year ended December 31, 2007.  The $1,584,247 decrease in cash used byoperating activities was due primarily to decreases of $481,068 for net loss,$437,783 for deposits, $254,923 for deferred revenue and $42,514 for accountsreceivable, and increases of $765,945 for equity-based compensationexpense.  This was partially offset by adecrease of $392,424 for accounts payable and accrued expenses.

 

We did not have any cashflows from investing activities for the years ended December 31, 2008 and2007.

 

Net cash provided by financing activities was$1,485,055 for the year ended December 31, 2008 compared to $1,359,200 forthe year ended December 31, 2007. The $125,855 increase in cash provided by financing activities was dueto increases of $527,415 for proceeds from the exercise of warrants, and$50,000 for proceeds from the issuance of debt, partially offset by an increaseof $20,000 for payments on debt and a decrease of $431,560 for proceeds fromthe sale of common stock and warrants.

 

Our primary sources ofcapital over the past 12 months are set forth below.

 

In April 2008, we sold 500,000 shares ofcommon stock and one Class A warrant exercisable into 500,000 shares ofcommon stock to an accredited investor for aggregate gross proceeds of $75,000.The Class A warrant had an exercise price of $0.12 per share, wasexercisable for a period commencing on the date of grant and ending on April 18,2008, and expired at the end of the exercise period.

 

In June 2008, we completed a private offeringof 675,000 shares of our common stock, Class A warrants exercisable into675,000 shares of our common stock and Class B warrants exercisable into675,000 shares of our common stock for aggregate cash consideration of$108,000.  These securities were sold inunits comprised of one share of our common stock, one Class A warrant andone Class B warrant at a purchase price of $0.16 per unit.  We agreed to provide each investor with anopportunity to include all shares of common stock and all shares of commonstock issued upon the exercise of the warrants in any registration statementthat we file with the SEC for the purposes of a public offering of oursecurities (excluding registration 

 

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statements on Forms S-4 or S-8).  The Class A warrants were initiallyexercisable into one share of our common stock at an exercise price of $0.20per share, were exercisable during a period of 90 days beginning on the date ofgrant, and expired at the end of the exercise period.  The Class B warrants are initiallyexercisable into one share of our common stock at an exercise price of $0.30per share, are exercisable during a period beginning on the date of grant andending on December 31, 2008, and expireat the end of the exercise period.

 

In July 2008, we sold 3,000,000 shares of ourcommon stock and Class A warrants exercisable into 3,000,000 shares of ourcommon stock to an accredited investor for aggregate cash consideration of$750,000.  These securities were sold inunits comprised of one share of our common stock, and one Class A warrantat a purchase price of $0.25 per unit. The Class A warrants are initially exercisable into one share ofour common stock at an exercise price of $0.30 per share, are exercisableduring a period beginning on the date of grant and ending on December 31,2009, and expire at the end of the exerciseperiod.

 

During the periodbeginning January 1, 2008 and ending December 31, 2008, we issued3,463,250 shares of common stock upon the exercise of warrants at exerciseprices ranging between $0.12 and $0.40 per share for aggregate gross proceedsof $597,415.

 

To date, ourcapital needs have been met primarily through sales of our equity and debtsecurities and proceeds received upon the exercise of warrants held by oursecurity holders.   We do not currentlymaintain a line of credit or term loan with any commercial bank or otherfinancial institution.  We have used theproceeds from the exercise of warrants and our private offerings of securitiesto pay virtually all of the costs and expenses we have incurred.  These costs and expenses were comprised ofoperating expenses, which consisted of the employee compensation expenses,professional fees and other general and administrative expenses discussedabove, and the costs of sales discussed above to the extent such costs of salesexceeded our revenue.

 

We believe thatour current cash resources will not be sufficient to sustain our currentoperations for the next 12 months.  Wewill need to obtain additional cash resources within the next 12 months toenable us to pay our ongoing costs and expenses as they are incurred and financethe growth of our business.  We intend toobtain these funds through internally generated cash flows from operatingactivities and proceeds from the issuance of debt and equity securities.  The sale of equity or convertible debtsecurities would result in additional dilution to our shareholders.  The issuance of debt would result inincreased expenses and could subject us to covenants that may have the effectof restricting our operations.  We havenot made arrangements to obtain additional financing and we can provide noassurance that additional financing will be available in an amount or on termsacceptable to us, if at all.  If we areunable to obtain additional funds when they are needed or if such funds cannotbe obtained on terms favorable to us, we may be unable to execute upon ourbusiness plan or pay our costs and expenses as they are incurred, which couldhave a material, adverse effect on our business, financial condition andresults of operations.

 

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**Contractual Obligations**

 

The followingsummarizes our material long-term contractual obligations as of December 31,2008:

 
| **Contractual Obligations** | ** ** | **Total** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** |
|-----------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Employment Agreements  (1)  |       | $         | 804,422    |     | $          | 748,107  |       | $        | 56,315     |     | $          | -0-      |       | $ | -0- |   | $ | -0- |   |
| Office Lease (2)            |       | 244,908   |       | 172,876  |       | 72,032   |       | -0-      |       | -0-      |       | -0-      |       |
| Total                       |       | $         | 1,049,330  |     | $          | 914,779  |       | $        | 126,375    |     | $          | -0-      |       | $ | -0- |   | $ | -0- |   |

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(1) At December 31, 2008, we were a party to employment agreements with DavidM. Daniels, Alex Soufflas and Patricia S. Bathurst.  A summary of these employment agreements andarrangements is provided herein under *“Item 11.  Executive Compensation — Employment Contractsand Arrangeme**nts.”*

 

(2)  At December 31, 2007, we were a party to anoperating lease for our office space in Horsham, Pennsylvania that expires May 30,2010.  A summary of this office lease isprovided herein under *“Item 2.  Properties.”*

 

To date, we havemade payments under these obligations with proceeds received from sales of ourequity and debt securities, proceeds received upon the exercise of outstandingwarrants by our security holders and internally generated cash flows fromoperating activities.  We intend to makefuture payments due under these obligations primarily through internallygenerated cash flows from operating activities and proceeds received from theissuance of debt and equity securities.

 

**Off-BalanceSheet Arrangements**

 

As of December 31,2008, we did not have any relationships with unconsolidated entities orfinancial partners, such as entities often referred to as structured finance orspecial purpose entities, that had been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes.  As such, we are notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

 

**Item 8.****          ****Financial Statements andSupplementary Data.**

 

Our audited consolidated financial statements atand for each of the years ended December 31, 2008 and 2007, respectively,begin on page F-1 of this report located immediately after the signature page hereto.

 

**Item 9.****          ****Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

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**Item9A(T).  Controls and Procedures.**

 

**Evaluation of Disclosure Controlsand Procedures**

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and that such information is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow for timely decisions regarding requireddisclosure. In designing and evaluating our disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  Our disclosure controls andprocedures were designed to provide reasonable assurance that the controls andprocedures would meet management’s objectives.

 

As of December 31, 2008, we carried out theevaluation of the effectiveness of our disclosure controls and procedures asdefined by Rule 13a-15(e) under the Exchange Act under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of December 31, 2008, our disclosurecontrols and procedures were effective to provide reasonable assurance thatinformation we are required to disclose in reports that we file or submit underthe Exchange Act is: (i) recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and (ii) accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

**Management’s Report on Internal Control Over FinancialReporting**

 

Our management, under the supervision of our Chief Executive Officerand Chief Financial Officer, is responsible for establishing and maintainingadequate internal control over financial reporting.  Internal control over financial reporting isa process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with GAAP.  Internal control over financialreporting includes policies and procedures that:

 

(1)           pertain to themaintenance of records that in reasonable detail accurately and fairly reflectthe transactions and dispositions of our assets;

 

(2)           provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with GAAP, and that our receipts andexpenditures are being made only in accordance with authorization of ourmanagement and directors; and

 

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(3)           provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisitions, use ordisposition of our assets that could have a material effect on our financialstatements.

 

Internalcontrol over financial reporting cannot provide absolute assurance of achievingfinancial reporting objectives because of its inherent limitations.  Internal control over financial reporting isa process that involves human diligence and compliance and is subject to lapsesin judgment and breakdowns resulting from human failures.  Internal control over financial reportingalso can be circumvented by collusion or improper management override.  Because of such limitations, there is a riskthat material misstatements may not be prevented or detected on a timely basisby internal control over financial reporting. However, these inherent limitations are known features of the financialreporting process.  Therefore, it ispossible to design safeguards to reduce, though not eliminate, this risk.

 

Ourmanagement used the framework set forth in the report entitled, “*Internal Control — Integrated Framework”*publishedby the Committee of Sponsoring Organizations of the Treadway Commission, knownas COSO, to evaluate the effectiveness of our internal control over financialreporting.  Based on this assessment, ourmanagement concluded that our internal control over financial reporting was noteffective at December 31, 2008 due to the existence of material weaknessesin our internal controls.

 

A material weakness is a control deficiency, or a combination ofcontrol deficiencies, that results in a more than remote likelihood that amaterial misstatement of our annual or interim financial statements will not beprevented or detected on a timely basis. Our management, in consultation with our independent registered public accounting firm, concludedthat material weaknesses existed in the following areas as of December 31,2008:

 

(1)           Our Chief Executive Officeralso serves as the sole member of our board of directors.  As a result, there are no independentdirectors monitoring the actions of our senior management.  One of the responsibilities of a company’s board ofdirectors is to act as an independent source for monitoring the actions of acompany’s senior management.  Thelack of independent directors on our board of directors constituted a materialweakness in our internal controls.

 

(2)           Our Chief Executive Officer and solemember of our board of directors resides in the state of Florida and visitedour sole business office located in Horsham, Pennsylvania infrequently during2008.  Senior management has theresponsibility to monitor the quality of a company’s internal controls.  This is most often performed through theregular management and supervisory activities of the company’s day-to-dayoperations.  The lack of monitoring byour Chief Executive Officer constituted a material weakness in the ability oftop management to effectively monitor the quality of our internal controls.

 

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We are actively seekingto remediate each of these material weaknesses in the following manner:

 

(1)           We are currently seeking additional,independent directors to join our board of directors.  The addition ofsuch board members would provide us with independent directors who would bemonitoring the actions of our top management. Our efforts to do so have been hindered substantially by the fact thatwe do not have a directors and officers insurance policy in place. Because such policies are very expensive, we believe it is in the best interestof the company to forego the purchase of such a policy and instead focus theuse of our financial resources on the development and growth of the company.

 

(2)           Our Chief Executive Officer iscurrently seeking to obtain a residence close in proximity to our Horsham,Pennsylvania business office.  This willenable him to engage in the regular management and supervisory activities ofthe company’s day-to-day operations and, accordingly, adequately monitor thequality of our internal controls.

 

Notwithstandingthe existence of these material weaknesses in internal controls, we believethat our consolidated financial statements fairly present, in all materialrespects, our consolidated balance sheets at December 31, 2008 and2007 and our consolidated statements of operations, stockholders’ equityand cash flows for the years ended December 31, 2008 and 2007 inconformity with GAAP.

 

Thisannual report does not include an attestation report of our independentregistered public accounting firm regarding internal control over financialreporting.  Our management’s report wasnot subject to attestation by our independent registered public accounting firmpursuant to temporary rules of the SEC that permit us to provide only ourmanagement’s report in this annual report.

 

Therehas been no change in our internal control over financial reporting during ourmost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**Item 9B. Other Information.**

 

The description set forthbelow is included herewith for the purpose of providing the disclosure requiredunder “Item 5.02 — Departure of Directors or Certain Officers; Election ofDirectors; Appointment of Certain Officers; Compensatory Arrangements ofCertain Officers” of Form 8-K in connection with our issuance of stock toDavid M. Daniels and Alex Soufflas on December 30, 2008 and our issuanceof an option to Patricia S. Bathurst on December 30, 2008.

 

OnDecember 30, 2008, we granted 690,000 and 523,500 shares of common stockto David M. Daniels and Alex Soufflas, respectively, and granted an option toPatricia S. Bathurst to acquire 286,500 shares of our common stock.  The shares and option were granted to Messrs. Danielsand Soufflas and Ms. Bathurst, respectively, in full payment of deferredsalary compensation that was earned by each of them during 2008 and payable tothem as of December 31, 2008.  Theoption is for a term of 10 years, has an exercise price of $0.055 per share(the closing market price of our common stock on the OTC Bulletin Board on thedate of grant), and 

 

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wasvested in full on the date of grant.  In the event the employment of Ms. Bathurstis terminated for death, disability or retirement, her option may be exercisedto the extent exercisable on the date of such termination of employment untilthe earlier of the date that is one year after the date of such termination ofemployment (90 days in the case of termination due to retirement) or the expirationdate of the option.  In the event heremployment is terminated not for “cause” or is terminated by her for “goodreason,” as such terms are defined in the option, the option vests in fullimmediately and remains exercisable until the expiration date of theoption.  In the event her employment isterminated for “cause,” the option terminates immediately.

 

The foregoing descriptionof the option does not purport to be complete and is qualified in its entiretyby the terms of the option filed as Exhibit 10.36 to this report andincorporated by reference herein.

 

**PART III**

 

**Item10.  Directors, Executive Officers andCorporate Governance.**

 

**Directorsand Executive Officers**

 

The following chart setsforth certain information about each of our directors and executive officers.

 
| **Name**              | ** ** | **Age** | ** ** | **Positions Held**                                                         | ** ** |
|-----------------------|------------|---------|------------|----------------------------------------------------------------------------|------------|
| David M. Daniels      |       | 51      |       | Chairman of the Board of Directors, Chief Executive  Officer and President |       |
| Alex Soufflas         |       | 34      |       | Chief Financial Officer, Executive Vice President  and Secretary           |       |
| Patricia S.  Bathurst |       | 54      |       | Vice President — Marketing                                            |       |

 

The following is abrief summary of the business experience of each of the above-namedindividuals:

 

*David M.Daniels*****has served as our Chief Executive Officerand ssole member of our board of directors since February 2004, and hasserved as our President since February 2005.  From 1998 to February 2004, Mr. Danielsprovided financing and management consulting services to several companiesoperating in the manufacturing, technology and services industries, includingMarket Pathways Financial Relations, Inc., a financial consulting firm,from April 2000 until February 2004, The Research Works, Inc.,an equity research firm, from April 2001 until December 2003, andXraymedia, Inc., an advertising agency, from September 2001 until February 2004.  Mr. Daniels served as the ChiefFinancial Officer of North American Technologies Group, Inc., a researchand development company, from 1994 to 1995 and served as the President andChief Operating Officer from 1995 to 1998. Mr. Daniels founded Industrial Pipe Fittings, Inc., amanufacturer of industrial fittings for the high density polyethylene market,in 1994 and served as the Chairman, President and Chief Executive Officer until1998.  Prior to 1994, Mr. Danielsserved in several capacities with Morgan Stanley Dean Witter, achieving the 

 

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position of First VicePresident of the company in 1986.  Mr. Danielsis a graduate of the Georgia Military Academy and the University of Houston,where he received a B.A. in finance.

 

*AlexSoufflas* hasserved as our Chief Financial Officer and Secretary since February 2006and has served as our Executive Vice President since August 2005.  Mr. Soufflas served as our GeneralCounsel from August 2005 until February 2006.  From May 2004 to August 2005, Mr. Soufflaswas an attorney at Duane Morris LLP, a national law firm, where he specializedin public and private securities offerings, mergers & acquisitions,contracts and corporate counseling.  Mr. Soufflasspecialized in general corporate law as an attorney at Spector Gadon &Rosen, P.C., a Philadelphia-based law firm, from April 2003 to May 2004,and at Sullivan & Worcester, LLP, a Boston-based law firm, from September 2000to October 2002.  Prior to that, Mr. Soufflaswas an accountant at KPMG LLP, an international accounting and consultingfirm.  Mr. Soufflas received a B.S.in accounting from Purdue University and a juris doctor from Boston College LawSchool.

