UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-KSB




(Mark
one)




ý ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
fiscal year ended December 29,
2007




 ̈ TRANSITION REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
transition period from _________ to ____________




Commission
File No. 000-33389









nFinanSe
Inc.


(Name of
small business issuer in its charter)




Nevada
            65-1071956(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      Number)3923
      Coconut Palm Drive, Suite 107,Tampa, Florida
            33619(Address
      of principal executive offices)
            (Zip
      Code)




Registrant’s
telephone number, including area code: (813)
367-4400




Securities
registered pursuant to Section 12 (b) of the Act: none




Securities
registered pursuant to Section 12 (g) of the Act:  200,000,000 common
shares par value $0.001 per share




Check
whether the issuer (l) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.  Yes ý No  ̈




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o




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




Revenues
for our fiscal year ending December 29, 2007 were $32,763.




The
aggregate market value of our voting stock held by non-affiliates computed by
reference to the last reported sale price of such stock as of March 14, 2008,
was $17,173,802.




The
number of shares of the issuer’s Common Stock outstanding as of March 14, 2008
is 7,696,454.




Documents
Incorporated By Reference: As stated in Part III of this annual report, portions
of the registrant’s definitive proxy statement to be filed within 120 days after
the end of the fiscal year covered by this annual report are incorporated herein
by reference.




Transitional
Small Business Disclosure Format (check one): Yes  ̈   No
ý











TABLE OF CONTENTS




PageFORWARD-LOOKING
      STATEMENTS.......................................................................................................................................................................................
            1PART
      I................................................................................................................................................................................................................................
            2Item
      1.
            Description
      of
      Business..............................................................................................................................................................
            2Item
      2.
            Description
      of
      Property..............................................................................................................................................................
            11Item
      3.
            Legal
      Proceedings.....................................................................................................................................................................
            12Item
      4.
            Submission
      of Matters to a Vote of Security
      Holders.......................................................................................................................
            12PART
      II...............................................................................................................................................................................................................................
            13Item
      5.
            Market
      for Our Common Equity and Related Stockholder
      Matters......................................................................................................
            13Item
      6.
            Management’s
      Discussion and Analysis or Plan of
      Operation...........................................................................................................
            15Item
      7.
            Financial
      Statements...................................................................................................................................................................
            27Item
      8.
            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure..................................................................
            27Item
      8A.
            Controls
      and
      Procedures.............................................................................................................................................................
            27Item
      8B.
            Other
      Information......................................................................................................................................................................
            28PART
      III...................................................................................................................................................................................................................................................................
            29Item
      9.
            Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange Act.......
            29Item
      10.
            Executive
      Compensation..............................................................................................................................................................
            29Item
      11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.......................................................
            29Item
      12.
            Certain
      Relationships and Related Transactions, and Director
      Independence.......................................................................................
            29Item
      13.
            Exhibits....................................................................................................................................................................................
            30Item
      14.
            Principal
      Accounting Fees and
      Services.........................................................................................................................................
            33








-i-


FORWARD-LOOKING
STATEMENTS





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





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





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





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





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





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









PART
I




Item 1.Descriptionof
Business





BUSINESS
OVERVIEW




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




We
operate two divisions: (i) the nFinanSe Card Division, which issues prepaid gift
cards, reloadable general spend prepaid cards, payroll cards and
promotional/incentive cards; and (ii) thenFinanSe NetworkTM, which
is a network of load locations for stored value and prepaid cards.




BACKGROUND




We were
founded on July 10, 2000 and began developing a technology platform focused on
selling debit cards to individuals without bank accounts or who maintain limited
funds in their bank accounts.  Those individuals are referred to by us
as the unbanked and underbanked. Typically, the unbanked and underbanked market
is composed of credit “challenged” and cash-based consumers. We ascertained that
a major barrier to the acceptance and use of debit cards was the ability to load
additional funds on the SVCs.  To address this issue, we shifted focus in
2003 toward enhancing our network, known as the nFinanSe NetworkTM, to enable
customers to load funds directly onto their prepaid SVCs.




In August
2004, our predecessor company, Morgan Beaumont, completed a reverse merger and
recapitalization with a publicly traded company, Pan American Energy Corp., or
Pan American.  From a legal perspective, Pan American remained as the
surviving entity, however, for financial statement purposes, the transaction was
treated as a reverse merger and a recapitalization whereby we were deemed to be
the acquirer and no goodwill or other intangible assets were
recorded.  Accordingly, Pan American changed its name to Morgan
Beaumont, Inc., and adopted the business plans and strategies of Morgan
Beaumont. On November 22, 2006, we changed our name from Morgan Beaumont, Inc.
to nFinanSe Inc.




In May 2005, through our wholly owned
subsidiary MBI Services Group, LLC, we commenced selling traditional wholesale
telecommunications services and during the fiscal year of 2005, we launched
prepaid phone cards in an effort to develop brand recognition within the credit
challenged or cash-based consumer market. We originally made the decision to
enter the prepaid phone card business in order to gain exposure with the
targeted consumer group for our stored value cards.  The phone card
operation struggled with low and non-existent margins and unacceptable operating
losses which were draining resources from our core stored value card
business.  Additionally, we had re-directed our strategy on the retail
sale of stored value cards by focusing on established prepaid card distributors
who provide direct channels into large numbers of retail outlets for sale and
loading of our stored value cards and making the continued offering of prepaid
phone cards an unnecessary component of our sales
strategy.  Accordingly, we made the decision to abandon this line of
business in the fourth quarter of fiscal 2006.  We accounted for this
discontinued operation using the component-business approach in accordance with
Financial Accounting Standard No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” As such, the results of MBI Services
Group, LLC have been eliminated from ongoing operations for all periods
presented and shown as a single line item on the statements of operations
entitled “Loss from discontinued operations” for each period
presented.




During
fiscal 2006, we added Western Union® and MoneyGram® to our fund loading network
and signed an agreement with Discover Financial Services LLC whereby we
became a preferred issuer of Discover® Network-branded SVCs.  In June
2007, we extended this agreement with Discover Financial Services LLC,
executed a Program Sponsor Agreement whereby we sell bank-issued Discover®
Network branded SVCs and executed an Incentive Agreement that provides us with
marketing funds for the sale of Discover® Network branded SVCs.




-2-




PRODUCTS
AND SERVICES




nFinanSe
Card Division




The
nFinanSe Card Division, or the Card Division, sells open loop, bank-issued gift
and reloadable general spend SVCs.  These SVCs are sold directly to
consumers through our distribution partners’ network of retail
locations.  The Card Division also sells payroll and reward SVCs
directly to companies. These SVCs are sold to corporate sponsors by our sales
team.








Card
      Product
            Description
            
            Uses
            
            BenefitsReloadable
      General Spend SVC
            A
      prepaid SVC primarily for the unbanked cash-based consumer that is
      reloadable at nFinanSe locations nationwide and is sold at selected retail
      locations through our prepaid card distributors.
            
            Underbanked/unbanked/cash-based
      consumers can use the SVC at ATMs and to make purchases wherever Discover
      Cards are accepted
            
            Security,
      convenience, lower cost than check cashing and money
    orders.Gift
      SVC
            A
      Discover® Network-branded SVC that is denominated for a set
      value.
            
            Typically
      a retail product sold at retail locations.
            
            Can
      be used at accepting retailers nationwide.Payroll
      SVC
            A
      prepaid SVC for the loading of an employee’s payroll. The SVC is
      reloadable through the web, from the client’s payroll department via
      direct deposit.
            
            Payroll
      distribution targeting companies with a large population of employees that
      receive payroll and commission checks.
            
            Improves
      compliance, eliminates costly checks and reduces the loss of employee
      productivity in cashing payroll checksReward
      SVC
            A
      prepaid SVC that can either be private labeled or Discover® Network
      branded.
            
            Used
      by companies for reward programs and incentives
            
            Rewards
      are immediate and cardholders are able to use as
  directed.





We have a
strategic relationship with Discover® Network whereby we are a program sponsor
of Discover® Network–branded SVCs. We believe that Discover® Network SVCs offer
significant advantages over other branded SVCs sold in the United States.
Because Discover® Network SVCs can be used everywhere Discover® Network cards
are accepted, they provide nationwide reach and 24/7 coverage. These SVCs also
offer the advantages of immediate issuance, balance reporting and real-time
authorization. We believe that most non–Discover® Network cards cannot
provide these services.




Additionally,
we believe that there is a tremendous growth opportunity in offering Discover®
Network–branded customer loyalty/employee incentive reward cards. These cards
are offered by companies to replace coupons, rebates, merchandise and other
customer loyalty programs. These programs are customizable and can be modified
by a consumer company on an as-needed basis. We believe that our ability to
provide 24/7 customer service, ease of card loading and servicing, the
flexibility to offer an open- or closed-loop solution and a redundant secure
network, coupled with Discover® Network’s brand recognition and market
penetration, make our programs quite attractive to offering
companies.




nFinanSe
NetworkTM




We have
developed our nFinanSe NetworkTM, which connects with load locations and multiple
SVC processors. As of December 29, 2007, we had approximately 70,000 nFinanSe
NetworkTM locations consisting primarily of Western Union® and MoneyGram®
locations.




-3-


We believe that the nFinanSe NetworkTM
is the largest universal load platform in the United States. We are able to add
locations to our nFinanSe NetworkTM by integrating with select distributors who
are connected to their participating retailers.  We believe the
nFinanSe NetworkTM is also compliant with federal and state legal requirements
(including the PATRIOT Act). Currently, the nFinanSe NetworkTM enables us to
issue and service our own general-spend SVCs while directly controlling all
aspects of the cardholder experience such as customer service and web portal
access. We believe that as our SVCs are sold at more locations, there will be
more endpoints connected to the nFinanSe NetworkTM. This should enable SVC
holders to reload at many sites, increasing customer satisfaction, reducing
churn and increasing card usage. This makes the nFinanSe NetworkTM one of our key
strategic assets.





nFinanSe NetworkTM Locations
as of December 29, 2007 (approximate)





Retail
      locations
            600Western
      Union®
            49,000MoneyGram®
            20,000




IMPORTANT
BUSINESS RELATIONSHIPS




Our
current and planned operations involve working with the following business
partners, among others, to sell SVCs and services. Each of these relationships
plays a different role in our operations.




