**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-KSB**

 

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**(MarkOne)**

 

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

 

**For the fiscal year ended:  December 31, 2007**

 

**o****        Transition Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934.**

 

**For the transition period from                  to                    .**

 

**CommissionFile Number:  000-51731**

 

**NATIONAL HEALTH PARTNERS, INC.**

(Name of Small Business Issuer in Its Charter)

 

| **Indiana**  (State or Other Jurisdictionof Incorporation or Organization) |       | **04-3786176**  (I.R.S. Employer Identification No.) |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|
|                                                                       |       |                                                 |
| **120 Gibraltar Road,  Suite 107********Horsham, PA**                 |       | **19044**                                            |
| (Address  of Principal Executive Offices)                                  |       | (Zip  Code)                                          |
|                                                                       |       |                                                 |
| **(215) 682-7114**(Issuer’s Telephone Number, Including Area Code)    |
|                                                                       |       |                                                 |
| Securities registered  under Section 12(b) of the Exchange Act:  |
|                                                                       |       |                                                 |
| ** **                                                                 | ** ** | **Name of Each Exchange**                            |
| **Title of Each Class**                                                    | ** ** | **On Which Registered**                              |
| None                                                                       |       | None                                                 |

 

Securities registered under Section 12(g) of the ExchangeAct:

 

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

 

Check whether the issuer is not required to filereports pursuant to Section 13 or 15(d) of the Exchange Act.  o

 

Checkwhether the issuer: (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes  x   No  o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSBor any amendment to this Form 10-KSB. x

 

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

 

The issuer’srevenue for its most recent fiscal year were: **$3,724,204.**

 

Theaggregate market value of the voting common equity held by non-affiliates ofthe issuer computed by reference to the price at which the common equity wassold on March 24, 2008, was $11,702,761.

 

As of March 24,2008, 41,689,856 shares of the registrant’s common stock were outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None.

 

TransitionalSmall Business Disclosure Format (check one):  Yes  o   No  x

 

 

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**TABLE OF CONTENTS**

 
| ** **                          | ** **                                                                                                                               | **Page** |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                |                                                                                                                                     |     |
| PART I                         |                                                                                                                                     |     |
|                                |                                                                                                                                     |     |
| Item 1.                             | Description of  Business                                                                                                                 | 2        |
|                                |                                                                                                                                     |     |
| Item 2.                             | Description of  Property                                                                                                                 | 35       |
|                                |                                                                                                                                     |     |
| Item 3.                             | Legal Proceedings                                                                                                                        | 35       |
|                                |                                                                                                                                     |     |
| Item 4.                             | Submission  of Matters to a Vote of Security Holders                                                                                     | 35       |
|                                |                                                                                                                                     |     |
| PART II                        |                                                                                                                                     |     |
|                                |                                                                                                                                     |     |
| Item 5.                             | Market For  Common Equity, Related Stockholder Matters and Small Business Issuer  Purchases of Equity Securities                         | 36       |
|                                |                                                                                                                                     |     |
| Item 6.                             | Management’s  Discussion and Analysis                                                                                               | 40       |
|                                |                                                                                                                                     |     |
| Item 7.                             | Financial  Statements                                                                                                                    | 53       |
|                                |                                                                                                                                     |     |
| Item 8.                             | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                                                    | 53       |
|                                |                                                                                                                                     |     |
| Item  8A(T).Controls and Procedures | 53                                                                                                                                       |
|                                |                                                                                                                                     |     |
| Item 8B.                            | Other Information                                                                                                                        | 56       |
|                                |                                                                                                                                     |     |
| PART III                       |                                                                                                                                     |     |
|                                |                                                                                                                                     |     |
| Item 9.                             | Directors,  Executive Officers, Promoters, Control Persons and Corporate Governance;  Compliance With Section  16(a) of the Exchange Act | 56       |
|                                |                                                                                                                                     |     |
| Item 10.                            | Executive  Compensation                                                                                                                  | 59       |
|                                |                                                                                                                                     |     |
| Item 11.                            | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                                         | 64       |
|                                |                                                                                                                                     |     |
| Item 12.                            | Certain  Relationships and Related Transactions, and Director Independence                                                               | 68       |
|                                |                                                                                                                                     |     |
| Item  13.                           | Exhibits                                                                                                                                 | 69       |
|                                |                                                                                                                                     |     |
| Item 14.                            | Principal  Accountant Fees and Services                                                                                                  | 72       |
|                                |                                                                                                                                     |     |
| Index to  Financial Statements      | F-1                                                                                                                                      |

 

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** **

**DISCLOSUREREGARDING 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.

 

These forward-looking statements are subject to risksand uncertainties that could cause actual results to differ materially fromresults proposed in such statements. Although we believe that the expectations reflected in suchforward-looking statements are reasonable, we can give no assurance that suchexpectations will prove to have been correct. Important factors that could cause actual results to differ materiallyfrom our expectations include, but are not 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 CARExpressTM Plus 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 1.  Description of Business– Risks and Uncertainties”* and *“Item 6.  Management’s Discussion and Analysis”*below.  All subsequent written and oralforward-looking statements attributable to us, or persons acting on our behalf,are expressly qualified in their entirety by the foregoing.  Except as required by law, we assume no dutyto update or revise 

 

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our forward-looking statements based on changes ininternal estimates or expectations or otherwise.

 

**Item 1. Description of Business.**

 

**Overview**

 

NationalHealth Partners, Inc. is a national healthcare membership organizationthat was formed by healthcare professionals to address the need for affordablehealthcare nationwide.  We create,market and sell membership programs targeted toward underserved markets in thehealthcare industry through a national healthcare savings network calledCARExpressTM.  CARExpressTM is a networkof over 1,000,000 participating hospitals, doctors, dentists, pharmacists andother healthcare providers that have agreed to render their services andproducts to our members at discounted prices. CARExpressTM enables our members to engage inpoint-of-service transactions directly with participating healthcare providersand pay discounted 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 industry toaddress 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 CARExpressTM.  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 customer servicebase 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 CARExpressTM Plus programs and have begun toactively market and sell these programs to the public.

 

Our strategy is to sustainand 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**

 

TheU.S. Department of Commerce estimates that 15.8% of all Americans, or 47million individuals, were without health insurance coverage in 2006, up from15.3%, or 44.8 million individuals, in 2005, an increase of 2.2 millionpeople.  The Kaiser Commission estimatesthat an additional 60 million people are underinsured.  According to the National Coalition on 

 

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Healthcare (the “NCH”),the primary reason for this increase is that rapidly rising health insurancepremiums have caused many employers to reduce or discontinue health insurancecoverage.  The NCH stated that more than40% of small businesses do not offer employer-sponsored health coverage, andpremiums for employer-sponsored health coverage are expected to increase from$7,000 per year in 2001 to $17,000 per year in 2011.  It also stated that the average cost of family coverageis now nearly $11,480 per year, including workers contributions of nearly$2,973.

 

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 this phenomenonis 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 90-plus million Americans who haveeither no 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****TM**** ****Healthcare Solution**

 

Overview

 

We offer membershipprograms to uninsured and underinsured people through a national healthcaresavings network called CARExpress.  Wedesigned our programs in response to the growing number of people who can nolonger 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.

 

OurCARExpressTM MembershipPrograms

 

We have designed membershipprograms that range from our traditional health discount programs that provideaccess to networks of providers that have agreed to provide our members with areduced rate for services, to membership programs that include limitedliability insurance benefits.** **We currently offer two families ofCARExpressTM membership programs to our members: (i) ourCARExpressTM health discount programs, and (ii) our CARExpressTM Plusmembership programs.

 

OurCARExpressTM health discount programs encompass all aspectsof healthcare, 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 CARExpressTM healthdiscount programs arenot insurance. There is no undertaking by us to pay a portion of any feefor services or prescriptions purchased using our CARExpressTM membership cards. Rather, our health discount programs provide consumers with access to healthcare providerswho, through their affiliations with PPOs, have agreed in advance to honor ourmembership cards and accept the discounted fees set by the PPOs.  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 CARExpressTM Plus programs are membership programscomprised of our CARExpressTM health discount programs and limited liabilityinsurance benefits underwritten by The United States Life Insurance Company inthe City of 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 CARExpressTM Plus, our health discount programs provide ourmembers with a “point of service” discount on their healthcare expenses at thetime of service.  Then, the limitedliability insurance benefits reimburse our members for some, if not all, of theremaining portion of their healthcare expenses.

 

We believe that millions of Americans can benefit insome manner from joining CARExpressTM,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 CARExpressTMWorks

 

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 CARExpressTM membership card(s) along with instructions on howto use the programs 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 ahospital savings company to negotiate discounts with the providers and arrangefinancing with the members for the payment of the hospital services.  Members may use any accredited hospital inthe United States.  Members make nopayments to the hospital at the time services are rendered.  Instead, they simply present their membershipcard to the provider at the hospital at the time of service.  The members contact the hospital savingscompany prior to or after their hospital stay and the hospital savings companynegotiates a discounted rate for the hospital services.  The hospital savings company then pays thebill in full for the member and arranges financing with the member directly.

 

In theevent a member purchases one of our CARExpressTM Plus programs, the process is similar.  The member presents his or her CARExpressTM membership 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 UsingCARExpressTM

 

Our membership programs provide benefits to ourmembers, unions, associations and businesses, and healthcare providers andprovider 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 CARExpressTM Plus programs, reimbursement for some, if notall, of the remaining portion of their healthcare expenses.  Membership in our membership programs isunrestricted and provides benefits to individuals who, because of their medicalhistory, age, occupation or financial condition, are unable to obtain traditionalhealth insurance. Our membership programs cover each person in the member’shousehold 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 customers andpatients.

 

**Strategy**

 

Our strategy is to sustain and expand our position asa provider of unique healthcare membership programs.  We intend to focus predominantly inunderserved markets where individuals either have limited or no healthcarebenefits. We have developed healthcare membership programs that enable peopleto access healthcare providers throughout the country for a lower cost.  Through product design, competitivemembership pricing and strong distribution channel partners, we plan to fill asignificant void in the healthcare market that insurance companies have notaddressed.

 

Key elements of ourstrategy are as follows:

 

*Continue to Develop Unique Healthcare Programs ForBroad Markets. *Our focus is on the continued developmentand introduction of unique programs that address the health and lifestyle needsof targeted 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 (“HSAs”).

 

*Recruit and Retain Marketing and DistributionPartners*.  Growth in sales of our membership programs isdependent upon our marketing and distribution partners continuing to market ourmembership programs to prospective customers and recruit additional marketingand distribution partners to market our membership programs to prospectivecustomers.  We intend to continue tofocus our efforts on retaining our existing marketing and distribution partnersand obtaining new marketing and distribution partners by expanding our in-housesales and marketing staff.  We also planto improve the productivity of our marketing and distribution partners throughlead development, marketing support, sales assistance and training.

 

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*Leverage our PPOs and Provider Networks. *While we currently have contractual relationshipswith several large, well-recognized and fully developed PPO and providernetworks, we intendto continuously assess the capabilities of our PPOs and provider networks andwork towards making alternative healthcare solutions available to ourmembers.  We believe that our largeprovider base enhances our membership programs with market credibility, and weintend to leverage this credibility to further our market penetration.

 

*Provide High Quality Customer Service*. In order to achieve our anticipated growth and to ensure member,healthcare provider and marketing and distribution partner loyalty, we intendto continue to develop and invest significantly in our customer servicesystems.  Our in-house customer servicestaff provides members, healthcare providers and marketing and distributionpartners with prompt, courteous, and complete information about all aspects ofour membership programs.  We have alsodeveloped a proprietary 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 47 million Americans who haveno health insurance of any kind. This group includes self-employed individualsand part-time or temporary employees, and people who have been turned down forinsurance because of age, occupation, medical history, lifestyle or otherreasons. Our secondary target customer group includes the approximately 60million Americans who lack complete health insurance coverage. This groupincludes people with gaps in their insurance coverage, employees paying largedeductibles or premiums, and employees who do not receive adequate insurancecoverage through their employers. It also includes people who are underinsuredbecause of restrictions or provisions in their managed care plans, such aslimited coverage, high deductibles or co-insurance limits, people who have beenturned 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****TM**** ****Membership Programs**

 

We have designed two distinct groups of membershipprograms that we currently offer to our members: (i) our CARExpressTM health discount programs, and (ii) ourCARExpressTM Plus membership programs.  Our CARExpressTM healthdiscount programs enable our members to engage in point-of-service transactionsdirectly with participating healthcare providers and pay 

 

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discounted prices that are similar in amountto those paid by insurance companies on behalf of their insureds.  Our CARExpressTM Plus programs are comprised of variationsof our comprehensive CARExpressTM health 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 CARExpressTM Plus, our health discount programs provide our memberswith a point-of-service discount on their medical expenses at the time ofservice.  Then, the limited liabilityinsurance benefits reimburse our members for some, if not all, of the remainingportion of their medical expenses.

 

CARExpressTMHealth Discount Programs

 

Wesell our CARExpressTM health discount programs directly andindirectly through a variety of marketing and distribution partners.  Our programs typically range in price from$9.95 to $39.95 per month, depending upon the program selected. We also offerfeatures to encourage potential members to try out our CARExpressTM health discount programs, including refundguarantees and “trial” periods of free or discounted membership.  Healthcare products and services are bundled,priced and marketed using relationship marketing strategies or direct marketingto target the profiled needs of our customers. The discounted prices paid byour members typically range from 10% to 50% off providers’ usual and customaryfees.  These discounts are designed tosave the individual substantially more than the cost of the program itself.

 

We currently offer fivestandard CARExpressTM health discount programs that provide benefits thatrange from prescription drug and vision care to comprehensive physician,hospital, vision, dental and other care. A description of each of our five standard programs 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.  Ourcomprehensive care program targets those with little or no insurance, or thosewith only catastrophic coverage.  Webelieve that our comprehensive care program is of particular interest toconsumers who are not 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 is designed to offermembers an inexpensive way to save money on prescriptions and vision care.  This program is our low-cost entryprogram.  The monthly retail price forthis program is $9.95 per household.

 

CARExpressTM Plus MembershipPrograms

 

We sell our CARExpressTM health discount programs in combination with limitedliability insurance benefits underwritten by The United States Life InsuranceCompany in the City of New York, a member company of American InternationalGroup, Inc., as part of our CARExpressTM Plus 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 CARExpressTM Plus programs typically range in price from$99 to $498 per month, depending upon the program selected. We market these programs directly andindirectly through insurance companies and independent third parties.  Our CARExpressTM Plus programs provide an innovative and affordablesolution to individuals who previously could not afford a comprehensive medicalplan.  These programs are bundled, pricedand marketed utilizing relationship marketing strategies to target the profiledneeds of the clients’ particular member base.

 

We currently offer threestandard CARExpressTM Plus programs. A description of each of these programs is provided below.

 

*CARExpress*TM* Plus Platinum Program. *This program is our premium CARExpressTM Plus program. It is comprised of a variation of our CARExpressTM Comprehensive Care Program that includes on-linephysician and psychologist services, and limited liability insurance benefitsconsisting of AD&D coverage of $50,000, AME coverage of $2,500, accidentdisability coverage of $400 per month for up to 12 months, a daily hospitalbenefit of $1,000 for up to 180 days, a daily ICU benefit of $1,000 for up to14 days, $75 for up to eight doctor visits, inpatient/outpatient surgicalvisits of up to $20,000 per year, $100 for emergency room visits for up tothree visits per person per year and $100 for ambulance services for up tothree times per 

 

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person per year. The monthly retail price for this membership program is $228 for anindividual and $498 for a family.

 

*CARExpress*TM* Plus Gold Program. *This program is our mid-level CARExpressTM Plus program. It is comprised of a variation of our CARExpressTM Comprehensive Care Program that includes on-linephysician services, and limited liability insurance benefits consisting ofAD&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 peryear.  The monthly retail price for thismembership program is $137 for an individual and $285 for a family.

 

*CARExpress*TM* Plus Silver Program. *This program is our low-cost entry CARExpressTM Plus program. It is comprised of our CARExpressTM Comprehensive Care Program and limited liabilityinsurance benefits consisting of AD&D coverage of $10,000, AME coverage of$1,000, a daily hospital benefit of $250 for up to 180 days, a daily ICUbenefit of $250 for up to 14 days, $50 for up to five doctor’s visits,inpatient/outpatient surgical visits of up to $20,000 per year, $50 foremergency room visits for up to three visits per person per year and $100 forambulance services for up to three times per person per year.  The monthly retail price for this membershipprogram is $99 for an individual and $225 for a 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 CARExpressTM health savings network.  Instead, we contract with PPOs or theiraffiliates and other provider networks for access to the discounted rates theyhave negotiated with their healthcare providers.  We select and utilize only those providernetworks that we believe can deliver adequate savings to our members whileproviding adequate support for our membership programs with the healthcareproviders.  We typically pay a per memberper month fee for use of a provider network that is determined in part based onthe number of providers participating in the network, the number of our membersaccessing the network, and the particular products and services utilized by ourmembers.  We only pay fees for thosemembers authorized to utilize the network. The agreements through which we have contracted for access to the PPO orother provider networks are generally for a term of between one and two years,may be terminated by either party on between 45 and 180 days’ prior writtennotice, and renew automatically for additional terms unless so terminated.  Most of these agreements are not exclusive asit is not customary in the health membership industry for PPOs to agree to workexclusively with a single healthcare savings organization, and most containprovisions maintaining the confidentiality of the terms of the agreement.

 

The principal suppliers of the over 1,000,000healthcare providers that comprise CARExpressTM are 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 varying 

 

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combinations ofspecialties and at varying discounts from the scheduled prices for coveredproducts and services.  Although we havearrangements in place with several secondary networks, these PPOs currentlysupply the provider commitments for almost all of our members.  If we lose our arrangement with any of thesePPOs for any reason, we would attempt to establish a primary relationship withone of our secondary suppliers.  If weare unable to replace the lost arrangement with a similar arrangement withanother provider network, however, our business may 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 CARExpressTM Web site atwww.carexpresshealth.com.  Our CARExpressTM Web site enables consumers to review our membershipprograms, our healthcare providers and their locations, the products andservices available through our healthcare providers, and the discounts andspecial promotions available to members for their products and services.  Consumers can also purchase our membershipprograms through our CARExpressTM Web 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.

 

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

 

*Brokers and Agents*.  We sell ourmembership programs through licensed insurance brokers and agents by enteringinto commission-sharing arrangements with them under which they market and sellour membership programs to individual consumers through large employer groups,life insurance companies and associations. Our membership programs are not competitive with the insurance productsthey sell, but instead are complementary program offerings.  Brokers and agents typically offer ourmembership programs as a complementary value-added program to the traditionalinsurance products that they sell.  Weestimate that a total of between 150 and 200 such brokers and agents currentlymarket our membership programs to prospective customers.  The brokers and agents that we utilizetypically offer and sell our 

 

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membership programs on apart-time basis and may engage in other related or unrelated business activities,including selling the products or services of our competitors.  Most of the prospective customers to whombrokers and agents market our programs are current clients of the brokers andagents who have purchased products or services through the brokersand agents in the past.  The otherprospective customers are new clients that the brokers and agents haveidentified through their own efforts.

 

*Small Businesses and Trade Associations*. We use small businesses, trade associations, charitable organizationsand similar organizations to market our membership programs to their membersand employees.  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 deduction plan.  In this event, we will typically pay suchorganizations a marketing fee for each membership sold.

 

*Unions and Associations. *We market our membership programs to unions,associations, corporations and similar organizations.  These organizations provideus with the opportunity to acquire a large group of members.  Group accounts provide us with higherretention 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 employees resultingfrom 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 employees or members the opportunity topurchase our programs directly from us or through a payroll deductionplan.  In this case, we typically pay theorganizations 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 

 

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being sold by themarketing companies and the number of members being generated over a set periodof time by the marketing companies.

 

**Customer Service, Training andSupport**

 

We believe that providing superior customer support iscritical to our business.  Currently, wemaintain an in-house customer service center at our corporate headquarters in Horsham,Pennsylvania, where we employ full-time customer service representatives andutilize the services of temporary customer service representatives on anas-needed basis.  Our customer servicecenter is available to members and may be accessed via e-mail or toll-freenumbers, Monday through Friday, from 9:00 a.m. to 11:00 p.m. EasternStandard Time.  We also utilize anoutside call center for after-hours calls so that we are able to provide full24-hour toll-free coverage for our members. Our customer service center provides dependable and timely resolution ofcustomer technical inquiries and is available to customers by telephone ande-mail.  Our customer service centerstaff delivers education, training and pre-sales support to our members,employers and other sponsoring organizations, and healthcare providers andprovider networks.  We also offer onlinetraining to our customers and resellers to provide them with the knowledge andskills to successfully deploy, use and maintain our products.  Our customer service staff is responsible forhandling general customer inquires, answering questions about the orderingprocess, updating and maintaining customer account information, investigatingthe status of orders and payments, as well as processing customer orders.  In addition, our customer service staffproactively updates customers on a variety of topics, including release datesof 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 servicerepresentatives are required to complete a training course before beginning totake calls and attend on-the-job training thereafter.  Through our training programs, systems andsoftware, we seek to provide members with friendly, rapid and effective answersto questions.  We continue to workclosely with our healthcare providers and organizations to ensure that theirrepresentatives 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 trainingencompasses both product training as well as marketing training and salestechniques.  We have also implementedpolicies and procedures in place to control any advertising or promotions thatare utilized by our marketing and distribution partners.  We believe these policies and procedures arenecessary to assure the proper representation of the program at all times andinclude the pre-approval of all advertising, adherence to anti-spamming andanti-fax blasting rules, and limits where the representatives can 

 

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advertise ourprograms.  The failure of arepresentative to follow these rules can result in termination of therepresentative’s relationship with us.