 

*PatriciaS. Bathurst* hasserved as our Vice President — Marketing since March 2001.** **From 1989 to 2000, Ms. Bathurstserved as the Vice President of Marketing for National Health and SafetyCorporation where she was responsible for all of the marketing, advertising andpromotional functions for the company. From 1985 to 1989, Ms. Bathurst served as the Director of Marketingfor Horizon Healthcare Group, Inc., a provider of healthcare servicesutilizing national provider networks that she co-founded in 1985.  Prior to 1985, Ms. Bathurst served asthe Director of Administration and Customer Service for Phoenix InternationalCorporation, a provider of healthcare services utilizing national providernetworks.  Ms. Bathurst is agraduate of Temple University with a B.A. in business administration.

 

**Board ofDirectors**

 

David M. Daniels,our Chief Executive Officer and President, is the sole member of our board ofdirectors.  Mr. Daniels will serveuntil the next annual meeting of shareholders or until his successor is dulyelected and qualified.  Officers areelected annually by our board of directors and serve at the discretion of ourboard of directors.  We do not currentlyhave any committees of our board of directors.

 

**Shareholder Communications**

 

We have not implemented any formal procedures forshareholder communication with our board of directors. Any matter intended forour board of directors, or for any individual member or members of our board ofdirectors, should be directed to our corporate secretary at National HealthPartners, Inc., 120 Gibraltar Road, Suite 107, Horsham, PA19044.  In general, all shareholdercommunication delivered to the corporate secretary for forwarding to the boardof directors or specified members of the board of directors will be forwardedin accordance with the shareholder’s instructions.  However, the corporate secretary reserves theright to not forward to members of the board of directors any abusive,threatening or otherwise inappropriate materials.

 

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AuditCommittee and Audit Committee Financial Expert

 

Our board ofdirectors has not created a separately-designated standing audit committee or acommittee performing similar functions. Accordingly, our full board of directors acts as our auditcommittee.  We currently have a smallnumber of employees and have generated only a small amount of revenue todate.  In light of the foregoing, ourboard of directors concluded that the benefits of retaining an individual whoqualifies as an “audit committee financial expert,” as that term is defined inItem 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act,would be outweighed by the costs of retaining such a person.  As a result, no member of our board ofdirectors is an “audit committee financial expert.”

 

**Code of Business Conduct and Ethics**

 

We have adopted a Code of Business Conduct and Ethics thatapplies to our principal executive officer, principal financial officer,principal accounting officer or controller, and persons performing similarfunctions.  Our Code of Business Conductand Ethics is designed to deter wrongdoing and promote: (i) honest andethical conduct, including the ethical handling of actual or apparent conflictsof interest between personal and professional relationships; (ii) full,fair, accurate, timely and understandable disclosure in reports and documentsthat we file with, or submit to, the SEC and in other public communicationsthat we make; (iii) compliance with applicable governmental laws, rules andregulations; (iv) prompt internal reporting of violations of the code toan appropriate person or persons identified in the code; and (v) accountabilityfor adherence to the code.

 

A copy of our Code of Business Conduct and Ethics isavailable on our corporate website at www.nationalhealthpartners.com.

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

Section 16(a) ofthe Exchange Act requires that our officers and directors and persons whobeneficially own more than 10% of our common stock file initial reports of ownership and reportsof changes in beneficial ownership of our common stock with the SEC.  They are also required to furnish us withcopies of all Section 16(a) forms that they file with the SEC.  Based solely on our review of the copies ofsuch forms received by us, or written representations from such persons that noreports were required for those persons, we believe that all Section 16(a) filingrequirements were satisfied in a timely fashion during our fiscal year ended December 31,2008.

 

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**Item 11. Executive Compensation.**

 

                The following table providescertain summary information concerning compensation earned by the executiveofficers named below during the fiscal year ended December 31, 2008.

 

***SummaryCompensation Table***

 
| **Name and Principal Position**                                                | ** ** | **Year**   | ** ** | **Salary ($)**   | ** ** | **Bonus ($)** | ** ** | **Stock  Awards  ($) (1)** | ** ** | **Option  Awards  ($) (1)** | ** ** | **All Other  Compensation  ($) (2)** | ** ** | **Total ($)**    | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|---------------|------------|----------------------------|------------|-----------------------------|------------|--------------------------------------|------------|------------------|------------|
| David M. Daniels*President and Chief Executive Officer*                        |       | 2008  2007 |       | 384,540  385,152 |       | -0-  -0-      |       | 173,213   84,175           |       | 27,978  -0-                 |       | 10,175  6,051                        |       | 595,906  475,378 |       |
| Alex Soufflas*Chief Financial Officer, Executive Vice President and Secretary* |       | 2008  2007 |       | 291,720  264,000 |       | -0-  -0-      |       | 68,865   39,963            |       | 90,430  20,190              |       | 10,507  9,240                        |       | 461,522  333,393 |       |
| Patricia S.  Bathurst*Vice President — Marketing*                         |       | 2008  2007 |       | 165,709  159,720 |       | -0-  -0-      |       | 30,055   29,972            |       | 93,694  16,152              |       | 4,193  4,193                         |       | 293,651  210,037 |       |

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(1) Asummary of the assumptions made in the valuation of these awards is providedunder *“Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations — Critical Accounting Policies”* and *“Item 11.  Executive Compensation —Employment Contracts and Arrangements”* and in our notes toconsolidated financial statements beginning on page F-7 of this report.

 

(2) Consists of matching contributions made by us on behalf of the applicableexecutive officer under the National Health Partners, Inc. 401(k) Plan.

 

**Narrative Disclosure of Executive Compensation**

 

We are a party toemployment agreements with each of David M. Daniels, Alex Soufflas and PatriciaM. Bathurst.  Under these agreements, Messrs. Danielsand Soufflas and Ms. Bathurst are currently entitled to receive annualizedbase salaries of $382,800, $319,440 and $175,692, respectively.

 

We have issued a varietyof equity securities to Messrs. Daniels and Soufflas and Ms. Bathurstduring the course of their employment with us. We have issued options to Messrs. Daniels and Soufflas and Ms. Bathurstto acquire 3,150,000, 2,050,000 and 2,136,500 shares of our common stock,respectively.  In addition, we haveissued restricted stock awards to each of Messrs. Daniels and Soufflas andMs. Bathurst with respect to 1,050,000, 300,000 and 225,000 shares of ourcommon stock, respectively, and have issued Messrs. Daniels and Soufflas690,000 and 523,500 shares of common stock, respectively.

 

A summary of the materialterms of these employment agreements and the options, restricted stock awardsand shares of common stock granted to each of these individuals is providedbelow.

 

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**Employment Contracts andArrangements**

 

*David M.Daniels*

 

On May 13, 2005, we enteredinto an employment agreement with David M. Daniels to serve as our ChiefExecutive Officer effective February 1, 2005.  The agreement is for an initial term of fiveyears and renews automatically for successive one-year periods unless earlierterminated or prior notice of non-renewal is provided by either party.  Under the agreement, Mr. Daniels isentitled to an annual base salary of $231,000 with annual increases on January 1of each year of a minimum of 10% of the annual base salary for the immediatelypreceding year, and is eligible for an annual bonus and incentive compensationawards in an amount and form to be determined by our board of directors in itssole discretion.  Pursuant to theagreement, on May 13, 2005, Mr. Daniels was granted an option toacquire 2,500,000 shares of our common stock.

 

On March 28, 2006and September 4, 2007, we granted Mr. Daniels a restricted stockaward with respect to 450,000 and 600,000 shares of our common stock,respectively. On December 12, 2006 and March 25, 2008, we granted Mr. Danielsan option to acquire 250,000 and 400,000 shares of our common stock,respectively.  On December 30, 2008,we granted Mr. Daniels 690,000 shares of our common stock in full paymentof deferred salary compensation that was earned by him during 2008 and payableto him as of December 31, 2008.

 

*AlexSoufflas*

 

On March 29, 2006,we entered into an employment agreement with Alex Soufflas to serve as ourChief Financial Officer and Executive Vice President effective February 1,2006.  The agreement is for an initialterm of three years and renews automatically for successive one-year periodsunless earlier terminated or prior notice of non-renewal is provided by eitherparty.  Under the agreement, Mr. Soufflasis entitled to an annual base salary of $210,000 with annual increases on January 1of each year of a minimum of 10% of the annual base salary for the immediatelypreceding year, and is eligible for an annual bonus and incentive compensationawards in an amount and form to be determined by our board of directors in itssole discretion.

 

On August 15, 2005,we granted Mr. Soufflas an option to acquire 1,000,000 shares of ourcommon stock, and on March 28, 2006 we granted Mr. Soufflas arestricted stock award with respect to 300,000 shares of our common stock.  On December 12, 2006, September 4,2007 and March 25, 2008, we granted Mr. Soufflas an option to acquire150,000, 500,000 and 400,000 shares of our common stock, respectively.  On December 30, 2008, we granted Mr. Soufflas523,500 shares of our common stock in full payment of deferredsalary compensation that was earned by him during 2008 and payable to him as ofDecember 31, 2008.

 

*PatriciaS. Bathurst*

 

On May 13, 2005, weentered into an employment agreement with Patricia S. Bathurst to serve as ourVice President — Marketing effective February 1, 2005.  The agreement is for an initial term of fiveyears and renews automatically for successive one-year periods unless earlierterminated or prior notice of non-renewal is provided by either party.  Under the agreement, Ms. Bathurst isentitled to an annual base salary of $132,000 with annual increases on January 1of 

 

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eachyear of a minimum of 10% of the annual base salary for the immediatelypreceding year, and is eligible for an annual bonus and incentive compensationawards in an amount and form to be determined by our board of directors in itssole discretion.  Pursuant to theagreement, on May 13, 2005, Ms. Bathurst was granted an option toacquire 1,000,000 shares of our common stock.

 

On March 28, 2006,we granted Ms. Bathurst a restricted stock award with respect to 225,000shares of our common stock.  On December 12,2006, September 4, 2007 and March 25, 2008, we granted Ms. Bathurstan option to acquire 50,000, 400,000 and 400,000 shares of our common stock,respectively.  On March 25,2008, we granted an option to Patricia S. Bathurst to acquire 286,500 shares ofour common stock in full payment of deferred salary compensation that wasearned by her during 2008 and payable to her as of December 31, 2008.

 

**TerminationProvisions of Employment Agreements**

 

The employment agreementswith Mr. Daniels and Ms. Bathurst provide that if we terminate theemployment of the applicable executive officer without “cause” or the officerterminates his or her employment with us for “good reason,” as such terms aredefined in the agreements, the officer is immediately entitled to two years’annual base salary, the full annual base salary to which the officer wouldotherwise have been entitled during the remainder of the initial term, and allother compensation and benefits to which the officer would have been entitledhad the officer been employed by us for the remainder of the initial term.  The employment agreement with Mr. Soufflasprovides that if we terminate his employment without “cause” or he terminateshis employment with us for “good reason,” as such terms are defined in theagreement, he is entitled to receive an amount equal to the annual base salaryhe was receiving on the date of termination to be paid over a period of 12months.

 

**Terms of Options**

 

The options that wegranted to Mr. Daniels and Ms. Bathurst in 2005 are for a term of 10years, have an exercise price of $0.40 per share, and vest in four equalinstallments commencing May 13, 2005. On December 12, 2006, we accelerated the vesting schedule of theoptions so that they vested in full on that date.  In the event the employment of the applicableexecutive officer is terminated for any reason other than for “cause,” as suchterm is defined in the employment agreements, the officer’s option may beexercised at any time prior to the expiration date of the option.  In the event we terminate the employment ofthe applicable executive officer without “cause” or the officer terminates hisor her employment with us for “good reason” (including a “change in control”),as such terms are defined in the employment agreements, we are required to useour best efforts to prepare and file a registration statement with the SECwithin 180 days of the date of termination to register the public resale of theshares underlying the officer’s option. In the event the employment of the applicable executive officer isterminated for “cause,” the option terminates immediately.

 

The option that we granted to Mr. Soufflas in2005 is for a term of 10 years, has an exercise price of $0.40 per share, andvests in four equal annual installments commencing on February 1,2006.  On December 12, 2006, weaccelerated the vesting schedule of the options so that they vested in full onthat date.  In the event the employmentof Mr. Soufflas is terminated for any reason other than for “cause,” assuch term is defined in the option, the option may be 

 

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exercised untilthe earlier of the date that is 90 days after the date of such termination ofemployment or the expiration date of the option.  In the event the employment of Mr. Soufflasis terminated for “cause,” the option terminates immediately.

 

The options that wegranted to Messrs. Daniels and Soufflas and Ms. Bathurst in 2006 arefor a term of 10 years, have an exercise price of $0.88 per share, and werevested in full on the date of grant.  Inthe event the employment of the applicable executive officer is terminated fordeath, disability or retirement, the officer’s option may be exercised untilthe earlier of the date that is one year after the date of such termination ofemployment (90 days in the case of termination due to retirement) or theexpiration date of the option.  In theevent the employment of the applicable executive officer is terminated not for “cause”or is terminated by the executive for “good reason,” as such terms are definedin the applicable options, the option remains exercisable until the expirationdate of the option.  In the event theemployment of the applicable executive officer is terminated for “cause,” theoption terminates immediately.

 

The options that wegranted to Mr. Soufflas and Ms. Bathurst in 2007 are for a term of 10years, have an exercise price of $0.50 per share, and vest in four equal annualinstallments commencing on September 4, 2008.  In the event the employment of the applicableexecutive officer is terminated for death, disability or retirement, theofficer’s option may be exercised to the extent exercisable on the date of suchtermination of employment until the earlier of the date that is one year afterthe date of such termination of employment (90 days in the case of terminationdue to retirement) or the expiration date of the option.  In the event the employment of the applicableexecutive officer is terminated not for “cause” or is terminated by theexecutive for “good reason,” as such terms are defined in the applicableoptions, the option vests in full immediately and remains exercisable until theexpiration date of the option.  In theevent the employment of the applicable executive officer is terminated for “cause,”the option terminates immediately.

 

The options that wegranted to Messrs. Daniels and Soufflas and Ms. Bathurst in March 2008are for a term of 10 years, have an exercise price of $0.28 per share, and vestin four equal annual installments commencing on March 25, 2009.  The option that we granted to Ms. Bathurstin December 2008 is for a term of 10 years, has an exercise price of$0.055 per share, and vested in full on the date of grant.  In the event the employment of the applicableexecutive officer is terminated for death, disability or retirement, theofficer’s option may be exercised to the extent exercisable on the date of suchtermination of employment until the earlier of the date that is one year afterthe date of such termination of employment (90 days in the case of terminationdue to retirement) or the expiration date of the option.  In the event the employment of the applicableexecutive officer is terminated not for “cause” or is terminated by theexecutive for “good reason,” as such terms are defined in the applicableoptions, the option vests in full immediately and remains exercisable until theexpiration date of the option.  In theevent the employment of the applicable executive officer is terminated for “cause,”the option terminates immediately.