●      Discover® Network.
Our agreement with Discover permits us to offer SVCs with the Discover hologram
to prospective cardholders through various channels approved by Discover®
Network. This agreement runs through June 2012 and renews annually thereafter.
We pay Discover certain program, authorization and settlement fees and
Discover pays the issuing bank interchange revenue earned on sales
transactions from cards that we sponsor which is then passed down to
us.




●      Issuing
Banks.  Our business plan involves using federally
chartered banks to issue Discover branded SVCs.  Until we complete our
state licensing initiative, the benefits of using a federally chartered bank are
integral in meeting certain regulatory and licensing requirements. These
agreements typically run for three years and have renewal terms of one to three
year terms. The agreements vary; however, most include charges for transactions
and revenue sharing arrangements in interchange revenues paid to us by Discover
as well as the interest earned on cardholder balances.




●      Processor. Discover®
Network and the issuing banks require that we engage an approved processor so
that all of the consumer transactions are tracked and all debits and credits to
the consumer SVC accounts are properly adjusted. We chose Metavante Corporation,
or Metavante, to act as the processor. Metavante has all necessary regulatory
and banking approvals to conduct transactions from point-of-sale, or POS,
terminals, and banks to apply credits and debits to the consumer cards.
Metavante has a schedule of fees for services provided to us and to the SVC
holder. Those fees associated with SVC holder activity are typically passed on
to the consumer, usually through a service-related price mark-up.




●      Distribution
Partners. Our retail strategy is to use prepaid phone card distributors
who wish to add additional products to their line. We ship SVCs to distributors
on a consignment basis. The distributor then moves the SVCs to their contracted
retail locations. When the SVC is sold at retail, the retailer activates the SVC
by swiping it through a POS terminal that is connected to us through their
distributor.  We immediately load value on cards concurrently with the
collection of funds by the retailer.  The retailer collects the
amounts due from the consumer at POS and subsequently remits all but the
retailer's fee to the distributor.  The distributor then subsequently
reimburses the Company for the load value on the card and pays our portion of
the wholesale fees based on contractual terms through an ACH transaction. We
also collect monthly maintenance fees from the cardholder directly and, in some
cases, we share some portion of these fees with the distributor.  We
have executed agreements with prepaid card distributors including InComm, QComm,
ViaOne, Now Prepay, LDC and Emida. These distributors represent more than
100,000 retail locations. We expect over the next 12 months that these
distributors will market our cards in many of their retail
locations.


-4-




●      Third-Party Load
Locations. We have important relationships with Western Union® and
MoneyGram® that allow them to load nFinanSe NetworkTM reloadable SVCs. These
relationships greatly expand our load network and give us what we believe to be
a competitive advantage in reloadable SVCs. Not only can we load our Discover®
Network–branded SVCs at these locations, but our network has the functionality
to load preauthorized third-party-issued cards as well.  At this time,
we do not have any third-party-issued card arrangements.





LICENSING
REQUIREMENTS




We have obtained a United
States Treasury, FinCen, Federal Money Services Business License, which is
required by some states to conduct our operations.  In addition,
approximately 45 states have established laws or regulations requiring entities
taking or loading money on cards or processing such transactions, to be licensed
by the state unless that entity has a federal or state banking charter. 
Although we offer our cards in conjunction with national banking institutions,
on October 2, 2007, we created our wholly owned subsidiary nFinanSe Payments
Inc. for the express purpose of acquiring these state licenses to comply with
various state laws and regulations governing the sale and loading of SVCs even
though we do not believe that we are required to do so.





COMPETITION




The
markets for financial products and services, including SVCs and services related
thereto, are intensely competitive. We compete with a variety of companies in
our markets and our competitors vary in size, scope and breadth of products and
services offered.  Certain segments of the financial services industry tend
to be highly fragmented, with numerous companies competing for market share.
Highly fragmented segments currently include financial account processing,
customer relationship management solutions, electronic funds transfer and SVC
solutions. In addition to competition from other companies, we face competition
from the in-house technology departments of existing and potential clients who
may develop their own product offerings.




We
believe our competitive advantages are:




●
            the
      attributes of the Discover® Network–branded card, including:
              ●    instant
      issuance
              ●    no
      floor limits; and
              ●    acceptance
      by over 4 million merchants;




●
            the
      size and breadth of our load
network;




●
            the
      industry experience of our sales force;
and




●
            the
      price and features of our SVCs and
services.




PROPRIETARY
RIGHTS




We have
not patented or trademarked any of our products or technology through the U.S.
Patent and Trademark Office, nor have we copyrighted any of our products or
technology through the U.S. Copyright Office. We have filed trademark
applications for the name nFinanSe Inc. and our logo and the nFinanSe NetworkTM
name and logo. Third parties may infringe or misappropriate our intellectual
property rights or we may not be able to detect unauthorized use and take
appropriate steps to enforce our rights. In addition, other parties may assert
infringement claims against us. Such claims, regardless of merit, could result
in the expenditure of significant financial and managerial resources. Further,
an increasing number of patents are being issued to third parties regarding
money and debit card processes. Future patents may limit our ability to use
processes covered by such patents or expose us to claims of patent infringement
or otherwise require us to seek to obtain related licenses. Such licenses may
not be available to us on acceptable terms. The failure to obtain such licenses
on acceptable terms could have a negative effect on our business.


-5-




Our
management believes that our products, trademarks and other proprietary rights
do not infringe on the proprietary rights of third parties and that we have
licensed the proprietary rights required to conduct our business from third
parties.




Our
proprietary intellectual property consists of:




●
            interactive
      voice response software, to provide access to information in a database
      using a telephone;




●
            customer
      relationship management software, for use in customer service applications
      that require tightly integrated and customizable interaction;
      and




●
            application
      server and web server software, to provide the business logistics
      necessary for proper data transmission of all
  transactions.




We
believe that the majority of our proprietary software is protected by common law
copyright.





EMPLOYEES





As of December 29, 2007, we had 50
full-time employees, of which ten are officers and executives, four are engaged
in sales, two are engaged in marketing, seven are engaged in technology research
and development, seventeen are engaged in customer service, six are engaged in
operations, two are engaged in finance and two are engaged in general
administration.  None of our current employees are covered by any
collective bargaining agreement and we have never experienced a work stoppage.
We consider our employee relations to be good.





RISK
FACTORS




In
addition to the other information included in this annual report, the following
factors should be carefully considered in evaluating our business, financial
position and future prospects. Any of the following risks, either alone or taken
together, could materially and adversely affect our business, financial position
or future prospects. If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be incorrect, our actual
results may vary materially from what we have projected.




We
have incurred losses since inception and anticipate that we will continue to
incur losses for the foreseeable future.




We have
operated continuously at a loss since inception and may be unable to continue as
a going concern. We expect to experience continuing financial losses. Losses for
the year ended December 29, 2007, and losses since inception were $9,948,094 and
$35,527,678, respectively.  The extent to which we experience losses
will depend on a number of factors, including:




●
            implementation
      of our sales and marketing
strategies;





●
            competitive
      developments in our market;




●
            customer
      acceptance of and demand for our SVCs and
  services;




●
            our
      ability to attract, retain and motivate qualified personnel, particularly
      sales associates; and




●
            the
      continued adoption by consumers of
SVCs.




Our
products may never achieve commercial acceptance among our target SVC customers.
In addition, we may never obtain or sustain positive operating cash flow or
generate net income in the future or ultimately achieve cash flow levels
sufficient to support our operations.


-6-




We
will need to raise additional capital.





To fund
the full scale implementation of our business plan and the planned rollout and
distribution of cards in both the retail and payroll card segments of our
business, we will need to raise $6 - $7 million of additional capital over the
next 12 months (of which approximately $1.7 million was raised in March 2008).
 Additionally, we expect to arrange a revolving accounts receivable credit
facility which will be used to fund the face amount of gift cards and the load
amounts on general spend cards on a daily basis.  We need this
facility because the cash received at the POS will be collected by our
distributors and remitted to us on terms ranging from two to twelve days. 
However, our actual capital requirements will depend on many factors, including
the success of our products, the amounts needed to fund anticipated gift
card sales and general spend loads until we receive reimbursement from our
distributors, the costs and bonding collateral required for state licensure and
the market acceptance of new product offerings.  Additional funds may
not be available when needed, or, if available, such funds may not be obtainable
on terms acceptable to us. If adequate funds are unavailable, we may be
required, among other things, to:




●
            delay
      or reduce the scope of or eliminate one or more of our marketing or sales
      programs or product development
initiatives;





●
            obtain
      funds through arrangements that may require us to relinquish rights to
      technology or products that we would otherwise seek to develop or
      commercialize by ourselves.





Additional
equity or debt financing may be dilutive to existing stockholders or impose
terms that are unfavorable to us or our existing stockholders.




If we
raise additional funds by issuing equity securities, our stockholders may
experience dilution. Debt financing, if available, may involve arrangements that
include covenants limiting or restricting our ability to take specific actions,
such as incurring additional debt, making capital expenditures or declaring
dividends. Any debt financing or additional equity that we raise may contain
terms, such as liquidation and other preferences that are not favorable to us or
our other stockholders. If we raise additional funds through collaboration and
licensing arrangements with third parties, it may be necessary to relinquish
valuable rights to our technologies and products or grant unfavorable license
terms.




Most
states require us to undergo a difficult and costly process of obtaining
licenses to sell and load SVCs.