 

**Technology**

 

               We have made substantialinvestments in our proprietary technology and management informationsystems.  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 payingcommissions, maintaining a database of all healthcare providers and providinghealthcare provider locator services, drafting members’ accounts on a monthlybasis, and tracking of cash receipts and revenue.  We have also created an extensive CARExpressTM Web site for our membership programs at www.carexpresshealth.comthat provides information about the various healthcare products and servicesavailable, allows for healthcare provider searches, answers questions, providessavings schedules, and allows new members and representatives to enrollonline.  It also allows our marketing anddistribution partners to access support and training files and to view theirgenealogy and commission information through a password-protected area.  Our CARExpressTM Web 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 of productsthat they can choose to market, whether competing with us in the healthcaremarket or not.

 

We believe that success in the health membershipindustry is dependent upon the ability of companies to:

 

·                  identify retail markets andoutlets, unions and associations, and consumers that may benefit fromhealthcare membership programs;

 

·                  maintain contracts withreputable PPO and provider networks that offer substantial healthcare savingsand reputable insurance companies that offer affordable health insurancepolicies;

 

·                  develop and implementeffective marketing and advertising campaigns;

 

·                  provide programs comparableor superior to those of competitors at competitive prices;

 

·                  enhance the quality and breadthof the membership programs offered;

 

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·                  provide high qualitycustomer service;

 

·                  offer substantial savings onthe major-medical costs such as hospital and surgical costs;

 

·                  combine the programs withaffordable insurance policies that have high deductibles or set pre-definedpayment for hospitalization;

 

·                  adapt quickly to evolvingindustry trends or changing market requirements;

 

·                  satisfy investigations onthe part of state attorney generals, insurance commissioners and otherregulatory bodies; and

 

·                  hire and retain marketingand distribution partners and finance promotions for the recruiting of newmembers 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, several of themajor drug manufacturers have begun, or announced plans to begin, offeringprescription discount 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.

 

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**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.*  Overthe last few years, more than 20 states have enacted legislation thatspecifically addresses the operation and marketing of discount health programslike ours.  Additional states areexpected 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:

 

·                  non-compliance may cause us to become the subjectof a variety of enforcement or private actions;

 

·                  compliance with changes in applicable regulationscould materially increase the associated operating costs;

 

·                  non-compliance with any rules and regulationsenforced by a federal or state consumer protection authority may subject us orour management personnel to fines or various forms of civil or criminal prosecution;and

 

·                  non-compliance or alleged non-compliance may resultin negative publicity potentially damaging our reputation and the relationshipswe have with our members, provider networks and consumers in general.

 

*Insurance Regulations*.  Our membershipprograms are not insurance programs and we are not subject to regulation as aninsurance company or as a seller of insurance in connection with the sale ofour membership programs.  Occasionally, we receive inquires frominsurance commissioners in various states that require us to supply them withinformation about our membershipprograms.  To date, these agencies haveconcurred with our view that our health 

 

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discount programs are nota form of insurance.  We can provide noassurance that this situation will not change in the future, or that aninsurance commissioner will not successfully challenge our ability to offer ourmembership programswithout compliance with state insurance regulations in the future.  Furthermore, states may adopt regulations orenact legislation that may affect the manner by which we sell our membership programs or restrict orprohibit the sale of 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.

 

Government regulation of health insurance, healthcarecoverage and health membership plans is a changing area of law and varies fromstate to state.  The sale ofinsurance products and the licensing of insurance brokers and agents aresubject to regulation and supervision, predominantly by state authorities.  While the scope of regulation and form ofsupervision may vary from state to state, insurance laws relating to the saleof insurance products and licensing of insurance brokers and agents are oftencomplex and generally grant broad discretion to supervisory authorities inadopting regulations.  These regulations extensively cover operations,including scope of benefits, rate formula, delivery systems, utilization reviewprocedures, quality assurance, enrollment requirements, claim payments, marketingand advertising.  States havebroad powers over the granting, renewing and revoking of licenses andapprovals, marketing activities and the receipt of commissions.  Althoughwe are not an insurance company, the insurance companies from which we obtain thelimited insurance benefits included in our CARExpressTM Plus membership programs are subject to variousfederal and state regulations applicable to their operations.  We must rely on the insurance companies thatprovide the limited insurance benefits that we offer as part of our CARExpressTM Plusmembership programs to carefully monitor state and federal legislative andregulatory activity as it affects their insurance products and services.  These insurance companies 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 CARExpressTM Plusmembership programs as a result of these laws and 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 CARExpressTM Plus 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. Our ability to offer limited insurance benefits for inclusion in thesebenefit packages may be affected by governmental regulation or futureinterpretation of existing regulations that may increase the cost of regulatorycompliance or affect the nature and scope of products that we may makeavailable to such associations.  Inaddition, 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 its 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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*Product Claims and Advertising Laws.*  The Federal Trade Commission and certainstates regulate advertising, product claims, and other consumer matters.  The Federal Trade Commission may instituteenforcement actions against companies for false and misleading advertising ofconsumer products.  In addition, theFederal Trade Commission has increased its scrutiny of the use of testimonials,similar to those used by us and the marketing companies, brokers and agentsmarketing our membership programs.  Whilewe have not been the target of any Federal Trade Commission enforcementactions, we can provide no assurance that:

 

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

 

·                  a state will notinterpret product claims presumptively valid under federal law as illegal underthat 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.

 

*Healthcare Regulation and Reform.*  Government regulation and reform of thehealthcare industry may also affect the manner in which we conduct our businessin the future. There continues to be diverse legislative and regulatoryinitiatives at both the federal and state levels to affect aspects of thenation’s health care system.  Many stateshave enacted, or are considering, various healthcare reform statutes.  These reforms relate to, among other things,managed care practices, prompt pay payment practices, health insurer liabilityand mandated benefits.  Most states havealso enacted patient confidentiality laws that prohibit the disclosure ofconfidential information.  As with allareas of legislation, the federal regulations establish minimum standards andpreempt conflicting state laws that are less restrictive but will allow statelaws that are more restrictive.  Weexpect this trend of increased legislation to continue. We are unable topredict what state reforms will be enacted or how they would affect ourbusiness.

 

*Legislative Developments.*  Numerous proposals to reform thecurrent healthcare system have been introduced in the U.S. Congress and invarious state legislatures.  Proposalshave included, among other things, modifications to the existing employer-basedinsurance system, a quasi-regulated system of “managed competition” amonghealth insurers, and a single-payer, 

 

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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 CARExpressTM brand.  Our general policy is to enter intoconfidentiality agreements with our employees and consultants, andnondisclosure agreements with all other parties to whom we discloseconfidential information.  We haveobtained registered trademarks from the United States Patent and TrademarkOffice for the word “CARExpress” and our CARExpressTM brand.  We have applied for trademark registrationfor the word “CARExpress Plus” and mayapply for legal protection for certain of our other intellectual property inthe future.  We can provide no assurance,however, that we will receive such legal protection or that, if received, suchlegal protection will be adequate to protect our intellectual property rights.

 

**Employees**

 

As of March 24, 2007, we had 23 employees.  Of this number, 20 were full-time employeesand three were part-time employees.  Weutilize the services of approximately ten 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.

 

**Risks and Uncertainties**

 

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 company with an unprovenbusiness model, which makes it difficult for us to evaluate our currentbusiness and future prospects.*

 

While we are actively engaged in marketing ourmembership programs to the public and are experiencing rapid growth in sales ofour membership programs, we have generated only a small amount of revenue todate.  In addition, since we have onlybeen offering our membership 

 

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programs to the public since 2003, we have very limited historical datawith respect to sales of our health membership cards.  As a result of these factors, the revenue andincome potential of our business is unproven, and we have only a limitedoperating history upon which to base an evaluation of our current business andfuture prospects.  Because of our limitedoperating history and because the health membership industry is rapidlyevolving, we have limited insight into trends that may emerge and affect ourbusiness.  We may make errors inpredicting and reacting to relevant business trends, which could harm ourbusiness.

 

Before purchasing our common stock, you shouldconsider an investment in our common stock in light of the risks, uncertaintiesand difficulties frequently encountered by early-stage companies in new andrapidly evolving markets such as ours, including those described herein.  We may not be able to successfully addressany or all of these risks.  Failure toadequately address such risks could cause our business, financial condition andresults of operations to suffer.

 

*We have a history of losses and the report of ourindependent accountants issued in connection with the audit of our financialstatements contained a qualification raising a substantial doubt about ourability to continue as a going concern.*

 

We have experienced net losses in each fiscal quartersince our inception and as of December 31, 2007, had an accumulateddeficit of approximately $21.4 million. We incurred net losses to common stockholders of approximately $3.5million for the year ended December 31, 2007 and approximately $10 millionfor the year ended December 31, 2006. As a result of these conditions, the report of our independentaccountants issued in connection with the audit of our financial statements asof and for our fiscal year ended December 31, 2007 contained aqualification raising a substantial doubt about our ability to continue as agoing concern.  While we expect to begingenerating net profits from operations in the future, we can provide noassurance that this expectation will be met. As a result, we may continue to generate losses for the foreseeablefuture.

 

*We will need to raise additional funds in thefuture to cover our long-term contractual obligations and operating expenses,which funds may not be available or, if available, may not be available onacceptable terms.*

 

We have significant long-term contractualobligations that we must satisfy over the next several years.  We are a party to employment agreements withDavid M. Daniels, Alex Soufflas and Patricia S. Bathurst pursuant to which weare currently paying them annualized base salaries of $348,000, $290,400 and$159,720, respectively.  We must alsomake payments under the operating lease for our office space in Horsham,Pennsylvania in the aggregate amount of approximately $165,000 over the next 12months.  A summary of the materialterms of these employment agreements and the lease and our financialobligations thereunder is provided herein under *“Item6.  Management’s Discussion and Analysis –Contractual Obligations.”*  If we are unable to satisfy these obligationsas they become due, our business may be materially and adversely affected.

 

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

 

·                  develop new membership programs;

 

·                  recruit additional marketing anddistribution partners and hire additional personnel, including sales personnel,customer service staff and support staff;

 

·                  leverage and develop relationshipswith additional PPOs and provider networks;

 

·                  upgrade our operational and financialsystems, procedures and controls; and

 

·                  comply with state and federal lawsgoverning our business operations, comply with Securities and ExchangeCommission (“SEC”) reporting requirements and fulfill the otherresponsibilities that we have as a public company.

 

We may also experience a material decrease in liquidity due tounforeseen capital requirements or other events and uncertainties.

 

We believe that our current cash resources will not be sufficient tosustain our current operations for the next 12 months.  As a result, we will need to raise additionalfunds during the next 12 months.  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 cannotraise funds when they are needed or if such funds cannot be obtained onacceptable terms, we may not be able to pay our costs and expenses as they areincurred, sell or create new membership programs, execute our business plan,take advantage of future opportunities or respond to competitive pressures orunanticipated requirements.  This mayseriously harm our business, financial condition and results of operations.

 

*We currently generate almost all of our revenuethrough a limited number of marketing and distribution partners.*

 

A limited number of marketing and distribution partners currentlygenerate almost all of our revenue for us. Although we are in the process of expanding the number of marketing anddistribution partners selling our membership programs, we can provide noassurance that we will be successful in adequately doing so.  In the event any of our significant marketingand distribution partners stops selling our programs to prospective members, orif prospective members do not purchase our programs through these marketing anddistribution partners, our business, financial condition and results ofoperations could be materially and adversely affected.

 

*We must develop and expand our use of marketing anddistribution partners to increase revenue and improve our operating results.*

 

Our success will depend in large part upon our abilityto attract, retain and motivate the marketing and distribution partners thatmarket our membership programs.   We willneed to expand our existing relationships and enter into new relationships withmarketing and distribution partners in order to increase our current and futuremarket share and revenue.  We competewith all types of healthcare companies throughout the United States formarketing and 

 

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distribution partners.  We canprovide no assurance 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-marketing benefitsand sales, and our operating results may suffer.

 

***Our reliance on brokers, agents, unions,associations and other organizations for sales of our membership programs couldresult in reduced revenue growth because we have little control over them.***

** **

Brokers, agents, unions, associations and otherorganizations currently account formost of our revenue.  None of theseparties is obligated to continue selling our membership programs.  Ourability to generate increased revenue depends significantly upon the abilityand willingness of these parties to market and sell our membershipprograms throughout the UnitedStates.  If they are unsuccessful intheir efforts or are unwilling or unable to market and sell our programs, ouroperating results may suffer.

 

We cannot control the levelof effort these parties expend or the extent to which any of them will besuccessful in marketing and selling our membership programs.  Theseparties typically offer and sell our programs on a part-time basis, and mayengage in other business activities. They also may give higher 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.

 

*We are dependent upon insurancebrokers and agents to offer and sell our**CARExpress*TM* **Plusprograms to the public.*

 

Werely primarily upon insurance brokers and agents to offer and sell our CARExpressTM Plus programs.  These insurance brokers and agents may offerand sell membership programs that are competitive with ours and may give higherpriority and greater incentives (financial or otherwise) to other membershipprograms, reducing their efforts devoted to the marketing and distribution ofour CARExpressTM Plusprograms. Also, our ability to attract and retain independent insuranceagencies could be negatively affected by adverse publicity relating to ourproducts and services or our operations. Development and maintenance of the relationships with insurance brokersand agents may in part be based on professional relationships and thereputation of our management and marketing personnel.  Consequently, these relationships may beadversely affected by events beyond our control, including departures of keypersonnel 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.

 

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*We currently rely on a small number of PPOs andother provider networks, the loss of any one of which or the change in ourrelationship with any one of which could have a material adverse effect on ourbusiness.*

 

CareMark, Aetna, Optum,Outlook Vision, Integrated Health, Three Rivers and HealthFi are the principalPPOs and provider networks through which our members receive savings onhealthcare products 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 and maintain relationships with PPOs and other providernetworks within each market area that our services are offered.  Developing and maintaining relationships withPPOs and provider networks is based in part on professional relationships andthe reputation of our management and marketing personnel.  Our PPO and provider network relationshipsmay be adversely affected by events beyond our control, including departures ofkey personnel and alterations in professional relationships.  The loss of a PPO or provider network withina geographic market area that is not be replaced on a timely basis, or at all,could have a material adverse effect on our business, financial condition, andresults of operations.

 

*We must develop and maintainrelationships with insurance companies**for theinsurance benefits included in our CARExpress*TM* Plus programs.*

 

Weare not an insurance company.  Theinsurance benefits that we offer as part of our CARExpressTM Plus programs are developed andoffered by a third-party insurance company. We currentlyrely upon The United States Life Insurance Company in the City ofNew York, a member company of American International Group, Inc., for allof the insurance benefits that we include in our CARExpressTM Plus programs.  Theloss or termination of this strategic relationship could adversely affect ourrevenues and operating results and may also impair our ability to maintain andattract new insurance brokers and agents to offer our CARExpressTM Plus programs to the public.

 

Wemust develop and maintain relationships with several insurance companies sothat we can continue offering insurance benefits as part of our CARExpressTM Plus programs. Development and maintenance of relationships with insurance companiesmay in part be based on professional relationships and the reputation of ourmanagement and marketing personnel. Consequently, the relationships with insurance companies may beadversely affected by events beyond our control, including departures of keypersonnel and alterations in professional relationships.  Our success and growth will depend in largepart upon our ability to establish and 

 

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maintain these strategic relationships,contractual or otherwise, with various insurance companies to provide theirproducts and services.

 

*Because we expect to derive substantially all ofour future revenue from our membership programs, any failure of these programsto satisfy customer demands or to achieve meaningful market acceptance mayseriously harm our business.*

 

Substantially all of our revenue comes from monthlymembership fees that we receive from the sale of our membership programs.  We expect our membership programs to continueto account for substantially all of our revenue for the foreseeablefuture.  If, for any reason, revenuederived from sales of our membership programs declines or does not grow asrapidly as we anticipate, our operating results and our business may besignificantly 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 new membershipprograms at a rate required by our rapidly changing market.*

 

Our future success depends on our ability to developnew membership programs that keep pace with the rapidly evolving healthmembership industry and that address the changing needs of our customers.  We may not be successful in either developingsuch programs or achieving market acceptance of any new programs that wedevelop.  Uncertainties about the timingand nature of changes to healthcare regulations and the evolution of the healthmembership industry could delay our development of new programs or increase theexpenses in developing them.  The failureof our membership programs to satisfy the needs of our customers may limit orreduce the market for these programs, result in customer dissatisfaction, andseriously harm our business, financial condition and results of operations.

 

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

 

We market and sell our membership programs withoutthe need for an insurance license by any federal, state or local regulatorylicensing agency or commission.  Bycontrast, companies that provide insurance benefits and operate HMOs and PPOsare regulated by state licensing agencies and commissions. These regulationsextensively cover operations, including scope of benefits, rate formula, deliverysystems, utilization review procedures, quality assurance, enrollmentrequirements, claim payments, marketing and advertising.  Several states have enacted laws andregulations governing membership programs such as ours 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 costof complying with these laws and regulations has and will likely continue tohave a material effect on our financial position.

 

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Government regulation of health insurance,healthcare coverage and health membership plans is a changing area of law andvaries from state to state.  Thesale of insurance products and the licensing of insurance brokers and agentsare subject to regulation and supervision, predominantly by stateauthorities.  While the scope ofregulation and form of supervision may vary from state to state, insurance lawsrelating to the sale of insurance products and licensing of insurance brokersand agents are often complex and generally grant broad discretion tosupervisory 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 insurance company, theinsurance company from which we obtain the limited insurance benefits includedin our CARExpressTM Plus membership programs is subject to variousfederal 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 CARExpressTM Plusmembership programs as a result of these laws and regulations.

 

We market our CARExpressTM Plusmembership 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.  Most states allow theseprograms to be sold under certain circumstances without a licensed insuranceagent making each sale.  If a state laterdetermines that our sales of these programs do not comply with their 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.

 

***Our continued growth could strain our personnel andinfrastructure resources, and if we are unable to implement appropriatecontrols and procedures to manage our growth, we may not be able tosuccessfully implement our business plan.***

** **

**We are experiencing rapidgrowth in our operations which is placing, and will continue to place, asignificant strain on our management, administrative, operational and financialinfrastructure.  Our future success willdepend in part upon the ability of our management to manage growtheffectively.  This may require us to hireand train additional personnel to manage our expanding operations.  In addition, we will be required to continueto improve our operational, financial and management controls and our reportingsystems and procedures.  If we fail tosuccessfully manage our growth, we may be unable to execute upon our businessplan.**

** **

*We face increasing competition from moreestablished companies that have significantly greater resources than we do thatmay place pressure on our pricing and that could prevent us from increasingrevenue or attaining profitability.*

 

The health membership industry is rapidly evolving andcompetition for members is becoming increasingly intense.  Our membership programs are similar to ordirectly in competition with products and services offered by many of ourdirect and potential competitors.  Someof our healthcare providers may provide, either directly or through thirdparties, programs that directly compete with our programs.  If healthcare membership programs becomestandard 

 

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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 functionallysimilar or superior to our membership programs;

 

·                  established reputations relating tomembership programs;

 

·                  greater name recognition and largermarketing budgets and resources;

 

·                  established marketing relationshipsand access to larger customer bases; and

 

·                  substantially greater financial,personal and other resources.

 

We compete with numerous well-established companiesthat design, market and sell healthcare membership programs.  Our current principal competitors includecompanies that offer healthcare products and services through membershipprograms, as well as insurance companies, PPOs, provider networks and otherorganizations that offer health benefit programs to their customers.  Some of our competitors may be companies thathave programs that are functionally similar or superior to our membershipprograms.  Most of our competitorspossess substantially greater financial, marketing, personnel and otherresources than us.

 

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

 

·                  providehealthcare membership programs comparable or superior to our programs at lowermembership prices;

 

·                  adapt morequickly to evolving healthcare industry trends or changing industryrequirements;

 

·                  respond morequickly and effectively to new or changing opportunities, technologies,standards or customer requirements;

 

·                  increase theiremphasis on programs similar to ours to more effectively compete with us; or

 

·                  successfullyrecruit marketing companies, brokers and agents by offering more attractivecompensation plans.

 

For these and other reasons, we may not beable to compete 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.

 

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** **

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

** **

Intellectual property isimportant to our success.  We rely uponconfidentiality procedures and contractual provisions to protect our business,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 word “CARExpress” and ourCARExpressTM brand.  We haveapplied for trademark registration for the word “CARExpress Plus” and may apply for legal protection for certain ofour other intellectual property in the future.  These trademarks and any additional legal protection we may obtain inthe future may be challenged by others or invalidated through administrativeprocess or litigation.  As a result, ourmeans of protecting our proprietary technology and brands may beinadequate.  Furthermore, despite ourefforts, we may be unable to prevent third parties from infringing upon ormisappropriating our intellectual property. Any such infringement or misappropriation could have a material adverseeffect on our business, financial condition and results of operations.

 

***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 suchbreaches.  Any breach or perceived breachcould subject us to legal claims from our marketing and distribution partnersor customers and/or regulatory or law enforcement authorities under laws thatgovern the protection of non-public personal information.   Moreover, any public perception that we haveengaged in the unauthorized release of, or have failed to adequately protect,private information could adversely affect our ability to attract and retainmembers and customers.  Such events could be very expensive toremedy, could damage our reputation and could discourage existing and potentialcustomers from purchasing our membership programs.  Any such events could substantially harm our business,results of operations and financial condition.