 

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**Terms of Restricted Stock Awards**

 

The restricted stockawards that we granted to Messrs. Daniels and Soufflas and Ms. Bathurstin 2006 vest in three equal annual installments commencing on March 28,2007.  In the event we terminate theemployment of the applicable executive officer without “cause” or the officerterminates his or her employment with us for “good reason,” as such terms aredefined in such officer’s respective employment agreement, the officer’s restrictedstock award vests in full immediately. In the event the employment of the applicable executive officer isterminated for “cause,” any shares of common stock that have not vested as ofthe date of termination will be forfeited to us and cancelled.

 

The restricted stockaward that we granted to Mr. Daniels in 2007 vests in four equal annualinstallments commencing on September 4, 2008.  In the event we terminate the employment of Mr. Danielswithout “cause” or he terminates his employment with us for “good reason,” assuch terms are defined in his employment agreement, his restricted stock awardvests in full immediately.  In the eventthe employment of Mr. Daniels is terminated for “cause,” any shares ofcommon stock that have not vested as of the date of termination will beforfeited to us and cancelled.

 

**National****HealthPartners, Inc. 401(k) Plan**

 

On January 15, 2007, we adopted the National Health Partners, Inc.401(k) Plan.  The purpose of thisplan is to provide our employees with tax-advantaged retirement benefits toassist them in saving and accumulating assets for retirement.  Under the plan, eligible employees may electto contribute up to 100% of their compensation to the plan each year, subjectto certain Internal Revenue Service (“IRS”) limitations.  We match 100% of the first 3% of the employee’scontribution and 50% of the next 2% of the employee’s contribution, subject tocertain IRS limitations.  We contributeda total of $35,707 and $26,928 to the plan during the years ended December 31,2008 and 2007, respectively.

 

**Director Compensation**

 

We do not provide any compensation to our employeedirectors andhave not adopted a standard compensation package for non-employee directorsserving as members of our board of directors. We did not have anynon-employee directors on our board of directors during 2008 and, thus, did notpay any director compensation to any non-employee directors during 2008.  We intend to add non-employee directors toour board of directors in the future.  In the event we do so, we intend toprovide them with remuneration that may consist of one or more of thefollowing: an annual retainer, a fee paid for each board meeting attended, anannual grant of equity compensation, and reimbursement for reasonable travel expenses incurred to attendmeetings of the board of directors.  We mayprovide additional remuneration to board members participating on committees ofour board of directors.

 

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***Outstanding Equity Awards atFiscal Year End***

 

The following table setsforth, for each named executive officer, information regarding unexercisedoptions, stock that had not vested, and equity incentive plan awards as of theend of our fiscal year ended December 31, 2008.

*** ***
| ** **            | ** ** | **Option Awards**                                                            | ** ** | **Stock Awards**                                                               | ** ** |
|-----------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **Name**              | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of Stock  That Have Not  Vested (#)** | ** ** | **Market Value  of Shares or  Units of Stock  That Have Not  Vested ($) (5)** | ** ** |
| David M. Daniels      |       | 2,500,000                                                                    |       | -0-                                                                            |       | .40 |   | 5/12/15 |   | 150,000 | (3) | 7,500 |   |
|                  |       | 250,000                                                                      |       | -0-                                                                            |       | .88 |   | 12/11/16 |   | 450,000 | (4) | 22,500 |   |
|                  |       | -0-                                                                          |       | 400,000                                                                        | (1)        | .28 |   | 3/24/18 |   |   |   |   |   |
| Alex Soufflas         |       | 1,000,000                                                                    |       | -0-                                                                            |       | .40 |   | 8/14/15 |   | 100,000 | (3) | 5,000 |   |
|                  |       | 150,000                                                                      |       | -0-                                                                            |       | .88 |   | 12/11/16 |   |   |   |   |   |
|                  |       | 125,000                                                                      |       | 375,000                                                                        | (2)        | .50 |   | 9/3/17 |   |   |   |   |   |
|                  |       | -0-                                                                          |       | 400,000                                                                        | (1)        | .28 |   | 3/24/18 |   |   |   |   |   |
| Patricia S.  Bathurst |       | 1,000,000                                                                    |       | -0-                                                                            |       | .40 |   | 5/12/15 |   | 75,000 | (3) | 3,750 |   |
|                  |       | 50,000                                                                       |       | -0-                                                                            |       | .88 |   | 12/11/16 |   |   |   |   |   |
|                  |       | 100,000                                                                      |       | 300,000                                                                        | (2)        | .50 |   | 9/3/17 |   |   |   |   |   |
|                  |       | -0-                                                                          |       | 400,000                                                                        | (1)        | .28 |   | 3/24/18 |   |   |   |   |   |
|                  |       | 286,500                                                                      |       | -0-                                                                            |       | .055 |   | 12/29/18 |   |   |   |   |   |

----

(1) These options vest in four equal annual installments commencing on March 25,2009.

 

(2) These options vest in three equal annual installments commencing on September 4,2009.

 

(3) These restricted stock awards vest on March 28, 2009.

 

(4) This restricted stock award vests in three equal annual installmentscommencing on September 4, 2009.

 

(5)  The marketvalue of these shares was calculated based on a price per share of $0.05, theclosing market price for our shares of common stock on the OTC Bulletin Boardon December 31, 2008.

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

The followingtable sets forth, as of March 19, 2009, information with respect to thesecurities holdings of all persons that we have reason to believe, pursuant tofilings with the SEC, may be deemed the beneficial owner of more than 5% of ouroutstanding common stock.  The followingtable also sets forth, as of such date, the beneficial ownership of our commonstock by all executive officers and directors, individually and as a group.

 

The beneficialowners and amount of securities beneficially owned have been determined inaccordance with Rule 13d-3 under the Exchange Act and, in accordancetherewith, includes all shares of our common stock that may be acquired by suchbeneficial owners within 60 days of March 19, 2009 upon the exercise orconversion of any options, warrants or other convertible securities.  Unless otherwise indicated, each person orentity named below has sole voting and investment power with respect to allcommon stock beneficially owned by that person or entity, 

 

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subject to the matters set forth in the footnotes to the table below,and has an address of 120 Gibraltar Road, Suite 107, Horsham, Pennsylvania19044.

 

| **Name and Address of Beneficial Owner**           | ** ** | **Amount and Nature  of Beneficial  Ownership (1)** | ** ** | **Percentage  of Class (1)** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------|------------|
| David M. Daniels                                   |       | 5,588,050                                           | (2)        | 10.0                              | %          |
| Patricia S.  Bathurst                              |       | 1,869,100                                           | (3)        | 3.4                               | %          |
| Alex Soufflas                                      |       | 2,198,500                                           | (4)        | 4.0                               | %          |
| Bank Julius  Baer & Co., Ltd.             |       | 6,000,000                                           | (5)        | 10.7                              | %          |
| Pierre Besuchet                                    |       | 4,050,000                                           | (6)        | 7.3                               | %          |
| Ronald F. Westman                                  |       | 3,453,000                                           | (7)        | 6.3                               | %          |
| All officers and  directors as a group (3 persons) |       | 9,655,650                                           | (8)        | 16.4                              | %          |

----

*    Less than 1%.

 

(1)  This table hasbeen prepared based on 53,186,281 shares of our common stock outstanding on March 19,2009.

 

(2) Includes 2,500,000 shares issuable upon the exercise of options that have anexercise price of $0.40 per share, 250,000 shares issuable upon the exercise ofoptions that have an exercise price of $0.88 per share, 100,000 shares issuableupon the exercise of options that have an exercise price of $0.28 per share and450,000 shares underlying restricted stock awards.

 

(3)  Includes1,000,000 shares issuable upon the exercise of options that have an exerciseprice of $0.40 per share, 50,000 shares issuable upon the exercise of optionsthat have an exercise price of $0.88 per share, 100,000 shares issuable uponthe exercise of options that have an exercise price of $0.50 per share, 100,000shares issuable upon the exercise of options that have an exercise price of$0.28 per share and 286,500 shares issuable upon the exercise of options thathave an exercise price of $0.055 per share.

 

(4)  Includes1,000,000 shares issuable upon the exercise of options that have an exerciseprice of $0.40 per share, 150,000 shares issuable upon the exercise of optionsthat have an exercise price of $0.88 per share, 125,000 shares issuable uponthe exercise of options that have an exercise price of $0.50 per share and100,000 shares issuable upon the exercise of options that have an exercise priceof $0.28 per share.

 

(5)  Includes3,000,000 shares issuable upon the exercise of warrants that have an exerciseprice of $0.30 per share.

 

(6)  Includes1,000,000 shares issuable upon the exercise of warrants that have an exerciseprice of $.80 per share, 1,000,000 shares issuable upon the exercise ofwarrants that have an exercise price of $.40 per share, and 225,000 sharesissuable upon the exercise of warrants that have an exercise price of $.30 pershare.

 

(7)  Includes100,000 shares issuable upon the exercise of options that have an exerciseprice of $0.40 per share and 1,860,000 shares issuable upon the exercise ofwarrants that have an exercise price of $0.80 per share.

 

(8)  Includes4,500,000 shares issuable upon the exercise of options that have an exerciseprice of $0.40 per share, 450,000 shares issuable upon the exercise of optionsthat have an exercise price of $0.88 per share, 225,000 shares issuable uponthe exercise of options that have an exercise price of $0.50 per share, 

 

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300,000shares issuable upon the exercise of options that have an exercise price of$0.28 per share, 286,500 shares issuable upon the exercise of options that havean exercise price of $0.055 per share and 450,000 shares underlying restrictedstock awards.

 

***Equity Compensation Plan Information***

 

Thefollowing table sets forth information regarding the number of options, warrants,rights and similar securities that were outstanding at December 31, 2008under equity compensation plans that have not been approved by our securityholders. None of our securities were outstanding at December 31, 2008under plans that have been approved by our security holders.

 
| *** ***                                                 | ** ** | **Number of securities  to be issued upon  exercise of outstanding  options, warrants  and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column (a))  (c)** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders      |       | -0-                                                                                                      |       | -0-                                                                                     |       | -0-                                                                                                                                                        |       |
| Equity  compensation plans not approved by security holders: |       |                                                                                                     |       |                                                                                    |       |                                                                                                                                                       |       |
| Options issued  to directors and employees                   |       | 9,176,500                                                                                                |       | $0.41                                                                                   |       | -0-                                                                                                                                                        |       |
| Total                                                        |       | 9,176,500                                                                                                |       | $0.41                                                                                   |       | -0-                                                                                                                                                        |       |

 

**Options Issued toEmployees**

** **

A description of the options issued to our directorsand employees that were outstanding at December 31, 2008 is set forthabove under “*Item 11. Executive Compensation — Terms of Options*” and in Note 10 toour audited consolidated financial statements beginning on page F-1 ofthis report.

** **

**Stock Incentive Plans**

 

We have adopted twoadditional equity compensation plans that have not been approved by securityholders.  These consist of the NationalHealth Partners, Inc. 2006 Stock Incentive Plan and the National HealthPartners, Inc. 2008 Stock Incentive Plan. As of March 19, 2009, awards have been granted under each of theplans with respect to all shares of our common stock available for issuance under therespective plans and there were no securities issuable upon the exercise ofoutstanding options, warrants or rights under either of the plans.  A description of the 

 

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National Health Partners, Inc.2006 Stock Incentive Plan and the National Health Partners, Inc. 2008Stock Incentive Plan is set forth in Notes 6 and 7, respectively, to ouraudited consolidated financial statements beginning on page F-1 of thisreport.

 

**Item 13. Certain Relationships and Related Transactions, and DirectorIndependence.**

 

**Certain Relationships and Related Transactions**

 

We have entered into employment agreements with eachof David M. Daniels, Alex Soufflas and Patricia S. Bathurst and have issuedoptions, restricted stock awards and/or shares of common stock to each ofthem.  A description of the employmentagreements, options, restricted stock awards and common stock grants is setforth under *“Item 11. Executive Compensation”* of this report.

 

**DirectorIndependence**

 

David M. Daniels,our President and Chief Executive Officer, is the sole member of our board ofdirectors.  Mr. Daniels will serveuntil the next annual meeting of shareholders or until his successor is dulyelected and qualified.  Pursuant to Item407(a)(1)(ii) of Regulation S-K promulgated under the Securities Act, wehave adopted the definition of “independent director” as set forth in theAmerican Stock Exchange (AMEX) Company Guide. Mr. Daniels does not qualify as an “independent director” pursuantto the AMEX Company Guide.  Our board ofdirectors has not created separately-designated standing committees and Mr. Danielsis not “independent” for purposes of Section 121A or Section 803 ofthe AMEX Company Guide.  Officers areelected annually by our board of directors and serve at the discretion of ourboard of directors.

 

**Item 14. Principal Accountant Fees and Services.**

 

The following tablepresents fees for professional audit services performed by HJ &Associates, LLC for the audit of our annual financial statements for our fiscalyears ended December 31, 2008 and 2007, and fees billed for other servicesrendered by HJ & Associates, LLC during such years.

 
| ** **           | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| Audit Fees:          |       | $        | 45,000     |     | $          | 60,000 |   |
|                 |       |     |       |     |       |
| Audit-Related  Fees: |       | 3,854    |       | 2,914    |       |
|                 |       |     |       |     |       |
| Tax Fees:            |       | 1,691    |       | 1,519    |       |
|                 |       |     |       |     |       |
| All Other Fees:      |       | —   |       | —   |       |
|                 |       |     |       |     |       |
| Total:               |       | $        | 50,545     |     | $          | 64,433 |   |

 

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*Audit Fees*consist of fees billed for professional services rendered by our principalaccountant for the audit of our annual consolidated financial statements andreview of our interim consolidated financial statements included in ourquarterly reports and services that are normally provided by our principal accountant in connection with statutory and regulatoryfilings or engagements.

 

*Audit-Related Fees* consist of fees billed for assurance and related services rendered byour principal accountant that are reasonably related to the performance of theaudit or review of our consolidated financial statements and are not reported under“Audit Fees” and relate to services performed in connection with the review ofour Registration Statements on Form SB-2 and Form S-1.

 

*Tax Fees*consists of fees billed for professional services rendered by our principalaccountant for tax compliance, tax advice and tax planning.  These services include assistance regardingfederal and state tax compliance and filings.

* *

*All Other Fees*consist of fees billed for products and services provided by our principalaccountant, other than those services described above.

 

Our board of directors serves as our auditcommittee.  It approves the engagement ofour independent auditors, and meets with our independent auditors to approvethe annual scope of accounting services to be performed and the related feeestimates.  It also meets with ourindependent auditors prior to the completion of our annual audit and reviewsthe results of their audit and review of our annual and interim consolidatedfinancial statements, respectively. During the course of the year, our chairman has the authority topre-approve requests for services that were not approved in the annualpre-approval process.  The chairmanreports any interim pre-approvals at the following quarterly meeting.  At each of the meetings, management and ourindependent auditors update our board of directors regarding material changesto any service engagement and related fee estimates as compared to amountspreviously approved.  During 2007 and2008, all audit and non-audit services performed by our independent accountantswere pre-approved by our board of directors in accordance with the foregoingprocedures.