Approximately
45 states have established laws or regulations requiring entities taking or
loading money on cards or processing such transactions, to be licensed by the
state unless that entity has a federal or state banking charter.  In the
interim, we intend to rely upon the licenses of our federally-chartered issuing
banks.  However, we believe this to be an interim solution and our
goal is to be licensed.  We are currently in the process of applying
for licenses in virtually every state in which we plan to conduct
business. Additionally, prior to applying for a license, we are required to file
for authority to do business in each such state and thereafter file tax returns
and be subject to service of process in each state. We are under the impression
that this process could take 12 to 24 months to complete. We do not
presently know if we will be able to obtain all of the licenses.  We do not
believe the inability to obtain license will impact our business negatively in
the short term as we use federally chartered banks as issuers of our
cards.  Licensing with various states requires that we post
performance bonds concurrent with submitting the license
application.  We project the initial amounts of the various state
bonds will total more than $7 million.  We posted these bonds in early
2008.  With our lack of operations, the surety company willing to
supply the bonds is requiring approximately $1.8 million of
collateral.  We completed the funding of collateral in February 2008
in the form of a letter of credit guaranteed by Jeffrey Porter, one of our major
stockholders, and Bruce E. Terker, a current member of our Board of
Directors.  In addition, the issuing bank required a guarantee by the
Company.  The Company can cancel the agreements with the Messrs.
Porter and Terker and may be required to provide collateral to the issuing bank
in order to support the letter of credit.  In addition, certain states
may require that we post increases on the surety bonds and the surety company
may request additional collateral on the $7 million and/or on state imposed
increases in the bonds.


-7-




States
may adopt even more stringent licensing rules and regulations, compliance with
which could be expensive and time consuming.




There
have been, and we expect that there will continue to be, a number of legislative
and regulatory proposals aimed at changing the SVC industry. We expect
regulation of this industry to only increase and become more complicated.
Regulatory- and tax-intensive states may adopt complex and heavily regulated
schemes. While we cannot predict the legislative or regulatory proposals that
will be adopted or what effect those proposals may have on our business,
including any future licensing requirements, the pendency or approval of such
proposals could materially adversely affect our business by limiting our ability
to generate projected revenues, to raise capital or to obtain strategic
partnerships or licenses.  An increase in bonding or fee requirements
in particular states could curtail our activities in those
jurisdictions.




Our
point-of-purchase operators may subject us to liability if they fail to follow
applicable laws.




As part
of our license requirements, we may be required to have agency agreements with
each of our load centers. Among other things, the agreements will require them
to comply with the Patriot Act and anti-money-laundering laws. While we do not
intend to be responsible for their actions, we could be subject to state or
federal actions if our load center agents violate or are accused of violating
the law. Such actions could compromise our credibility with our customers,
issuing banks and state regulators and generally have a materially adverse
effect on our business. Any such claims or litigation, with or without merit,
could be costly and a diversion of management’s attention, which could have a
material adverse effect on our business, operating results and financial
condition. Adverse determinations in such claims or litigation could harm our
business, operating results and financial condition.




There
is only a limited market for our common stock as a “penny stock.”




A limited
public market currently exists for our common stock on the OTC Bulletin Board.
In the future, a more active public market for our common stock may never
develop or be sustained.




Our
common stock is also subject to the penny stock rules. The term “penny stock”
generally refers to low-priced, speculative securities of very small companies.
Before a broker-dealer can sell a penny stock, SEC rules require the
broker-dealer to first approve the customer for the transaction and receive from
the customer a written agreement for the transaction. The broker-dealer must
furnish the customer with a document describing the risks of investing in penny
stocks. The broker-dealer must tell the customer the current market quotation,
if any, for the penny stock and the compensation the broker-dealer and its
broker will receive for the trade. Finally, the broker-dealer must send monthly
account statements showing the market value of each penny stock held in the
customer’s account. These requirements make penny stocks more difficult to
trade. Since our common stock is subject to the penny stock rules, the market
liquidity of our common stock may be adversely affected.




We
depend on key personnel and could be harmed by the loss of their services
because of the limited number of qualified people in our industry.




Because
of our small size, we require the continued service and performance of our
management team, sales and technology employees, all of whom we consider to be
key employees. Competition for highly qualified employees in the financial
services industry is intense. Our success will depend to a significant degree
upon our ability to attract, train, and retain highly skilled directors,
officers, management, business, financial, legal, marketing, sales, and
technical personnel and upon the continued contributions of such people. In
addition, we may not be able to retain our current key employees. The loss of
the services of one or more of our key personnel and our failure to attract
additional highly qualified personnel could impair our ability to expand our
operations and provide service to our customers.




-8-




Security
and privacy breaches of our electronic transactions may damage customer
relations and inhibit our growth.




Any
failures in our security and privacy measures could have a material adverse
effect on our business, financial condition and results of operations. We
electronically store personal information about consumers, including bank
account numbers, credit card information, social security numbers and merchant
account numbers. If we are unable to protect this information, or if consumers
perceive that we are unable to protect this information, our business and the
growth of the electronic commerce market in general could be materially
adversely affected. A security or privacy breach may:





·
            cause
      our customers to lose confidence in our services;·
            deter
      consumers from using our services;·
            harm
      our reputation;·
            require
      that we expend significant additional resources related to our information
      security systems and could result in a disruption of our
      operations;·
            expose
      us to liability;·
            increase
      expenses related to remediation costs; and·
            decrease
      market acceptance of electronic commerce transactions and SVC
      use.





While
management believes that we have utilized proven applications designed for
premium data security and integrity in electronic transactions, our use of these
applications may be insufficient to address changing market conditions and the
security and privacy concerns of existing and potential customers.




A Payment Card Industry Security
and Compliance audit was completed on May 6, 2007 and we received a Level
One Payment Service Provider certification for our nFinanSe
NetworkTM.  This is the highest certification attainable. We
anticipate maintaining this certification going forward.





The
market for electronic commerce services is evolving and may not continue to
develop or grow rapidly enough for us to become profitable.





If the
number of electronic commerce transactions does not continue to grow or if
consumers or businesses do not continue as projected to adopt our products and
services, it could have a material adverse effect on our business, financial
condition and results of operations. Management believes future growth in the
electronic commerce market will be driven by the cost, ease of use and
quality of products and services offered to consumers and businesses. In order
to reach and thereafter maintain our profitability, consumers and businesses
must continue to adopt our products and services.





The
debit card and SVC industry is a fairly new industry that is developing and
building out standards, processes and relationships.





We are a
developmental company building out networks and relationships. In the course of
this build out of the network, relationships, load locations and related
systems, there exists the possibility that the associated companies may delay
roll-out of our products and services.  These delays could have an
adverse effect on cash flow, sales and inventory levels.





If
we do not respond to rapid technological change or changes in industry
standards, our products and services could become obsolete and we could lose our
existing and future customers.





If
competitors introduce new products and services, or if new industry standards
and practices emerge, our existing product and service offerings, technology and
systems may become obsolete. Further, if we fail to adopt or develop new
technologies or to adapt our products and services to emerging industry
standards, we may lose current and future customers, which could have a material
adverse effect on our business, financial condition and results of operations.
The electronic commerce industry is changing rapidly. To remain competitive, we
must continue to enhance and improve the functionality and features of our
products, services and technologies.


-9-




Changes
in network and banking regulations could hurt our ability to carry out our
business plan.





We have
designed our systems and card programs to comply and work in association with
the Discover® Network and applicable banking rules and regulations. A
significant change of those rules and regulations could require us to
dramatically alter our software programs, the hardware upon which we operate and
our implementation and operation of SVCs. Such changes could be costly or
impractical and we may not be able to modify our operations and technology to
comply with any major changes in banking regulations.





Changes
in the Bank Secrecy Act and/or the USA PATRIOT Act could impede our ability
to circulate cards that can be easily loaded or issued.





Our
current compliance program and screening process for the distribution and/or
sale of SVCs is designed to comply with the Bank Secrecy Act, or the BSA,
and the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act, or the USA PATRIOT
Act.  These regulations require financial institutions to obtain and
confirm information related to their respective cardholders. If the BSA, and/or
the USA PATRIOT Act or subsequent legislation increases the level of scrutiny
that we must apply to our cardholders and customers, it may be costly or
impractical for us to continue to profitably issue and load cards for our
customers.




We
may eventually face significant competition from major banks.





While
several other small and private companies offer products and services similar to
those offered by us, most banks have not targeted the “credit challenged
consumer” and “cash-based consumer” markets. It is possible that those banks may
begin to enter the market for, and expend increasing resources to develop,
financial services targeted at the credit challenged and cash-based markets,
including the sale and servicing of SVCs and similar services. These banks have
significantly greater market presence, brand-name recognition, and financial,
technical, and personnel resources than us. Although few banks have focused on
our intended target market, they may do so in the future either directly or
through acquisition. Accordingly, we may experience increased competition from
traditional and emerging banks and other financial institutions. We cannot
predict whether we will be able to compete successfully against current or
future competitors or that competitive pressures will not materially adversely
affect our business, financial condition, or prospects. Any increase in
competition may reduce our gross margins, require increased spending on sales
and marketing, and otherwise materially adversely affect our business, financial
condition and prospects.





Internal
processing errors could result in our failing to appropriately deduct
transactions from customer accounts.





In the
event of a system failure that goes undetected for a substantial period of time,
we could allow transactions on blocked accounts, false authorizations, fail to
deduct charges from accounts or fail to detect systematic fraud or abuse. Errors
or failures of this nature could adversely impact our operations, our
credibility and our financial standing.





Information
system processing interruptions could result in an adverse impact on us, our
credibility and our financial standing.