 

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

 

Our ability to collect monthly membership fees fromour members is largely dependent upon our ability to charge our monthlymembership fees to our members’ credit cards. Substantially all of our members pay their monthly membership fees to usthrough monthly debits to their credit cards. We utilize the services of merchant processors to process these creditcard transactions for us.  In the past,we have been subject to service disruptions as the result of our merchantprocessors terminating their agreements with us.  While we have taken several precautions toprevent such actions from disrupting our ability to process credit cards in thefuture, it is possible that we may experience additional service interruptionsby the merchant processors that we us.  Anysuch disruptions may result in our loss of a significant number of members anda significant amount of revenue, either of which would have a material adverseaffect on our results 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.***

** **

**Our success depends largelyupon the continued services of our executive officers and other key managementand development personnel.  While we haveentered into employment agreements with**each ofour executive officers, they may each terminate their employment with us at anytime without penalty.  We do not maintain keyperson life 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.

** **

***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.***

** **

**To execute our growth plan,we must attract and retain highly-qualified personnel.  We need to hire additional personnel invirtually all operational areas, including selling and marketing, operationsand technical 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 

 

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or investments to date,and therefore, our ability to make acquisitions or investments isunproven.  Acquisitions and investmentsinvolve numerous risks, including:

 

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

 

·                  the diversion of financial and managementresources from existing operations;

 

·                  the risk of entering new markets;

 

·                  the potential loss of key employees; and

 

·                  the inability to generate sufficientrevenue to offset acquisition 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 to properlyevaluate 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 experience with consumers, we believethat many consumers are not familiar with the health discount membershipindustry and the benefits provided by these membership programs.  In addition, there may be a limited-timeopportunity to achieve and maintain a significant share of the market for thesemembership programs due in part to the rapidly evolving nature of the healthmembership industry and the substantial resources available to our existing andpotential competitors.  If people do notrecognize or acknowledge these benefits, the market for our CARExpressTM membership programs may develop more slowly than weexpect, which could adversely affect our operating results.

 

Developing and maintaining consumer awareness of ourCARExpressTM brand is critical to achieving widespreadacceptance of our membership programs. Furthermore, we believe that the importance of brand recognition willincrease 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 and maintain ourCARExpressTM brand are greater than anticipated, ourfinancial condition 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 our membership programs will dependon the acceptance of membership programs as a suitable alternative orsupplement to traditional health insurance. Health discount membership programs could lose their viability as analternative to health 

 

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insurance due to changesin healthcare laws and regulations, an inadequate number of healthcareproviders participating in the programs, customer dissatisfaction with themethod of making payments and receiving discounts, and new alternativehealthcare solutions.  If health discountmembership programs do not gain widespread market acceptance, the demand forour membership programs could be significantly reduced, which could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

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

** **

As the healthdiscount membership industry continues to evolve, increasing regulation byfederal and state agencies becomes more likely. The marketing and sale of health discount membership programs issubject to federal, state and local regulation, including the prohibition ofbusiness corporations from providing medical care, the fraud and abuseprovisions of the Medicare and Medicaid statutes, state laws that prohibitreferral fees and fee splitting, and regulations applicable to insurance companiesand organizations that provide healthcare services.  Compliance with changes in applicable lawsand regulations could materially increase the associated operating costs.  Non-compliance with these laws andregulations could cause us to become the subject of a variety of enforcement orprivate actions, subject us or our management personnel to fines or variousforms of civil or criminal prosecution, and result in negative publicitypotentially damaging our reputation, our PPO and network relationships, and ourrelationships with members and consumers in general.  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.

 

Risks Associated With OurStock

 

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

 

As of March 24,2008, we had 41,689,856 shares of common stock outstanding.  Of this amount, 22,486,601 are freelytradable without restriction, unless the shares are purchased by ouraffiliates.  The remaining 19,203,255shares are “restricted securities” as that term is defined under Rule 144of the Securities Act.  None of ourdirectors, executive officers or employees is subject to lock-up agreements ormarket stand-off provisions that limit their ability 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 raise additional capital in the future tohelp fund our operations through sales of shares of our common stock orsecurities convertible into shares of our common stock, as well as issuances ofdebt.  Such additional financing may bedilutive to our stockholders, and debt financing, if available, may involverestrictive covenants which may limit our operating flexibility.  If additional capital is raised through theissuances of shares of our common stock or securities convertible into sharesof our common stock, the percentage ownership of existing stockholders will bereduced.  These stockholders mayexperience additional dilution in net book 

 

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value per share and anyadditional equity securities may have rights, preferences and privileges seniorto those of the holders of our common 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 financial statements included in thisreport**.*

 

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 financial statementsfor the year ended December 31, 2007. During the preparation of our financial statements, 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, 2007.

 

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.

 

*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 theSEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 will requireour independent registered public accounting firm to complete an attestationreport on our assessment of our internal control over financial reporting. The first attestation report of our assessment that our independentregistered public accounting firm must complete will be required in connectionwith the preparation of our annual report for our fiscal year ending December 31,2008, unless extended by the SEC as currently proposed.  The attestation process that must beperformed by our independent registered public accounting firm is also new andcomplex.  We may encounter problems ordelays in receiving an unqualified attestation of our assessment by ourindependent registered 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 

 

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registered publicaccounting firm is unable to provide an unqualified attestation report on ourassessment, investors may lose confidence in us and our stock may be negativelyimpacted.

 

*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.*

 

Sinceour common stock is not listed for trading on a national securities exchange,we are not subject to certain of the corporate governance rules establishedby the national securities exchanges pursuant to the Sarbanes-Oxley Act of2002.  These rules relate toindependent director standards, director nomination procedures, audit andcompensation committees standards, the use of an audit committee financialexpert and the adoption of a code of ethics.

 

Ourboard of directors currently consists of David M. Daniels, who is our Presidentand Chief Executive Officer.  Mr. Danielsis not an “independent director” as such term is defined by any of the nationalsecurities exchanges or inter-dealer quotation systems.  Our board of directors has not created aseparately-designated standing audit committee and Mr. Daniels does notqualify as an “audit committee financial expert” as that term is defined inItem 407(d)(5)(ii) of Regulation S-B promulgated under the SecuritiesAct.  Unless we voluntarily elect tofully comply with all of these rules, we will not receive the benefits andprotections they were enacted to provide.

 

Whilewe intend to file an application to have our securities listed for trading on anational securities exchange in the future which would require us to fullycomply with those obligations, we cannot assure you that we will file such anapplication, that we will be able to satisfy applicable listing standards, or,if we do satisfy such standards, that we will be successful in receivingapproval of our application by the governing body of the applicable nationalsecurities exchange.

 

*The market price of our commonstock is likely to be 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 servicesby our competitors;

 

·                  demand for our membership programs,including fluctuations in membership renewals; and

 

·                  fluctuations in revenue from themarketing and distribution partners that we use.

 

In addition, the marketprice of our common stock could be subject to wide fluctuations in response to:

 

·                  quarterly variations in our revenues andoperating expenses;

 

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·                  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 mayfluctuate significantly, and these fluctuations may cause our stock price tofall.*

 

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.*

 

Ourcommon stock began trading on the OTC Bulletin Board on March 30,2006.  While our common stock currentlytrades on the OTC Bulletin Board, it does not trade on any national securitiesexchange or the Nasdaq Stock Market. Investments in securities trading on the OTC Bulletin Board aregenerally less liquid than investments in securities trading on a nationalsecurities exchange or the Nasdaq Stock Market. While we intend to submit an application to a national securitiesexchange or the Nasdaq Stock Market to list our shares of common stock fortrading thereon, we can provide no assurance that we will submit such anapplication, that such application willbe accepted, or that our shares of common stock will be approved for tradingthereon.  The failure of our shares to beapproved for trading on a national securities exchange or the NasdaqStock Market may have the effect oflimiting the trading activity of our common stock and reducing the liquidity ofan investment in our common stock.

 

*We have never paid any dividends on our common stockand do not intend to pay any dividends on our common stock in the foreseeablefuture.*

 

Wehave never paid any dividends on our common stock and do not intend to pay anydividends on our common stock in the foreseeable future.  We intend to use any cash generated from ouroperations for reinvestment in 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 principal stockholders,and their respective affiliates, beneficially own approximately 34.9% of ouroutstanding common stock.  Thesestockholders, acting together, have the ability to exert substantial influenceover any matters requiring approval by our stockholders, including the electionand removal of directors and any proposed merger, 

 

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consolidation or sale of all or substantially all ofour assets.  In addition, they coulddictate the management of our business and affairs.  This concentration of ownership could havethe effect of delaying, deferring or preventing a change in control of us orimpeding a merger or consolidation, takeover or other business combination thatcould be favorable to you.

 

***Applicable SEC rules governingthe trading of “penny stocks” may limit the trading and liquidity of our commonstock which may affect the trading price of our common 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 orcertain accredited investors must make a special written suitabilitydetermination regarding such a purchaser and receive such purchaser’s writtenagreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activityof our common stock and reducing the liquidity of an investment in our commonstock.

 

**Item 2.    Description of Property.**

 

Our corporate headquarters and sole business office islocated at 120 Gibraltar Road, Suite 107, Horsham, Pennsylvania 19044,where we lease approximately 7,100 square feet of space for a monthly rentpayment of approximately $13,500.  Thislease has a term of three years and expires on May 30, 2010.  We believe that our office space is adequateto support our current operations and that adequate additional space isavailable to support projected growth in our operations over the next 12months.

 

**Item3.  Legal Proceedings.**

 

We are not currently a party to any material legalproceedings.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders.**

 

None.

 

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**PART II**

 

**Item 5.   MarketFor Common Equity, Related Stockholder Matters and Small Business IssuerPurchases of Equity Securities.**

 

**Market Information**

 

Ourcommon stock currently trades on the OTC Bulletin Board under the symbol “NHPR”.  The first reported trade of our common stockon the OTC Bulletin Board occurred on March 30, 2006.   The following table sets forth the range ofhigh and low bid prices for shares of our common stock on the OTC BulletinBoard 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, 2006** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|---------|------------|
|                                                             |       |     |       |    |       |
| Quarter ended March 31, 2006                                |       | $        | 0.85       |    | $          | 0.40 |   |
| Quarter ended June 30, 2006                                 |       | $        | 2.15       |    | $          | 0.65 |   |
| Quarter ended September 30, 2006                            |       | $        | 1.61       |    | $          | 0.52 |   |
| Quarter ended December 31, 2006                             |       | $        | 1.44       |    | $          | 0.71 |   |

 
| **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 |   |

 

Thelast reported trading price of our common stock as reported on the OTC BulletinBoard on March 24, 2008 was $0.30 per share.

 

**Holders**

 

As of March 24,2008, the number of stockholders of record of our common stock was 111.

 

**Dividends**

 

Wehave not paid any dividends on our common stock to date, nor do we intend topay any dividends on our common stock in the foreseeable future.  We intend to retain future earnings, if any,to finance the growth of our business.

 

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**RecentSales of Unregistered Securities**

 

Duringour fiscal year ended December 31, 2007, we sold the following securitieswithout registration under the Securities Act:

 

In January 2007, we issuedan option to acquire 100,000 shares of common stock to a new employee.  The option has an initial exercise price of$0.69 per share, vests in four equal annual installments commencing on the dateof issuance, and has a term of 10 years. The securities were issued to an accredited investor in a privateplacement transaction exempt from the registration requirements of theSecurities Act pursuant to Section 4(2) of the Securities Act directly by uswithout engaging in any advertising or general solicitation of any kind andwithout payment of underwriting discounts or commissions to any person. 

 

In March 2007, we issued anoption to acquire 40,000 shares of common stock to a new employee.  The option has an initial exercise price of$0.67 per share, vests in four equal annual installments commencing on the dateof issuance, and has a term of 10 years. The securities were issued to an accredited investor in a privateplacement transaction exempt from the registration requirements of theSecurities Act pursuant to Section 4(2) of the Securities Act directly by uswithout engaging in any advertising or general solicitation of any kind andwithout payment of underwriting discounts or commissions to any person. 

 

In March 2007, we issued arestricted stock award for 200,000 shares of common stock to an accreditedinvestor in exchange for sales and marketing services.  The award vests in four equal quarterlyinstallments commencing June 30, 2007 if certain performance criteria areachieved.  These securities were issuedto one accredited investor in a private placement transaction exempt from theregistration requirements of the Securities Act pursuant to Section 4(2) of theSecurities Act directly by us without engaging in any advertising or generalsolicitation of any kind and without payment of underwriting discounts orcommissions to any person.

 

In August 2007, we 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.  We agreed to use our reasonable best effortsto file a registration statement with the SEC by December 31, 2007 toregister all of the shares of our common stock issued in the offering and allof the shares of our common stock underlying the Class A warrants and Class Bwarrants issued in the offering.  AllClass A warrants had an exercise price of $0.60 per share, wereexercisable for a period of 30 days commencing on the date the registrationstatement was declared effective by the SEC, and expired at the end of theexercise period.  All Class Bwarrants have an exercise price of $.80 per share, are exercisable until December 31,2008, are callable by us if certain criteria are satisfied, and expire at theend of the exercise period.  We paidfinder fees in the amount of $64,800 and 60,000 shares of our common stock inconnection with this offering.  These securities were issued to oneaccredited investor in a private placement transaction exempt from theregistration 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.

 

In September 2007,we issued an option to acquire 100,000 shares of common stock to anon-executive employee.  The option hasan initial exercise price of $0.50 per share, vests in four equal annualinstallments commencing on the first anniversary of the date of grant, and hasa term of 10 years.  The securities wereissued to an accredited investor in a private placement transaction exempt fromthe 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.

 

In October 2007,we issued options for an aggregate of 75,000 shares of common stock to three ofour non-executive employees.  The optionsare exercisable at $0.51 per share and have a term of 10 years.  The options vested immediately on the date ofgrant with respect to 2,500 shares.  Theoptions vest with respect to the remainder of the shares in three equal annualinstallments beginning on the first anniversary of the date of grant.  The securities were issued to a limited number ofaccredited investors in a private placement transaction exempt from theregistration 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.

 

In October 2007,we issued an option to a non-executive employee for 15,000 shares of commonstock.  The option is exercisable at$0.51 per share, has a term of 10 years, and vests in three equal annualinstallments beginning on the first anniversary of the date of grant.  The securities were issued to an accredited investorin a private placement transaction exempt from the registration requirements ofthe Securities Act pursuant to Section 4(2) of the Securities Act 

 

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directly by us withoutengaging in any advertising or general solicitation of any kind and withoutpayment of underwriting discounts or commissions to any person.

 

In October 2007, we completed a privateoffering of 810,000 shares of our common stock, Class A warrants toacquire 810,000 shares of our common stock and Class B warrants to acquire810,000 shares of our common stock for aggregate cash consideration of$243,000.  These securities were sold inunits comprised of one share of our common stock, one Class A warrant andone Class B warrant.  The units weresold at a purchase price of $0.30 per unit. We agreed to use our reasonable best efforts to file a registration statementwith the SEC by December 15, 2007 to register all of the shares of ourcommon stock issued in the offering and all of the shares of our common stockunderlying the Class A warrants and Class B warrants issued in theoffering.  The Class A warrants wereinitially exercisable into one share of our common stock at an exercise priceof $0.30 per share, were exercisable during a period beginning on the date theregistration statement covering the public resale of the shares underlying thewarrants was declared effective by the SEC and ending on the later of January 31,2008 or the date that is 30 calendar days after the effective date of theregistration statement, and expired at the end of the exercise period.  The Class B warrants were initiallyexercisable into one share of our common stock at an exercise price of $0.40per share, were exercisable during a period beginning on the date theregistration statement covering the public resale of the shares underlying thewarrants was declared effective by the SEC and ending on January 31, 2008,and expired at the end of the exercise period. We paid finder fees consisting of 121,500 units identical to the unitssold in the offering.  We issued these securities to a limitednumber of accredited investors in a private offering exempt from theregistration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act without engaging in any advertising or general solicitationof any kind.

 

In November 2007,we issued an option to a new non-executive employee for 250,000 shares ofcommon stock.  The option is exercisableat $0.45 per share, has a term of 10 years, and vests in four equal annualinstallments beginning on the first anniversary of the date of grant.  The securities were issued to an accredited investorin a private placement transaction exempt from the registration requirements ofthe Securities Act pursuant to Section 4(2) of the Securities Actdirectly by us without engaging in any advertising or general solicitation ofany kind and without payment of underwriting discounts or commissions to anyperson.

 

In November 2007, we completed a privateoffering of 500,000 shares of our common stock, Class A warrants toacquire 500,000 shares of our common stock and Class B warrants to acquire500,000 shares of our common stock for aggregate cash consideration of$150,000.  These securities were sold inunits comprised of one share of our common stock, one Class A warrant andone Class B warrant.  The units weresold at a purchase price of $0.30 per unit. We agreed to use our reasonable best efforts to file a registrationstatement with the SEC by December 15, 2007 to register all of the sharesof our common stock issued in the offering and all of the shares of our commonstock underlying the Class A warrants and Class B warrants issued inthe offering.  The Class A warrantswere initially exercisable into one share of our common stock at an exerciseprice of $0.30 per share, were exercisable during a period beginning on thedate a registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on thelater of January 31, 2008 or 

 

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the date that is 30calendar days after the effective date of the registration statement, andexpired at the end of the exercise period. The Class B warrants were initially exercisable into one share ofour common stock at an exercise price of $0.40 per share, were exercisableduring a period beginning on the date the registration statement covering thepublic resale of the shares underlying the warrants was declared effective bythe SEC and ending on January 31, 2008, and expired at the end of theexercise period.  We paid finder feesconsisting of 75,000 units identical to the units sold in the offering.  We issued these securities to a limited number ofaccredited investors in a private offering exempt from the registrationrequirements of the Securities Act pursuant to Section 4(2) of theSecurities Act without engaging in any advertising or general solicitation ofany kind.

 

In November 2007, we completed a privateoffering of 1,240,000 shares of our common stock, Class A warrants toacquire 1,240,000 shares of our common stock, and Class B warrants toacquire 1,240,000 shares of our common stock for aggregate cash considerationof $310,000.  These securities were soldin units comprised of one share of our common stock, one Class A warrantand one Class B warrant.  The unitswere sold at a purchase price of $0.25 per unit.  We agreed to use our reasonable best effortsto file a registration statement with the SEC by December 15, 2007 toregister all of the shares of our common stock issued in the offering and allof the shares of our common stock underlying the Class A warrants and Class Bwarrants issued in the offering.  The Class Awarrants were initially exercisable into one share of our common stock at anexercise price of $0.30 per share, were exercisable during a period beginningon the date a registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on thelater of January 31, 2008 or the date that is 30 calendar days after theeffective date of the registration statement, and expired at the end of theexercise period.  The Class Bwarrants were initially exercisable into one share of our common stock at anexercise price of $0.40 per share, were exercisable during a period beginningon the date a registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on January 31,2008, and expired at the end of the exercise period.  We paid finder fees consisting of 186,000units identical to the units sold in the offering.  We issued these securities to a limited number ofaccredited investors in a private offering exempt from the registrationrequirements of the Securities Act pursuant to Section 4(2) of theSecurities Act without engaging in any advertising or general solicitation ofany kind.

 

In November 2007, weissued an aggregate of 950,000 shares of our common stock to two accreditedinvestors in exchange for various consulting services to be rendered tous.  We agreed to use ourreasonable best efforts to file a registration statement with the SEC by December 15,2007 to register all of the shares of our common stock issued to theconsultants.  These securities were issued to two accreditedinvestors in private placement transactions exempt from the registrationrequirements of the Securities Act pursuant to Section 4(2) of theSecurities Act directly by us without engaging in any advertising or generalsolicitation of any kind and without payment of underwriting discounts orcommissions to any person.

 

In December 2007, we completed a privateoffering of 555,000 shares of our common stock, Class A warrants toacquire 555,000 shares of our common stock, Class B warrants to acquire555,000 shares of our common stock, and Class C warrants to acquire 555,000shares of 

 

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our common stock foraggregate cash consideration of $111,000. These securities were sold in units comprised of one share of our commonstock, one Class A warrant, one Class B warrant and one Class Cwarrant.  The units were sold at apurchase price of $0.20 per unit.  Weagreed to use our reasonable best efforts to file a registration statement withthe SEC by December 15, 2007 to register all of the shares of our commonstock issued in the offering and all of the shares of our common stockunderlying the Class A warrants, Class B warrants and Class Cwarrants issued in the offering.  The Class Awarrants were initially exercisable into one share of our common stock at anexercise price of $0.22 per share, are exercisable during a period beginning onthe date a registration statement covering the public resale of the sharesunderlying the warrants is declared effective by the SEC and ending on the datethat is 90 calendar days after the effective date of the registration statement, are callable by us if certain criteriaare satisfied, and expire at the end of the exerciseperiod.  The Class B warrants areinitially exercisable into one share of our common stock at an exercise priceof $0.30 per share, are exercisable during a period beginning on the date aregistration statement covering the public resale of the shares underlying thewarrants is declared effective by the SEC and ending on the date that is 180calendar days after the effective date of the registration statement, are callable by us if certain criteriaare satisfied, and expire at the end of the exerciseperiod.  The Class C warrants areinitially exercisable into one share of our common stock at an exercise priceof $0.30 per share, are exercisable during a period beginning on the date aregistration statement covering the public resale of the shares underlying thewarrants is declared effective by the SEC and ending on the third anniversaryof the effective date of the registration statement, and expire at the end ofthe exercise period.  We paid finder feesconsisting of 83,250 units identical to the units sold in the offering.  We issued these securities to a limited number ofaccredited investors in a private offering exempt from the registrationrequirements of the Securities Act pursuant to Section 4(2) of theSecurities Act without engaging in any advertising or general solicitation ofany kind.

 

During the year ended December 31,2007, we issued 140,000 shares of common stock upon the exercise of warrants atan exercise price of $0.50 per share for aggregate gross proceeds of$70,000.  We issued these securities to a limitednumber of accredited investors in private offerings exempt from theregistration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act without engaging in any advertising or general solicitationof any kind and without payment of underwriting discounts or commissions to anyperson.