 

**Item 15.  Exhibits**

 

Thefollowing exhibits are filed as part of this report:

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Restated  Articles of Incorporation (incorporated by reference to  Exhibit 3.1 to the registration statement on Form SB-2, File  No. 333-126315, initially filed with the Securities and Exchange  Commission (“SEC”) on June 30, 2005, as amended (“Registration Statement  No. 333-126315”) |
|                 |       |                                                                                                                                                                                                                                                                                                                                       |
| 3.2                  |       | Amended  and Restated Bylaws (incorporated by reference to Exhibit 3.2 to  Registration Statement No. 333-126315)                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.1                  |       | Specimen Stock  Certificate (incorporated by reference to Exhibit 4.1 to  Registration Statement No. 333-126315)                                                                                                                                                                                                                 |

 

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| 10.1        |   | Employment  Agreement, dated May 13, 2005, by an between the Company and David M.  Daniels (incorporated by reference to Exhibit 10.1 to Registration  Statement No. 333-126315)                                  |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                             |
| 10.2        |   | Employment  Agreement, dated May 13, 2005, by an between the Company and Roger H.  Folts (incorporated by reference to Exhibit 10.2 to Registration  Statement No. 333-126315)                                    |
|        |   |                                                                                                                                                                                                                             |
| 10.3        |   | Employment  Agreement, dated May 13, 2005, by an between the Company and Patricia S.  Bathurst (incorporated by reference to Exhibit 10.3 to Registration  Statement No. 333-126315)                              |
|        |   |                                                                                                                                                                                                                             |
| 10.4        |   | Option to  Acquire Shares of Common Stock, dated May 13, 2005, issued by the  Company to David M. Daniels (incorporated by reference  to Exhibit 10.4 to Registration Statement No. 333-126315)                   |
|        |   |                                                                                                                                                                                                                             |
| 10.5        |   | Option to  Acquire Shares of Common Stock, dated May 13, 2005, issued by the  Company to Roger H. Folts (incorporated by reference to  Exhibit 10.5 to Registration Statement No. 333-126315)                     |
|        |   |                                                                                                                                                                                                                             |
| 10.6        |   | Option to  Acquire Shares of Common Stock, dated May 13, 2005, issued by the  Company to Patricia S. Bathurst (incorporated by reference  to Exhibit 10.6 to Registration Statement No. 333-126315)               |
|        |   |                                                                                                                                                                                                                             |
| 10.7†  |   | Network Access  Agreement, dated April 30, 2001, between the Company and Careington  International Corporation (incorporated by reference to  Exhibit 10.7 to Registration Statement No. 333-126315)              |
|        |   |                                                                                                                                                                                                                             |
| 10.8†  |   | Optum Services  Agreement, dated October 1, 2001, between the Company and United  HealthCare Services, Inc. (incorporated by reference  to Exhibit 10.8 to Registration Statement No. 333-126315)            |
|        |   |                                                                                                                                                                                                                             |
| 10.9†  |   | Network Access  and Repricing Agreement, dated September 1, 2002, between the Company  and First Access, Inc. (incorporated by reference to  Exhibit 10.9 to Registration Statement No. 333-126315)          |
|        |   |                                                                                                                                                                                                                             |
| 10.10† |   | Network Leasing  Agreement, dated December 18, 2003, between the Company and National  Benefit Builders, Inc. (incorporated by reference to  Exhibit 10.10 to Registration Statement No. 333-126315)         |
|        |   |                                                                                                                                                                                                                             |
| 10.11† |   | AdvancePCS, L.P.  Managed Pharmaceutical Benefit Agreement, dated July 1, 2001, between  the Company and AdvancePCS, L.P. (incorporated by  reference to Exhibit 10.11 to Registration Statement  No. 333-126315) |
|        |   |                                                                                                                                                                                                                             |
| 10.12       |   | Agreement of  Lease, dated April 22, 2004, between Liberty Property Limited  Partnership and the Company (incorporated by reference  to Exhibit 10.12 to Registration Statement No. 333-126315)                   |
|        |   |                                                                                                                                                                                                                             |
| 10.13       |   | Option to  Acquire Shares of Common Stock, dated June 29, 2005, issued by the  Company to Jay Rosen (incorporated by reference to Exhibit 10.17  to Registration Statement No. 333-126315)                        |

 

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| 10.14  |   | Option to  Acquire Shares of Common Stock, dated August 15, 2005, issued by the  Company to Alex Soufflas (incorporated by reference to  Exhibit 10.18 to Registration Statement No. 333-126315)                                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                           |
| 10.15  |   | Option to  Acquire Shares of Common Stock, dated August 15, 2005, issued by the  Company to David A. Taylor (incorporated by reference to  Exhibit 10.19 to Registration Statement No. 333-126315)                                              |
|   |   |                                                                                                                                                                                                                                                           |
| 10.16  |   | National Health Partners, Inc. 2006 Stock Incentive Plan  (incorporated by reference to Exhibit 99.1 to the registration statement  on Form S-8, File No. 333-131589, filed with the SEC on  February 6, 2006)                        |
|   |   |                                                                                                                                                                                                                                                           |
| 10.17  |   | Employment  Agreement, dated March 29, 2006, by and between the Company and Alex  Soufflas (incorporated by reference to Exhibit 10.45 to the Annual Report  on Form 10-KSB filed with the SEC on March 31, 2006)                          |
|   |   |                                                                                                                                                                                                                                                           |
| 10.18  |   | Restricted Stock  Award Agreement, dated March 28, 2006, by and between the Company and  David M. Daniels (incorporated by reference to Exhibit 10.47  to the Annual Report on Form 10-KSB filed with the SEC on March 31,  2006)          |
|   |   |                                                                                                                                                                                                                                                           |
| 10.19  |   | Restricted Stock  Award Agreement, dated March 28, 2006, by and between the Company and  Alex Soufflas (incorporated by reference to Exhibit 10.48  to the Annual Report on Form 10-KSB filed with the SEC on March 31,  2006)             |
|   |   |                                                                                                                                                                                                                                                           |
| 10.20  |   | Restricted Stock  Award Agreement, dated March 28, 2006, by and between the Company and  Patricia S. Bathurst (incorporated by reference to Exhibit 10.49  to the Annual Report on Form 10-KSB filed with the SEC on March 31,  2006)      |
|   |   |                                                                                                                                                                                                                                                           |
| 10.21  |   | Termination and  Mutual Release, dated April 1, 2006, by and between Centerpointe  Property, LLC and the Company (incorporated by reference  to Exhibit 10.1 to the Quarterly Report on Form 10-QSB filed with  the SEC on May 15, 2006)   |
|   |   |                                                                                                                                                                                                                                                           |
| 10.22  |   | Option to  Acquire Shares of Common Stock, dated December 12, 2006, issued by the  Company to David M. Daniels (incorporated by reference  to Exhibit 10.1 to the Current Report on Form 8-K filed with the  SEC on December 14, 2006)     |
|   |   |                                                                                                                                                                                                                                                           |
| 10.23  |   | Option to  Acquire Shares of Common Stock, dated December 12, 2006, issued by the  Company to Alex Soufflas (incorporated by reference to  Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC  on December 14, 2006)        |
|   |   |                                                                                                                                                                                                                                                           |
| 10.24  |   | Option to  Acquire Shares of Common Stock, dated December 12, 2006, issued by the  Company to Patricia S. Bathurst (incorporated by reference  to Exhibit 10.3 to the Current Report on Form 8-K filed with the  SEC on December 14, 2006) |

 

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| 10.25  |   | Amendment  No. 1 to Option to Acquire Shares of Common Stock, dated  December 12, 2006, between the Company and David M. Daniels (incorporated  by reference to Exhibit 10.4 to the Current Report on Form 8-K  filed with the SEC on December 14, 2006)     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.26  |   | Amendment  No. 1 to Option to Acquire Shares of Common Stock, dated  December 12, 2006, between the Company and Alex Soufflas (incorporated  by reference to Exhibit 10.5 to the Current Report on Form 8-K  filed with the SEC on December 14, 2006)        |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.27  |   | Amendment  No. 1 to Option to Acquire Shares of Common Stock, dated  December 12, 2006, between the Company and Patricia S. Bathurst (incorporated  by reference to Exhibit 10.6 to the Current Report on Form 8-K  filed with the SEC on December 14, 2006) |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.28  |   | Amendment  No. 1 to Option to Acquire Shares of Common Stock, dated  December 12, 2006, between the Company and David A. Taylor (incorporated  by reference to Exhibit 10.7 to the Current Report on Form 8-K  filed with the SEC on December 14, 2006)      |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.29  |   | First Amendment  to Lease Agreement dated March 13, 2007 by and between the Company and  Liberty Property Limited Partnership (incorporated by reference  to Exhibit 10.2 to the Current Report on Form 8-K filed with the  SEC on March 19, 2007)                |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.30  |   | Restricted Stock  Award, dated September 4, 2007, issued by the Company to David M.  Daniels (incorporated by reference to Exhibit 10.1 to the Current Report  on Form 8-K filed with the SEC on September 7, 2007)                                               |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.31  |   | Option to  Acquire Shares of Common Stock, dated September 4, 2007, issued by the  Company to Alex Soufflas (incorporated by reference to  Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC  on September 7, 2007)                               |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.32  |   | Option to  Acquire Shares of Common Stock, dated September 4, 2007, issued by the  Company to Patricia S. Bathurst (incorporated by reference  to Exhibit 10.3 to the Current Report on Form 8-K filed with the  SEC on September 7, 2007)                        |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.33  |   | Option to  Acquire Shares of Common Stock, dated March 25, 2008, issued by the  Company to David M. Daniels (incorporated by reference  to Exhibit 10.33 to the Annual Report on Form 10-KSB filed with the  SEC on March 31, 2008)                               |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.34  |   | Option to  Acquire Shares of Common Stock, dated March 25, 2008, issued by the  Company to Alex Soufflas (incorporated by reference to  Exhibit 10.34 to the Annual Report on Form 10-KSB filed with the  SEC on March 31, 2008)                                  |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.35  |   | Option to  Acquire Shares of Common Stock, dated March 25, 2008, issued by the  Company to Patricia S. Bathurst (incorporated by reference  to Exhibit 10.35 to the Annual Report on Form 10-KSB filed with the  SEC on March 31, 2008)                           |

 

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| 10.36  |   | Option to  Acquire Shares of Common Stock, dated December 30, 2008, issued by the  Company to Patricia S. Bathurst                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                               |
| 21.1   |   | Subsidiaries of  the Company                                                                                                                                       |
|   |   |                                                                                                                                                               |
| 23.1   |   | Consent of H  J & Associates, LLC                                                                                                                         |
|   |   |                                                                                                                                                               |
| 31.1   |   | Certification of Chief  Executive Officer required by Rule 13a-14(a) under the Securities  Exchange Act of 1934, as amended                              |
|   |   |                                                                                                                                                               |
| 31.2   |   | Certification of Chief  Financial Officer required by Rule 13a-14(a) under the Securities  Exchange Act of 1934, as amended                              |
|   |   |                                                                                                                                                               |
| 32.1   |   | Certification of Chief  Executive Officer and Chief Financial Officer required by  Rule 13a-14(b) under the Securities Exchange Act of 1934, as  amended |

----

† Certain information in this document hasbeen omitted and filed separately with the Securities and ExchangeCommission.  Confidential treatment hasbeen granted with respect to the omitted portions.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|                      | **NATIONAL HEALTH PARTNERS, INC.** |
|---------------------------|------------------------------------|
|                      | ** **                         |
|                      |                               |   |
| Date: March 23, 2009 | By:                                | /s/ David M. Daniels |
|                      |                               | David M. Daniels |
|                      |                               | Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**        | ** ** | **Title**                                                        | ** ** | **Date**            |
|----------------------|------------|------------------------------------------------------------------|------------|---------------------|
|                 |       |                                                             |       |                |
| /s/ David M. Daniels |       | Chief Executive Officer, President and Chairman of  the Board    |       | March 23, 2009 |
| David M. Daniels     |       | (Principal Executive Officer)                                    |       |                |
|                 |       |                                                             |       |                |
| /s/ Alex Soufflas    |       | Chief Financial Officer, Executive Vice President  and Secretary |       | March 23, 2009 |
| Alex Soufflas        |       | (Principal Financial and Accounting Officer)                     |       |                |

 

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Table ofContents

 

**NATIONAL HEALTH PARTNERS, INC.AND SUBSIDIARIES**

**CONSOLIDATED FINANCIAL STATEMENTS**

 

Table of Contents

 
| Report of Independent Registered Public Accounting  Firm                                                             |   | F-2    |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                                 |   |   |   |
| Consolidated Balance  Sheets at December 31, 2008 and 2007                                                      |   | F-3    |   |
|                                                                                                                 |   |   |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2008 and 2007                           |   | F-4    |   |
|                                                                                                                 |   |   |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit) for the Years Ended  December 31, 2008 and 2007 |   | F-5    |   |
|                                                                                                                 |   |   |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2008 and 2007                           |   | F-6    |   |
|                                                                                                                 |   |   |   |
| Notes  to Consolidated Financial Statements — December 31, 2008 and 2007                                   |   | F-7    |   |

 

F-1

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Table ofContents

 

**Report ofIndependent Registered Public Accounting Firm**

 

Tothe Board of Directors of

NationalHealth Partners, Inc. and Subsidiaries

Horsham,Pennsylvania

 

Wehave audited the accompanying consolidated balance sheets of National HealthPartners, Inc. and Subsidiaries, as of December 31, 2008 and 2007,and the related statements of operations, stockholders’ equity (deficit) andcash flows for each of the two years ended December 31, 2008. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of National HealthPartners, Inc. and Subsidiaries as of December 31, 2008 and 2007, andthe results of its operations and its cash flows for each of the two years inthe period ended December 31, 2008, in conformity with U.S. generallyaccepted accounting principles.