In the
event of an information systems processing interruption due to hardware failure,
software failure or environmental force majeure resulting in loss of access
by cardholders to loading funds on a card, checking their balance, authorizing
purchases or reaching customer service, such an event could also allow
transactions on blocked accounts, false authorizations, failure to deduct
charges from accounts or failure to detect systematic fraud or abuse. Errors or
failures of this nature could immediately adversely impact our operations, our
credibility and our financial standing.




-10-


The
requirements to maintain higher reserve accounts could impair our growth and
profitability.





We are
required to maintain reserve deposit accounts with both Discover and our issuing
banks. If we are required to deposit higher than normal reserves with either or
both, it could have a material impact on our cash available for operations and
impede our business expansion.




If
Discover Financial Services changes its requirements or terminates our contract,
the loss would substantially interfere with our marketing strategy and require
us to issue only non-hologram products.




Our
business proposition focuses solely on the Discover® Network hologram card
due to what we believe to be superior attributes.  Discover® Network cards
can be instantly issued at the POS, real-time authorization of transactions
mitigate fraud and customers routinely receive balance information on their
sales receipts.  In addition, Discover® Network cards are accepted by
over four million merchants and ATMs throughout the United States. If we were to
lose our ability to manage card programs issued under the Discover® Network
brand, we would lose market acceptance for our products.




Certain
delays could cause loss of business opportunities and inhibit our
growth.




Delays in
the development of our programs or business plans could cause loss of
opportunities. These delays could be in areas such as:




·
            integration
      and deployment with our retail distributors;·
            SVC
      sales and activation; and·
            SVC
      integration and usage.





The
delays may impact our cash flow and profitability.  Delays in
distribution and/or adoption of our technology or products could delay the sale,
activation and use of SVCs.




Providing
credit to the wrong distributors could harm our business and inhibit our
growth.




If
distributors are unable to fulfill their credit obligations to us, it could have
a material adverse effect on our financial condition and results of operations.
We immediately transfer funds into the cardholder pooled account at the issuing
bank even though the money will not be remitted to us for several days by the
distributor. We continually monitor our distributors’ financial condition and in
many cases we have arrangements whereby we are authorized to electronically
debit their accounts each day for amounts due us. We usually require that some
level of minimum cash balance be maintained with us to cover the associated
risk. However, if at the time the ACH “electronic” debit is initiated, the
distributor does not pay us as agreed and the amount is in excess of the
maintained cash balance, it could seriously harm our financial
condition.





Item
2. Description of
Property.




Our
offices are located at 3923 Coconut Palm Drive, Suite 107, Tampa, Florida 
33619.  The lease, which commenced in October 2007, calls for future
minimum rentals of approximately $740,000 (exclusive of sales tax and Common
Area Maintenance, or CAM, charges we are also required to pay) to be paid over a
five year period.  In October 2007, we vacated our former offices,
located at 6015 31st Street East, Suite 201, Bradenton,
Florida 34203.  We remain liable for monthly rents of
approximately $12,200 through the lease expiration on December 31,
2008.  We also leased an additional 10,000 square feet on the second
floor of the same building, for which we paid a monthly rent of approximately
$11,800 through October 2007 (at which time our lessor released us from future
liability on such lease with minimal cost to us.)   We made
the decision to relocate primarily because we believe that our new Tampa
location will make it easier for us to hire the technical and customer service
personnel we anticipate needing to implement our business model.  We
also have operating lease agreements with terms of one year or less for two
sales offices, one in Atlanta, Georgia and the other in Dallas, Texas, and a
temporary warehouse in Sarasota, Florida.


-11-




As of
December 29, 2007, we evaluated the ability to recover the minimum future lease
payments on our previous Bradenton offices of approximately $149,500 as well as
leasehold improvements, fixtures and equipment having a net book value of
approximately $58,000.  Our evaluation, taking into consideration the
leasing market in Bradenton and our recent experience concerning the second
floor of the Bradenton location, resulted in our recording a charge to
operations of approximately $176,000 for the fair value of the net remaining
rent (i.e. the future minimum lease payments minus estimated sublease rentals we
reasonably can expect to receive) and the carrying value of the aforementioned
assets related to such facility. We did not incur any other significant
costs as a result of our move to our Tampa, Florida facility.





We
maintain technology equipment, primarily network servers, telecommunications and
security equipment, to run the nFinanSe Network at two third party
locations.  Our primary location is in Sarasota, Florida and our
backup location, with functionally identical equipment, is in Tampa,
Florida.  All of our other tangible personal property is located at
our new facility. All of our equipment is in good operating condition and repair
(subject to normal wear and tear).





Item
3.  Legal Proceedings.




On
December 10, 2007, Bedlington Securities, Inc., a Bahamian corporation, filed
suit against the Company in the Eighth Judicial District Court, Clark County,
Nevada, alleging securities fraud in connection with stock it purportedly
purchased between August 2004 and November 2006.  Bedlington
Securities, Inc. claims damages in excess of $50,000 and seeks a judgment for
general and special damages to be determined at the time of trial, punitive
damages, reasonable attorney fees and costs of suit and such other further
relief as the court may deem just.  The Company believes that
Bedlington Securities, Inc.'s claim is without merit and intends to defend the
suit.  The litigation is currently in the discovery stage and
accordingly the ultimate resolution of this matter cannot be determined at this
time.  As such, no effect has been given to any loss that might result
from the resolution of this matter in the accompanying consolidated financial
statements.





We may
also become involved in certain other litigation from time to time in the
ordinary course of business, however at December 29, 2007, no such litigation
exists or has been threatened.





Item
4.  Submission of Matters to a Vote of Security Holders.




None.











-12-




PART
II




Item
5.  Market for Our Common Equity and Related Stockholder
Matters.




Market
Information




Shares of
our common stock are quoted on the OTC Bulletin Board under the symbol
“NFSE.”  On November 15, 2006, we changed our fiscal year-end to the
Saturday closest to December 31 of each year.  The following
quotations reflect the high and low bids for the shares of the common stock
based on inter-dealer prices without retail mark-up, mark-down or commission,
and may not represent actual transactions. The high and low bid prices for the
shares of the common stock during each full financial quarter for the three most
recent fiscal years were as follows:





Quarter
      Ended
            High
            LowDecember
      29, 2007
            $4.95
            $3.15September
      29, 2007
            $3.80
            $2.98June
      30, 2007
            $4.49
            $2.96March
      31, 2007
            $5.05
            $1.30December
      31, 2006
            $1.96
            $0.60September
      30, 2006
            $8.40
            $1.34June
      30, 2006
            $9.00
            $4.94March
      31, 2006
            $16.00
            $6.70December
      31, 2005
            $14.60
            $6.00September
      30, 2005
            $22.80
            $8.60June
      30, 2005
            $18.00
            $8.80March
      31, 2005
            $35.20
            $10.20





Holders
of Record of Common Stock




As of March 14, 2008, there were 98
holders of record of our commonstock.




Dividends




Our Series A Convertible Preferred
Stock accrues dividends of 5% per annum. Unless and until these dividends are
declared and paid in full, the Company is prohibited from declaring any
dividends on its common stock. There are no dividend requirements on our Series
B Convertible Preferred Stock.





In September 2007, dividends were paid
on the voluntary conversion of 1,300,000 shares of Series A Preferred Stock into
1,300,000 shares of common stock, in the form of 12,865 shares of common stock
and cash for fractional shares of $11. In December 2007, dividends were paid on
an additional voluntary conversion of 207,450 shares of Series A Preferred Stock
into 207,450 shares of common stock, in the form of 2,260 shares of common
stock.  As of December 29, 2007, dividends owed but not declared on
our Series A Convertible Preferred Stock were $393,167.  In January
2008, these dividends were declared and satisfied through the issuance of
104,252 shares of our common stock.  We have not paid cash dividends
on our common stock since inception.





Recent
Sales of Unregistered Securities





During
the third quarter of fiscal 2006, we entered into a Convertible Promissory Notes
for $1,150,000 to provide interim funding until we could complete our next
longer-term funding.  The notes were initially due on the earlier of five
days after a qualified financing or the three month anniversary of the loan,
however, the maturity date was subsequently extended until February 2, 2007. The
note accrued interest at the rate of  9% per annum, was convertible
into our common stock and contained 100% warrant coverage. Both the conversion
price of the note and the exercise price of the warrant were assumed to be equal
to the price paid for our shares in the subsequent qualified financing which
occurred in August 2006, which was $0.25.


-13-




On August
2, 2006, we entered into a series of Senior Secured Convertible Promissory Notes
for an aggregate of $3,967,250, the August Notes, which included the conversion
of the April 2006 note of $1,050,000 plus $17,250 of accrued and unpaid interest
($100,000 of the notes discussed above were repaid).  These notes were
due on the earlier of five days after a qualified financing, as defined in the
notes, or February 2, 2007. The notes accrued interest at the rate of 9%
per annum and were convertible into our common stock at the same terms of
our next qualified financing.  In connection with this financing, we
issued warrants to purchase 793,450 shares of common stock with an exercise
price of $5.00 per share.




On
September 29, 2006, we entered into Securities Exchange Agreements, or the
Exchange Agreements, with the holders of the August Notes.  Pursuant
to the Exchange Agreements, we issued an aggregate of $3,967,250 senior secured
convertible promissory notes in exchange for the surrender of the
August Notes in the aggregate of $3,967,250 and warrants exercisable into
793,450 shares of our common stock.  Within 90 days of the date of the
Exchange Agreements, we had the right to demand and the investors had certain
additional investment rights to purchase of an additional $1,000,000 of notes by
the investors and their affiliates on a pro rata basis.  The investors
exercised this right and purchased an additional $1,000,000 of the notes on
November 8, 2006.  All $4,967,250 of convertible promissory notes are
referred to as September Notes.




On
December 21, 2006, we issued an additional $200,000 in Senior Secured
Convertible Promissory Notes to an existing holder of the September
Notes.