 

We have issued options and restricted stock awardsto each of David M. Daniels, Alex Soufflas and Patricia S. Bathurst, our three executive officers. A description of the options and restricted stock awards is set forth under *“Item10.  Executive Compensation — EmploymentContracts and Arrangements”* of this report.  The securities were issued to a limitednumber of accredited investors in private placement transactions exempt fromthe 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 6. Management’s Discussion and Analysis.**

 

ThisManagement’s Discussion and Analysis and other parts of this report containforward-looking statements that involve risks and uncertainties.  All forward-looking statements 

 

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included in this report are based on informationavailable to us on the date hereof, and, except as required by law, we assumeno obligation to update any such forward-looking statements.  Our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of a numberof factors, including those set forth under the caption *“Item1.  Description of Business – Risks andUncertainties”* 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 by healthcare professionalsto address the need for affordable healthcare nationwide.  We create, market and sell membershipprograms to predominantly underserved markets in the healthcare industrythrough a national healthcare savings network called CARExpressTM.  CARExpressTM is a network ofhospitals, doctors, dentists, pharmacists and other healthcare providerscomprised of over 1,000,000 healthcare providers that render their services andproducts to CARExpressTM members at discounted prices.  CARExpressTM enables people to engage in point-of-servicetransactions directly with these healthcare providers and pay discounted pricesto 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 market share ofthis market is currently less than one percent and has been less than onepercent since our inception.  Since weare not currently large enough to pursue and support the entire market, weintend to continue to pursue specific opportunities that we identify in thismarket through our various marketing and distribution channels.  Through product design, competitivemembership pricing and a variety of marketing and distribution partners, we arepursuing opportunities in the healthcare market that insurance companies havenot addressed.

 

**Recent Developments**

 

We have experienced asubstantial increase in revenue over the past 12 months.  We achieved revenue of $3,724,204 for yearended December 31, 2007, compared to revenue of $1,870,612 for the yearended December 31, 2006, an increase of almost 100%.  We have entered into agreements with severalmarketing and distribution partners that are selling our CARExpressTM membershipprograms to the public and are currently in discussions with several 

 

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other companies regardingthe sale of our CARExpressTM membership programs.  We are also beginning to sell our programsdirectly to the public through our direct sales force.

 

**Operational Metrics**

 

Our revenue consists exclusively of recurring monthlymembership fees that we receive from members of our membership programs.  To generate revenue, we engage in marketingcampaigns offering money-back guarantees and free-trial periods as an incentivefor prospective members to try our membership programs.  Upon becoming paying members, the members payus 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.  We do not havesimilar data available for our new CARExpressTM Plus membership programs since we onlyrecently began selling them to the public.

 

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.  For those memberships sold inconnection with our free-trial offers, we receive the member’s billinginformation at the beginning of the free-trial period.  After the free-trial period has expired, themember is charged for the next monthly membership period unless the membercancels the membership prior to the expiration of the free-trial period.  The monthly membership fees that we receiveare 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.

 

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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.

 

**Outlook**

 

Our strategy is to continueto expand our position as a provider of unique healthcare membership serviceprograms.  We implemented severalstrategic growth initiatives during 2006 and 2007 through which we achieved newcontracts and strategic partnerships with a number of marketing anddistribution companies.  We have alsoinitiated several measures in anticipation of our future growth, includinghiring additional customer service staff and transitioning our current customerservice staff from one shift to two shifts to ensure adequate coverage for ourmembers.  We expect to generate futurerevenue and members primarily through our direct sales force, marketing anddistribution partners and various marketing and advertising campaigns.  We intend to finance each of these projectsthrough cash on hand, internally generated cash flows from operating activitiesand proceeds from the issuance of debt and equity securities.  We will use any additional investments thatwe receive to accelerate the expansion of each of our advertising campaigns andprograms and increase sales of our membership programs.

 

We expect the number of CARExpressTM membersgenerated each month to increase for the foreseeable future.  We also expect our retention rates to improveover the next 12 months as we obtain additional information regarding memberdemographics and target our marketing and advertising campaigns towardsprospective members and member groups that are most suitable for our membershipprograms.  As a result, we expect tobegin generating a net profit from operations during 2008 as the recurringmembership fees from our increasing membership base overtake the costsassociated with obtaining the new members we are generating.  We can provide no assurance, however, thatour membership base will increase as projected, that our member retention rateswill improve over the next 12 months or that we will begin generating a netprofit from operations during 2008.

 

**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.

 

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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

 

Wesell health discount membership programs in return for monthly membershipfees.  The date a monthly membershipbegins varies for each individual member depending upon when the particularmember purchased the membership. We recognize the membership fees as revenuewhen persuasive evidence of an arrangement exists, delivery or performance hasoccurred, the sales price is fixed and determinable, and collectibility isreasonably assured.  The fees arerecognized as revenue on a straight-line basis over the longer of the initialcontractual term or the expected period during which the services will beperformed if the relationship with the member is expected to extend beyond theinitial contractual term and the member continues to benefit from the payment ofthe fees.

 

Atthe beginning of each membership period, the monthly membership fee is paid bythe member and recorded as deferred revenue. We then recognize the deferred revenue as revenue as the services arerendered.  Shipping and handling feesthat we receive for the shipment of membership packages to new members areincluded in its membership 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 membership 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 we recognize revenue as servicesare rendered.  We also offer a 30-daymoney-back guarantee to our members. Members can cancel their membership during the first 30 days of theirinitial membership period and receive a full refund.  After that, members can cancel theirmembership 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.

 

Stock-Based Compensation

 

We account for employee stock-based compensation usingthe fair value recognition provisions of Financial Statement of FinancialAccounting Standards No. 123 (revised 2004), *“Share-BasedPayment”* (“SFAS 123R”).  Weadopted SFAS 123R on January 1, 2006 using the modified prospectivetransition method.  Under this method,compensation expense includes: (a) compensation expense for allshare-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 SFAS 123, and (b) compensation expense for allshare-based payments granted subsequent to January 1, 2006, based on thegrant-date fair value estimated in accordance with the provisions of SFAS123R.  Such amounts have been reduced byour estimate of forfeitures of all unvested awards.

 

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Weaccount for non-employee stock-based compensation in accordance with Statementof Financial Accounting Standards No. 123, *“AccountingFor Stock-Based Compensation”*(“SFAS 123”) and Emerging Issues TaskForce No. 96-18 *“Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring or in Conjunctionwith 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 is generallythe 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 past share price history todetermine volatility and cannot predict how the price of our shares of commonstock will react on the open market in the future since our common stock hasonly been trading 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.

 

For a morecomplete discussion of our accounting policies and procedures, see our notes toconsolidated financial statements beginning on page F-8.

 

**Recent Accounting Pronouncements**

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard No. 157 – *“Fair Value Measurements”* (“SFAS157”).  This standard establishes aframework for measuring fair value and expands disclosures about fair valuemeasurement of a company’s assets and liabilities.  This standard also requires that the fairvalue measurement should be determined based on the assumptions that marketparticipants would use in pricing the asset or liability.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007 and,generally, must be applied prospectively. In February 2008, the FASB issued FSP No. FAS 157-2, “*Effective Date of FASB Statement 157*,” which delays theeffective date of SFAS 157 for one year for all non-financial assets andnon-financial liabilities, except those that are recognized or disclosed atfair value in the financial statements on at least an annual basis.  We are currently evaluating the impact that thisnew standard will have on our financial position and results of operations.

 

In February 2007,the FASB issued Statement of Financial Accounting Standard No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities”* (“SFAS159”).  SFAS 159 providescompanies with an option to report selected financial assets and liabilities atfair value.  Its objective is to reduceboth complexity in accounting for financial instruments and the volatility inearnings caused by measuring related assets and liabilities differently.  It also establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets andliabilities.  SFAS 159 requires companiesto provide additional information that will help investors and 

 

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other users of financial statements to more easilyunderstand the effect of the company’s choice to use fair value on itsearnings.  It also requires entities todisplay the fair value of those assets and liabilities for which the companyhas chosen to use fair value on the face of the balance sheet.  SFAS 159 does not eliminate disclosurerequirements included in other accounting standards, including requirements fordisclosures about fair value measurements included in SFAS 157, discussedabove, and Statement of Financial Accounting Standards No. 107 *Disclosures about Fair Value of Financial Instruments*.  SFAS 159 became effective for us on January 1,2008.  We are currently evaluating theimpact that this new standard will have on our financial position and resultsof operations.

 

InDecember 2007, the FASB issued Statement of FinancialAccounting Standard No. 141(R), “*Business Combinations*”(“SFAS 141R”), which changes accounting for business acquisitions.  SFAS No. 141R 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 assets acquiredand liabilities assumed in a business combination.  Certain provisions ofthis standard will, among other things, impact the determination ofacquisition-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 beginning after December 15, 2008.  We are currently evaluatingthe impact that this new standard will have on our financial position andresults of operations.

 

InDecember 2007, the FASB issued Statement of FinancialAccounting Standard No. 160, “*Noncontrolling Interestsin Consolidated Financial Statements – an Amendment of Accounting ResearchBulletin No. 51*” (“SFAS 160”). The objective of SFAS 160 is toimprove the relevance, comparability, and transparency of the financial informationthat a reporting entity provides in its consolidated financial statements.  SFAS 160 applies to all entities that prepareconsolidated financial statements, except not-for-profit organizations, butwill 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 as of thebeginning of an entity’s first fiscal year that starts after December 15,2008 and prohibits early adoption.  We are currentlyevaluating the impact that this new standard will have on our financialposition and results of operations.

 

**Comparisonof the Years Ended December 31, 2007****and 2006**

 

Revenue

 

Revenue consistsof the monthly membership fees that we receive from members of our membershipprograms.  To date, revenue has consistedexclusively of the monthly membership fees we receive from members of ourCARExpressTM health discount programs.  Revenue increased $1,853,592 to $3,724,204for the year ended December 31, 2008 from $1,870,612 for the year ended December 31,2006.  The increase of $1,853,592resulted primarily from sales of our CARExpressTM health discount programs to new members andincreased revenue generated 

 

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from our existingmembers.  Approximately 65% of therevenue that we generated during the year ended December 31, 2007 wasderived from sales of our CARExpressTM health discount programs to first-timemembers, compared to approximately 95% during the corresponding period in2006.  The remainder of the revenue thatwe generated during these periods was derived from existing members.  We expect revenue to increase over the next12 months as a result of increased sales of our CARExpressTM health discountprograms and our CARExpressTM Plus membership programs through our directsales force, our marketing and distribution partners, and our various marketingand 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 increased$1,304,324 to $2,742,129 for the year ended December 31, 2007, from$1,437,805 for the year ended December 31, 2006.  The increase of $1,304,324 was due to anincrease of $1,034,210 for sales commissions and $270,114 for PPO and networkprovider costs.  We expect cost of salesto increase over the next 12 months as increased sales of our membershipprograms result in higher overall sales commission expenses and providernetworks 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 marketingactivities, depreciation and amortization expense allocated to our selling andmarketing activities, and all other selling and marketing expenses incurred byus.  Selling and marketing expensesdecreased $2,814,432 to $225,016 for the year ended December 31, 2007,from $3,039,448 for the year ended December 31, 2006.  The decrease of $2,814,432 was due primarilyto decreases of $2,320,274 for television and radio marketing campaigns andactivities and $479,926 for salaries and other compensation paid to employeesselling and marketing our membership programs. We expect selling and marketing expenses to increase during the next 12months as we grow our direct sales force and engage in marketing andadvertising 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 decreased$1,474,202 to $2,083,637 for the year ended December 31, 2007, from$3,557,839 for the year ended December 31, 2006.  The decrease of $1,474,202 was due primarilyto a decrease of $2,088,900 in stock option expense.  This decrease was partially offset byincreases of $381,120 

 

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insalary expense associated primarily with an increase in the number of ouremployees and annual increases in the salaries payable to our executiveofficers under their respective employment agreements, and $160,188 inrestricted stock award expense.  We areparty to employment agreements with David M. Daniels, Alex Soufflas andPatricia S. Bathurst.  A summary of thematerial terms of these employment agreements and our financial obligationsthereunder is provided under the captions *“Item 6.  Management’s Discussion and Analysis –Contractual Obligations” and “Item 10. Executive Compensation.”* We expect employee compensation expense to increase over the next 12months as we continue to retain additional executive management personnel andother employees in connection with the growth of our business.

 

*Professional Fees*.  Professionalfees consist of fees paid to our independent accountants, lawyers, technologyconsultants and other professionals and consultants.  Professional fees decreased $1,505,137 to$655,484 for the year ended December 31, 2007 from $2,160,621 for the yearended December 31, 2006.  Thedecrease of $1,505,137 was due primarily to decreases of $1,032,180 in theamount of expense recognized in connection with equity-based compensation paidto service providers and consultants for various services, and $471,628 in feesfor legal, accounting, technology and general consulting services.  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 costs for supplies,computer hardware and system costs, bank service charges, filing fees and dues,non-employee customer service representative expense, rent expense, healthinsurance costs, financial printer costs, transfer agent costs, the costs ofinvestor relations campaigns and activities, postage and delivery expenses,severance expenses, general business expenses and miscellaneous general and administrativeexpenses that are not associated with our selling and marketingactivities.  Other general andadministrative expenses decreased $153,808 to $1,565,340 for the year ended December 31,2007 from $1,719,148 for the year ended December 31, 2006.  The decrease of $153,808 resulted primarilyfrom decreases of $503,359 for investor relations campaigns and activities,$164,079 for non-employee customer service representative expense, $56,412 forfinancial printing costs, partially offset by increases of $387,059 for bankservice charges associated with new and recurring member transactions, $41,968for corporate filing fees, $56,759 for postage and delivery expenses, and$59,619 for supplies.  We expect othergeneral and administrative expenses to increase over the next 12 months as wecontinue to incur expenses for bank service charges, financial printerservices, investor relations campaigns and activities, transfer agent fees,health insurance, rent, non-employee customer service representatives, supplies,computer hardware and systems, and other miscellaneous items associated withthe general operation and growth of our business.

 

Gain on the Extinguishment of Debt

 

Gain on the extinguishment of debt consists of thegain that we recognized in connection with our termination of the lease for ouroffice space in Sarasota, Florida upon the issuance of common stock toCenterpointe Property, LLC on April 1, 2006 in full payment of all rentand other expenses that were due and payable under the lease and a mutualrelease from any and all 

 

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claims arising out of the lease.  We recognized a gain on the extinguishment ofdebt of $35,932 during the year ended December 31, 2006 in connection withthe issuance of these shares.  We did notrecognize any such gain 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 $6,433,458 to $3,531,970 for the year ended December 31,2007, from $9,965,428 for the year ended December 31, 2006.  The decrease of $6,433,458 was primarily theresult of an increase of $1,853,592 in revenue and decreases of $2,814,432 forselling and marketing expense, $1,474,202 for employee compensation expense,$1,505,137 for professional fees and $153,808 for general and administrativeexpenses, partially offset by increases of $1,304,324 for direct costs incurredin connection with the sale of our membership programs.  We expect to begin generating a net profitfrom operations during 2008 as the recurring membership fees from ourincreasing membership base overtake the costs associated with obtaining andretaining 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 31,2007, we had cash and cash equivalents of approximately $32,206 and workingcapital of approximately $215,903.

 

Net cash used byoperating activities was $2,923,963 for the year ended December 31, 2007compared to $5,215,208 for the year ended December 31, 2006.  The $2,291,245 decrease in cash used byoperating activities was due primarily to a decrease of $6,433,458 for net lossand an increase of $200,839 for accounts payable and accrued expenses,partially offset by a decrease of $3,746,309 for equity-based compensationexpense and increases of $212,756 for deposits and $335,205 for deferredrevenue.

 

We did not have any cashflows from investing activities for the year ended December 31, 2007.  Net cash used by investing activities was$47,761 for the year ended December 31, 2006.  The $47,761 difference in cash flows frominvesting activities was due to a decrease of $83,478 for property andequipment purchased in 2006, partially offset by an increase of $35,717 forcertificates of deposit that were disposed of in 2006.

 

Net cash provided by financing activities was$1,359,200 for the year ended December 31, 2007 compared to $6,750,131 forthe year ended December 31, 2006. The $5,390,931 decrease in cash provided by financing activities was dueto decreases of $914,960 for proceeds from the sale of common stock and$4,679,713 for proceeds received upon the exercise of outstanding warrants,partially offset by a decrease of $203,742 for the payment of notes payable.

 

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

 

In August 2007, we sold 1,200,000 sharesof common stock, one Class A warrant exercisable into 1,000,000 shares ofcommon stock and one Class B warrant exercisable into 1,000,000 shares ofcommon stock to an accredited investor for aggregate gross proceeds of 

 

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$540,000.  Weagreed to use our reasonable best efforts to file a registration statement withthe SEC by December 31, 2007 to register all of the shares of our commonstock issued in the offering and all of the shares of our common stockunderlying the Class A warrants and Class B warrants issued in theoffering.  All Class Awarrants had an exercise price of $0.60 per share, were exercisable for aperiod of 30 days commencing on the date the registration statement wasdeclared effective by the SEC, and expired at the end of the exerciseperiod.  All Class B warrants havean exercise price of $.80 per share, are exercisable until December 31,2008, are callable by us if certain criteria are satisfied, and expire at theend of the exercise period.

 

In October 2007, we completed a privateoffering of 810,000 shares of our common stock, Class A warrants toacquire 810,000 shares of our common stock and Class B warrants to acquire810,000 shares of our common stock for aggregate cash consideration of$243,000.  These securities were sold inunits comprised of one share of our common stock, one Class A warrant andone Class B warrant.  The units weresold at a purchase price of $0.30 per unit. We agreed to use our reasonable best efforts to file a registrationstatement with the SEC by December 15, 2007 to register all of the sharesof our common stock issued in the offering and all of the shares of our commonstock underlying the Class A warrants and Class B warrants issued inthe offering.  The Class A warrantswere initially exercisable into one share of our common stock at an exerciseprice of $0.30 per share, were exercisable during a period beginning on thedate the registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on thelater of January 31, 2008 or the date that is 30 calendar days after theeffective date of the registration statement, and expired at the end of theexercise period.  The Class Bwarrants were initially exercisable into one share of our common stock at anexercise price of $0.40 per share, were exercisable during a period beginningon the date the registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on January 31,2008, and expired at the end of the exercise period.

 

In November 2007, we completed a privateoffering of 500,000 shares of our common stock, Class A warrants toacquire 500,000 shares of our common stock and Class B warrants to acquire500,000 shares of our common stock for aggregate cash consideration of$150,000.  These securities were sold inunits comprised of one share of our common stock, one Class A warrant andone Class B warrant.  The units weresold at a purchase price of $0.30 per unit. We agreed to use our reasonable best efforts to file a registrationstatement with the SEC by December 15, 2007 to register all of the sharesof our common stock issued in the offering and all of the shares of our commonstock underlying the Class A warrants and Class B warrants issued inthe offering.  The Class A warrantswere initially exercisable into one share of our common stock at an exerciseprice of $0.30 per share, were exercisable during a period beginning on thedate a registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on thelater of January 31, 2008 or the date that is 30 calendar days after theeffective date of the registration statement, and expired at the end of theexercise period.  The Class Bwarrants were initially exercisable into one share of our common stock at anexercise price of $0.40 per share, were exercisable during a period beginningon the date the registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on January 31,2008, and expired at the end of the exercise period.

 

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In November 2007, we completed a privateoffering of 1,240,000 shares of our common stock, Class A warrants toacquire 1,240,000 shares of our common stock, and Class B warrants toacquire 1,240,000 shares of our common stock for aggregate cash considerationof $310,000.  These securities were soldin units comprised of one share of our common stock, one Class A warrantand one Class B warrant.  The unitswere sold at a purchase price of $0.25 per unit.  We agreed to use our reasonable best effortsto file a registration statement with the SEC by December 15, 2007 toregister all of the shares of our common stock issued in the offering and allof the shares of our common stock underlying the Class A warrants and Class Bwarrants issued in the offering.  The Class Awarrants were initially exercisable into one share of our common stock at anexercise price of $0.30 per share, were exercisable during a period beginningon the date a registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on thelater of January 31, 2008 or the date that is 30 calendar days after theeffective date of the registration statement, and expired at the end of theexercise period.  The Class Bwarrants were initially exercisable into one share of our common stock at anexercise price of $0.40 per share, were exercisable during a period beginningon the date a registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on January 31,2008, and expired at the end of the exercise period.

 

In December 2007, we completed a privateoffering of 555,000 shares of our common stock, Class A warrants toacquire 555,000 shares of our common stock, Class B warrants to acquire555,000 shares of our common stock, and Class C warrants to acquire555,000 shares of our common stock for aggregate cash consideration of$111,000.  These securities were sold inunits comprised of one share of our common stock, one Class A warrant, oneClass B warrant and one Class C warrant.  The units were sold at a purchase price of$0.20 per unit.  We agreed to use ourreasonable best efforts to file a registration statement with the SEC by December 15,2007 to register all of the shares of our common stock issued in the offeringand all of the shares of our common stock underlying the Class A warrants,Class B warrants and Class C warrants issued in the offering.  The Class A warrants were initiallyexercisable into one share of our common stock at an exercise price of $0.22per share, are exercisable during a period beginning on the date a registrationstatement covering the public resale of the shares underlying the warrants isdeclared effective by the SEC and ending on the date that is 90 calendar daysafter the effective date of the registration statement, are callable by us if certain criteriaare satisfied, and expire at the end of the exerciseperiod.  The Class B warrants areinitially exercisable into one share of our common stock at an exercise price of$0.30 per share, are exercisable during a period beginning on the date aregistration statement covering the public resale of the shares underlying thewarrants is declared effective by the SEC and ending on the date that is 180calendar days after the effective date of the registration statement, are callable by us if certain criteriaare satisfied, and expire at the end of the exerciseperiod.  The Class C warrants areinitially exercisable into one share of our common stock at an exercise priceof $0.30 per share, are exercisable during a period beginning on the date aregistration statement covering the public resale of the shares underlying thewarrants is declared effective by the SEC and ending on the third anniversaryof the effective date of the registration statement, and expire at the end ofthe exercise period.