 

Wewere not engaged to examine management’s assertion about the effectiveness ofNational Health Partners, Inc. and Subsidiaries’ internal control overfinancial reporting as of December 31, 2008 and accordingly, we do notexpress an opinion thereon.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, theCompany has suffered recurring losses and has experienced negative cash flowsfrom operations, which raises substantial doubt about the Company’s ability tocontinue as a going concern. Management’s plans in regard to those matters arealso described in Note 2 to the consolidated financial statements.  The consolidated financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

/s/  HJ & Associates, LLC

 

HJ &Associates, LLC

SaltLake City, Utah

March 16,2009

 

F-2

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Consolidated Balance Sheets

 
| ** **                                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                                                                                                                                                                                        |       |                  |       |   |   |
| **Assets**                                                                                                                                                                                  |       |                  |       |   |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Current assets:                                                                                                                                                                             |       |                  |       |   |   |
| Cash                                                                                                                                                                                        |       | $                     | 177,545    |   | $ | 32,206 |   |
| Accounts receivable, net                                                                                                                                                                    |       | —                |       | 21,257 |   |
| Prepaid expense                                                                                                                                                                             |       | 205,690               |       | 182,228 |   |
| Deposits                                                                                                                                                                                    |       | 114,378               |       | 276,389 |   |
| Other current assets                                                                                                                                                                        |       | —                |       | 4,500 |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Total current assets                                                                                                                                                                        |       | 497,613               |       | 516,580 |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Property and equipment, net                                                                                                                                                                 |       | 33,842                |       | 69,550 |   |
| Prepaid expense                                                                                                                                                                             |       | 201,669               |       | 117,702 |   |
| Deposits                                                                                                                                                                                    |       | 19,000                |       | 19,000 |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Total assets                                                                                                                                                                                |       | $                     | 752,124    |   | $ | 722,832 |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| **Liabilities and stockholders’ equity**                                                                                                                                               |       |                  |       |   |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Current liabilities                                                                                                                                                                         |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                            |       | $                     | 68,513     |   | $ | 262,355 |   |
| Accrued expenses                                                                                                                                                                            |       | 13,014                |       | 39,984 |   |
| Deferred revenue                                                                                                                                                                            |       | 79,008                |       | 17,338 |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Total current liabilities                                                                                                                                                                   |       | 160,535               |       | 319,677 |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Total liabilities                                                                                                                                                                           |       | 160,535               |       | 319,677 |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Commitments and contingencies                                                                                                                                                               |       |                  |       |   |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                                  |       |                  |       |   |   |
| Common stock, $0.001 par value, 100,000,000 shares authorized, 52,586,281  and 39,419,856 shares issued and outstanding on December 31, 2008 and  December 31, 2007, respectively |       | 52,586                |       | 39,420 |   |
| Additional paid-in capital                                                                                                                                                                  |       | 25,195,670            |       | 22,174,891 |   |
| Deferred compensation                                                                                                                                                                       |       | (205,133              | )          | (410,524 | ) |
| Accumulated deficit                                                                                                                                                                         |       | (24,451,534           | )          | (21,400,632 | ) |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Total stockholders’ equity                                                                                                                                                             |       | 591,589               |       | 403,155 |   |
|                                                                                                                                                                                        |       |                  |       |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                             |       | $                     | 752,124    |   | $ | 722,832 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-3

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Consolidated Statements of Operations

 
| ** **                                                             | ** ** | **For the Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **December 31,**           | ** ** |
| ** **                                                             | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                                                   |       |                            |       |   |   |
| Net revenue                                                            |       | $                               | 2,671,420  |   | $ | 3,724,204 |   |
|                                                                   |       |                            |       |   |   |
| Direct costs                                                           |       | 1,036,076                       |       | 2,742,129 |   |
|                                                                   |       |                            |       |   |   |
| Gross profit                                                           |       | 1,635,344                       |       | 982,075 |   |
|                                                                   |       |                            |       |   |   |
| Operating expenses:                                                    |       |                            |       |   |   |
| Selling and marketing                                                  |       | 224,546                         |       | 225,016 |   |
| General and administrative                                             |       | 4,433,930                       |       | 4,304,461 |   |
|                                                                   |       |                            |       |   |   |
| Total operating expenses                                               |       | 4,658,476                       |       | 4,529,477 |   |
|                                                                   |       |                            |       |   |   |
| Loss from operations                                                   |       | (3,023,132                      | )          | (3,547,402 | ) |
|                                                                   |       |                            |       |   |   |
| Other income (expense):                                                |       |                            |       |   |   |
| Interest income                                                        |       | 2,230                           |       | 15,432 |   |
| Loss on extinguishment of debt                                         |       | (30,000                         | )          | — |   |
|                                                                   |       |                            |       |   |   |
| Total other income (expense)                                           |       | (27,770                         | )          | 15,432 |   |
|                                                                   |       |                            |       |   |   |
| Net loss                                                               |       | $                               | (3,050,902 | ) | $ | (3,531,970 | ) |
|                                                                   |       |                            |       |   |   |
| Loss per share — basic and diluted                                |       | $                               | (0.07      | ) | $ | (0.10 | ) |
|                                                                   |       |                            |       |   |   |
| Weighted average number of shares outstanding — basic and diluted |       | 46,796,331                      |       | 34,066,929 |   |

 

The accompanying notes arean integral part of these consolidated financial statements

 

F-4

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Consolidated Statements ofStockholders’ Equity (Deficit)

 
| ** **                                     | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **       | ** ** | ** **             | ** ** | **Total**            | ** ** |
|------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Deferred**   | ** ** | **Accumulated**  | ** ** | **Stockholders’** | ** ** |
| ** **                                     | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**            | ** ** | **Equity (Deficit)** | ** ** |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| **Balance at December 31, 2006**          |       | 32,659,106       |       | $           | 32,659     |           | $          | 20,045,689       |       | $                      | (391,396   | )                    | $          | (17,868,662 | ) | $ | 1,818,290 |   |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock issued for services               |       | 1,690,000        |       | 1,690       |       | 683,427        |       | (19,128          | )          | —                 |       | 665,989              |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock issued upon exercise of warrants  |       | 140,000          |       | 140         |       | 69,860         |       | —           |       | —                 |       | 70,000               |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Options issued for services                    |       | —           |       | —      |       | 91,645         |       | —           |       | —                 |       | 91,645               |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock and warrants issued for cash      |       | 4,930,750        |       | 4,931       |       | 1,284,270      |       | —           |       | —                 |       | 1,289,201            |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Net loss                                       |       | —           |       | —      |       | —         |       | —           |       | (3,531,970             | )          | (3,531,970           | )          |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| **Balance at December 31, 2007**          |       | 39,419,856       |       | 39,420      |       | 22,174,891     |       | (410,524         | )          | (21,400,632            | )          | 403,155              |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock issued for services               |       | 5,629,025        |       | 5,629       |       | 1,509,017      |       | 205,391          |       | —                 |       | 1,720,037            |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock returned by service providers     |       | (742,100         | )          | (742        | )          | (285,862       | )          | —           |       | —                 |       | (286,604             | )          |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock issued upon exercise of warrants  |       | 3,463,250        |       | 3,463       |       | 593,952        |       | —           |       | —                 |       | 597,415              |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Options issued for services                    |       | —           |       | —      |       | 290,847        |       | —           |       | —                 |       | 290,847              |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock and warrants issued for cash      |       | 4,576,250        |       | 4,576       |       | 853,064        |       | —           |       | —                 |       | 857,640              |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock issued for extinguishment of debt |       | 240,000          |       | 240         |       | 59760          |       | —           |       | —                 |       | 60,000               |       |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Net loss                                       |       | —           |       | —      |       | —         |       | —           |       | (3,050,902             | )          | (3,050,902           | )          |
|                                           |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| **Balance at December 31, 2008**          |       | 52,586,281       |       | $           | 52,586     |           | $          | 25,195,670       |       | $                      | (205,133   | )                    | $          | (24,451,534 | ) | $ | 591,589 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

F-5

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Consolidated Statements ofCash Flows

 
| ** **                                                                   | ** ** | **For the Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**           | ** ** |
| ** **                                                                   | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                                                         |       |                            |       |   |   |
| **Cash flows from operating activities**                                     |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Net loss                                                                     |       | $                               | (3,050,902 | ) | $ | (3,531,970 | ) |
| Adjustments to reconcile net loss to net cash used by operating  activities: |       |                            |       |   |   |
| Common stock issued for services and amortization of prepaid services        |       | 1,322,507                       |       | 671,049 |   |
| Warrants issued for services                                                 |       | 3,498                           |       | 88,214 |   |
| Options issued for services                                                  |       | 290,848                         |       | 91,645 |   |
| Depreciation                                                                 |       | 35,708                          |       | 75,271 |   |
| Loss on extinguishment of debt                                               |       | 30,000                          |       | — |   |
| Changes in operating assets and liabilities:                                 |       |                            |       |   |   |
| Decrease (increase) in accounts receivable                                   |       | 21,257                          |       | (21,257 | ) |
| Decrease (increase) in prepaid expenses                                      |       | —                          |       | 5,000 |   |
| Decrease (increase) in deposits                                              |       | 162,011                         |       | (275,772 | ) |
| Decrease in other current assets                                             |       | 4,500                           |       | (4,500 | ) |
| (Decrease) increase in accounts payable and accrued expenses                 |       | (220,813                        | )          | 171,611 |   |
| Decrease (increase) in deferred revenue                                      |       | 61,670                          |       | (193,254 | ) |
|                                                                         |       |                            |       |   |   |
| Net cash used by operating activities                                        |       | (1,339,716                      | )          | (2,923,963 | ) |
|                                                                         |       |                            |       |   |   |
| **Cash flows from investing activities**                                     |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Net cash provided by investing activities                                    |       | —                          |       | — |   |
|                                                                         |       |                            |       |   |   |
| **Cash flows from financing activities**                                     |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Proceeds from sale of stocks and warrants                                    |       | 933,340                         |       | 1,289,200 |   |
| Stock offering costs                                                         |       | (75,700                         | )          | — |   |
| Proceeds from exercise of warrants                                           |       | 597,415                         |       | 70,000 |   |
| Proceeds from issuance of note payable                                       |       | 50,000                          |       | — |   |
| Payments on note payable                                                     |       | (20,000                         | )          | — |   |
|                                                                         |       |                            |       |   |   |
| Net cash provided by financing activities                                    |       | 1,485,055                       |       | 1,359,200 |   |
|                                                                         |       |                            |       |   |   |
| Net increase (decrease) in cash                                              |       | 145,339                         |       | (1,564,763 | ) |
| Cash at beginning of period                                                  |       | 32,206                          |       | 1,596,969 |   |
|                                                                         |       |                            |       |   |   |
| Cash at end of period                                                        |       | $                               | 177,545    |   | $ | 32,206 |   |
|                                                                         |       |                            |       |   |   |
| **Supplemental disclosure of cash flow information**                         |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Cash paid for interest                                                       |       | $                               | —     |   | $ | 15,432 |   |
| Cash paid for taxes                                                          |       | $                               | —     |   | $ | — |   |
|                                                                         |       |                            |       |   |   |
| **Schedule of non-cash financing activities**                                |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Common stock issued for services                                             |       | $                               | 1,514,646  |   | $ | 727,800 |   |
| Stock options issued for services                                            |       | $                               | 374,714    |   | $ | 755,161 |   |
| Common stock issued for extinguishment of debt                               |       | $                               | 60,000     |   | $ | — |   |
| Common stock issued for stock offering costs                                 |       | $                               | 83,700     |   | $ | 174,100 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

 

**Note 1.  Description of Business.**

 

NationalHealth Partners, Inc. (the “Company”) was organized on March 10, 1989as “Spectrum Vision Systems of Indiana, Inc.” under the laws of the Stateof Indiana.  The Company changed its nameto “National Health Partners, Inc.” on March 13, 2001.

 

TheCompany sells membership programs that encompass all aspects of healthcare,including physicians, hospitals, ancillary services, dentists, prescriptiondrugs and vision care through a national healthcare savings network called “CARExpress.”  The Company derives almost all of its revenuefrom the monthly membership fees it receives from its members.  It markets its programs through a directsales force, brokers and agents, unions and associations, chambers of commerce,and a variety of other organizations. The Company typically pays these organizations commissions on the saleprice of the membership programs.  Theseorganizations typically offer and sell the Company’s membership programs on apart-time basis and may engage in other related or unrelated business activities,including selling the products or services of the Company’s competitors.  The Company’s agreements with theseorganizations are generally for a term of one year and renew automatically foradditional one-year terms unless written notice of termination is delivered byeither party to the other at least 30 days prior to the then-current term.

 

TheCompany contracts with preferred provider organizations and other providernetworks for access to the discounted rates they have negotiated with theirhealthcare providers.  The principalsuppliers of the healthcare providers that comprise CARExpress are CareMark,Aetna, Optum, Outlook Vision, Integrated Health, Three Rivers andHealthFi.  The Company selects andutilizes only those provider networks that it believes can deliver adequatesavings to its members while providing adequate support for its membershipprograms with the healthcare providers. It typically pays a per member per month fee for use of the provider networksthat is determined in part based on the number of providers participating inthe network, the number of members accessing the network, and the particularproducts or services offered by the providers. The Company’s agreements with the provider networks are generally for aterm of between one and two years, may be terminated by either party on between45 and 180 days’ prior written notice, and renew automatically for additionalterms unless so terminated.  Most ofthese agreements are non-exclusive and contain confidentiality provisions.

 

**Note2.  Significant Accounting Policies**

 

Thissummary of significant accounting policies is provided to assist the reader inunderstanding the Company’s financial statements.  The financial statements and notes theretoare representations of the Company’s management.  The Company’s management is responsible fortheir integrity and objectivity.  Theseaccounting policies conform to accounting principles generally accepted in theUnited States of America and have been consistently applied in the preparation ofthe financial statements.

 

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

 

**Basis of Presentation**

 

The Company’s financial statements have beenprepared using accounting principles generally accepted in the United States ofAmerica applicable to a going concern which contemplates the realization ofassets and liquidation of liabilities in the normal course of business.  The Company has historically incurredsignificant losses, which raises substantial doubt about the Company’s abilityto continue as a going concern.  Theaccompanying financial statements do not include any adjustments relating tothe recoverability and classification of asset carrying amounts or the amountand classification of liabilities that might result from the outcome of thisuncertainty.

 

**Principles of Consolidation**

 

Thefinancial statements include the balances of National Health Partners, Inc.and its wholly-owned subsidiaries.  Allmaterial inter-company balances and transactions have been eliminated inconsolidation.

 

**Reclassifications**

 

Certainamounts in the 2007 financial statements have been reclassified to conform tothe 2008 presentation.  Thesereclassifications did not result in any change to the previously reported totalassets, net loss or stockholders’ equity.

 

**Estimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and accompanying notes. Actual results could differ from those estimates.

 

**Revenue Recognition**

 

The Company’srevenue consists of the monthly membership fees that it receives from the saleof its membership programs as well as any shipping and handling fees that itmay receive for the shipment of membership packages to new members.  The date amonthly membership begins varies for each individual member depending upon whenthe particular member purchased the membership. Members have the right toterminate their membership at any time and may do so at the end of each monthbefore they pay the membership fee for the next month.  The Companyrecognizes the membership fees and shipping and handling fees as revenue whenpersuasive evidence of an arrangement exists, delivery or performance hasoccurred, the sales price is fixed and determinable, and collectibility isreasonably assured in accordance withStaff Accounting Bulletin Topic 13.A (“SAB Topic 13.A”).

 

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Tableof Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and2007

 

The membership feesare paid by members repeatedly each month. The contractual term for the membership fees is equal to the monthlymembership period.  The expected periodduring which the services will be performed in return for the membership feeswill never extend beyond the one-month membership period since the members willpay another monthly membership fee before the next monthly membership periodbegins.  As a result, the Company recognizes the membership fees on astraight-line basis over the contract term since the relationship with themember is not expected to extend beyond the contractual term and the member isnot expected to continue to benefit from the payment of the membership feeafter the contractual term has expired.

 

# **The shipping and handling fees are one-time paymentsreceived by the Company from the applicable members when they first become amember.  These fees are not paid repeatedly each month.  The monthlycontract term is, therefore, not necessarily equal to the expected periodduring which services will be performed since the period during which serviceswill be performed is the average period during which each person is expected tobe a member.  The Company calculates the expected period during which itexpects its members to remain members as of the end of each fiscalquarter.  It does so by determining the total number of members that ithad on such date, then dividing the total number of months for which all ofsuch members had been a member as of that date by the number of suchmembers.  This provides the average number of months each member has beena member.  The expected period during which services will be performed(i.e., the expected period during which each member will remain a member) hasalways exceeded the initial monthly membership period.  Therefore, theCompany recognizes shipping and handling fees on a straight-line basis over theexpected period during which the services will be performed since therelationship with the members is expected to extend beyond the initialcontractual term and the members are expected to continue to benefit from thepayment of the shipping and handling fees after the initial contractual termhas expired.**

# ** **

At the beginning of each membership period,the monthly membership fee is paid by the member and recorded as deferredrevenue.  The Company then recognizesrevenue as the services are rendered. Shipping and handling fees that the Company receives for the shipment ofmembership packages to new members are included in its membership fees andrecorded as deferred revenue.  TheCompany typically receives cash within five days of the date the membership feeis charged to a member’s credit card. The Company had deferred revenue of $79,008 and $17,338 at December 31,2008 and 2007, respectively.