On
December 28, 2006, we completed the exchange of all of our outstanding September
Notes, in the aggregate amount of $5,327,930 of principal and accrued interest,
into 5,327,930 shares of our Series A Convertible Preferred
Stock.  Pursuant to the terms of the exchange, all of the notes were
surrendered and cancelled as consideration for the shares of such stock, which
are convertible into one share of our common stock at a conversion rate of $1.00
per share.





Further,
in a private placement occurring concurrently with the exchange, we received
proceeds of $4,000,000 through the sale of an additional 4,000,000 shares of the
aforementioned Series A Convertible Preferred Stock to certain accredited
investors, including investors who had been holders of the September
Notes.





On June
29, 2007, the Company entered into Securities Purchase Agreements, dated as of
June 29, 2007, or the Purchase Agreements, with several institutional and
accredited investors, or the Investors, pursuant to which the Company issued and
sold to the Investors an aggregate of (i) 1,000,000 shares of Series B
Convertible Preferred Stock, $0.001 par value per share, or Series B Preferred
Stock, (ii) 2,023,199 shares of common stock, $0.001 par value per share, and
(iii) warrants to purchase 1,511,600 shares of common stock, or Warrants, for an
aggregate purchase price of $9,069,597.





Pursuant to the Purchase Agreements,
for the first $999,999 invested, each Investor received (i) common stock at the
purchase price of $3.00 per share, and (ii) Warrants to purchase such number of
shares of common stock that is equal to 50% of the common stock
purchased.  For amounts invested between $1,000,000 and $1,999,998,
each Investor received (i) Series B Preferred Stock at the purchase price of
$3.00 per share, and (ii) Warrants to purchase such number of shares of common
stock that is equal to 50% of the Series B Preferred Stock
purchased.  For amounts invested over $1,999,999, each Investor
received (i) for the amount equal to 25% of the investment over $1,999,998,
common stock at a purchase price of $3.00 per share; (ii) for the amount equal
to 75% of the investment over $1,999,998, Series B Preferred Stock at a purchase
price of $3.00 per share; and (iii) Warrants to purchase such number of shares
of common stock that is equal to 50% of the common stock and Series B Preferred
Stock purchased.




-14-


The Warrants entitle the Investors to
purchase up to an aggregate of 1,511,600 shares of common stock at an initial
exercise price of $5.00 per share.  The Warrants expire after a
five-year term.  Each Investor received a Warrant exercisable for a
number of shares of common stock equal to 50% of the shares of common stock and
Series B Preferred Stock purchased by such Investor pursuant to the Purchase
Agreement.  The exercise price is subject to adjustments for common
stock splits and reverse stock splits.  In the event that the Company
shall consolidate with or merge with or into another person or entity, or the
Company shall sell, transfer or lease all or substantially all of its assets, or
the Company shall change its common stock into property or other securities
collectively referred to as the Triggering Transaction, the Warrant shall
terminate and shall thereafter represent only the right to receive the cash,
evidences of indebtedness or other property as the Investor would have received
had the Investor been the record owner, at the time of completion of the
Triggering Transaction, of that number of shares of common stock receivable upon
exercise of the Warrant in full, less the aggregate exercise price payable in
connection with the full exercise of the Warrant.  The Warrant shall
not be exercisable by any Investor to the extent (but only to the extent) that,
if exercised by the Investor, the Investor or any of its affiliates would
beneficially own in excess of 9.99% of the then issued and outstanding shares of
common stock.





On March
21, 2008, the Company entered into a securities purchase agreement with Bruce
Terker, a current member of our Board of Directors, pursuant to which the
Company sold to Mr. Terker (i) 200,000 shares of common stock at $2.50 per share
and, (ii) a warrant to purchase 100,000 shares of common stock, exercisable at
$3.25 per share and expiring on March 21, 2011, for an aggregate purchase price
of $500,000.





As of
March 28, 2008, the Company entered into securities purchase agreements with
certain accredited investors, pursuant to which the Company sold (i) 490,000
shares of common stock at $2.50 per share, and (ii) warrants to purchase 245,000
shares of common stock, exercisable at $3.25 per share and expiring on March 28,
2011, for an aggregate purchase price of approximately $1.2
million.





Equity
Compensation Plan Information





The
following table provides information concerning our equity compensation plans as
of December 29, 2007:




Plan
      Category
            
            Number
      of
              securities
              to
      be issued
              upon
      exercise
              of
      outstandingoptions
            
            Weighted-
              average
              exercise
      price
              ofoutstanding
              options
            
            Number of
              securities remaining
              available for future
              issuance under equity
              compensation
      plansEquity
      compensation plans approved by security holders
            
            2,403,696
            
            $3.59
            
            512,468Equity
      compensation plans not approved by security holders
            
            --
            
            --
            
            --Total
            
            2,403,696
            
            $3.59
            
            512,468




Item
6. Management’s Discussion and Analysis and Plan of Operation.
  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
  Overview.nFinanSe
is a provider of Stored Value Cards, or SVCs. There are four basic types of SVCs
that we issue: reloadable general spend, gift, payroll and corporate reward
SVCs. The reloadable general spend and gift SVCs are marketed to the consumer
through retailer programs managed by established prepaid card distributors.
Payroll and corporate reward SVCs are marketed to large companies by our
internal sales force. The loading of SVCs either takes place over our
proprietary nFinanSe NetworkTM,
through Automated Clearing House, or ACH, transactions, or though transmitted
files containing dollar amounts and card identification which we call “batch”
loads. In addition, the nFinanSe NetworkTM can be
used to process load transactions for other companies that market SVCs.
nFinanSe NetworkTM
transactions can take place throughout our distributors’ retail networks and at
several different payment and remittance processors such as Western Union® and
MoneyGram®.




-15-





Reloadable
general spend SVCs are marketed mainly to the “cash-based consumer” credit
market, which consists primarily of those consumers who cannot qualify for a
credit card or bank account or who are otherwise unattractive to banks, such as
people who are recent immigrants, recently divorced, young or have no credit
history or low income.  We believe gift SVCs have gained a high degree
of consumer acceptance and our gift SVCs are marketed to appeal to this large
consumer market segment. We market payroll SVCs directly to employers whose
employee demographics fit the cash-based market profile. Our corporate reward
SVCs are marketed to companies who intend to reward customer loyalty through the
issuance of SVCs.





We earn
revenues when a SVC is sold, when a reloadable SVC is loaded with funds, when
the SVC is used for purchases or ATM transactions and, in some cases, interest
on the card balances and for maintaining the use of the SVC on a monthly basis.
The amount of revenue that we earn varies by transaction type, card issuing bank
and the physical location of the transaction.





Changes in Fiscal Year
End.As part
of our merger with Pan American in August 2004, our fiscal year end changed from
December 31 to September 30.  At a Special Stockholder’s Meeting held
on November 15, 2006, we were granted approval to change our fiscal year end to
the Saturday closest to December 31 of each year.




Discontinued
Operations.During the fourth
quarter of fiscal 2006, we made the decision to discontinue the operations of
our wholesale long-distance and prepaid phone card subsidiary, MBI Services,
Inc., due to lack of profitability and management’s desire to focus our entire
effort on our core SVC business. Accordingly, all financial information
pertaining to this discontinued business has been eliminated from ongoing
operations for all periods presented in our financial statements and is instead
shown as a single line item entitled “Gain (loss) from discontinued
operations.”




Results of
Operations. We
have had limited revenues since our inception, and accordingly are considered a
development stage enterprise as defined in Financial Accounting Standard No.
7.





Lack of Profitability of
Business Operations Since 2001.We were initially
focused exclusively on the sale of SVCs issued by a bank sponsor with a
MasterCard® hologram. During the years leading up to fiscal 2006, we experienced
significant difficulties, with bank sponsors and processors due to
administrative errors, defective cards, poor service and improper paperwork
Additionally, it became apparent to management that there was a flaw in focusing
solely on the sale of SVC products that did not have a convenient load solution
for consumers. Consequently, management made the decision to expand our focus to
include the development of a proprietary process, the nFinanSe NetworkTM, to
allow the consumer to perform value loads in a retail environment. In fiscal
2006, we entered into agreements with MoneyGram® and Western Union® whereby SVCs
could be loaded at their locations using the nFinanSe NetworkTM. These agreements
greatly expanded our load network. In  2006, we signed an agreement
with DFS Services LLC, or DFS, that permits us to issue Discover®Network–branded
SVCs directly or through an issuing bank. We believe the Discover®Network SVC
products have multiple competitive advantages over the bank sponsored Mastercard
SVCs we previously sold. The difficulties with our pre–Discover® Network SVC
programs could not be resolved in a manner favorable to us. Consequently,
management made the decision to focus our efforts solely on implementing the
agreement with DFS. Accordingly, our sales efforts were interrupted while we
developed our new Discover®Network SVC programs and abandoned our existing SVC
programs by disposing of our then existing SVC inventory. The time and money
lost due to the difficulties and interruptions we experienced with other
issuers’ SVC programs, the cessation of sales activity and the SVC inventory
write offs associated with the adoption and development of the Discover® Network
SVC products, along with the expense of developing the nFinanSe NetworkTM, has
kept us from achieving profitability to date.





-16-


During fiscal year 2007, we entered
into agreements with established prepaid card distributors that will enable us
to expand the number of active retail locations where our retail gift and
reloadable general spend SVCs can be purchased.  Once our SVCs are
deployed, we expect this effort will increase the number of locations where our
cardholders can load funds onto their cards using the nFinanSe
NetworkTM.  As of December 29, 2007, there were over
70,000 locations where our SVCs could be loaded.  During 2007, we
entered into agreements with several prepaid card distributors representing over
144,000 retail locations. Although much work is still required to get these
agreements implemented and to have our reloadable general spend and retail gift
SVCs accepted in the market, our business plan is to have a significant number
of retail locations selling our retail gift and reloadable general spend SVCs by
the end of calendar 2008. As of December 29, 2007, we had approximately 600
retail locations offering our SVCs for sale and for reload
services.