 

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During the periodbeginning January 1, 2007 and ending March 27, 2008, we issued1,950,000 shares of common stock upon the exercise of warrants at exerciseprices ranging between $0.12 and $0.22 per share for aggregate grossproceeds of $299,000.

 

To date, ourcapital needs have been met principally through the sales of our equity anddebt securities and proceeds received upon the exercise of outstanding warrantsby our security holders.   We do notcurrently maintain a line of credit or term loan with any commercial bank orother financial institution.  We haveused the proceeds from the exercise of warrants and our private offerings ofsecurities to pay virtually all of the costs and expenses we haveincurred.  These costs and expenses werecomprised of operating expenses, which consisted of the salary expenses,professional fees, rent expenses and other general and administrative expensesdiscussed above, and the costs of sales discussed above to the extent suchcosts of sales exceeded 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 andfinance the growth of our business.  Weintend to obtain these funds through internally generated cash flows from operatingactivities and proceeds from the issuance of debt and equity securities.  The sale of additional equity or convertibledebt securities would result in additional dilution to our shareholders.  The issuance of additional debt would resultin increased expenses and could subject us to covenants that may have theeffect of restricting our operations.  Wehave not 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.

 

**Contractual Obligations**

 

The followingsummarizes our material long-term contractual obligations as of December 31,2007:

 
| **Contractual  Obligations** | ** ** | **Total** | ** ** | **2008** | ** ** | **2009**  | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** |
|------------------------------|------------|-----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|
| Employment  Agreements (1)   |       | $         | 1,849,334  |     | $          | 1,044,912 |       | $        | 748,107    |     | $          | 56,315   |       | $ | -0- |   | $ | -0- |   |
| Office Lease (2)             |       | 399,870   |       | 163,138  |       | 166,672   |       | 70,060   |       | -0-      |       | -0-      |       |
| Total                        |       | $         | 2,249,204  |     | $          | 1,208,050 |       | $        | 914,779    |     | $          | 126,375  |       | $ | -0- |   | $ | -0- |   |

 

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(1) At December 31, 2007, we were a party to employment agreements with DavidM. Daniels, Alex Soufflas, David A. Taylor and Patricia S.Bathurst.  On March 15, 2007, weterminated the employment of David A. Taylor. This table reflects the remainder of the payments to be made to Mr. Tayloras a result of our termination of his employment.  A summary of these employment agreements andarrangements is provided herein under *“Item 10.  Executive Compensation – Employment Contractsand Arrangeme**nts.”*

 

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(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.  Description of 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 31,2007, 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.

 

**Item7.  Financial Statements.**

 

Our audited consolidated financial statements at December 31,2007 and for each of the years ended December 31, 2007 and 2006,respectively, begin on page F-1 of this report located immediately afterthe signature page hereto.

 

**Item8.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item8A(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 the 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 and procedures.Our disclosure controls and procedures were designed to provide reasonableassurance that the controls and procedures would meet their objectives.

 

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As of December 31,2007, we carried out the evaluation of the effectiveness of our disclosurecontrols and procedures as defined by Rule 13a-15(e) under theExchange Act under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief FinancialOfficer.  Based upon that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that, as of December 31,2007, our disclosure controls and procedures were effective to providereasonable assurance that information we are required to disclose in reportsthat we file or submit under the Exchange Act is: (i) recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and (ii) accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosure.

 

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

 

Ourmanagement, under the supervision of our Chief Executive Officer and ChiefFinancial Officer, is responsible for establishing and maintaining adequateinternal control over financial reporting. Internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith GAAP.  Internal control over financial reporting includespolicies and procedures that:

 

(1)           pertain to the maintenance of recordsthat in reasonable detail accurately and fairly reflect the transactions anddispositions of our assets;

 

(2)           provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with GAAP, and that our receipts and expenditures arebeing made only in accordance with authorization of our management anddirectors; and

 

(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 

 

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control over financial reporting was not effectiveat December 31, 2007 due to the existence of material weaknesses in ourinternal controls.

 

Amaterial weakness is a control deficiency, or a combination of control deficiencies,that results in a more than remote likelihood that a material misstatement ofour annual or interim financial statements will not be prevented or detected ona timely basis.  Our management, inconsultation with independent registered public accounting firm, concluded that materialweaknesses existed in the following areas as of December 31, 2007:

 

(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 top 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 top management.  Thelack of independent directors on our board of directors constituted a materialweakness in our internal controls.

 

(2)           OurChief Executive Officer and sole member of our board of directors resides inthe state of Florida and visited our sole business office located in Horsham,Pennsylvania infrequently during 2007. Top management has the responsibility to monitor the quality of acompany’s internal controls.  This ismost often performed through the regular management and supervisory activitiesof the company’s day-to-day operations. The lack of monitoring by our Chief Executive Officer constituted amaterial weakness in the ability of top management to effectively monitor thequality of our internal controls.

 

We are actively seeking to remediate each of thesematerial weaknesses in the following manner:

 

(1)           Weare currently seeking additional, independent directors to join our board ofdirectors.  Our efforts to do so have been hindered substantially by thefact that we do not have a directors and officers insurance policy inplace.  Because such policies are very expensive, we believed it was inthe best interest of the company to forego the purchase of such a policy andinstead focus the use of our financial resources on the development and growthof the company.  The addition of such board members would provide us withindependent directors who would be monitoring the actions of our topmanagement.

 

(2)           OurChief Executive Officer is currently seeking to obtain a residence close inproximity to our Horsham, Pennsylvania business office.  This will enable him to engage in the regularmanagement and supervisory activities of the company’s day-to-day operationsand, accordingly, adequately monitor the quality of our internal controls.

 

Notwithstanding the existence of these materialweaknesses in internal controls, we believe that the consolidated financialstatements fairly present, in all material respects, our consolidated balancesheet as of December 31, 2007 and our consolidated statements ofoperations, stockholders’ equity and cash flows for the years ended December 31,2007 and 2006 in conformity with GAAP.

 

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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.

 

There hasbeen no change in our internal control over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Item 8B.  Other Information.**

 

The description set forth below is included herewithfor the purpose of providing the disclosure required under “Item 5.02 –Departure of Directors or Certain Officers; Election of Directors; Appointmentof Certain Officers; Compensatory Arrangements of Certain Officers” of Form 8-Kin connection with our issuance of options to David M. Daniels, Alex Soufflasand Patricia S. Bathurst on March 25, 2008.

 

On March 25, 2008, we granted an option to eachof David M. Daniels, Alex Soufflas and Patricia S. Bathurst to acquire 400,000shares of our common stock, respectively. The options are for a term of 10 years, have an exercise price of $0.28per share (the closing market price of our common stock on the OTC BulletinBoard on the date of grant), and vest in four equal annual installmentscommencing on March 25, 2009.  Inthe event the employment of the applicable executive officer is terminated forany reason other than for “cause,” as such term is defined in the applicableofficer’s option, the officer’s option may be exercised to the extentexercisable on the date of such termination of employment until the earlier ofthe date that is 90 days after the date of such termination of employment (oneyear in the case of termination due to retirement or disability) or theexpiration date of the option.   In theevent the employment of the applicable executive officer is terminated for “cause,”the option terminates immediately.

 

The foregoing descriptions of the options do notpurport to be complete and are qualified in their entirety by the terms of theoptions filed as Exhibits 10.33 through 10.35 to this report and incorporatedby reference herein.

 

**PART III**

 

**Item 9.****         ****Directors, Executive Officers,Promoters, Control Persons and Corporate Governance; Compliance With Section 16(a) ofthe Exchange Act.**

 

**Directors and Executive Officers**

 

Thefollowing chart sets forth certain information about each of our directors andexecutive officers.

 
| **Name**             | ** ** | **Age** | ** ** | **Positions Held**                                                    |
|----------------------|------------|---------|------------|----------------------------------------------------------------------------|
| David M. Daniels     |       | 50      |       | Chairman of the Board  of Directors, Chief Executive Officer and President |
| Alex Soufflas        |       | 33      |       | Chief Financial  Officer, Executive Vice President and Secretary           |
| Patricia S. Bathurst |       | 53      |       | Vice President –  Marketing                                           |

 

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The following is a briefsummary of the business experience of each of the above-named individuals:

 

*David M. Daniels*****has served as our Chief Executive Officer and a memberof our board of directors since February 2004, and has served as ourPresident since February 2005.  From1998 to February 2004, Mr. Daniels provided financing and managementconsulting services to several companies operating in the manufacturing,technology and services industries, including Market Pathways FinancialRelations, Inc., a financial consulting firm, from April 2000 until February 2004,The Research Works, Inc., an equity research firm, from April 2001until December 2003, and Xraymedia, Inc., an advertising agency, fromSeptember 2001 until February 2004. Mr. Daniels served as the Chief Financial Officer of North AmericanTechnologies Group, Inc., a research and development company, from 1994 to1995, and served as the President and Chief Operating Officer from 1995 to1998.  Mr. Daniels foundedIndustrial Pipe Fittings, Inc., a manufacturer of industrial fittings forthe high density polyethylene market, in 1994 and served as the Chairman,President and Chief Executive Officer until 1998.  Prior to 1994, Mr. Daniels served inseveral capacities with Morgan Stanley Dean Witter, achieving the position ofFirst Vice President of the company in 1986. Mr. Daniels is a graduate of the Georgia Military Academy and theUniversity of Houston, where he received a B.A. in finance.

 

*Alex Soufflas* has served as our Chief Financial Officer andSecretary since February 2006 and has served as our Executive VicePresident since August 2005.  Mr. Soufflasserved as our General Counsel 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. Prior to that, Mr. Soufflas specialized in general corporate law asan attorney at Spector Gadon & Rosen, P.C., a Philadelphia-based lawfirm, from April 2003 to May 2004, and at Sullivan &Worcester, LLP, a Boston-based law firm, from September 2000 to October 2002.  Mr. Soufflas received a B.S. inaccounting from Purdue University and a juris doctor from Boston College LawSchool.

 

*Patricia S. Bathurst* has served 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, advertisingand promotional 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 of Directors**

 

David M. Daniels, ourChief 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.

 

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**ShareholderCommunications**

 

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.

 

Audit Committee and AuditCommittee Financial Expert

 

Our board of directorshas not created a separately-designated standing audit committee or a committeeperforming 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-B 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**

 

Wehave adopted a Code of Business Conduct and Ethics that applies to ourprincipal executive officer, principal financial officer, principal accountingofficer or controller, and persons performing similar functions.  Our Code of Business Conduct and Ethics isdesigned to deter wrongdoing and promote: (i) honest and ethical conduct,including the ethical handling of actual or apparent conflicts of interestbetween personal and professional relationships; (ii) full, fair,accurate, timely and understandable disclosure in reports and documents that wefile with, or submit to, the SEC and in other public communications that wemake; (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.

 

Acopy of our Code of Business Conduct and Ethics is available on our corporatewebsite 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) 

 

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filing requirements were satisfied in a timely fashion during ourfiscal year ended December 31, 2007.

 

**Item10.  Executive Compensation.**

 

Thefollowing table provides certain summary information concerning compensationearned by the executive officers named below during the fiscal year ended December 31,2007.

 

***SummaryCompensation Table***

 
| **Name and  Principal Position**                                     | ** ** | **Year**   | ** ** | **Salary ($)** | ** ** | **Bonus ($)** | ** ** | **Stock  Awards  ($) (1)** | ** ** | **Option  Awards  ($) (1)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total ($)** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|---------------------|------------|--------------------|------------|---------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|--------------------|------------|
|                                                                           |       |       |       |                |       |               |       |                            |       |                             |       |                                  |       |               |       |
| David M. Daniels*President and Chief Executive Officer*                        |       | 2007  2006 |       | 385,152  338,202    |       | -0-  50,000        |       | 84,175  49,535                  |       | -0- 969,988                      |       | 6,051  -0-                            | (2)        | 475,378 1,407,725  |       |
| * *                                                                       |       |       |       |                |       |               |       |                            |       |                             |       |                                  |       |               |       |
| Alex Soufflas*Chief Financial Officer, Executive Vice President and Secretary* |       | 2007  2006 |       | 264,000  224,100    |       | -0-  30,000        |       | 39,963  33,023                  |       | 20,190 481,994                   |       | 9,240  -0-                            | (3)        | 333,393 769,117    |       |
| * *                                                                       |       |       |       |                |       |               |       |                            |       |                             |       |                                  |       |               |       |
| Patricia S. Bathurst*Vice President – Marketing*                          |       | 2007  2006 |       | 159,720  145,200    |       | -0-  10,000        |       | 29,972  24,767                  |       | 16,152 343,997                   |       | 4,193  -0-                            | (3)        | 210,037 514,964    |       |

 

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(1)  Asummary of the assumptions made in the valuation of these awards is providedunder *“Item 6. Management’s Discussion and Analysis – Critical Accounting Policies”*and *“Item 10. Executive Compensation – Employment Contracts and Arrangements”*and in our notes to consolidated financial statements beginning on page F-8of this report.

 

(2)  Consistsof monetary reimbursement made to Mr. Daniels for expenses incurred by Mr. Danielsfor items that were not related to our business and/or for which no receiptswere provided to us by Mr. Daniels.

 

(3) Consistsof matching contributions made by us on behalf of the applicable executiveofficer under the National Health Partners, Inc. 401(k) Plan.

 

**NarrativeDisclosure of Executive Compensation**

 

We area party to employment agreements with each of David M. Daniels, Alex Soufflasand Patricia M. Bathurst.  Under theseagreements, we are currently paying Messrs. Daniels and Soufflas and Ms. Bathurstan annualized base salary of $348,000, $290,400 and $159,720, respectively.

 

We have issued options to Messrs. Daniels andSoufflas and Ms. Bathurst to acquire 3,150,000, 2,050,000 and 1,850,000shares of our common stock, respectively. In addition, we have issued restricted stock awards to each of Messrs. Danielsand Soufflas and Ms. Bathurst with respect to 1,050,000, 300,000 and225,000 shares of our common stock, respectively.

 

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Asummary of the material terms of these employment agreements and the optionsand restricted stock awards granted to each of these individuals is providedbelow.

 

**Employment Contracts and Arrangements**

 

*David M.Daniels*

 

On May 13,2005, we entered into an employment agreement with David M. Daniels to serve asour Chief Executive 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 received an option to acquire2,500,000 shares of our common stock.

 

On March 28,2006 and 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.

 

*AlexSoufflas*

 

On March 29,2006, we entered into an employment agreement with Alex Soufflas to serve asour Chief 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.

 

*PatriciaS. Bathurst*

 

On May 13,2005, we entered into an employment agreement with Patricia S. Bathurst toserve as our Vice 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 each year of a minimum of 10% of the annual base salary for the immediatelypreceding year, 

 

60

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and is eligiblefor an annual bonus and incentive compensation awards in an amount and form tobe determined by our board of directors in its sole discretion.  Pursuant to the agreement, on May 13,2005, Ms. Bathurst received an option to acquire 1,000,000 shares of ourcommon stock.

 

On March 28,2006, we granted Ms. Bathurst a restricted stock award with respect to225,000 shares 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.

 

**TerminationProvisions of Employment Agreements**

 

Theemployment agreements with Mr. Daniels and Ms. Bathurst provide thatif we terminate the employment of the applicable executive officer without “cause”or the officer terminates his or her employment with us for “good reason,” assuch terms are defined in the agreements, the officer is immediately entitledto two years’ annual base salary, the full annual base salary to which theofficer would otherwise have been entitled during the remainder of the initialterm, and all other compensation and benefits to which the officer would havebeen entitled had the officer been employed by us for the remainder of theinitial term.  “Good reason” includes a “changein control,” which includes: (i) the acquisition by any person of 30% ormore of the combined voting power of our outstanding securities; (ii) achange in the majority of our board of directors that was not approved by atleast 50% of our board of directors; (iii) the completion of areorganization, merger or consolidation of us, or the sale or other dispositionof at least 80% of our assets; or (iv) approval by our stockholders of aliquidation or dissolution of us.

 

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.  “Good reason” includes a “changein control,” which includes: (i) the acquisition by any person of 50% ormore of the combined voting power of our outstanding securities; (ii) a changein the majority of our board of directors that was not approved by at least 50%of our board of directors; (iii) the completion of a reorganization,merger or consolidation of us, or the sale or other disposition of all orsubstantially all of our assets; or (iv) approval by our stockholders of aliquidation or dissolution of us.

 

**Terms of Options**

 

Theoptions that we granted to Mr. Daniels and Ms. Bathurst in 2005 arefor a term of 10 years, have an exercise price of $0.40 per share, and vest infour equal installments commencing May 13, 2005.  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 vests infull immediately and may be exercised at any time prior to the expiration dateof the option.  In the event we terminatethe employment of the applicable executive officer without “cause” or theofficer terminates his or 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 use our best efforts to prepare and file a registrationstatement with the SEC 

 

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within 180 days ofthe date of termination to register the public resale of the shares underlyingthe officer’s option.  In the event theemployment of the applicable executive officer is terminated for “cause,” theoption terminates immediately.  On December 12,2006, we accelerated the vesting schedule of the options so that they vested infull on that date.

 

Theoption that we granted to Mr. Soufflas in 2005 is for a term of 10 years,has an exercise price of $0.40 per share, and vests in four equal annualinstallments commencing on February 1, 2006.  In the event the employment of Mr. Soufflasis terminated for any reason other than for “cause,” as such term is defined inthe option, the option may be exercised to the extent exercisable on the dateof such termination of employment until the earlier of the date that is 90 daysafter the date of such termination of employment or the expiration date of theoption.  In the event the employment of Mr. Soufflasis terminated for “cause,” the option terminates immediately.  On December 12, 2006, we accelerated thevesting schedule of the option so that it vested in full on that date.

 

The options that we granted to Messrs. Danielsand Soufflas and Ms. Bathurst in 2006 are for a term of 10 years, have anexercise price of $0.88 per share, and were vested in full on the date ofgrant.  In the event the employment ofthe applicable executive officer is terminated for any reason other than for “cause,”as such term is defined in the applicable officer’s option, the officer’soption may be exercised to the extent exercisable on the date of suchtermination of employment until the earlier of the date that is 90 days afterthe date of such termination of employment (one year in the case of terminationdue to retirement or disability) or the expiration date of the option.   In the event the employment of theapplicable executive officer is terminated for “cause,” the option terminatesimmediately.

 

The options that we granted to Mr. Soufflas and Ms. Bathurstin 2007 are for a term of 10 years, have an exercise price of $0.50 per share,and vest in four equal annual installments commencing on September 4,2008.  In the event the employment of theapplicable executive officer is terminated for any reason other than for “cause,”as such term is defined in the applicable officer’s option, the officer’soption may be exercised to the extent exercisable on the date of suchtermination of employment until the earlier of the date that is 90 days afterthe date of such termination of employment (one year in the case of terminationdue to retirement or disability) or the expiration date of the option.   In the event the employment of theapplicable executive officer is terminated for “cause,” the option terminatesimmediately.

 

The options that we granted to Messrs. Daniels andSoufflas and Ms. Bathurst in 2008 are for a term of 10 years, have anexercise price of $0.28 per share, and vest in four equal annual installmentscommencing on March 25, 2009.  Inthe event the employment of the applicable executive officer is terminated forany reason other than for “cause,” as such term is defined in the applicableofficer’s option, the officer’s option may be exercised to the extentexercisable on the date of such termination of employment until the earlier ofthe date that is 90 days after the date of such termination of employment (oneyear in the case of termination due to retirement or disability) or 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**

** **

Therestricted stock awards that we granted to Messrs. Daniels and Soufflasand Ms. Bathurst in 2006 vest in three equal annual installmentscommencing on March 28, 2007.  Inthe event we terminate the employment of the applicable executive officerwithout “cause” or the officer terminates his or her employment with us for “goodreason,” as such terms are defined in such officer’s respective employmentagreement, the officer’s restricted stock award vests in full immediately.  “Good reason” includes a “change in control,”which includes: (i) the acquisition by any person of 50% or more of thecombined voting power of our outstanding securities; (ii) a change in themajority of our board of directors that was not approved by at least 50% of ourboard of directors; (iii) the completion of a reorganization, merger orconsolidation of us, or the sale or other disposition of all or substantiallyall of our assets; or (iv) approval by our stockholders of a liquidationor dissolution of us.  In the event theemployment of the applicable executive officer is terminated for “cause,” anyshares of common stock that have not vested as of the date of termination willbe forfeited to us and cancelled.

 

Therestricted stock award that we granted to Mr. Daniels in 2007 vests infour equal annual installments 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.  “Good reason”includes a “change in control,” which includes: (i) the acquisition by anyperson of 50% or more of the combined voting power of our outstanding securities;(ii) a change in the majority of our board of directors that was notapproved by at least 50% of our board of directors; (iii) the completionof a reorganization, merger or consolidation of us, or the sale or otherdisposition of all or substantially all of our assets; or (iv) approval byour stockholders of a liquidation or dissolution of us.  In the event the employment of Mr. Danielsis terminated for “cause,” any shares of common stock that have not vested asof the date of termination will be forfeited to us and cancelled.

 

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

 

OnJanuary 15, 2007, we adopted the National Health Partners, Inc. 401(k) Plan.  The purpose of this plan is to provide ouremployees with tax-advantaged retirement benefits to assist them in saving andaccumulating assets for retirement. Under the plan, eligible employees may elect to contribute up to 100% oftheir compensation to the plan each year, subject to certain 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 $26,928 to the plan during the year ended December 31, 2007.