 

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Tableof Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and2007

 

The Company offers a free trial to some of its members.  The Company does not recognize any revenueduring the free-trial period.  In theevent the member continues the membership after the free-trial period expires,the member pays the monthly membership fee and the Company recognizes revenueas services are rendered.

 

The Company also offers a 30-day money-back guarantee to itsmembers.  Members can cancel theirmembership during the first 30 days of their initial membership period andreceive a full refund.  After that,members can cancel their membership at the end of any subsequent monthlymembership period.  If a member cancelshis or her membership and the member’s credit card has already been processedfor the next monthly membership period, a refund check will be issued to themember and no revenue will be recognized for that period.

 

The Company recognizes refunds as expense in accordance with SAB Topic13.A.4.a and Statement of Financial Accounting Standards No. 48, *“Revenue Recognition When Right of Return Exists,”* whichpermit companies to recognize refundable membership fees, net of estimatedrefunds, as earned revenue over the membership term in limited circumstances ifthe following criteria are met: (i) the estimate of cancellations andrefunded revenue are being made for a large pool of homogeneous items(membership transactions with the same characteristics, such as terms, periods,class of customers, nature of services, etc.), (ii) reliable estimates ofthe expected refunds can be made on a timely basis and it is remote thatmaterial adjustments to previously recognized revenue would be required, (iii) thereis a sufficient company-specific historical basis upon which to estimate therefunds and such historical basis is predictive of future events, and (iv) theamount of the membership fees specified in the agreement at the outset of thearrangement is fixed, other than the customer’s right to request a refund.  The Company had sales refunds of $203,870 and$873,019 that were netted against sales for the years ended December 31,2008 and 2007, respectively, and had minimal refunds payable that were includedin accounts payable at December 31, 2008 and 2007, respectively.

 

**DirectCosts**

 

The Company’s direct costs consist of sales commissions and fees paidto PPOs and provider networks.  TheCompany incurred sales commission expense of $578,057 and $2,177,066 andnetwork provider costs of $458,019 and $565,063 for the years ended December 31,2008 and 2007, respectively.

 

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

 

**Selling and Marketing Expenses**

 

The Company’s selling and marketing expenses consist of advertisingexpenses, marketing expenses, compensation paid to employees selling andmarketing the Company’s CARExpress membership programs to potential customers,and rent expense, depreciation and amortization expense allocated to theCompany’s selling and marketing activities, as well as all other selling andmarketing expenses incurred by the Company. Depreciation and amortization expense included in selling and marketingexpense is derived from the Company’s telephones and website and certain of theCompany’s computers, all of which are an integral part of the Company’s sellingand marketing activities.

 

**Stock-BasedCompensation Expense**

 

TheCompany accounts for employee stock-based compensation in accordance with thefair value recognition provisions of Financial Statement of FinancialAccounting Standards No. 123 (revised 2004), *“Share-BasedPayment”* (“SFAS 123R”) using the modified prospective transitionmethod.  Under this method, compensationexpense includes: (a) compensation expense for all stock-based paymentsgranted, but not yet vested, as of January 1, 2006 based on the grant-datefair value estimated in accordance with the original provisions of Statement ofFinancial Accounting Standards No. 123, *“AccountingFor Stock-Based Compensation”*(“SFAS 123”), and (b) compensationexpense for all stock-based payments granted subsequent to January 1,2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS 123R.  Such amountshave been reduced by the Company’s estimate of forfeitures of all unvestedawards.

 

The Company accounts for non-employeestock-based compensation in accordance with SFAS 123 and Emerging Issues TaskForce No. 96-18 *“Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring or inConjunction with Selling Goods or Services”* (“EITF 96-18”).  SFAS 123 and EITF 96-18 require that theCompany recognizes compensation expense based on the estimated fair value ofstock-based compensation granted to non-employees over the vesting period,which is generally the period during which services are rendered by thenon-employees.

 

TheCompany uses the Black-Scholes pricing model to determine the fair value of thestock-based compensation that it grants to employees and non-employees.  The Company is required to make certainassumptions in connection with this determination, the most important of whichinvolves the calculation of volatility with respect to the price of its commonstock.  The computation of volatility isintended to produce a volatility value that is representative of the Company’sexpectations about the future volatility of the price of its common stock overan expected term.

 

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** **

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

** **

TheCompany used its share price history to determine volatility and cannot predicthow the price of its shares of common stock will react on the open market inthe future since its common stock has only been trading on the OTC BulletinBoard since March 30, 2006.  As aresult, the volatility value that the Company calculated may differ from thefuture volatility of the price of its shares of common stock.

 

The Company recognized $1,616,853 and$850,908 of stock compensation expense during the years ended December 31,2008 and 2007, respectively.

 

**IncomeTaxes**

 

TheCompany uses the liability method of accounting for income taxes under whichdeferred tax assets and liabilities are recognized for the estimated future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates in effect for the year in which thosetemporary differences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized as part of the provision forincome taxes in the period that includes the enactment date.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realizedin the future.

 

Netdeferred tax assets consisted of the following components at December 31,2008 and 2007, respectively:

 

| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Deferred tax assets:             |       |                  |       |   |   |
| Net operating loss carryforwards |       | $                     | 5,250,900  |   | $ | 4,760,300 |   |
| Depreciation                     |       | 2,000                 |       | -0- |   |
| Deferred revenue                 |       | 30,800                |       | -0- |   |
|                             |       |                  |       |   |   |
| Deferred tax liabilities:        |       |                  |       |   |   |
| Depreciation                     |       | -0-                   |       | (2,400 | ) |
|                             |       |                  |       |   |   |
| Valuation allowance              |       | (5,283,700            | )          | (4,757,900 | ) |
|                             |       |                  |       |   |   |
| Net deferred tax asset           |       | $                     | —     |   | $ | — |   |

 

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

 

At December 31,2008, the Company had net operating loss carry-forwards of approximately$13,464,000 that may be offset against future taxable income from the years2009 through 2029. No tax benefit has been reported in the December 31,2008 financial statements since the potential tax benefit is offset by avaluation allowance of the same amount.

 

Utilization of netoperating loss carryforwards may be subject to a substantial annual limitationdue to ownership change limitations provided by the Internal Revenue Code of1986, as well as similar state and foreign provisions.  These ownership changes may limit the amountof net operating loss carryforwards that can be utilized annually to offsetfuture taxable income and tax, respectively. Subsequent ownership changes could further affect the limitation infuture years.  These annual limitationprovisions may result in the expiration of certain net operating losses andcredits before utilization.

 

In calculating theamount of pretax income from continuing operations for the years ended December 31,2008 and 2007, the amount of income tax calculated under accounting principlesgenerally accepted in the United States of America differed from the amount ofincome tax determined under United States federal and state income taxprovisions as follows:

 

| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2008**              | ** ** | **2007** | ** ** |
|                    |       |                  |       |   |   |
| Book income             |       | $                     | (1,189,852 | ) | $ | (1,377,535 | ) |
| Meals and entertainment |       | 9,971                 |       | 4,470 |   |
| Depreciation            |       | -0-                   |       | 12,770 |   |
| Stock compensation      |       | 653,973               |       | 331,850 |   |
| Valuation allowance     |       | 525,908               |       | 1,028,445 |   |
|                    |       |                  |       |   |   |
|                    |       | $                     | —     |   | $ | — |   |

 

**LossPer Share**

 

Basicloss per share is based on the weighted average number of shares of the Company’scommon stock outstanding during the applicable year, and is calculated bydividing the reported net loss for the applicable year by the weighted averagenumber of shares of common stock outstanding during the applicable year.   The Company calculates diluted loss pershare by dividing the reported net loss for the applicable year by the weightedaverage number of shares of common stock outstanding during the applicable yearas adjusted to give effect to the exercise of all potentially dilutive optionsand warrants outstanding at the end of the year.  A total of 16,838,092 and 22,198,092 sharesof common stock underlying options and warrants that were outstanding on December 31,2008 and 2007, respectively, have been excluded from the computation of dilutedearnings per share because they are anti-dilutive.  As a result, basic loss per share was equalto diluted loss per share for each year.

 

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

 

| ** **                                                             | ** ** | **For the Years  Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
|                                                                   |       |                                       |       |   |   |
| Net loss as reported                                                   |       | $                                          | (3,050,902 | ) | $ | (3,531,970 | ) |
| Weighted average number of shares outstanding – basic and diluted |       | 46,796,331                                 |       | 34,066,929 |   |
| Loss per share – basic and diluted                                |       | $                                          | (0.07      | ) | $ | (0.10 | ) |

 

**Cashand Cash Equivalents**

 

TheCompany considers all highly liquid investments with an original maturity ofthree months or less on the date of purchase to be cash equivalents.

 

**FinancialInstruments**

 

                The carrying amounts of theCompany’s cash and cash equivalents, accounts payable, accrued liabilities andother short-term liabilities in the consolidated balance sheet approximatetheir fair value due to the short-tem maturity of these instruments andobligations.

 

**DerivativeFinancial Instruments**

 

TheCompany has issued common stock and warrants to certain consultants to theCompany and has evaluated the terms and conditions of the common stock andwarrants to determine whether the warrants represented embedded or freestandingderivative instruments under the provisions of Statement of FinancialAccounting Standards No. 133, *“Accounting for DerivativeInstruments and Hedging Activities” and* Emerging Issues Task Force No. 00-19,*“Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock”* (“EITF00-19”).  The Company determined that thewarrants did not represent freestanding derivative instruments and that thewarrants did not meet the requirements for liability classification under EITF00-19.  As a result, the fair value ofthe warrants is reflected in the Company’s additional paid-in capital.  The fair value of the Company’s derivativefinancial instruments are estimated using the Black-Scholes pricing model whichtakes into consideration the estimated term of the warrants, the volatility ofthe price of the Company’s common stock, interest rates and the probabilitythat the warrants will be exercised.

 

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Table of Contents

** **

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31,2008 and 2007

** **

**Property and Equipment**

 

Property and equipmentare stated at cost, less accumulated depreciation and amortization.Depreciation and amortization are calculated using the straight-line basis overthe estimated useful lives of the related assets.  The estimated useful lives of the Company’sproperty and equipment are as follows:

 
| Computer equipment      |   | 3 years |
|-------------------------|--------|---------|
| Computer software       |   | 3 years |
| Furniture and  fixtures |   | 5 years |
| Telephone equipment     |   | 5 years |
| Website equipment       |   | 3 years |

 

 

The cost of major improvements to the Company’s property and equipmentare capitalized. The cost of maintenance and repairs that do not improve orextend the life of the applicable assets are expensed as incurred.  When assets are retired or otherwise disposedof, the cost and accumulated depreciation and amortization are removed from theaccounts and any resulting gain or loss is reported in the period realized.

 

The Company reviews property and equipment for impairment wheneverevents or changes in circumstances indicate that the carrying amount of assetsmay not be recoverable.  Recoverabilityis measured by comparison of the carrying amount of the assets to the futureundiscounted net cash flows that the assets are expected to generate.  If the assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount of these assets exceeds the fair value of the assets.

 

**RecentAccounting Pronouncements**

 

InDecember 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 141(R), “*Business Combinations*” (“SFAS 141R”), which changesaccounting for business acquisitions.  SFAS No. 141(R) requiresthe acquiring entity in a business combination to recognize all (and only) theassets acquired and liabilities assumed in the transaction and establishes theacquisition-date fair value as the measurement objective for all assetsacquired and liabilities assumed in a business combination.  Certainprovisions of this standard will, among other things, impact the determinationof acquisition-date fair value of consideration paid in a business combination(including contingent consideration), exclude transaction costs fromacquisition accounting, and change accounting practices for acquiredcontingencies, acquisition-related restructuring costs, in-process research anddevelopment, indemnification assets and tax benefits.  SFAS 141R iseffective for fiscal years and periods beginning after December 15, 2008.

 

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Table of Contents

** **

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

** **

InDecember 2007, the FASB issued Statement of Financial Accounting StandardsNo. 160, “*Non-controlling Interests in ConsolidatedFinancial Statements — an Amendment of Accounting Research Bulletin No. 51*”(“SFAS 160”).  The objective of SFAS 160is to improve the relevance, comparability and transparency of the financialinformation that a reporting entity provides in its consolidated financialstatements.  SFAS 160 applies to allentities that prepare consolidated financial statements, except not-for-profitorganizations, but will affect only those entities that have an outstanding non-controllinginterest in one or more subsidiaries or that deconsolidate a subsidiary.  SFAS No. 160 is effective for fiscalyears and periods beginning after December 15, 2008, and early adoption isprohibited.

 

In February 2008, the FASBissued FASB Staff Position No. 157-2, “*EffectiveDate of FASB Statement No. 157,*” (“FSP 157-2”) which delayedthe effective date for adoption of fair value measurements for non-financialassets and liabilities, except those that are recognized or disclosed at fairvalue in the financial statements on a recurring basis (at least annually),until fiscal years beginning after November 15, 2008.  These non-financial items include assets andliabilities such as reporting units measured at fair value in a goodwillimpairment test and non-financial assets acquired and liabilities assumed in abusiness combination.  FSP 157-2 iseffective for fiscal years beginning after December 15, 2008.

 

In March 2008, the FASB issued Statement of Financial AccountingStandards No. 161, “*Disclosures AboutDerivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133*”(“SFAS 161”).  SFAS 161 amendsand expands the disclosure requirements of FASB Statement No. 133,requiring enhanced disclosures about the Company’s hedging activities. TheCompany is required to provide enhanced disclosures about (a) how and whyit uses derivative instruments, (b) how derivative instruments and relatedhedged items are accounted for under FASB Statement No. 133 and itsrelated interpretations, and (c) how derivative instruments and relatedhedged items affect the Company’s financial position, results of operations,and cash flows.  SFAS No. 161 iseffective for fiscal years and periods beginning after December 15, 2008,with comparative disclosures of earlier periods encouraged upon initialadoption.

 

InMay 2008, the FASB issued FASB Staff Position No. 14-1, “*Accounting for Convertible Debt Instruments That May BeSettled in Cash upon Conversion (Including Partial Cash Settlement)*”(“FSP 14-1”).  FSP 14-1 specifies thatissuers of convertible debt instruments should separately account for theliability (debt) and equity (conversion option) components of such instrumentsin a manner that reflects the issuer’s non-convertible debt borrowing rate. Previous guidance provided for accounting for this type of convertibledebt instrument entirely as debt.  FSP14-1 is effective for fiscal years beginning after December 15, 2008.

 

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** **

**National Health Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

December 31, 2008 and 2007

 

In June 2008, the FASB issuedEmerging Issues Task Force Issue No. 07-5, “*Determining Whether an Instrument (or Embedded Feature) Is Indexed toan Entity’s Own Stock”* (“EITF 07-5”).  EITF 07-5 provides guidance in assessingwhether an equity-linked financial instrument (or embedded feature) is indexedto an entity’s own stock for purposes of determining whether the appropriateaccounting treatment falls under the scope of Statement of Financial AccountingStandards No. 133, “*Accounting ForDerivative Instruments and Hedging Activities”* and/or EmergingIssues Task Force Issue No. 00-19, “*AccountingFor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock*.”  EITF07-5 provides that an entity should use a two step approach to evaluate whetheran equity-linked financial instrument (or embedded feature) is indexed to itsown stock, including evaluating the instrument’s contingent exercise provisionsand settlement provisions.  It alsoclarifies the impact of foreign currency denominated strike prices andmarket-based employee stock option valuation instruments on theevaluation.  EITF 07-5 is effectivefor fiscal years and periods beginning after December 15, 2008, and earlyadoption is prohibited.