Also
during fiscal 2007, our corporate sales force began actively marketing our
payroll card and we were awarded a major payroll card program by a large
retailer with up to 50,000 employees eligible for a payroll card.  We
expect this program to begin by the end of the second quarter of
2008.  We intend to continue marketing our payroll card program and
adding active payroll card SVCs into 2008.





The
following discussion compares the operations of the business for the fiscal year
ended December 29, 2007 and the fiscal year ended September 30, 2006 and the
three months ended December 30, 2006 and December 31, 2005.




Sales and
Revenues.We
produce revenues through five types of fees: fees when a card is sold, fees when
the nFinanSe Network TM is used
to reload a card, fees when a card is used in a purchase or ATM transaction,
interest revenue which arises from overnight investing of card balances by our
card issuing bank and fees when a card with a cash balance is charged for
monthly maintenance. These fees differ by card type, issuing bank or transaction
type.




Revenues
for the years ended December 29, 2007 and September 30, 2006 were $32,763 and
$77,833, respectively.  Revenue was down approximately 84% in the year
ended December 29, 2007 compared to the year ended September 30, 2006 due to
discontinuing our former bank sponsored SVC programs and focusing solely on our
Discover®Network branded SVCs with programs developed by us and issued through
selected Federally chartered banks.





Revenues
for the three months ended December 30, 2006 and the three months ended December
31, 2005 were $19,518 and $39,885, respectively. Revenue was down in the three
months ended December 30, 2006 by 51% when compared to the three months ended
December 31, 2005.





Revenues
in 2006 were hindered due to the cessation of our former bank sponsored SVC
programs and the re-alignment of our business solely with the
Discover®Network.  Revenues in 2007 were limited due to distributor
program delays in getting cards for sale at retail locations.  These
delays stem from the distributors inability to (i) timely certify their
equipment, (ii) successfully complete pilots, (iii) market, train and sell their
retailers on the Company’s products  and (iv) rollout cards prior to
the forth quarter holiday season, a traditional blackout time for any systems or
product initiatives.  During 2007, our focus was on executing
agreements with prepaid card distributors.  Late in 2007, we had two
distribution partners that began selling our SVC products, QComm and Via One,
each of which had a limited number of retail locations on our
network.  We have executed agreements with other prepaid card
distributors including InComm, Now Prepay, LDC and Emida. These distributors
provide prepaid programs at more than 100,000 retail locations in the United
States and we expect, over the next 12 months, that these distributors will
market our SVCs in many of these locations.  In addition during 2007,
the Company also focused on executing payroll card agreements with large
corporate customers.  In October 2007, the Company was awarded a
payroll card program with a large employer that we expect will be rolled-out in
the second quarter of fiscal 2008.


-17-




Transaction and
Operating Expenses.Transaction and operating
expenses reflect charges for the cost of SVCs sold, charges from our processor,
issuing-banks and networks (Discover® Network, ATM networks and EFT networks)
for our SVC programs and card transaction costs and the costs of the nFinanSe
customer service department.





Description
            
            For
      the
              yearended
              December
      29, 2007
            
            
            For
      the
              yearended
              September
      30, 2006
            
            
            For
      the
              three
      month
              period
      ended
              December
      30, 2006
            
            
            For
      the
              threemonth
              periodended
              December
      31, 2005SVC
      card cost, program and transaction expenses
            
            $
            533,865
            
            
            $
            -
            
            
            $
            49,237
            
            
            $
            37,368Inventory
      disposals and reserves
            
            
            68,300
            
            
            
            583,762
            
            
            
            -
            
            
            
            -Stock
      based compensation
            
            
            2,210
            
            
            
            7,545
            
            
            
            1,506
            
            
            
            -Customer
      service expenses
            
            
            449,497
            
            
            
            227,874
            
            
            
            25,372
            
            
            
            86,018Transaction
      and operating expenses
            
            $
            1,053,872
            
            
            $
            819,181
            
            
            $
            76,115
            
            
            $
            123,386





Transaction
and operating expenses increased 28.7% to $1,053,872 in the year ended December
29, 2007 from $819,181 in the year ended September 30, 2006.  The
increase is primarily the result of the Company’s initiative during 2007 in
developing a 24 hour seven days a week customer service department to support
our SVC products and programs plus SVC program and transaction expenses related
to the nFinanSe Discover® Network.  Inventory disposals and reserves
decreased $515,462 to $68,300 for the year ending December 29, 2007 from
$583,762 for the year ending September 30, 2006 due primarily to the previous
year write-off of obsolete inventory in connection with the cessation of our
former bank sponsored SVC programs.





Transaction
and operating expenses decreased 38.3% to $76,115 for the three month period
ending December 30, 2006 from $123,386 for the three month period ending
December 31, 2005.  The decrease for the three month period ending
December 30, 2006 was primarily due to lower customer service costs, the result
of the cessation of the former bank sponsored SVC programs and, prior to the
development of a 24 hour seven day a week customer service department,
support  of our Discover® SVC products.  The decrease was
slightly offset by higher SVC program and transaction expenses due to the set-up
and distributor program costs associated with the nFinanSe Discover® Network SVC
programs and stock based compensation due to the Company’s adoption of Financial
Accounting Standards No. 123R (“FAS 123 (Revised)”), “Share-Based Payments” (“FAS
123(R)”) on January 1, 2006.  The Company adopted a modified
prospective method for awards existing at the date of adoption which required us
to record compensation expense as such awards continue to vest.  As
such, we recorded expense for the three month period ended December 30, 2006,
but had not recorded any stock based compensation expense for the three month
period ended December 31, 2005.





Selling and
Marketing Expenses.Selling and marketing
expenses represent the costs we incur for our sales force and for the
advertising, trade show and internal marketing expenses associated with
marketing our SVCs.





Description
            
            For
      the year
              ended
              December
      29,
              2007
            
            
            For
      the year
              ended
              September
      30,
              2006
            
            
            For
      the three
              month
      period
              ended
              December
      30,
              2006
            
            
            For
      the three
              month
      period
              ended
              December
      31,
              2005Advertising
      and marketing expenses
            
            $
            547,996
            
            
            $
            495,259
            
            
            $
            106,103
            
            
            $
            163,306Sales
      force expenses
            
            
            1,535,291
            
            
            
            477,700
            
            
            
            224,205
            
            
            
            134,341Stock
      based compensation
            
            
            181,148
            
            
            
            161,440
            
            
            
            58,027
            
            
            
            -Selling
      and marketing expenses
            
            $
            2,264,435
            
            
            $
            1,134,399
            
            
            $
            388,335
            
            
            $
            297,647






-18-




Selling
and marketing expenses increased 100.0%, or $1,130,036, to $2,264,435 in the
year ended December 29, 2007 from $1,134,399 in the year ended September 30,
2006.  Advertising and marketing expenses were $52,737 higher due to
increases in advertising, trade shows and promotional materials. Higher sales
force expenses of $1,057,591 were incurred in connection with the hiring of 10
additional personnel and related business expenses.  Because the
Company implemented FAS 123(R) on January 1, 2006, stock based compensation was
higher for the year ended December 29, 2007 due a full year of expense compared
to nine months of expense in the year ended September 30, 2006.





Selling
and marketing expenses increased 30.5%, or $90,688, to $388,335 for the three
month period ended December 30, 2006 from $297,647 for the three month period
ended December 31, 2005.  This increase was the result of higher sales
force expenses in connection with the hiring of three additional personnel and
related business expenses offset by lower advertising and marketing
expenses.  Advertising and marketing expenses were lower due primarily
to lower marketing personnel and personnel related expenses and to lower media
expense.  Stock based compensation was approximately $58,000 of the
increase because the Company began implementing FAS 123(R) on January 1, 2006,
and therefore had not reported any stock based compensation in the three month
period ended December 31, 2005.





General and
Administrative Expenses.General and administrative
expenses increased $551,246 to $6,862,485 for the year ended December 29, 2007
from $6,311,239 for the year ended September 30, 2006.  The increase
was primarily due to:





·
            personnel
      expenses due to increases in personnel and charges of approximately
      $250,000 for our settlement with our former chief executive officer under
      a non-cancelable employment
agreement;


·
            stock
      based compensation due to nine months of expense in the year ended
      September 30, 2006 as compared to a full year of expense for the year
      ended December 29, 2007 because the Company implemented FAS 123(R) on
      January 1, 2006 and due to options granted under an accelerated vesting
      schedule for our CEO and CFO for the year ended December 29,
      2007;


·
            impairment
      of asset charges of $99,348 in connection with our former corporate office
      and write off of dormant card program costs;
and


·
            licensing
      costs associated with our state money transmission/service business
      licensing initiative,




offset
slightly by decreases in:





·
            consulting
      expenses related to the financing, operation of the business and
      compliance efforts;


·
            legal
      fees associated with filing our Registration Statement on Form SB-2 in
      fiscal 2006; and


·
            other
      general and administrative
expenses.





General
and administrative expenses increased $13,937 to $1,345,822 for the three month
period ended December 30, 2006 from $1,359,759 for the three month period ended
December 31, 2005.  The increase was primarily attributable to stock
based compensation expense of $65,523 recorded in the three month period ended
December 30, 2006 and none recorded in the three month period ended December 31,
2005, because the Company began implementing FAS 123(R) on January 1,
2006.  This increase was slightly offset by lower legal and
professional fees related to the filing of our Registration Statement on Form
SB-2 (which became effective on June 14, 2006) and a reduction in legal and
consulting fees incurred in connection with our licensing and compliance
efforts, which were substantially complete by September 30, 2006.





Loss Before Other
Income (Expense).As a result of the above,
loss before other income (expense) for the years ended December 29, 2007 and
September 30, 2006 was $10,148,029 and $8,186,986, respectively.