 

**Director Compensation**

 

Wedo not provide any compensation to our employee directors and have not adopted a standard compensationpackage for non-employee directors serving as members of our board ofdirectors.  We did not have any non-employee directors on ourboard of directors during 2007 and, thus, did not pay any director compensationto any non-employee directors during 2007.

 

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

 

The followingtable sets forth, 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, 2007.

*** ***
| ** **            | ** ** | **Option Awards**                                                                 | ** ** | **Stock Awards**                                                                    | ** ** |
|-----------------------|------------|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| **Name**              | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of Shares  or Units of Stock  That Have Not   Vested (#)** | ** ** | **Market Value of Shares  or Units of Stock That  Have Not Vested ($) (4)** | ** ** |
| ** **            | ** ** | ** **                                                                             | ** ** | ** **                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| David M. Daniels      |       | 2,500,000 250,000                                                                      |       | -0-  -0-                                                                                 |       | .40  .88 |   | 5/12/15 12/11/16 |   | 300,000  600,000 | (2)  (3) | 78,000  156,000 |   |
|                  |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |
| Alex Soufflas         |       | 1,000,000 150,000  -0-                                                                 |       | -0-  -0-  500,000                                                                        | (1)   | .40  .88  .50 |   | 8/14/15 12/11/16 9/3/17 |   | 200,000   | (2) | 52,000 |   |
|                  |       |                                                                                   |       |                                                                                     |       |   |   |   |   |   |   |   |   |
| Patricia S.  Bathurst |       | 1,000,000 50,000  -0-                                                                  |       | -0-  -0-  400,000                                                                        | (1)   | .40  .88  .50 |   | 5/12/15 12/11/16 9/3/17 |   | 150,000   | (2) | 39,000 |   |

 

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(1)  Theseoptions vest in four equal annual installments commencing on September 4, 2008.

 

(2)  Theserestricted stock awards vest in three equal annual installments commencing on March 28,2007.

 

(3) This restrictedstock award vests in four equal annual installments commencing on September 4,2008.

 

(4)  The market value of these shares was calculated based on$0.26, the closing market price for our shares of common stock on the OTCBulletin Board on December 31, 2007.

 

**Item11.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

The following table setsforth, as of March 24, 2008, information with respect to the securitiesholdings of all persons that we have reason to believe, pursuant to filingswith 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 beneficial owners andamount of securities beneficially owned have been determined in accordance withRule 13d-3 under the Exchange Act and, in accordance therewith, includesall shares of our common stock that may be acquired by such beneficial ownerswithin 60 days of March 24, 2008 upon the exercise or conversion of anyoptions, 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 thematters set forth in the footnotes to the table below, and has an address of120 Gibraltar Road, Suite 107, Horsham, Pennsylvania 19044.

 
| **Name and Address of Beneficial Owner** | ** ** | **Amount and Nature  of Beneficial  Ownership (1)** | ** ** | **Percentage  of Class (1)** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                        | ** ** | ** **                                                              | ** ** | ** **                             | ** ** |
| David M. Daniels                                                  |       | 4,798,050                                                               | (2)        | 10.6                                   | %          |
|                                                              |       |                                                                    |       |                                   |       |
| Patricia S.  Bathurst                                             |       | 1,382,600                                                               | (3)        | 3.2                                    | %          |
|                                                              |       |                                                                    |       |                                   |       |
| Alex Soufflas                                                     |       | 1,450,000                                                               | (4)        | 3.4                                    | %          |
|                                                              |       |                                                                    |       |                                   |       |
| Pierre Besuchet                                                   |       | 4,700,000                                                               | (5)        | 10.5                                   | %          |
|                                                              |       |                                                                    |       |                                   |       |
| Ronald F.  Westman                                                |       | 3,453,000                                                               | (6)        | 7.9                                    | %          |
|                                                              |       |                                                                    |       |                                   |       |
| Giese Realty  Investment, Inc.                               |       | 3,000,000                                                               | (7)        | 7.0                                    | %          |
|                                                              |       |                                                                    |       |                                   |       |
| All officers and  directors as a group (3 persons)                |       | 7,630,650                                                               | (8)        | 15.9                                   | %          |

 

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*    Less than 1%.

 

(1)  This table has been prepared based on 41,689,856shares of our common stock outstanding on March 24, 2008.

 

(2)  Includes 2,500,000 shares issuableupon the exercise of options that have an exercise price of $0.40 per share,250,000 shares issuable upon the exercise of options that have an exerciseprice of $0.88 per share and 900,000 shares underlying restricted stock awards.

 

(3)  Includes 1,000,000 shares issuable upon the exerciseof options that have an exercise price of $0.40 per share, 50,000 sharesissuable upon the exercise of options that have an exercise price of $0.88 pershare and 150,000 shares underlying restricted stock awards.

 

(4)  Includes 1,000,000 shares issuable upon the exerciseof options that have an exercise price of $0.40 per share, 150,000 sharesissuable upon the exercise of options that have an exercise price of $0.88 pershare and 200,000 shares underlying restricted stock awards.

 

(5)  Includes 1,000,000 shares issuable upon the exerciseof warrants that have an exercise price of $.80 per share, 1,000,000 sharesissuable upon the exercise of warrants that have an exercise price of $.30 pershare and 1,000,000 shares issuable upon the exercise of warrants that have anexercise price of $.40 per share.

 

(6)  Includes 100,000 shares issuable upon the exerciseof options that have an exercise price of $0.40 per share and 1,860,000 sharesissuable upon the exercise of warrants that have an exercise price of $0.80 pershare.

 

(7)  Includes 1,000,000 shares issuable upon the exerciseof warrants that have an exercise price of $.40 per share.

 

(8)  Includes 4,500,000 shares issuable upon the exerciseof options that have an exercise price of $0.40 per share, 450,000 sharesissuable upon the exercise of options that have an exercise price of $0.88 pershare and 1,250,000 shares underlying restricted stock awards.

 

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***EquityCompensation Plan Information***

 

The following table sets forth information regardingthe number of options, warrants, rights and similar securities that wereoutstanding at December 31, 2007 under equity compensation plans that havenot been approved by our security holders. None of our securities were outstanding at December 31, 2007 underplans 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: |       |                                                                                                                                          |       |                                                                                                       |       |                                                                                                                                                                                                      |       |
|                                                         |       |                                                                                                                                          |       |                                                                                                       |       |                                                                                                                                                                                                      |       |
| 2006 Stock  Incentive Plan                                   |       | 360,000                                                                                                                                       |       | $                                                                                                          | 0.60       |                                                                                                                                                                                                      | 33,425     | (1) |
|                                                         |       |                                                                                                                                          |       |                                                                                                       |       |                                                                                                                                                                                                      |       |
| Options issued  to directors and employees                   |       | 7,660,000                                                                                                                                     |       | $                                                                                                          | 0.45       |                                                                                                                                                                                                      | -0-        |   |
|                                                         |       |                                                                                                                                          |       |                                                                                                       |       |                                                                                                                                                                                                      |       |
| Warrants issued  to consultants and advisors                 |       | 985,250                                                                                                                                       |       | $                                                                                                          | 0.40       |                                                                                                                                                                                                      | -0-        |   |
|                                                         |       |                                                                                                                                          |       |                                                                                                       |       |                                                                                                                                                                                                      |       |
| Total                                                        |       | 9,005,250                                                                                                                                     |       | $                                                                                                          | 0.45       |                                                                                                                                                                                                      | -0-        |   |

** **

----

**(1) **Under theterms of the 2006 Stock Incentive Plan, these shares of common stock may beawarded in the form of options, warrants, stock appreciation rights, restrictedstock, restricted stock units, unrestricted stock, and other equity-based orequity-related awards.

** **

**2006** Stock Incentive Plan

** **

On February 2, 2006, our board of directorsadopted the National Health Partners, Inc. 2006 Stock Incentive Plan.  Awards may be made under the plan for up to4,500,000 shares of our common stock in the form of options, warrants, stockappreciation rights, restricted stock, restricted stock units, unrestrictedstock, and other equity-based or equity-related awards.   Awards may be made to our employees,officers or directors as well as our consultants or advisors.  The plan is administered by our board ofdirectors which has full and final authority to interpret the plan, select thepersons to whom awards may be granted, and determine the amount, vesting andall other terms of any awards.  To theextent permitted by applicable law, our board of directors may delegate any orall of its powers under the plan to one or more committees or 

 

66

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subcommittees of the board.  Theplan is not subject to the provisions of the Employee Retirement IncomeSecurity Act of 1974, as amended, and is not a “qualified plan” under Section 401(a) ofthe Internal Revenue Code of 1986, as amended. The plan has not been approved by our shareholders.  As a result, “incentive stock options” asdefined under Section 422 of the Internal Revenue Code may not be grantedunder the plan until such approval is received for the plan.  The plan terminates on February 1, 2016.

 

Unless otherwise determined by the Board, awards maynot be transferred except by will or the laws of descent and distribution andterminate 90 days after termination of employment with us, whether voluntarilyby either party or by disability, or death or retirement.  In the event that termination of employmentor association is for “cause,” as that term is defined in the plan, awardsterminate immediately upon such termination. The plan provides for the immediate vesting or awards or the assumptionof awards in the event of certain “change in control” and “reorganizationevents,” which are defined generally under the plan to include the acquisitionby any person of 30% or more of the combined voting power of our outstandingsecurities, a change in the majority of our board of directors that was notapproved by at least a majority of our board of directors, the completion of areorganization, merger, share exchange or consolidation of us, the sale orother disposition of all or substantially all of our assets, or our liquidationor dissolution.

 

As of March 24, 2008, we have issued awards underthe plan with respect to 4,466,575 shares of our common stock.

 

**Options Issued toEmployees**

** **

**A description of the optionsissued to our directors and employees that were outstanding at December 31,2007 is set forth in Note 9 to our audited consolidated financial statementsbeginning on page F-1 of this report.**

** **

**Warrants Issued toConsultants and Advisors**

** **

**A description of the warrants issued to**certain of our consultants and advisors that wereoutstanding at December 31, 2007 is set forth in Note 8 to our auditedconsolidated financial statements beginning on page F-1 of this report.

 

67

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**Item 12.  Certain Relationships and RelatedTransactions, and Director Independence.**

 

**CertainRelationships and Related Transactions**

 

In June 2005, weentered into a lease for additional office space in the Centerpointe OfficeBuilding located at 2033 Main Street, Suite 501, Sarasota, Florida34237.   The lease is for approximately4,000 square feet of space for a monthly rent payment of approximately $7,500,commenced on July 1, 2005 and expires on July 1, 2010.  Centerpointe Office Building is owned byCenterpointe Property, LLC.  Ronald F.Westman owns all of the outstanding membership interests in CenterpointeProperty, LLC jointly with his wife, beneficially owns approximately 7.9% ofour common stock, and served as a member of our board of directors from June 29,2005 to September 26, 2005.  Therent per square foot that we pay for this office space is the same price persquare foot that the other tenants in the building pay for office space in thisbuilding.

 

On February 8, 2006, Roger H. Folts resigned asour Chief Financial Officer and Secretary. Concurrently therewith, we entered into a termination and mutual releasewith Mr. Folts effective February 1, 2006 pursuant to which hisemployment agreement was terminated effective February 1, 2006, andwe and Mr. Folts agreed to release each other from any and all claims thatthey may now hold or may in the future hold arising out of the employmentagreement or Mr. Folts’ employment with or separation from us.  We also entered into a consulting agreementwith Mr. Folts on February 8, 2006 pursuant to which Mr. Foltsagreed to provide accounting and related services to us on a full-time basisuntil June 30, 2006 and thereafter on a part-time basis until February 1,2009, and in exchange for which we agreed to issue him 300,000 shares of ourcommon stock and continue paying him the salary he was receiving under hisemployment agreement until March 31, 2006.

 

On April 1, 2006, we terminated the lease for our facility inSarasota, Florida.  Under the terminationand release agreement: (i) the Commercial Office Lease dated June 13,2005 between us and Centerpointe Property, LLC was terminated effective April 1,2006; (ii) we issued 10,000 shares of our common stock to CenterpointeProperty, LLC in full payment of all rent and other expenses that were due andpayable under the lease on April 1, 2006; and (iii) both partiesagreed to release each other from any and all claims that they may now hold ormay in the future hold arising out of the lease.  We did not incur any material earlytermination penalties in connection with the termination of the lease.  Ronald F. Westman owns all of the outstandingmembership interests in Centerpointe Property, LLC jointly with his wife,beneficially owns approximately 7.9% of our common stock, and served as amember of our board of directors from June 29, 2005 to September 26,2005.

 

We have entered into employment agreements with eachof David M. Daniels, Alex Soufflas and Patricia S. Bathurst and have issuedoptions and restricted stock awards to each of them.  A description of the employment agreements,options and restricted stock 

 

68

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awards is set forthunder *“Item 10. Executive Compensation — Employment Contracts and Arrangements”*of this report.

 

**Director Independence**

 

David M. Daniels, ourPresident and Chief Executive Officer, is the sole member of our board ofdirectors.  Mr. Daniels will serve untilthe next annual meeting of shareholders or until his successor is duly electedand qualified.  Pursuant to Item407(a)(1)(ii) of Regulation S-B 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 13.  Exhibits**

 

The followingexhibits 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)                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                       |
| 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)                                                                                                                             |

 

69

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| 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)                                |
|        |   |                                                                                                                                                                                                                                     |
| 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)    |

 

70

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| 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)                        |
|   |   |                                                                                                                                                                                                                                                                                  |
| 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) |

 

71

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| 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                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                             |
| 10.34  |   | Option to Acquire  Shares of Common Stock, dated March 25, 2008, issued by the Company to  Alex Soufflas                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                             |
| 10.35  |   | Option to Acquire  Shares of Common Stock, dated March 25, 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.

 

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

 

The following table presents fees for professionalaudit services performed by HJ & Associates, LLC for the audit of ourannual financial statements for our fiscal years ended 

 

72

----

 

December 31, 2007 and 2006, and fees billed for other services renderedby HJ & Associates during such years.

 
| ** **           | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |
| Audit Fees:          |       | $        | 60,000     |     | $          | 34,022 |   |
|                 |       |     |       |     |       |
| Audit-Related  Fees: |       | 2,914    |       | 2,277    |       |
|                 |       |     |       |     |       |
| Tax Fees:            |       | 1,519    |       | 1,175    |       |
|                 |       |     |       |     |       |
| All Other Fees:      |       | —   |       | —   |       |
|                 |       |     |       |     |       |
| Total:               |       | $        | 64,433     |     | $          | 37,474 |   |

 

*AuditFees* consist of fees billed for professionalservices rendered by our principal accountant for the audit of our annualconsolidated financial statements and review of our interim consolidatedfinancial statements included in our quarterly reports and services that arenormally provided by our principalaccountant in connection withstatutory and regulatory filings or engagements.

 

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

 

*TaxFees* consists of fees billed for professionalservices rendered by our principal accountant for tax compliance, tax adviceand tax planning.  These services includeassistance regarding federal and state tax compliance and filings.

 

*AllOther Fees* consist of fees billedfor products and services provided by our principal accountant, other thanthose 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 chairman reportsany 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 2006 and2007, all audit and non-audit services performed by our independent accountantswere pre-approved by our board of directors in accordance with the foregoingprocedures.

 

73

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**SIGNATURES**

 

In accordance with Section 13or 15(d) of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
|                      |   | **NATIONAL HEALTH PARTNERS, INC.** |
|---------------------------|--------|------------------------------------|
|                      |   |                               |
|                      |   |                               |
| Date: March 31, 2008 |   | By:                                | /s/   David M. Daniels |
|                      |   |                               | David M. Daniels |
|                      |   |                               | Chief Executive Officer |

 

In accordance with theExchange Act, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| **Signature**                   | ** ** | **Title**                                                                             | ** ** | **Date**            |
|---------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------|
|                            |       |                                                                                  |       |                |
| /s/  David M. Daniels |       | Chief Executive Officer,                                                              |       | March 31, 2008 |
| David M. Daniels                |       | President and Chairman of the  Board (Principal Executive  Officer)                   |       |                |
|                            |       |                                                                                  |       |                |
| /s/  Alex Soufflas    |       | Chief Financial Officer,                                                              |       | March 31, 2008 |
| Alex Soufflas                   |       | Executive Vice President and  Secretary (Principal Financial  and Accounting Officer) |       |                |

 

74

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

**CONSOLIDATED FINANCIAL STATEMENTS**

 

Table of Contents

 
| Report  of Independent Registered Public Accounting Firm                                                             | F-2    |
|----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                 |   |
| Consolidated  Balance Sheet at December 31, 2007                                                                | F-3    |
|                                                                                                                 |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2007 and 2006                           | F-4    |
|                                                                                                                 |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31,  2007 and 2006 | F-5    |
|                                                                                                                 |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2007and 2006                            | F-6    |
|                                                                                                                 |   |
| Notes to Consolidated Financial Statements –  December 31, 2007 and 2006                                   | F-8    |

 

F-1

----

 

**Report ofIndependent Registered Public Accounting Firm**

 

Tothe Board of Directors of

NationalHealth Partners, Inc. and Subsidiaries

Horsham,Pennsylvania

 

Wehave audited the accompanying consolidated balance sheet of National HealthPartners, Inc. and Subsidiaries, as of December 31, 2007, and therelated statements of operations, stockholders’ equity (deficit) and cash flowsfor the years ended December 31, 2007 and 2006. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements 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, 2007 and 2006, andthe results of its operations and its cash flows for the years then ended, inconformity with U.S. generally accepted 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, 2007 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 24,2008

 

F-2

----

 

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

Consolidated Balance Sheet

 
| ** **                                                                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                               | ** ** | **2007**              | ** ** |
|                                                                                                     |       |                  |       |
| **Assets**                                                                                               | ** ** | ** **            | ** ** |
|                                                                                                     |       |                  |       |
| Current assets:                                                                                          |       |                  |       |
| Cash                                                                                                     |       | $                     | 32,206     |   |
| Accounts receivable, net                                                                                 |       | 21,257                |       |
| Prepaid expense                                                                                          |       | 182,228               |       |
| Deposits                                                                                                 |       | 295,389               |       |
| Other current assets                                                                                     |       | 4,500                 |       |
|                                                                                                     |       |                  |       |
| Total current assets                                                                                     |       | 535,580               |       |
|                                                                                                     |       |                  |       |
| Property and equipment, net                                                                              |       | 69,550                |       |
| Prepaid expense                                                                                          |       | 117,702               |       |
|                                                                                                     |       |                  |       |
| Total assets                                                                                             |       | $                     | 722,832    |   |
|                                                                                                     |       |                  |       |
| **Liabilities and stockholders’ equity**                                                            | ** ** | ** **            | ** ** |
|                                                                                                     |       |                  |       |
| Current liabilities                                                                                      |       |                  |       |
| Accounts payable                                                                                         |       | $                     | 262,355    |   |
| Accrued expenses                                                                                         |       | 39,984                |       |
| Deferred revenue                                                                                         |       | 17,338                |       |
|                                                                                                     |       |                  |       |
| Total current liabilities                                                                                |       | 319,677               |       |
|                                                                                                     |       |                  |       |
| Total liabilities                                                                                        |       | 319,677               |       |
|                                                                                                     |       |                  |       |
| Commitments and contingencies                                                                            |       |                  |       |
|                                                                                                     |       |                  |       |
| Stockholders’ equity:                                                                               |       |                  |       |
| Common stock, $0.001 par value, 100,000,000  shares authorized, 39,419,856 shares issued and outstanding |       | 39,420                |       |
| Additional paid-in capital                                                                               |       | 22,174,891            |       |
| Deferred compensation                                                                                    |       | (410,524              | )          |
| Accumulated deficit                                                                                      |       | (21,400,632           | )          |
|                                                                                                     |       |                  |       |
| Total stockholders’ equity                                                                          |       | 403,155               |       |
|                                                                                                     |       |                  |       |
| Total liabilities and stockholders’ equity                                                          |       | $                     | 722,832    |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

 

F-3

----

 

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

Consolidated Statements of Operations

 
| ** **                               | ** ** | **For the Twelve Months Ended** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **December 31,**           | ** ** |
| ** **                               | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                     |       |                            |       |   |   |
| Net revenue                              |       | $                               | 3,724,204  |   | $ | 1,870,612 |   |
|                                     |       |                            |       |   |   |
| Direct costs                             |       | 2,742,129                       |       | 1,437,805 |   |
|                                     |       |                            |       |   |   |
| Gross profit                             |       | 982,075                         |       | 432,807 |   |
|                                     |       |                            |       |   |   |
| Operating  expenses:                     |       |                            |       |   |   |
| Selling and marketing                    |       | 225,016                         |       | 3,039,448 |   |
| General and administrative               |       | 4,304,461                       |       | 7,437,608 |   |
|                                     |       |                            |       |   |   |
| Total  operating expenses                |       | 4,529,477                       |       | 10,477,056 |   |
|                                     |       |                            |       |   |   |
| Loss from  operations                    |       | (3,547,402                      | )          | (10,044,249 | ) |
|                                     |       |                            |       |   |   |
| Other income  (expense):                 |       |                            |       |   |   |
| Interest income                          |       | 15,432                          |       | 55,019 |   |
| Interest expense                         |       | —                          |       | (12,130 | ) |
| Gain on extinguishment of debt           |       | —                          |       | 35,932 |   |
|                                     |       |                            |       |   |   |
| Total other  income                      |       | 15,432                          |       | 78,821 |   |
|                                     |       |                            |       |   |   |
| Net loss                                 |       | $                               | (3,531,970 | ) | $ | (9,965,428 | ) |
| ** **                               | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Loss per  share — basic and diluted |       | $                               | (0.10      | ) | $ | (0.39 | ) |
|                                     |       |                            |       |   |   |
| Weighted  average number of shares       |       |                            |       |   |   |
| outstanding — basic and diluted     |       | 34,066,929                      |       | 25,487,248 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F-4