 

**Note 3. Property and Equipment**

 

Property and equipment consisted of thefollowing at December 31, 2008 and 2007:

 

| ** **                     | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| **Asset**                      | ** ** | **2008**   | ** ** | **2007** | ** ** |
| Computers                      |       | $          | 60,708     |   | $ | 60,708 |   |
| Software                       |       | 6,109      |       | 6,109 |   |
| Furniture                      |       | 27,968     |       | 27,968 |   |
| Telephone                      |       | 80,780     |       | 80,780 |   |
| Website                        |       | 106,477    |       | 106,477 |   |
| Less: accumulated depreciation |       | (248,200   | )          | (212,492 | ) |
|                           |       |       |       |   |   |
| Net property and equipment     |       | $          | 33,842     |   | $ | 69,550 |   |

 

Depreciationexpense for the years ended December 31, 2008 and 2007 was $35,709 and$75,270, respectively.

 

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**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December31, 2008 and 2007

 

**Note 4.  Deposits**

 

                Deposits consistof cash reserves held by merchant processors that the Company uses to processcredit card transactions and the security deposit held by the lessor of theCompany’s office space.  Each agreementthat the Company has entered into with merchant processors contains a standardprovision that gives the merchant processors the right to withhold funds fromthe proceeds generated by the Company through the sale of its membershipprograms through credit card transactions. The amount of the reserves may be increased or decreased by eachmerchant processor at any time based on the perceived risk exposure of themerchant processor.  The merchantprocessors are required to return the amount of funds that they withhold fromthe proceeds within no less than six months and no more than nine months of thedate such funds were originally withheld. As a result, the Company expects to receive all such funds within six tonine months of the date such funds were originally withheld by the merchantprocessors.

 

                As of December 31, 2008,the Company had a total of $133,378 in deposits.  Of this amount, $75,000 was being held byPowerPay Payment Systems, Inc., $39,378 was being held by PayTran PaymentSystems and $19,000 was being held by the lessor of the Company’s officespace.  As of December 31, 2007, theCompany had a total of $295,389 in deposits. Of this amount, $237,772 was being held by Optimal Payments, Inc.,$31,000 was being held by Heartland Payment Systems, Inc., $19,000 wasbeing held by the lessor of the Company’s office space and the remainder wasbeing held by other entities.

 

**Note 5.  Commitments and Contingencies**

 

                The Company’smaterial commitments and contingencies consist of an operating lease for itsoffice space in Pennsylvania and employment agreements with its executiveofficers.

 

**Operating Leases**

 

                The Company is aparty to a lease for its office facility located in Horsham, Pennsylvania whichwas most recently amended on March 13, 2007.  The amendment extended the term of the leasefrom May 31, 2007 to May 31, 2010. The amendment provides for an initial monthly rent payment of $7,803 andan initial monthly operating expense payment of approximately $5,620.

 

Future minimum lease payments under this facility lease are as follows:

 

| **Fiscal Year** | ** ** | **Amount** | ** ** |
|-----------------|------------|------------|------------|
|            |       |       |       |
| 2009            |       | $          | 172,876    |   |
| 2010            |       | 72,032     |       |
|            |       | $          | 244,908    |   |

 

F-18

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

 

**EmploymentAgreements**

 

TheCompany is a party to employment agreements with each of its current executiveofficers.  Future minimum payments underthese employment agreements are as follows:

 

| **Fiscal Year** | ** ** | **Amount** | ** ** |
|-----------------|------------|------------|------------|
|            |       |       |       |
| 2009            |       | $          | 748,107    |   |
| 2010            |       | 56,315     |       |
|            |       | $          | 804,422    |   |

 

 

**Note6.  2006 Stock Incentive Plan**

 

OnFebruary 2, 2006, the Company adopted the National Health Partners, Inc.2006 Stock Incentive Plan.  Under theplan, 4,500,000 shares of common stock may be granted to employees, officersand directors of, and consultants and advisors to, the Company under awardsthat may be made in the form of stock options, warrants, stock appreciationrights, restricted stock, restricted units, unrestricted stock and otherequity-based or equity-related awards. As of December 31, 2008, all shares of common stock had been issuedunder the plan.  The plan terminates on February 1,2016.  On February 6, 2006, theCompany filed a registration statement on Form S-8, File No. 333-131589,with the Securities and Exchange Commission (“SEC”) covering the public sale ofthe 4,500,000 shares of common stock available for issuance under the plan.

 

**Note7.  2008 Stock Incentive Plan**

 

OnApril 7, 2008, the Company adopted the National Health Partners, Inc.2008 Stock Incentive Plan.  Under theplan, 3,000,000 shares of common stock may be granted to employees, officersand directors of, and consultants and advisors to, the Company under awardsthat may be made in the form of stock options, warrants, stock appreciationrights, restricted stock, restricted units, unrestricted stock and otherequity-based or equity-related awards. As of December 31, 2008, all shares of common stock had been issuedunder the plan.  The plan terminates on April 6,2018.  On April 10, 2008, theCompany filed a registration statement on Form S-8, File No. 333-150177,with the SEC covering the public sale of the 3,000,000 shares of common stockavailable for issuance under the plan.

 

F-19

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

 

**Note8.  401(k) Plan**

 

     On January 15,2007, the Company adopted the National Health Partners, Inc. 401(k) Plan.Under the plan, eligible employees may elect to contribute up to 100% of theircompensation to the plan each year, subject to certain limitations imposed bythe Internal Revenue Service.  TheCompany contributes 100% of the first 3% of the employee’s contribution and 50%of the next 2% of the employee’s contribution. The Company contributed $35,707 and $26,928 to the plan during the yearended December 31, 2008 and 2007, respectively.

 

**Note9.  Common Stock and Warrants**

 

TheCompany’s authorized capital consisted of 100,000,000 shares of common stock,$0.001 par value per share, at December 31, 2008 and 2007, respectively,of which 52,586,281 and 39,419,856 shares of common stock were outstanding at December 31,2008 and 2007, respectively.  Warrantsexercisable into a total of 7,661,592 and 14,538,092 shares of the Company’scommon stock were outstanding on December 31, 2008 and 2007, respectively.

 

TheCompany estimates the fair value of warrants issued for services on the date ofgrant by using the Black-Scholes pricing model. Under this model, the Company used the following weighted-averageassumptions to determine the fair value of the warrants that have been issuedfor services: a dividend yield of zero percent, an expected volatility of****282%, a risk-free interest rate of 3.5% and a remainingcontractual term of two years.  TheCompany follows EITF 96-18 to recognize the fair value of warrantsgranted.  Under EITF 96-18, the fairvalue of the warrants should be recognized as the services are rendered.  The Company is recognizing the cost ofservices evenly over the term of the agreements since the services are beingrendered on an ongoing basis during the term of the agreements.

 

**Non Capital-Raising Transactions**

 

InMarch 2007, the Company issued a restricted stock award for 200,000 sharesof common stock to Trident Marketing International, Inc.  The award vests in four equal quarterlyinstallments commencing June 30, 2007 if certain performance criteria areachieved.  The shares were valued at theclosing price of the Company’s common stock on the date of issuance for totalconsideration of $130,000.  The Companyrecognized $7,722 and $69,922 of expense during the years ended December 31,2008 and 2007, respectively, in connection with the issuance of these shares.

 

F-20

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

** **

InMarch 2007, the Company issued 30,000 shares of common stock to each ofthree consultants pursuant to individual consulting agreements.  The shares were valued at the closing priceof the Company’s common stock on the date of issuance for total considerationof $60,300, all of which was recognized as expense during the year ended December 31,2007.

 

In September 2007, the Companyissued a restricted stock award to David M. Daniels, its President and ChiefExecutive Officer, for 600,000 shares of common stock.  The award vests in four equal annualinstallments commencing on the first anniversary of the date of grant.  The shares were valued at $0.50 per share fortotal consideration of $300,000.  TheCompany recognized $75,154 and $24,230 of expense during the years ended December 31,2008 and 2007, respectively, in connection with the issuance of these shares.

 

In June 2007, 50,000 sharesunderlying the restricted stock award granted to Trident MarketingInternational, Inc. in March 2007 failed to vest and were canceled bythe Company in accordance with the terms of the restricted stock award.

 

In September 2007, 50,000 sharesunderlying the restricted stock award granted to Trident MarketingInternational, Inc. in March 2007 failed to vest and were canceled bythe Company in accordance with the terms of the restricted stock award.

 

InNovember 2007, the Company issued a total of 950,000 shares of common stockto two consultants pursuant to consulting agreements.  The Company granted registration rightscovering all of the shares issued by the Company.  The shares were issued at the closing priceof the Company’s common stock on the day immediately preceding the date ofissuance for total consideration of $237,500. The Company recognized $133,291 and $15,559 of expense during the yearsended December 31, 2008 and 2007, respectively, in connection with theissuance of these shares.

 

In December 2007, 50,000 sharesunderlying the restricted stock award granted to Trident MarketingInternational, Inc. in March 2007 failed to vest and were canceled bythe Company in accordance with the terms of the restricted stock award.

 

F-21

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and2007

##  

InJanuary and February 2008, the Company issued a total of 330,000shares of common stock to three consultants pursuant to individual consultingagreements. The shares were valued at the closing price of the Company’s commonstock on the date the agreements were executed for total consideration of$113,300, all of which was recognized as expense during the year ended December 31,2008.

 

In February 2008, the Companyissued 240,000 shares of common stock to the holder of a promissory note inpartial consideration for the extinguishment of debt.  The shares were issued at the closing priceof the Company’s common stock on the date the agreement was executed for totalconsideration of $60,000, all of which was recognized as expense during theyear ended December 31, 2008.

 

In January 2008, the Companyterminated its agreement with Trident Marketing International, Inc.  As a result, the remaining 50,000 sharesunderlying the restricted stock award granted to it in March 2007 failedto vest and were canceled by the Company in accordance with the terms of therestricted stock award.

 

InApril 2008, the Company issued a total of 2,700,000 shares of common stockto consultants for marketing and advisory services pursuant to individualconsulting agreements.  The shares werevalued at the closing price of the Company’s common stock on the date theagreements were executed for total consideration of $1,246,900.  The Company recognized $692,026 of expenseduring the year ended December 31, 2008 in connection with the issuance ofthese shares.

 

InDecember 2008, the Company issued a total of 1,385,525 shares of commonstock to five consultants pursuant to individual consulting agreements. Theshares were valued at the closing price of the Company’s common stock on thedate the agreements were executed for total consideration of $87,704. TheCompany recognized $16,746 of expense during the year ended December 31,2008 in connection with the issuance of these shares.

 

In December 2008, the Companyissued 690,000 and 523,500 shares of common stock to David M. Daniels, itsPresident and Chief Executive Officer, and Alex Soufflas, its Vice Presidentand Chief Financial Officer, respectively, in full payment of deferred salarycompensation that was earned by each of them during 2008 and payable to each ofthem as of December 31, 2008.  Theshares were valued at $0.055 per share for total consideration of $66,743, allof which was recognized as expense during the year ended December 31,2008.

 

F-22

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and2007

 

## **Capital-Raising Transactions**

##  

In August 2007, the Company sold1,200,000 shares of common stock, one Class A warrant exercisable into1,000,000 shares of common stock and one Class B warrant exercisable into1,000,000 shares of common stock to an accredited investor for aggregate grossproceeds of $540,000.  The Companygranted registration rights covering all shares of common stock and all sharesissuable upon the exercise of the warrants. The Class A warrants had an exercise price of $0.60 per share, wereexercisable for a period of 30 days commencing on the date the registrationstatement is declared effective by the SEC, and expired at the end of theexercise period.  The Class Bwarrants had an exercise price of $.80 per share, were exercisable until December 31,2008, were callable by the Company if certain criteria are satisfied, andexpired at the end of the exercise period.

 

In October 2007, theCompany completed a private offering of 810,000 shares of its common stock foraggregate cash consideration of $243,000. The shares were sold in units consisting of one share of common stock,one Class A warrant and one Class B warrant at a purchase price of $0.30 perunit.   Each warrant gives the holder theright to purchase one share of common stock. The Company granted registration rights covering all shares of commonstock and all shares issuable upon the exercise of the warrants.   The Class A warrants had an exercise priceof $0.30 per share, were exercisable during the period commencing on the datethe registration statement was declared effective by the SEC and ending on thelater of January 31, 2008 or the date that is 30 days after the date theregistration statement was declared effective by the SEC, and expired at theend of the exercise period.  The Class Bwarrants had an exercise price of $0.40 per share, were exercisable during theperiod commencing on the date the registration statement is declared effectiveby the SEC and ending on January 31, 2008, and expired at the end of theexercise period.

 

In November 2007, the Companycompleted a private offering of 500,000 shares of its common stock foraggregate cash consideration of $150,000. The shares were sold in units consisting of one share of common stock,one Class A warrant and one Class B warrant at a purchase price of$0.30 per unit.   Each warrant gives theholder the right to purchase one share of common stock.  The Company granted registration rightscovering all shares of common stock and all shares issuable upon the exerciseof the warrants.   The Class Awarrants had an exercise price of $0.30 per share, were exercisable during theperiod commencing on the date the registration statement was declared effectiveby the SEC and ending on the later of January 31, 2008 or the date that is30 days after the date the registration statement was declared effective by theSEC, and expired at the end of the exercise period.  The Class B warrants had an exerciseprice of $0.40 per share, were exercisable during the period commencing on thedate the registration statement was declared effective by the SEC and ending onJanuary 31, 2008, and expired at the end of the exercise period.

 

F-23

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and2007

 

In November 2007, the Companycompleted a private offering of 1,240,000 shares of its common stock foraggregate cash consideration of $310,000. The shares were sold in units consisting of one share of common stock,one Class A warrant and one Class B warrant at a purchase price of$0.25 per unit.   Each warrant gives theholder the right to purchase one share of common stock.  The Company granted registration rights coveringall shares of common stock and all shares issuable upon the exercise of thewarrants.  The Class A warrants hadan exercise price of $0.30 per share, were exercisable during the periodcommencing on the date the registration statement was declared effective by theSEC and ending on the later of January 31, 2008 or the date that is 30days after the date the registration statement was declared effective by theSEC, and expired at the end of the exercise period.  The Class B warrants had an exercise priceof $0.40 per share, were exercisable during the period commencing on the datethe registration statement was declared effective by the SEC and ending on January 31,2008, and expired at the end of the exercise period.

 

## In December 2007, the Company completeda private offering of 555,000 shares of its common stock for aggregate cashconsideration of $111,000.  The shareswere sold in units consisting of one share of common stock, one Class Awarrant, one Class B warrant and one Class C warrant at a purchaseprice of $0.22 per unit.  Each warrantgives the holder the right to purchase one share of common stock.  The Company granted registration rightscovering all shares of common stock and all shares issuable upon the exerciseof the warrants.   The Class Awarrants had an exercise price of $0.22 per share, were exercisable during theperiod commencing on the date the registration statement was declared effectiveby the SEC and ending March 31, 2008, and expired at the end of theexercise period.  The Class Bwarrants had an exercise price of $0.30 per share, were exercisable during theperiod commencing on the date the registration statement was declared effectiveby the SEC and ending on June 30, 2008, and expired at the end of theexercise period.  The Class Cwarrants had an exercise price of $0.30 per share, were exercisable during theperiod commencing on the date the registration statement was declared effectiveby the SEC and ending on December 31, 2008, and expired at the end of theexercise period.