Loss
before other income (expense) for the three month periods ending December 30,
2006 and December 31, 2005 was $1,790,754 and $1,740,907,
respectively.


-19-


Other
Income (Expense).





Interest income.Interest
income increased $165,588 from $17,737 for the fiscal year ended September 30,
2006 to $183,325 for the fiscal year ended December 29, 2007.  This
increase is primarily attributable to the interest income received on the
overnight investment of the higher bank balances in fiscal 2007.





Interest
income increased from $6,009 for the three months ended December 31, 2005 to
$868,540 for the three months ended December 30, 2006.  This increase
is primarily attributable to $863,000 of amortized premium related to the
carrying value of our notes payable that were converted into Series A
Convertible Preferred Stock on December 28, 2006.





Interest
expense.Interest expense decreased
from $1,499,630 for the fiscal year ended September 30, 2006, to $1,895 for the
fiscal year ended December 29, 2007.  In fiscal 2006, substantially
all of our interest expense represented non-cash amortization of debt discounts
that arose when we allocated proceeds from our financing transactions to other
securities issued in connection with the respective financings, such as
warrants, and derivative features embedded in the debt instruments. In fiscal
2007, our minimal interest expense relates primarily to insurance premium
financing agreements as all of our interest bearing debt was converted to equity
in 2006..





Interest
expense increased from $1,501 for the three months ended December 31, 2005, to
$169,698 for the three months year ended December 30,
2006.  Substantially all of our interest expense represented interest
accrued on notes payable.  The notes were converted to Series A
Convertible Preferred Stock on December 28, 2006.





Gain on Derivative
Financial Instruments.We
recognized a net gain on our non-trading derivative financial instruments of
$3,465,948 for the year ended September 30, 2006.  During fiscal 2007,
there were no derivative financial instrument liabilities outstanding and,
accordingly, we have no gains or losses on such instruments during the year
ended December 29, 2007.





We recognized a net gain on our
non-trading derivative financial instruments of $634,911 for the three months
ended December 31, 2005. As of September 30, 2006, we no longer had any
outstanding derivative financial instrument liabilities and, accordingly, we had
no gains or losses on such instruments during the quarter ended December 30,
2006.





Gains (losses) on
debt extinguishments.During our fiscal year
ending September 30, 2006, we entered into certain debt exchange and
modification agreements that, under current accounting standards, constituted
debt extinguishments. Such extinguishments arise when previously issued debt
instruments are exchanged for new instruments with materially different terms or
in instances where modifications to existing debt agreements materially modify
the original terms or material fees are paid to effect the modification. When
our debt was extinguished or, in the case of modifications, effectively
extinguished, we were required to record the newly issued debt at its fair
values which exceeded the carrying values of our existing balances. As a result,
we were required to recognize debt extinguishment gains and losses that net to a
loss of $5,137,817.  We did not have any gains or losses on debt
extinguishments for the year ended December 29, 2007.




During
the three months ended December 30, 2006, we entered into certain debt exchange
and modification agreements that, under current accounting standards,
constituted debt extinguishment.  As a result, when we extinguished
the debt, we were required to recognize debt extinguishment gains and losses
that net to a gain of $452,299 for the three months ended December 30,
2006.  We did not have any gains or losses on debt extinguishments for
the three month period ended December 31, 2005.






Loss from Continuing
Operations.Loss from continuing
operations was $9,939,356 for the year ended December 29, 2007 or $1,500,041
lower than the loss from continuing operations of $11,439,397 for the fiscal
year ended September 30, 2006.




Loss
from continuing operations for the three month periods ending December 30, 2006
and December 31, 2005 was $669,614 and $1,311,206, respectively.


-20-


Gain (Loss) from
Discontinued Operations.During the year ended
September 30, 2006, we discontinued our prepaid calling card business and,
accordingly, our statements of operations for all periods presented have been
restated to reflect the prepaid calling card business as a discontinued
operation.  During fiscal 2007, loss from our discontinued operations
was $8,738 versus a loss of $3,350,244 for the year ended September 30,
2006.  Approximately $741,400 of the fiscal year 2006 loss is
attributable to the write down of the discontinued operation’s assets to fair
value and approximately $111,400 of the fiscal year 2006 loss is attributable to
stock based compensation.




Loss from
our discontinued operations was $47,456 for the three months ended December 30,
2006 or $612,202 lower than the same period of the prior year. The decrease is
attributable to cessation of our telecom business operations in September
2006.




Liquidity and
Capital Resources.From inception to December 29, 2007, we
have raised net proceeds of $29,573,113 from financing activities. We used these
proceeds to fund operating and investing activities.





Net cash
used in operating activities was approximately $8,485,000 and $7,470,000 for the
twelve month periods ended December 29, 2007 and September 30, 2006,
respectively.  The increase in cash used in operations was primarily
the result of increases in inventories for the Discover ® Network
cards.





Net cash
used in investment activities for the fiscal year ended December 29, 2007 was
approximately $1,312,000, consisting of a short term investment of $728,000 and
$584,000 for purchases of property and equipment related to the relocation to
our Tampa office and computer hardware and software for new employees and
nFinanSe NetworkTM.  Net
cash used in investment activities for the fiscal year ended September 30, 2006
was approximately $508,800, of which approximately $16,000 was an investment in
a private company that was unwound and the balance was primarily for computer
hardware and software.





During
theyear ended
December 29, 2007, we secured net cash provided by financing activities of
approximately $8,407,000 through sales of certain of our equity instruments,
while for the year ended September 30, 2006 we secured net proceeds of
approximately $6,400,000 from the sale of certain debt and equity
instruments.   We had a cash balance of approximately $1.3
million as of March 28, 2008, which is inclusive of $1.7 million from the sale
of equity in March 2008.





On
February 19, 2008, we completed the funding of collateral required for bonds
issued in connection with our state licensing efforts amounting to approximately
$1.8 million. The collateral, which was in the form of a one year letter of
credit from a bank, was placed with the insurance company that issued the
various bonds aggregating to a face amount of approximately $7.2 million. The
issuing bank required that the letter of credit be guaranteed by Jeffrey Porter,
one of our major stockholders and Bruce E. Terker, a current member of our Board
of Directors,  in addition to the Company. In this case, approximately
$1 million of the collateral for the letter of credit was arranged by Mr. Porter
and the remaining collateral for the letter of credit was provided by Mr.
Terker, who is also a major stockholder. In connection with this accommodation,
the company and the Messrs. Porter and Terker entered into a Guaranty and
Indemnification Agreement. In one instance, Mr. Porter who put up the $1 million
of collateral agreed to a compensation of 2% per quarter paid in arrears in
cash. In the other instance, Mr. Terker agreed to be compensated in the form of
warrants to purchase 33,912 shares of the Company’s common stock at a purchase
price of $3.35 per share, which would be earned ratably over the course of the
year. The Guarantee and Indemnification Agreements can be cancelled by the
Company in certain circumstances in 30 days.  After one year, it is
expected that the Company will have the ability to fund the collateral
requirement, if any, without the assistance of the guarantors





To fund
the full scale implementation of our business plan and the planned rollout and
distribution of cards in both the retail and paycard segments of our business,
we will need to raise $6 - $7 million of additional capital over the next 12
months (we have recently closed on approximately $1.7 million of this equity
raise and such amount is included in cash as of March 28, 2008). 
Additionally, we expect to arrange a revolving accounts receivable credit
facility which will be used to fund the face amount of gift cards and the load
amounts on general spend cards on a daily basis. We expect to finance the
aforementioned needs principally through public or private equity offerings and
through debt financings and have retained investment bankers to assist us with
the aforementioned offerings and financings.  We may decide to raise
the capital in more than one transaction based on market conditions and business
circumstances.  Although we are confident of our business plan, we
have experienced unforeseen difficulties with implementing our plans in the past
and there can be no assurance that unforeseen difficulties can be avoided going
forward.  This fact alone could hamper our ability to raise the funds
necessary to permit us to continue as a going concern for a reasonable period of
time. If we are able to raise the funds, the terms and conditions may be highly
dilutive to existing stockholders.





-21-




Changes
in Number of Employees and Location.We anticipate that the
development of our business will require the hiring of a substantial number of
additional employees in sales, operations and customer
service.  We have relocated to an approximately 11,400 square foot
office in the greater Tampa, Florida area because we believed that our former
location in Bradenton, Florida made recruiting quite difficult due to the
demographics of the area. The lease for our new Tampa offices commenced on our
move-in date in October 2007. The total minimum payments, exclusive of sales
taxes and CAM charges, over the five-year lease obligation are approximately
$740,000. After
our move to the Tampa location, we vacated the leased premises in Bradenton,
Florida; however, we remain liable for the full amount of rent payable under our
Bradenton lease. As mentioned under "Description of Property" above, we
recognized an expense and liability for the fair value of the net remaining
lease rentals at the Bradenton location of approximately $149,500 (i.e. the
future minimum lease payments below minus estimated sublease rentals we
reasonably can expect to receive) during the quarter ended December 29,
2007.  In addition, we also impaired approximately $58,000 of property
and equipment upon abandonment of the facility. We did not incur any other
significant costs as a result of our move to our new facility.





Off-Balance
Sheet Arrangements




Operating
Leases




We are obligated under various
operating lease agreements.  Future minimum lease payments and
anticipated common area maintenance charges under all of our operating leases
are approximately as follows at December 29, 2007:





Year
      ended
            
            
            Amounts2008
            $
            441,0002009
            
            196,3002010
            
            200,6002011
            
            205,1002012
            
            156,300Total
            $
            1,199,300




Rent expense
included in loss from continuing operations for the year ended December 29,
2007, the three months ended December 30, 2006 and the year ended September 30,
2006 approximated $332,646, $71,700 and $274,000, respectively.