----

 

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

Consolidated Statements of Stockholders’ Equity (Deficit)

 
| ** **                                      | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **       | ** ** | ** **             | ** ** | **Total**            | ** ** |
|-------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Deferred**   | ** ** | **Accumulated**  | ** ** | **Stockholders’** | ** ** |
| ** **                                      | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**            | ** ** | **Equity (Deficit)** | ** ** |
|                                            |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| **Balance at December   31, 2005**         |       | 17,054,200       |       | 17,054      |       | 7,717,866      |       | —           |       | (7,903,234             | )          | (168,314             | )          |
|                                            |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock issued for services                |       | 4,941,575        |       | 4,942       |       | 2,272,358      |       | (391,396         | )          | —                 |       | 1,885,904            |       |
|                                            |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Warrants issued for services                    |       | —           |       | —      |       | 581,400        |       | —           |       | —                 |       | 581,400              |       |
|                                            |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock issued upon exercise of warrants   |       | 6,855,397        |       | 6,855       |       | 4,742,858      |       | —           |       | —                 |       | 4,749,713            |       |
|                                            |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Options issued for services                     |       | —           |       | —      |       | 2,525,855      |       | —           |       | —                 |       | 2,525,855            |       |
|                                            |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock and warrants issued for cash       |       | 3,797,934        |       | 3,798       |       | 2,200,362      |       | —           |       | —                 |       | 2,204,160            |       |
|                                            |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Common stock issued for extinguishment of  debt |       | 10,000           |       | 10          |       | 4,990          |       | —           |       | —                 |       | 5,000                |       |
|                                            |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| Net loss                                        |       | —           |       | —      |       | —         |       | —           |       | (9,965,428             | )          | (9,965,428           | )          |
|                                            |       |             |       |        |       |           |       |             |       |                   |       |                 |       |
| **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     |           | $          | 22,174,892       |       | $                      | (410,524   | )                    | $          | (21,400,632 | ) | $ | 403,155 |   |
|                                                 |            |                  |            |             |            |                |            |                  |            |                        |            |                      |            |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

F-5

----

 

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

Consolidated Statements of Cash Flows

 
| ** **                                                                   | ** ** | **For the Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**           | ** ** |
| ** **                                                                   | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                                                         |       |                            |       |   |   |
| **Cash flows from operating activities**                                     | ** ** | ** **                      | ** ** | ** ** | ** ** |
|                                                                         |       |                            |       |   |   |
| Net loss                                                                     |       | $                               | (3,531,970 | ) | $ | (9,965,428 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |       |                            |       |   |   |
| Common stock issued for services and amortization  of prepaid services       |       | 671,049                         |       | 1,584,414 |   |
| Warrants issued for services                                                 |       | 88,214                          |       | 486,948 |   |
| Options issued for services                                                  |       | 91,645                          |       | 2,525,855 |   |
| Depreciation                                                                 |       | 75,271                          |       | 65,919 |   |
| Changes in operating assets and  liabilities:                                |       |                            |       |   |   |
| Increase in accounts receivable                                              |       | (21,257                         | )          | — |   |
| Increase in prepaid expenses                                                 |       | 5,000                           |       | — |   |
| Increase in deposits                                                         |       | (275,772                        | )          | (617 | ) |
| Increase in other current assets                                             |       | (4,500                          | )          | 3,978 |   |
| Increase in accounts payable and                                             |       |                            |       |   |   |
| accrued expenses                                                             |       | 171,611                         |       | (12,855 | ) |
| Decrease in accounts payable — related  party                           |       | —                          |       | (16,373 | ) |
| Increase (decrease) in deferred revenue                                      |       | (193,254                        | )          | 141,951 |   |
| Decrease in deferred compensation                                            |       | —                          |       | (29,000 | ) |
|                                                                         |       |                            |       |   |   |
| Net cash used by operating activities                                        |       | (2,923,963                      | )          | (5,215,208 | ) |
|                                                                         |       |                            |       |   |   |
| **Cash flows from investing activities**                                     | ** ** | ** **                      | ** ** | ** ** | ** ** |
| ** **                                                                   | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Decrease in certificates of deposit                                          |       | —                          |       | 35,717 |   |
| Increase in property and equipment                                           |       | —                          |       | (83,478 | ) |
|                                                                         |       |                            |       |   |   |
| Net cash used by investing activities                                        |       | —                          |       | (47,761 | ) |
|                                                                         |       |                            |       |   |   |
| **Cash flows from financing activities**                                     | ** ** | ** **                      | ** ** | ** ** | ** ** |
|                                                                         |       |                            |       |   |   |
| Proceeds from sale of common stock                                           |       | 1,289,200                       |       | 2,204,160 |   |
| Proceeds from exercise of warrants                                           |       | 70,000                          |       | 4,749,713 |   |
| Payments on notes payable                                                    |       | —                          |       | (203,742 | ) |
|                                                                         |       |                            |       |   |   |
| Net cash provided by financing activities                                    |       | 1,359,200                       |       | 6,750,131 |   |
|                                                                         |       |                            |       |   |   |
| Net increase (decrease) in cash                                              |       | (1,564,763                      | )          | 1,487,162 |   |
| Cash at beginning of year                                                    |       | 1,596,969                       |       | 109,807 |   |
|                                                                         |       |                            |       |   |   |
| Cash at end of period                                                        |       | $                               | 32,206     |   | $ | 1,596,969 |   |

 

The accompanying notes are an integral partof these consolidated financial statements

 

F-6

----

 

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

Consolidated Statements of Cash Flows(Continued)

 
| ** **                                            | ** ** | **For the Twelve Months Ended** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **December 31,**           | ** ** |
| ** **                                            | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                                  |       |                            |       |   |   |
| **Supplemental  disclosure of cash flow information** | ** ** | ** **                      | ** ** | ** ** | ** ** |
|                                                  |       |                            |       |   |   |
| Cash paid for taxes                                   |       | $                               | —     |   | $ | — |   |
| Cash received (paid) for interest                     |       | $                               | 15,432     |   | $ | 42,889 |   |
|                                                  |       |                            |       |   |   |
| **Schedule  of non-cash financing activities**        | ** ** | ** **                      | ** ** | ** ** | ** ** |
|                                                  |       |                            |       |   |   |
| Common stock issued for services                      |       | $                               | 727,800    |   | $ | 2,277,300 |   |
| Warrants issued for services                          |       | $                               | —     |   | $ | 581,400 |   |
| Stock options issued for services                     |       | $                               | 755,161    |   | $ | 2,525,855 |   |
| Common stock issued for stock offering  costs         |       | $                               | 174,100    |   | $ | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements

 

F-7

----

 

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

Notes to Consolidated Financial Statements

December 31, 2007 and 2006

 

**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.  The Company markets its programs through adirect sales force, brokers and agents, unions and associations, chambers ofcommerce, 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 businessactivities, including selling the products or services of the Company’scompetitors.  The Company’s agreementswith these organizations are generally for a term of one year and renewautomatically for additional one-year terms unless written notice oftermination is delivered by either party to the other at least 30 days prior tothe then-current term.

 

TheCompany contracts with preferred provider organizations (“PPOs”) and otherprovider networks for access to the discounted rates they have negotiated withtheir healthcare providers.  Theprincipal suppliers of the healthcare providers that comprise CARExpress areCareMark, Aetna, Optum, Integrated Health, Three Rivers and HealthFi.  The Company selects and utilizes only thoseprovider networks that it believes can deliver adequate savings to its memberswhile providing adequate support for its membership programs with thehealthcare providers.  The Companytypically pays a per member per month fee for use of the provider networks thatis determined in part based on the number of providers participating in thenetwork, 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 preparationof the financial statements.

 

F-8

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

** **

**Note2.  Significant Accounting Policies(Continued)**

 

**Basis of Presentation**

 

The Company’s financial statements areprepared 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 incurred significantlosses, which raises substantial doubt about the Company’s ability to continueas a going concern.  The accompanyingfinancial statements do not include any adjustments relating to therecoverability and classification of asset carrying amounts or the amount andclassification 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 2006 financial statements have been reclassified to conform tothe 2007 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 sells health discount membershipprograms in return for monthly membership fees. The date a monthly membershipbegins varies for each individual member depending upon when the particularmember purchased the membership.  TheCompany recognizes the membership fees as revenue when persuasive evidence ofan arrangement exists, delivery or performance has occurred, the sales price isfixed and determinable, and collectibility is reasonably assured.  The fees are recognized as revenue on astraight-line basis over the longer of the initial contractual term or theexpected period during which the services will be performed if the relationshipwith the member is expected to extend beyond the initial contractual term andthe member continues to benefit from the payment of the fees.

 

F-9

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note2.  Significant Accounting Policies(Continued)**

 

**Revenue Recognition (Continued)**

 

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 $17,338 at December 31, 2007.

 

TheCompany offers a free trial to some of its members.  The Company does not recognize any membershiprevenue during the free-trial period.  Inthe event the member continues the membership after the free-trial periodexpires, the member pays the monthly membership fee and the Company recognizesrevenue as services are rendered.

 

TheCompany typically offers a 30-day money-back guarantee to its members.  Members can cancel their membership duringthe first 30 days of their initial membership period and receive a full refund.  After that, members can cancel theirmembership 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.  TheCompany had sales refunds of $873,019 and $432,547 that were netted againstsales for the years ended December 31, 2007 and 2006, respectively.

 

**DirectCosts**

 

TheCompany’s direct costs consist of sales commissions and fees paid to PPOs andprovider networks.  The Company incurredsales commission expense of $2,177,066 and $1,143,677 and network providercosts of $565,063 and $294,127 for the years ended December 31, 2007 and2006, respectively.

 

**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.

 

F-10

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note2.  Significant Accounting Policies(Continued)**

 

**Stock-BasedCompensation Expense**

 

TheCompany accounts for employee stock-based compensation using the fair valuerecognition provisions of Financial Statement of Financial Accounting StandardsNo. 123 (revised 2004), *“Share-Based Payment”*(“SFAS 123R”) using the modified prospective transition method.  Under this method, compensation expenseincludes: (a) compensation expense for all stock-based payments granted,but not yet vested, as of January 1, 2006 based on the grant-date fairvalue estimated in accordance with the original provisions of 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 Statement of Financial AccountingStandards No. 123, *“Accounting ForStock-Based Compensation”*(“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.

 

TheCompany used its stock price history to determine volatility.  The Company’s shares of common stock begantrading on the OTC Bulletin Board on March 30, 2006.  The Company cannot predict how the price ofits shares of common stock will continue to trade on the OTC BulletinBoard.  As a result, the volatility valuethat the Company calculated may differ from the future volatility of the priceof its shares of common stock.

 

The Company recognized $850,908 and$4,597,217 of stock compensation expense during the years ended December 31,2007 and 2006, respectively.

 

F-11

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note2.  Significant Accounting Policies(Continued)**

 

**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 31,2007 and 2006, respectively:

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Deferred tax assets:              |       |                  |       |   |   |
| Net operating loss  carryforwards |       | $                     | 4,760,300  |   | $ | 3,424,400 |   |
|                              |       |                  |       |   |   |
| Deferred tax liabilities:         |       |                  |       |   |   |
| Depreciation                      |       | (2,400                | )          | (13,990 | ) |
|                              |       |                  |       |   |   |
| Valuation allowance               |       | (4,757,900            | )          | (3,410,410 | ) |
|                              |       |                  |       |   |   |
| Net deferred tax asset            |       | $                     | —     |   | $ | — |   |

 

At December 31,2007, the Company had net operating loss carry-forwards of approximately$12,221,000 that may be offset against future taxable income from the years2008 through 2028. No tax benefit has been reported in the December 31,2007 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.

 

F-12

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note2.  Significant Accounting Policies(Continued)**

 

**IncomeTaxes (Continued)**

 

In calculating the amountof pretax income from continuing operations for the years ended December 31,2007 and 2006, 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,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                    |       |                  |       |   |   |
| Book Income             |       | $                     | (1,377,535 | ) | $ | (3,885,880 | ) |
| Meals and entertainment |       | 4,470                 |       | 1,395 |   |
| Depreciation            |       | 12,770                |       | (7,235 | ) |
| Stock compensation      |       | 331,850               |       | 2,099,980 |   |
| Other                   |       | —                |       | (280 | ) |
| Valuation allowance     |       | 1,028,445             |       | 1,792,020 |   |
|                    |       |                  |       |   |   |
|                    |       | $                     | —     |   | $ | — |   |

 

**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.  An aggregate of 22,198,092 and 20,732,686shares of common stock underlying options and warrants that were outstanding onDecember 31, 2007 and 2006, respectively, have been excluded from thecomputation of diluted earnings per share because they are anti-dilutive.  As a result, basic loss per share was equalto diluted loss per share for each year.

 

F-13

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note2.  Significant Accounting Policies(Continued)**

 

**LossPer Share (Continued)**

 
| ** **                                                             | ** ** | **For the Years  Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                                  | ** ** | **2006** | ** ** |
|                                                                   |       |                                                      |       |   |   |
| Net loss as reported                                                   |       | $                                                         | (3,531,970 | ) | $ | (9,965,428 | ) |
|                                                                   |       |                                                      |       |   |   |   |   |
| Weighted average number of shares outstanding – basic and diluted |       | 34,066,929                                                |       | 25,487,248 |   |
|                                                                   |       |                                                      |       |   |   |
| Loss per share – basic and diluted                                |       | $                                                         | (0.10      | ) | $ | (0.39 | ) |

 

**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.

 

F-14

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note2.  Significant Accounting Policies(Continued)**

 

**Property and Equipment**

 

Property and equipmentare stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are calculatedusing the straight-line basis over the 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 |   |

 

Thecost of major improvements to the Company’s property and equipment arecapitalized. The cost of maintenance and repairs that do not improve or extendthe 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.

 

TheCompany reviews property and equipment for impairment whenever events orchanges in circumstances indicate that the carrying amount of assets may not berecoverable.  Recoverability is measuredby comparison of the carrying amount of the assets to the future undiscountednet 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**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 157 – *“Fair Value Measurements”* (“SFAS157”).  This standard establishes aframework for measuring fair value and expands disclosures about fair valuemeasurement of a company’s assets and liabilities.  This standard also requires that the fairvalue measurement should be determined based on the assumptions that marketparticipants would use in pricing the asset or liability.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007 and,generally, must be applied prospectively. In February 2008, the FASB issued FSP No. FAS 157-2, “*Effective Date of FASB Statement 157*,” which delays theeffective date of SFAS 157 for one year for all non-financial assets andnon-financial liabilities, except those that are recognized or disclosed atfair value in the financial statements on at least an annual basis.

 

F-15

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note2.  Significant Accounting Policies(Continued)**

 

**RecentAccounting Pronouncements (Continued)**

 

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities”* (“SFAS 159”).  SFAS 159provides companies with an option to report selected financial assets andliabilities at fair value.  Its objectiveis to reduce both complexity in accounting for financial instruments and thevolatility in earnings caused by measuring related assets and liabilitiesdifferently.  It also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities.  SFAS159 requires companies to provide additional information that will helpinvestors and other users of financial statements to more easily understand theeffect of the company’s choice to use fair value on its earnings.  It also requires entities to display the fairvalue of those assets and liabilities for which the company has chosen to usefair value on the face of the balance sheet. SFAS 159 does not eliminate disclosure requirements included in otheraccounting standards, including requirements for disclosures about fair valuemeasurements included in SFAS 157, discussed above, and Statement of FinancialAccounting Standards No. 107 *Disclosuresabout Fair Value of Financial Instruments*.  SFAS 159 is effective as of the beginning ofa company’s first fiscal year beginning after November 15, 2007.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “*BusinessCombinations*” (“SFAS 141R”), which changes accounting forbusiness acquisitions.  SFAS No. 141(R) requires the acquiringentity in a business combination to recognize all (and only) the assetsacquired 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 beginning after December 15, 2008.

 

InDecember 2007, the FASB issued SFAS No. 160, “*NoncontrollingInterests in Consolidated Financial Statements — an Amendment of AccountingResearch Bulletin No. 51*” (“SFAS 160”). The objective of SFAS160 is to improve the relevance, comparability, and transparency of thefinancial information that a reporting entity provides in its consolidatedfinancial statements.  SFAS 160 appliesto all entities 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 as of the beginning of an entity’s first fiscal year that startsafter December 15, 2008 and prohibits early adoption.

 

F-16

----

** **

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

** **

**Note 3. Property and Equipment**

 

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

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

 

Depreciationexpense for the years ended December 31, 2007 and 2006 was $75,270 and$65,919, respectively.

 

**Note 4.  Deposits**

 

Deposits consist of cash reserves heldby merchant processors and the security deposit held by the lessor of theCompany’s office space.  As of December 31,2007, the Company had a total of $295,389 in deposits.  Of this amount, $237,772 was being held byOptimal Payments, Inc., $31,000 was being held by Heartland PaymentSystems, Inc., and the remainder was being held by the lessor of theCompany’s office space and other entities.

 

**Note 5.  Commitments and Contingencies**

 

The Company’s material commitments and contingencies consist of anoperating lease for its office space in Pennsylvania and employment agreementswith its executive officers.

 

**Operating Leases**

 

The Company is a party to a lease for its office facility located inHorsham, Pennsylvania which was most recently amended on March 13,2007.  The amendment extended the term ofthe lease from May 31, 2007 to May 31, 2010.  The amendment provides for an initial monthlyrent payment of $7,803 and an initial monthly operating expense payment ofapproximately $5,620.

 

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

 
| **Fiscal Year** | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
|                 |       |       |       |   |
| 2008                 |       | $          | 163,138    |   |
| 2009                 |       | 166,672    |       |
| 2010                 |       | 70,060     |       |
|                 |       | $          | 399,870    |   |

 

F-17

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note 5.  Commitments and Contingencies (Continued)**

 

**EmploymentAgreements**

 

TheCompany is a party to employment agreements with each of its current executiveofficers and one of its former executive officers.  Future minimum payments under theseemployment agreements are as follows:

 
| **Fiscal Year** | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
|                 |       |       |       |
| 2008                 |       | $          | 1,044,912  |   |
| 2009                 |       | 748,107    |       |
| 2010                 |       | 56,315     |       |
|                 |       |       |       |
|                 |       | $          | 1,849,334  |   |

 

**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, 2007, awards for an aggregate of 4,466,575shares of common stock had been issued under 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 SEC covering the public sale of the 4,500,000 shares of common stockavailable for issuance under the plan.

 

**Note7.  401(k) Plan**

 

On January 15, 2007, the Company adoptedthe National Health Partners, Inc. 401(k) Plan.  Under the plan, eligible employees may electto contribute up to 100% of their compensation to the 401(k) Plan eachyear, subject to certain IRS limitations. The Company contributes 100% of the first 3% of the employee’scontribution and 50% of the next 2% of the employee’s contribution. The Companycontributed $26,928 to the 401(k) Plan during the year ended December 31,2007.

 

F-18

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note8.  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, 2007 and 2006, respectively,of which 39,419,856  and 32,659,106 shares of commonstock were outstanding at December 31, 2007 and 2006, respectively.  Warrants exercisable into an aggregate of14,538,092 and 11,437,686 shares of the Company’s common stock were outstandingon December 31, 2007 and 2006, 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 issued for servicesduring the year ended December 31, 2007: a dividend yield of zero percent,an expected volatility of between 244% and 282%, a risk-free interest rate of3.5% and a remaining contractual term of 2 years.  The Company follows Emerging Issues TaskForce No. 96-18 to recognize the fair value of warrants granted.  Under EITF 96-18, the fair value of thewarrants 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**

 

InFebruary 2006, the Company issued 300,000 shares of common stock to RogerH. Folts, the Company’s former Chief Financial Officer, in partialconsideration for certain accounting and related services to be provided to theCompany under a consulting agreement. The shares were valued at $0.40 per share for total consideration of$120,000, all of which was recognized as expense during the year ended December 31,2006.

 

In February and March 2006,the Company issued 2,507,000 shares of common stock and warrants to acquire1,530,000 shares to service providers and consultants for services pursuant toseveral agreements.  Each warrant givesthe holder the right to purchase one share of common stock.  All warrants have an exercise price of $.60per share, are exercisable for a period of 24 months from the date of issuance,and expire on March 31, 2008.  Theshares and warrants were valued at $0.40 per share for total consideration of$1,584,200.  The Company recognized$302,531 of expense during the year ended December 31, 2007 in connectionwith the issuance of these shares and warrants.

 

InMarch 2006, the Company issued 36,250 shares of common stock to employeesin partial payment of accrued salaries. The shares were valued at $0.40 pershare for total consideration of $14,500, all of which was recognized asexpense during the year ended December 31, 2006.

 

F-19

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note8.  Common Stock and Warrants (Continued)**

 

**Non Capital-Raising Transactions(Continued)**

 

In March 2006, theCompany issued restricted stock awards to David M. Daniels, Alex Soufflas,Patricia S. Bathurst and David A. Taylor for 450,000, 300,000, 225,000 and375,000 shares of common stock, respectively. The awards vest in three equal annual installments commencing on thefirst anniversary of the date of grant. The shares were valued at $0.40 per share for total consideration of$540,000.  The Company recognized$270,745 of expense during the year ended December 31, 2007 in connectionwith the issuance of these shares.