##  

Duringthe year ended December 31, 2007, the Company received aggregate grossproceeds of $70,000 from the exercise of warrants held by one of the Company’ssecurity holders.  The Company issued atotal of 140,000 shares of its common stock in connection therewith at anexercise price of $0.50 per share.

 

In February 2008, the Company completeda private offering of Class A warrants exercisable into 1,000,000 sharesof common stock for aggregate gross proceeds of $100.  The Class A warrants had an exerciseprice of $0.12 per share, were exercisable until February 29, 2008, andexpired at the end of the exercise period.

 

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Table of Contents

** **

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

##  

In February 2008, the Company sold one Class Awarrant exercisable into 500,000 shares of common stock, one Class Bwarrant exercisable into 1,000,000 shares of common stock and one Class Cwarrant exercisable into 1,000,000 shares of common stock to an accreditedinvestor for aggregate gross proceeds of $100. The Class A warrant had an exercise price of $0.20 per share, wasexercisable until February 29, 2008, and expired at the end of theexercise period.  The Class Bwarrant had an exercise price of $0.30 per share, was exercisable until June 30,2008, was callable by the Company if certain criteria are satisfied, andexpired at the end of the exercise period. The Class C warrant had an exercise price of $0.40 per share, wasexercisable until December 31, 2008, was callable by the Company ifcertain criteria are satisfied, and expired at the end of the exercise period.

 

In February 2008, the Company completeda private offering of Class A warrants exercisable into 600,000 shares ofcommon stock for aggregate cash proceeds of $60.  The Class A warrants were sold in unitscomprised of one Class A warrant at a purchase price of $1.00 perunit.  The Class A warrants had anexercise price of $0.12 per share, were exercisable until March 28, 2008,and expired at the end of the exercise period.

 

In April 2008, the Company completed aprivate offering of 500,000 shares of common stock and Class A warrantsexercisable into 500,000 shares of common stock for aggregate gross proceeds of$75,000.  The Company paid finder feesconsisting of 75,000 shares of common stock and a Class A warrantexercisable into 75,000 shares of common stock in connection with thisoffering.  The Class A warrants hadan exercise price of $0.12 per share, were exercisable until April 18,2008, and expired at the end of the exercise period.

 

In June 2008, the Company completed aprivate offering of 675,000 shares of common stock, Class A warrantsexercisable into 675,000 shares of common stock and Class B warrantsexercisable into 675,000 shares of common stock for aggregate cashconsideration of $108,000.  Thesesecurities were sold in units comprised of one share of common stock, one Class Awarrant and one Class B warrant at a purchase price of $0.16 perunit.  The Company paid finder feesconsisting of 101,250 units identical to the units sold in the offering.  The Company agreed to provide each investorwith an opportunity to include all shares of common stock and all shares ofcommon stock issued upon the exercise of the warrants in any registrationstatement that the Company files with the SEC for the purposes of a publicoffering of the Company’s securities (excluding registration statements onForms S-4 or S-8).  The Class Awarrants were initially exercisable into one share of common stock at anexercise price of $0.20 per share, were exercisable during a period of 90 daysbeginning on the date of grant, and expired at the end of the exerciseperiod.  The Class B warrants wereinitially exercisable into one share of common stock at an exercise price of$0.30 per share, were exercisable during a period beginning on the date ofgrant and ending on December 31, 2008, and expired at the end of theexercise period.

 

F-25

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2008 and 2007

 

In July 2008, the Company sold 3,000,000shares of common stock and one Class A warrant exercisable into 3,000,000shares of common stock to an accredited investor for aggregate gross proceeds of$750,000.  The Company paid finder feesconsisting of 225,000 shares of common stock and a Class A warrantexercisable into 225,000 shares of common stock and cash consideration of$56,250 in connection with this offering. The Class A warrants have an exercise price of $0.30 per share, areexercisable for a period commencing on the date of grant and ending on December 31,2009, and expire at the end of the exercise period.

 

In July 2008, the Company completed aprivate offering of Class A warrants exercisable into 1,000,000 shares ofcommon stock for aggregate gross proceeds of $100.  The Class A warrants had an exerciseprice of $0.20 per share, were exercisable until December 31, 2008, andexpired at the end of the exercise period.

 

Duringthe year ended December 31, 2008, the Company received aggregate grossproceeds of $597,415 from the exercise of warrants held by the Company’ssecurity holders.  The Company issued atotal of 3,463,250 shares of its common stock in connection therewith atexercise prices ranging between $0.12 and $0.40 per share.

 

**Note10.  Stock Options**

 

Stockoptions exercisable into a total of 9,176,500 and 7,660,000 shares of theCompany’s common stock were outstanding on December 31, 2008 and 2007,respectively.  The weighted averageexercise price of the stock options outstanding on December 31, 2008 and2007 was $0.41 and $0.45, respectively. The Company estimates the fair value of its stock options on the date ofgrant by using the Black-Scholes pricing model in accordance with theprovisions of Statement of Financial Accounting Standards No. 148, *“Accounting for Stock-Based Compensation — Transition and Disclosure.”*  Under the Black-Scholes pricing model, theCompany used the following weighted-average assumptions to determine the fairvalue of the stock options issued: a dividend yield of zero percent, anexpected volatility of between 231% and 290%, a risk-free interest rate ofbetween 2.25% and 4.76% and a remaining contractual life of between 9.15 and9.95 years.

 

InJanuary 2007, the Company issued a stock option to a new non-executiveemployee to acquire 100,000 shares of common stock.  The option has an exercise price of $0.69 pershare and vests as follows: 25% on the date of grant and 25% per yearcommencing January 22, 2008.  Theoption has a term of 10 years and was valued at $68,997 on the date ofgrant.  The Company recognized $17,234and $30,234 of expense during the years ended December 31, 2008 and 2007,respectively, in connection with the issuance of this option.

 

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

December 31, 2008 and 2007

 

InMarch 2007, the Company issued a stock option to a new employee to acquire40,000 shares of common stock.  Theoption has an exercise price of $0.67 per share and vests as follows: 25% onthe date of grant and 25% per year commencing March 1, 2008.  The option has a term of 10 years and wasvalued at $26,799 on the date of grant. The Company recognized $9,194 of expense during the year ended December 31,2007 in connection with the issuance of this option.  The Company did not recognize any expenseduring the year ended December 31, 2008 becuase the employee wasterminated in November 2007.

 

InSeptember 2007, the Company issued a stock option to Alex Soufflas, itsChief Financial Officer and Executive Vice President, to acquire 500,000 sharesof common stock.  The option has anexercise price of $0.50 per share and vests in four equal annual installmentsbeginning on the first anniversary of the date of grant.  The option has a term of 10 years and wasvalued at $249,982 on the date of grant. The Company recognized $62,453 and $20,190 of expense during the yearsended December 31, 2008 and 2007, respectively, in connection with theissuance of this option.

 

InSeptember 2007, the Company issued a stock option to Patricia S. Bathurst,its Vice President — Marketing, to acquire 400,000 shares of common stock.  The option has an exercise price of $0.50 pershare and vests in four equal annual installments beginning on the firstanniversary of the date of grant.  Theoption has a term of 10 years and was valued at $199,986 on the date ofgrant.  The Company recognized $49,962and $16,152 of expense during the years ended December 31, 2008 and 2007,respectively, in connection with the issuance of this option.

 

InSeptember 2007, the Company issued a stock option to a non-executiveemployee to acquire 100,000 shares of common stock.  The option has an exercise price of $0.51 pershare and vests in four equal annual installments beginning on the firstanniversary of the date of grant.  Theoption has a term of 10 years and was valued at $50,996 on the date ofgrant.  The Company recognized $12,740and $4,014 of expense during the years ended December 31, 2008 and 2007,respectively, in connection with the issuance of this option.

 

InOctober 2007, the Company issued stock options for a total of 75,000 sharesof common stock to three of its non-executive employees.  The options are exercisable at $0.51 pershare and have a term of 10 years.  Theoptions vested immediately on the date of grant with respect to 2,500shares.  The options vest with respect tothe remainder of the shares in three equal annual installments beginning on thefirst anniversary of the date of grant. The options have a term of 10 years andwere valued at $38,247 on the date of grant. The Company recognized $12,737 and$6,620 of expense during the years ended December 31, 2008 and 2007,respectively, in connection with the issuance of this option.

 

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

December 31, 2008 and 2007

 

InOctober 2007, the Company issued a stock option to a non-executiveemployee for 15,000 shares of common stock. The option is exercisable at $0.51 per share, has a term of 10 years,and vests in three equal annual installments beginning on the first anniversaryof the date of grant. The options have a term of 10 years and were valued at$7,649 on the date of grant. The Company recognized $2,547 and $621 of expenseduring the years ended December 31, 2008 and 2007, respectively, inconnection with the issuance of this option.

 

InNovember 2007, the Company issued a stock option to a non-executiveemployee to acquire 250,000 shares of common stock.  The option has an exercise price of $0.45 pershare and vests in four equal annual installments beginning on the firstanniversary of the date of grant.  The optionhas a term of 10 years and was valued at $112,490 on the date of grant.  The Company recognized $28,103 and $4,620 ofexpense during the years ended December 31, 2008 and 2007, respectively,in connection with the issuance of this option.

 

InJanuary 2008, the Company issued a stock option to a new employee toacquire 100,000 shares of common stock. The option has an exercise price of $0.23 per share, which was theclosing sales price of the Company’s common stock on the date of grant, andvests in four equal annual installments beginning on the first anniversary ofthe date of grant.  The option has a termof 10 years and was valued at $22,997 on the date of grant. The Companyrecognized $5,383 of expense during the year ended December 31, 2008 inconnection with the issuance of this option.

 

InMarch 2008, the Company issued a stock option to each of David M. Daniels,Alex Soufflas and Patricia S. Bathurst to acquire 400,000 shares of commonstock.  Each option has an exercise priceof $0.28 per share, which was the closing sales price of the Company’s commonstock on the date of grant, and vests in four equal annual installmentsbeginning on the first anniversary of the date of grant.  The options have a term of 10 years and had atotal value of $335,962 on the date of grant. The Company recognized $83,933 ofexpense during the year ended December 31, 2008 in connection with theissuance of this option.

 

InDecember 2008, the Company issued a stock option to Patricia S. Bathurstto acquire 286,500 shares of common stock in full payment of deferred salarycompensation that was earned by her during 2008 and payable to her as of December 31,2008.  The option has an exercise priceof $0.055 per share and was vested in full on the date of grant.  The option has a term of 10 years and wasvalued at $15,754 on the date of grant, all of which was recognized as expenseduring the year ended December 31, 2008.

 

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

December 31, 2008 and 2007

 

Asummary of the stock options issued during the years ended December 31,2008 and 2007 is set forth below.  Nostock options were exercised during the years ended December 31, 2008 and2007.

 

| ** **                          | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
|-------------------------------------|------------|------------|------------|---------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**   | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise**  | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Price**     | ** ** |
|                                |       |       |       |          |       |
| Outstanding, January 1, 2007   |       | 8,095,000  |       | $             | 0.43       |   |
|                                |       |       |       |          |       |
| Granted                             |       | 1,480,000  |       | 0.51          |       |
| Expired                             |       | (1,915,000 | )          | 0.40          |       |
|                                |       |       |       |          |       |
| Outstanding, December 31, 2007 |       | 7,660,000  |       | $             | 0.45       |   |
|                                |       |       |       |          |       |
| Granted                             |       | 1,586,500  |       | 0.24          |       |
| Expired                             |       | (70,000    | )          | 0.55          |       |
|                                |       |       |       |          |       |
| Outstanding, December 31, 2008 |       | 9,176,500  |       | $             | 0.41       |   |
|                                |       |       |       |          |       |
| Exercisable, December 31, 2007 |       | 6,222,500  |       | $             | 0.44       |   |
| Exercisable, December 31, 2008 |       | 6,834,000  |       | $             | 0.42       |   |

 

 

 
| **Year Ended December 31,** | ** ** | **Range of  Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|----------------------------------|------------|-------------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|-----------------------------------------|------------|
|                             |       |                          |       |                    |       |                                                 |       |                                    |       |
| 2008                             |       | $0.055  – $0.88          |       | 9,176,500               |       | 9.32                                                 |       | $                                       | 0.41       |   |
| 2007                             |       |    $0.40 – $0.88    |       | 7,660,000               |       | 9.19                                                 |       | $                                       | 0.45       |   |

 

**Note 11.  Related-PartyTransactions**

 

In September 2007, the Companyissued a restricted stock award to David M. Daniels, its President and ChiefExecutive Officer, for 600,000 shares of common stock.  The award vests in four equal annualinstallments commencing on the first anniversary of the date of grant.

 

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**National Health Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

December 31, 2008 and 2007

 

InSeptember 2007, the Company issued a stock option to Alex Soufflas, itsChief Financial Officer and Executive Vice President, to acquire 500,000 sharesof common stock.  The option has anexercise price of $0.50 per share, vests in four equal annual installmentsbeginning on the first anniversary of the date of grant, and has a term of 10years.

 

InSeptember 2007, the Company issued a stock option to Patricia S. Bathurst,its Vice President — Marketing, to acquire 400,000 shares of common stock.  The option has an exercise price of $0.50 pershare, vests in four equal annual installments beginning on the firstanniversary of the date of grant, and has a term of 10 years.

 

InMarch 2008, the Company issued a stock option to each of David M. Daniels,Alex Soufflas and Patricia S. Bathurst to acquire 400,000 shares of commonstock.  Each option has an exercise priceof $0.28 per share and vests in four equal annual installments beginning on thefirst anniversary of the date of grant. The options have a term of 10 years.

 

InDecember 2008, the Company issued 690,000 and 523,500 shares of commonstock to David M. Daniels, its President and Chief Executive Officer, and AlexSoufflas, its Vice President and Chief Financial Officer, respectively, in fullpayment of deferred salary compensation that was earned by each of them during2008 and payable to each of them as of December 31, 2008.

 

InDecember 2008, the Company issued a stock option to Patricia S. Bathurstto acquire 286,500 shares of common stock in full payment of deferred salary compensationthat was earned by Ms. Bathurst during 2008 and payable to her as of December 31,2008.  The option has an exercise priceof $0.055 per share, was vested in full on the date of grant, and has a term of10 years.

 

**Note 12.  Subsequent Events**

 

InJanuary 2009, the Company issued 600,000 shares of common stock to aconsultant for marketing and advisory services pursuant to a consultingagreement.

 

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** **

**EXHIBIT INDEX**

** **
| **Exhibit** | ** ** | **Exhibit Description**                                                                                                                                       |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                               |
| 10.36       |       | Option  to Acquire Shares of Common Stock, dated December 30, 2008, issued by  the Company to Patricia S. Bathurst                                            |
|        |       |                                                                                                                                                               |
| 21.1        |       | Subsidiaries  of the Company                                                                                                                                       |
|        |       |                                                                                                                                                               |
| 23.1        |       | Consent  of H J & Associates, LLC                                                                                                                         |
|        |       |                                                                                                                                                               |
| 31.1        |       | Certification  of Chief Executive Officer required by Rule 13a-14(a) under the  Securities Exchange Act of 1934, as amended                              |
|        |       |                                                                                                                                                               |
| 31.2        |       | Certification  of Chief Financial Officer required by Rule 13a-14(a) under the  Securities Exchange Act of 1934, as amended                              |
|        |       |                                                                                                                                                               |
| 32.1        |       | Certification  of Chief Executive Officer and Chief Financial Officer required by  Rule 13a-14(b) under the Securities Exchange Act of 1934, as  amended |

 

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