 

InApril 2006, the Company issued 10,000 shares of common stock toCenterpointe Property, LLC in connection with the termination of its lease forits office space in Sarasota, Florida in full payment of all rent and otherexpenses that were due and payable, and the Company and Centerpointe agreed torelease each other from any and all claims that they may now hold or may in thefuture hold arising out of the lease. The Company did not incur any material early termination penalties inconnection with the termination of the lease. The shares were valued at $0.50 per share for total consideration of$5,000, all of which was recognized as expense during the year ended December 31,2006.  The Company recognized a gain onthe extinguishment of debt in the amount of $35,932 during the year ended December 31,2006 in connection with the issuance of these shares.

 

In April 2006, the Company issued 350,000 shares of common stockto a consultant pursuant to a consulting agreement.  The shares were valued at $0.50 per share fortotal consideration of $175,000, all of which was recognized as expense duringthe year ended December 31, 2006.

 

InApril, May and June 2006, the Company issued 23,325 shares of commonstock to a consultant pursuant to a consulting agreement.  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 $30,000, all of which was recognized asexpense during the year ended December 31, 2006.

 

InSeptember 2006, the Company issued 100,000 shares of common stock to abusiness partner pursuant to a sales and marketing agreement.  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 $74,000, all of which was recognized asexpense during the year ended December 31, 2006.

 

F-20

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note8.  Common Stock and Warrants (Continued)**

 

**Non Capital-Raising Transactions(Continued)**

 

InSeptember 2006, the Company issued 50,000 shares of common stock to aconsultant pursuant to a consulting agreement. The shares were issued at the closing price of the Company’s commonstock on the day immediately preceding the date of issuance for totalconsideration of $57,000, all of which was recognized as expense during theyear ended December 31, 2006.

 

InOctober 2006, the Company issued 200,000 shares of common stock to aconsultant pursuant to a consulting agreement. The shares were issued at the closing price of the Company’s commonstock on the day immediately preceding the date of issuance for totalconsideration of $236,000, all of which was recognized as expense during theyear ended December 31, 2006.

 

InOctober 2006, the Company issued 25,000 shares of common stock to aconsultant pursuant to a consulting agreement. The shares were issued at the closing price of the Company’s commonstock on the day immediately preceding the date of issuance for totalconsideration of $28,000, all of which was recognized as expense during theyear ended December 31, 2006.

 

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 $69,922 of expense during the year ended December 31, 2007 inconnection with the issuance of these shares.

 

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 $24,230 of expense during the year ended December 31,2007 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.

 

F-21

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note8.  Common Stock and Warrants (Continued)**

 

**Non Capital-Raising Transactions(Continued)**

 

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 an aggregate of 950,000 shares of commonstock to 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 $15,559 of expense during the year ended December 31,2007 in connection with the issuance 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.

 

## **Capital-Raising Transactions**

 

In May 2006, the Company completeda private offering of 211,934 shares of common stock.  The shares were sold for $0.60 per share foraggregate gross proceeds of $127,160. The shares were sold in units consisting of two shares of common stock,one Class A warrant and one Class B warrant at a purchase price of$1.20 per unit.  Each warrant gave theholder the right to purchase one share of common stock.  The Class A warrants had an exerciseprice of $0.60 per share, were exercisable for a period of 18 months commencingon the date of issuance, and expired at the end of the exercise period.  The Class B warrants have an exerciseprice of $0.80 per share, are exercisable for a period of 36 months commencingon the date of issuance, and expire at the end of the exercise period.

 

In August 2006,the Company completed a private offering of 1,705,000 shares of commonstock.  The shares were sold for $0.80per share for aggregate gross proceeds of $1,364,000.  The shares were sold in units consisting ofone share of common stock, one Class A warrant and one Class Bwarrant at a purchase price of $0.80 per unit. Each warrant gave the holder the right to purchase one share of commonstock.  The Class A warrants had anexercise price of $0.80 per share, were exercisable until August 31, 2006,and expired at the end of the exercise period. The Class B warrants had an exercise price of $1.00 per share, wereexercisable until November 30, 2006, and expired at the end of theexercise period.  The Company grantedregistration rights covering all shares issued by the Company upon the exerciseof the warrants.

 

F-22

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note8.  Common Stock and Warrants (Continued)**

 

**Capital-Raising Transactions(Continued)**

 

In September 2006, the Companycompleted a private offering of 710,000 shares of common stock.  The shares were sold for $0.50 per share foraggregate gross proceeds of $355,000. 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$0.50 per unit.  Each warrant gave theholder the right to purchase one share of common stock.  The Class A warrants had an exerciseprice of $0.50 per share, were exercisable until October 16, 2006, andexpired at the end of the exercise period. The Class B warrants had an exercise price of $0.50 per share, wereexercisable until August 31, 2007, and expired at the end of the exerciseperiod.  The Company paid finder feesconsisting of 106,500 units identical to the units sold in the offering.  The Company granted registration rightscovering all shares sold in the offering and all shares issued by the Companyupon the exercise of the warrants by November 30, 2006.

 

InSeptember 2006, the Company completed a private offering of 200,000 sharesof common stock.  The shares were soldfor $0.50 per share for aggregate gross proceeds of $100,000.  The shares were sold in units consisting oftwo shares of common stock, two Class A warrants, two Class Bwarrants and two Class C warrants at a purchase price of $0.50 perunit.  Each warrant gave the holder theright to purchase one share of common stock. The Class A warrants had an exercise price of $0.50 per share, wereexercisable until November 30, 2006, and expired at the end of theexercise period.  The Class Bwarrants had an exercise price of $0.50 per share, were exercisable until August 31,2007, and expired at the end of the exercise period.  The Class C warrants had an exerciseprice of $0.80 per share, were exercisable until November 30, 2007, andexpired at the end of the exercise period.  The Company paid finder fees consisting of 15,000 units identical to theunits sold in the offering.  The Companygranted registration rights covering all shares sold in the offering and allshares issued by the Company upon the exercise of the warrants by November 30,2006.

 

In October 2006, the Companycompleted a private offering of 510,000 shares of common stock.  The shares were sold for $0.50 per share foraggregate gross proceeds of $255,000. The shares were sold in units consisting of one share of common stock,one Class A warrant, one Class B warrant, one Class C warrantand one Class D warrant at a purchase price of $0.50 per unit.  Each warrant gave the holder the right topurchase one share of common stock.  The Class Awarrants had an exercise price of $0.50 per share, were exercisable until October 16,2006, and expired at the end of the exercise period.  The Class B warrants had an exerciseprice of $0.50 per share, were exercisable until November 30, 2006, andexpired at the end of the exercise period. The Class C warrants had an exercise price of $0.50 per share, wereexercisable until August 31, 2007, and expired at the end of the exerciseperiod.  The Class D warrants had anexercise price of $0.80 per share, were exercisable until November 30,2007, and expired at the end of the exercise period.  The Company paid finder fees consisting of76,500 units identical to the units sold in the offering.  The Company granted registration rightscovering all shares sold in the offering and all shares issued by the Companyupon the exercise of the warrants by November 30, 2006.

 

F-23

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note8.  Common Stock and Warrants (Continued)**

 

**Capital-Raising Transactions(Continued)**

 

In October 2006, the Companycompleted a private offering of Class A warrants to acquire 1,500,000shares of its common stock and Class B warrants to acquire 1,500,000shares of its common stock.  The shareswere sold in units consisting of 50,000 Class A warrants and 50,000 Class Bwarrants.  The units were sold for $100per unit for aggregate gross proceeds of $3,000.  Each warrant gave the holder the right topurchase one share of common stock.  The Class Awarrants had an exercise price of $0.60 per share, were exercisable until November 30,2006, and expired at the end of the exercise period.  The Class B warrants had an exerciseprice of $0.80 per share, were exercisable until November 30, 2007, andexpired at the end of the exercise period. The Company granted registration rights covering (i) all sharesissued by the Company upon the exercise of the warrants in full by November 30,2006, or (ii) 50% of the shares issued by the Company upon the exercise ofthe warrants if the warrants were not exercised in full by November 30,2006.

 

During the year ended December 31,2006, the Company received aggregate gross proceeds of $4,749,713 from theexercise of warrants held by certain of the Company’s security holders.  The Company issued a total of 6,855,397shares of its common stock in connection therewith at exercise prices rangingfrom $0.50 to $2.00.

 

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 have an exercise price of $.80 per share, are exercisable until December 31,2008, are callable by the Company if certain criteria are satisfied, and expireat the end of the exercise period.

 

F-24

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note8.  Common Stock and Warrants (Continued)**

 

**Capital-Raising Transactions(Continued)**

##  

## In October 2007, the Company completed a private offering of 810,000 shares of itscommon stock for aggregate cash consideration of $243,000.  The shares were sold in units consisting ofone share of common stock, one Class A warrant and one Class Bwarrant at a purchase price of $0.30 per unit.  Each warrant gives the holder the right to purchaseone share of common stock.  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 $0.30 per share, wereexercisable during the period commencing on the date the registration statementwas declared effective by the SEC and ending on the later of January 31,2008 or the date that is 30 days after the date the registration statement wasdeclared effective by the SEC, and expired at the end of the exerciseperiod.  The Class B warrants had anexercise price of $0.40 per share, were exercisable during the periodcommencing on the date the registration statement is declared effective by theSEC and ending on January 31, 2008, and expired at the end of the exerciseperiod.

 

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.

 

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 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-25

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note8.  Common Stock and Warrants (Continued)**

 

**Capital-Raising Transactions(Continued)**

##  

## In December 2007,the Company completed a private offering of 555,000 shares of its common stockfor aggregate cash consideration of $111,000. The shares were sold in units consisting of one share of common stock,one Class A warrant, one Class B warrant and one Class C warrantat a purchase price of $0.22 per unit. Each warrant gives the holder the right to purchase one share of commonstock.  The Company granted registrationrights covering all shares of common stock and all shares issuable upon theexercise of the warrants.   The Class Awarrants have an exercise price of $0.22 per share, are exercisable during theperiod commencing on the date the registration statement was declared effectiveby the SEC and ending March 31, 2008, and expire at the end of theexercise period.  The Class Bwarrants have an exercise price of $0.30 per share, are exercisable during theperiod commencing on the date the registration statement was declared effectiveby the SEC and ending on June 30, 2008, and expire at the end of theexercise period.  The Class Cwarrants have an exercise price of $0.30 per share, are exercisable during theperiod commencing on the date the registration statement was declared effectiveby the SEC and ending on December 31, 2008, and expire 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.

 

**Note9.  Stock Options**

 

Stockoptions exercisable into an aggregate of 7,660,000 and 8,095,000 shares of theCompany’s common stock were outstanding on December 31, 2007 and 2006,respectively.  The weighted averageexercise price of the stock options outstanding on December 31, 2007 was$0.45.  The Company estimates thefair value of its stock options on the date of grant by using the Black-Scholespricing model in accordance with the provisions of Statement of FinancialAccounting Standards No. 148, *“Accounting forStock-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 245% and 290%, a risk-free interest rate ofbetween 3.5% and 5% and a remaining contractual life of between 9.15 and 9.95 years.

 

In December 2006, theCompany amended each of the stock options granted to David M. Daniels andPatricia S. Bathurst in May 2005, Alex Soufflas and David A. Taylor in August 2005,and the employee who joined the company in September 2005 to acceleratethe vesting of the options so that they were vested in full in December 2006.

 

F-26

----

** **

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note9.  Stock Options (Continued)**

 

InDecember 2006, the Company issued stock options to David M. Daniels, AlexSoufflas and Patricia S. Bathurst to acquire 250,000, 150,000 and 50,000 sharesof common stock, respectively.  Theoptions have an exercise price of $0.88 per share and were vested in full onthe date of grant.  The options have aterm of 10 years and were valued at $395,989 on the date of grant, all of whichwas recognized as expense during the year ended December 31, 2006.

 

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 $30,234 ofexpense during the year ended December 31, 2007 in connection with theissuance of this option.

 

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.

 

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 $20,190 of expense during the year ended December 31,2007 in connection with the issuance 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 of grant.  The Company recognized $16,152 of expenseduring the year ended December 31, 2007 in connection with the issuance ofthis 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 $4,014 ofexpense during the year ended December 31, 2007 in connection with theissuance of this option.

 

F-27

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note9.  Stock Options (Continued)**

 

InOctober 2007, the Company issued stock options for an aggregate of 75,000shares of 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 $6,620 ofexpense during the year ended December 31, 2007 in connection with theissuance of this option.

 

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 $621 of expense during theyear ended December 31, 2007 in connection with the issuance of thisoption.

 

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.  Theoption has a term of 10 years and was valued at $112,490 on the date of grant.  The Company recognized $4,620 of expenseduring the year ended December 31, 2007 in connection with the issuance ofthis option.

 

Asummary of the stock options issued during the years ended December 31,2007 and 2006 is set forth below.  Nostock options were exercised during the years ended December 31, 2007 and2006.

 
| ** **                          | ** ** | ** ** | ** ** | **Weighted** | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**  | ** ** |
|                                |       |       |       | **Exercise** |       |
|                                |       | **Shares** |       | **Price**    |       |
|                                |       |       |       |         |       |
| Outstanding, January 1, 2006   |       | 8,045,000  |       | $            | 0.40       |   |
|                                |       |       |       |         |       |
| Granted                             |       | 450,000    |       | 0.88         |       |
| Expired                             |       | (400,000   | )          | 0.40         |       |
|                                |       |       |       |         |       |
| Outstanding, December 31, 2006 |       | 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       |   |
|                                |       |       |       |         |       |
| Exercisable, December 31, 2006 |       | 7,595,000  |       | $            | 0.45       |   |
| Exercisable, December 31, 2007 |       | 6,222,500  |       | $            | 0.44       |   |

 

F-28

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note9.  Stock Options (Continued)**

 
| **Year Ended   December 31,** | ** ** | **Range of   Exercise Prices** | ** ** | **Number   Outstanding** | ** ** | **Weighted   Average   Remaining   Contractual   Life** | ** ** | **Weighted   Average   Exercise   Price** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                                         |       |                                          |       |                          |       |                                                                        |       |                                                     |       |
| 2007                                         |       | $0.40  – $0.88                           |       | 7,660,000                     |       | 9.19                                                                        |       | $                                                        | 0.45       |   |
| 2006                                         |       | $0.40  – $0.88                           |       | 8,095,000                     |       | 8.97                                                                        |       | $                                                        | 0.43       |   |

 

**Note 10.  Related-PartyTransactions**

 

OnFebruary 8, 2006, Roger H. Folts resigned as the Chief Financial Officerand Secretary of the Company. Concurrently therewith, the Company entered into a termination andmutual release with Mr. Folts pursuant to which his employment agreementwith the Company was terminated effective February 1, 2006 and the Companyand Mr. Folts released each other from any obligations or claims arisingin connection with his employment with the Company.  Also on that date, Mr. Folts enteredinto a consulting agreement with the Company. Under the terms of the consulting agreement, Mr. Folts agreed toprovide accounting and related services to the Company on a full-time basisuntil June 30, 2006, and thereafter on a part-time basis until February 1,2009.  In exchange for his services, theCompany agreed to continue paying Mr. Folts the salary he was receivingunder his employment agreement until March 31, 2006, and agreed to issue300,000 shares of common stock to Mr. Folts, a maximum of 25,000 of whichmay be sold per calendar month during the period commencing April 1, 2006and ending December 31, 2006.

 

On March 28, 2006, theCompany issued restricted stock awards to David M. Daniels, Alex Soufflas,Patricia S. Bathurst and David A. Taylor for 450,000, 300,000, 225,000 and375,000 shares of common stock, respectively. The awards vest in three equal annual installments commencing on thefirst anniversary of the date of grant.

 

OnMarch 29, 2006, the Company entered into an employment agreement with AlexSoufflas to continue serving as its Chief Financial Officer and Executive VicePresident effective February 1, 2006. The employment agreement is for an initial term of three years andrenews automatically for successive one-year periods unless earlier terminatedor prior notice of non-renewal is provided by either party. Under theagreement, Mr. Soufflas is entitled to an annual base salary of $210,000with annual increases on January 1st of each year of a minimum of 10% ofthe annual base salary for the immediately preceding year, and is eligible foran annual bonus and incentive compensation awards in an amount and form to bedetermined by the Company’s board of directors.

 

F-29

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note10.  Related-Party Transactions****(Continued)**

 

OnMarch 29, 2006, the Company entered into an employment agreement withDavid A. Taylor to continue serving as its Senior Vice President – NationalSales effective February 1, 2006. The employment agreement is for an initial term of three years andrenews automatically for successive one-year periods unless earlier terminatedor prior notice of non-renewal is provided by either party.  Under the agreement, Mr. Taylor isentitled to an annual base salary of $162,000 with annual increases on January 1stof 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 the Company’s board ofdirectors.

 

On April 1, 2006, theCompany entered into a Termination and Mutual Release with CenterpointeProperty, LLC.  Under the agreement, thelease between the Company and Centerpointe with respect to the office space theCompany was leasing in Sarasota, Florida was terminated effective April 1,2006, the Company issued 10,000 shares of its common stock to Centerpointe infull payment of all rent and other expenses that were due and payable under thelease, and the Company and Centerpointe agreed to release each other from anyand all claims that they may now hold or may in the future hold arising out ofthe lease.  The Company did not incur anymaterial early termination penalties in connection with the termination of theLease.  Ronald F. Westman and his wifeown all of the outstanding membership interests in Centerpointe.  Mr. Westman beneficially ownsapproximately 7.9% of the Company’s common stock and served as a member of theCompany’s board of directors from June 29, 2005 to September 26,2005.

 

In December 2006, theCompany amended each of the stock options granted to David M. Daniels andPatricia S. Bathurst in May 2005, Alex Soufflas and David A. Taylor in August 2005,and the employee who joined the company in September 2005 to acceleratethe vesting of the options so that they were vested in full in December 2006.

 

InDecember 2006, the Company issued stock options to David M. Daniels, AlexSoufflas and Patricia S. Bathurst to acquire 250,000, 150,000 and 50,000 sharesof common stock, respectively.  Theoptions have an exercise price of $0.88 per share, were vested in full on thedate of grant, and have a term of 10 years.

 

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 annual installmentscommencing on the first anniversary of the date of grant.

 

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 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 of grant.

 

F-30

----

** **

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note 11.  Initial Public Offering**

 

On January 27, 2006, the Company’s registration statement on Form SB-2,File No. 333-126315, was declared effective by the Securities and ExchangeCommission in connection with the initial public offering of 10,258,135 sharesof common stock to be sold by certain selling security holders.  The Company did not receive any proceeds fromthe offering.

 

**Note 12.  Subsequent Events**

 

InJanuary 2008, the Company issued a promissory note to an accreditedinvestor in the amount of $50,000.  Thenote had a maturity date that was 30 days after the date of issuance of thenote, could be prepaid in whole or in part without penalty, and required thepayment of 40,000 shares of common stock as interest on the note.

 

InJanuary 2008, the Company issued 20,000 shares of common stock to aconsultant for sales and marketing services pursuant to a consulting agreement.

 

InJanuary 2008, the Company issued a stock option to a new non-executiveemployee for 100,000 shares of common stock. The option is exercisable at $0.23 per share, has a term of 10 years,and vests in four equal annual installments beginning on the first anniversaryof the date of grant.

 

In January 2008, the Companyterminated its agreement with Trident Marketing International, Inc.  As a result, the remaining 50,000 sharesunderlying the restricted stock award failed to vest and were canceled by theCompany in accordance with the terms of the restricted stock award.

 

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.

 

In February 2008, we 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 warrants had an exercise price of $0.20 per share, wereexercisable until February 29, 2008, and expired at the end of theexercise period.  The Class Bwarrants have an exercise price of $.30 per share, are exercisable until June 30,2008, are callable by us if certain criteria are satisfied, and expire at theend of the exercise period.  The Class Cwarrants have an exercise price of $.40 per share, are exercisable until December 31,2008, are callable by us if certain criteria are satisfied, and expire at theend of the exercise period.

 

F-31

----

 

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

Notesto Consolidated Financial Statements

December 31, 2007 and 2006

 

**Note 12.  Subsequent Events(Continued)**

 

In February 2008,the Company issued a total of 310,000 shares of common stock to two consultantsfor marketing and advisory services pursuant to individual consultingagreements.

 

In February 2008, the Company enteredinto an agreement with the accredited investor to whom the promissory note hadbeen issued in January 2008.  Underthe agreement, the Company agreed to pay off the $50,000 promissory note bypaying $20,000 and issuing 240,000 shares of common stock in full payment ofthe outstanding principal and interest on the note.

 

In February 2008, the Company commenceda private offering of Class A warrants for aggregate cash proceeds of$60.  The Class A warrants are beingsold in units comprised of one Class A warrant at a purchase price of$1.00 per unit.  The Class Awarrants have an exercise price of $0.12 per share, are exercisable into 10,000shares of common stock until March 28, 2008, and expire at the end of theexercise period.  As of March 27,2008, the Company had sold 20 units for aggregate cash proceeds of $20.

 

In March 2008, we granted a stock optionto each of David M. Daniels, Alex Soufflas and Patricia S. Bathurst for 400,000shares of our common stock, respectively. The options have an exercise price of $0.28 per share, vest in fourequal annual installments commencing on March 25, 2009, and are for a termof 10 years.

 

Asof March 27, 2008, the Company had received $299,000 in connection withthe exercise of warrants held by certain of the Company’s warrant holders.

 

F-32

----

 

**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Exhibit  Description**                                                                                                                                |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                    |
| 10.33       |       | Option to Acquire Shares of Common Stock, dated  March 25, 2008, issued by the Company to David M. Daniels                                              |
|        |       |                                                                                                                                                    |
| 10.34       |       | Option to Acquire Shares of Common Stock, dated  March 25, 2008, issued by the Company to Alex Soufflas                                                 |
|        |       |                                                                                                                                                    |
| 10.35       |       | Option to Acquire Shares of Common Stock, dated  March 25, 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 |

 

----