Employment
Agreements





We are
obligated under the following employment agreements:





●
            The
      employment agreement with our Chief Executive Officer, Jerry R. Welch, has
      a term from September 5, 2006 to December 31, 2008 and provides him with
      an annual salary of $235,000 (raised to $275,000 in February 2008). The
      agreement is to be automatically renewed for succeeding terms of two years
      unless otherwise terminated in accordance with the agreement.
      Additionally, Mr. Welch received the option to purchase approximately
      603,400 shares of our common stock at $1.50 per share, or the Welch Option
      Shares, which when using Black-Scholes, results in an aggregate fair value
      of approximately $845,000. This amount is being recognized as stock-based
      compensation expense on a straight line basis as the options vest. The
      grant was equal to 4.25% of the total of our outstanding shares, options
      and warrants as of December 28, 2006 (the date we completed the permanent
      financing required for the grant of such options). The Welch Option Shares
      are divided into 28 equal installments. The first six installments vested
      on February 28, 2007 and additional installments vest on the final day of
      each month through December 31, 2008.




-22-






On
      July 12, 2007, Mr. Welch was awarded 197,855 stock options at $3.40 per
      share, which when using Black-Scholes, results in an aggregate fair value
      of approximately $619,000.  The grant was equal to approximately
      4.25% of the shares of our total stock and warrants issued under the June
      29, 2007 Purchase Agreements. These options vest in 28 equal installments.
      The first eleven installments vested on July 31, 2007 and accordingly at
      that time 11/28 of the aforementioned stock-based compensation was
      recognized as compensation expense.  The remaining compensation
      expense is being recognized on a straight line basis as additional
      installments vest on the final day of each month through December 31,
      2008.
              
              On
      January 24, 2008, Mr. Welch was awarded 95,000 stock options at $4.00 per
      share, which when using Black-Scholes, results in an aggregate fair value
      of approximately $233,725.  These options vest in 28 equal
      installments. The first seventeen installments vested on January 31, 2008
      and accordingly at that time 17/28 of the aforementioned stock-based
      compensation was recognized as compensation expense.  The
      remaining compensation expense is being recognized on a straight line
      basis as additional installments vest on the final day of each month
      through December 31, 2008.


●
            The
      employment agreement with our Chief Financial Officer, Raymond Springer,
      has a term from September 5, 2006 to December 31, 2008 and provides him
      with an annual salary of $185,000 (raised to $200,000 in February 2008).
      Additionally, Mr. Springer received the option to purchase approximately
      284,000 shares of our common stock at $1.50 per share, or the Springer
      Option Shares, which when using Black-Scholes, results in an aggregate
      fair value of approximately $400,000. This amount is being recognized as
      stock-based compensation expense on a straight line basis as the options
      vest. This grant was equal to 2.0% of the total of our outstanding shares,
      options and warrants on December 28, 2006 (the date we completed the
      permanent financing required for the grant of such shares). The Springer
      Option Shares are divided into 28 equal installments. The first six
      installments vested on February 28, 2007, and additional installments vest
      on the final day of each month through December 31, 2008.
              
              On
      July 12, 2007, Mr. Springer was awarded 93,108 stock options at $3.40 per
      share, which when using Black-Scholes, results in an aggregate fair value
      of approximately $291,000.  The grant was equal to approximately
      2.00% of the shares of our total stock and warrants issued under the June
      29, 2007 Purchase Agreements. These options vest in 28 equal installments.
      The first eleven installments vested on July 31, 2007 and accordingly at
      that time 11/28 of the aforementioned stock-based compensation was
      recognized as compensation expense.  The remaining compensation
      expense is being recognized on a straight line basis as additional
      installments vest on the final day of each month through December 31,
      2008.
              
              On
      January 24, 2008, Mr. Springer was awarded 45,000 stock options at $4.00
      per share, which when using Black-Scholes, results in an aggregate fair
      value of approximately $110,700.  These options vest in 28 equal
      installments. The first seventeen installments vested on January 31, 2008
      and accordingly at that time 17/28 of the aforementioned stock-based
      compensation was recognized as compensation expense.  The
      remaining compensation expense is being recognized on a straight line
      basis as additional installments vest on the final day of each month
      through December 31, 2008.●
            Notwithstanding
      the above mentioned vesting schedules, all such options will be
      immediately fully vested and exercisable in the event of a change in
      control (as defined in the respective employment agreement), and/or the
      death or total disability of Mr. Welch or Mr. Springer during the terms of
      their employment. To the extent the options are not previously exercised,
      the options terminate on the earlier of (i) the date ten years following
      the grant date or (ii) at the date 12 months following the cessation of
      Mr. Welch’s and/or Mr. Springer’s employment with us.●
            Both
      Mr. Welch and Mr. Springer also receive performance-based bonuses and
      certain medical and other benefits.  If we terminate Mr. Welch
      or Mr. Springer without cause, we will be required to pay severance to
      them in the amount of compensation and benefits they would have otherwise
      earned in the remaining term of their agreements or twelve months,
      whichever period is shorter.




-23-


In addition to the above, on December
30, 2006, we were obligated under an employment agreement with our previous
Chairman of the Board of Directors and Chief Executive Officer, Clifford Wildes.
The agreement was terminated on January 29, 2007. As consideration for such
termination and as compensation for accrued vacation owed to Mr. Wildes of
approximately $90,000, we agreed to pay him a total sum of $250,000 over a
period of six months.  At December 29, 2007, the amounts owed to Mr.
Wildes under this arrangement were completely satisfied and there was no
remaining liability.





Service
and Purchase Agreements





We have entered into renewable
contracts with DFS Services LLC, our card network, Metavante, our processor, and
Palm Desert National Bank and First National Bank and Trust, or FNB&T, our
card issuing banks, that have initial expiration dates from June 2009 through
June 2012. Since the majority of the fees to be paid are contingent primarily on
card volume, it is not possible to calculate the amount of the future commitment
on these contracts. The Metavante and FNB&T agreements include a monthly
minimum payment of $5,000.  During the year ended December 29, 2007,
the three months ended December 30, 2006 and the year ended September 30, 2006,
we made aggregate payments of approximately $117,800, $9,000 and $0,
respectively to Metavante and no payments to FNB&T under these
arrangements.





Purchase
Commitments





As of December 29, 2007, we had
non-cancelable purchase commitments for card inventory, including plastic,
collateral material and fees, totaling approximately $1,000,000; substantially
all of which is expected to be paid by mid 2008.  This amount includes
approximately $670,000 that is recorded in accounts payable and accrued
inventory liability on the balance sheet as of December 29, 2007.





Critical
Accounting Policies





Revenue
Recognition




We generate the following types of
revenues:





•
 Wholesale fees, which arise from sales and activation of our
SVCs.


•
 Transaction fees, which arise from the use and loading of cash for
SVCs.


•
 Maintenance fees, which arise from keeping the SVCs active on a monthly
basis.








Our revenue recognition policy is
consistent with the criteria set forth in SEC Staff Accounting Bulletin 104,
“Revenue Recognition in
Financial Statements,” or SAB 104, for determining when revenue is
realized or realizable and earned. In accordance with the requirements of SAB
104, we recognize revenue when (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred; (3) our price to the buyer is fixed or determinable;
and (4) collectibility of the receivables is reasonably assured. We recognize
the costs of these revenues, including the cost of printing the cards, packaging
and collateral material, at the time revenue is recognized.




Use
of Estimates




The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires us to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements. The reported amounts of revenues and expenses during the
reporting period may be affected by the estimates and assumptions we are
required to make. Estimates that are critical to the accompanying consolidated
financial statements arise from our belief that we will generate adequate cash
to continue as a going concern, that all long-lived assets are recoverable and
that the resolution of certain litigation will not result in a significant
loss.  In addition, stock-based compensation expense represents a
significant estimate concerning the future but unknown value of our common stock
at some future date based on a formula used by most companies in making the
value determination.  The markets for our products are characterized
by intense price competition, rapid technological development, evolving
standards and regulations and short product life cycles, all of which could
impact the future realization of our assets. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the period
that they are determined to be necessary. It is at least reasonably possible
that our estimates could change in the near term with respect to these
matters.




-24-


Stock-Based
Compensation




Prior to
January 1, 2006, we used Financial Accounting Standard No. 148, Accounting for Stock-Based
Compensation — Transition and Disclosure, or FAS 148, to account for
our stock-based compensation arrangements. It amended the disclosure provisions
of Financial Accounting Standards Board Statement No. 123, Share-Based Payments or
FAS 123, to require prominent disclosure about the effects on reported net
income of an entity’s accounting policy decisions with respect to stock-based
employee compensation. Through December 31, 2005, as permitted by FAS 123 and
amended by FAS 148, we used the intrinsic value method under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, to account for our stock-based employee compensation
arrangements. Effective January 1, 2006, we began applying FAS 123(R), to
account for our stock-based compensation arrangements. This statement requires
us to recognize compensation expense in an amount equal to the fair value of
shared-based payments, such as stock options, granted to employees.





We have
elected to apply FAS 123(R) using a modified prospective method. Under this
method, we are required to record compensation expense (as previous awards
continue to vest) for the unvested portion of previously granted awards that
remain outstanding at the date of adoption.  With respect to nonemployee
stock options that vest at various times and have no significant disincentives
for nonperformance and/or specific performance commitments, we follow the
guidance in Emerging Issues Task Force Issue No. 96-18. Pursuant to this
standard, the value of these options is estimated at various reporting dates and
finally measured at the respective vesting date(s) of the options (or the date
on which the consultant’s performance is complete). The expense for each group
of options is recognized ratably over the vesting period for each group, and the
estimated value of any unvested options is updated at such time. As a result,
under these arrangements, our initial and periodic recording of stock-based
compensation expense, which relies on a number of estimates such as the
volatility of our stock, represents an estimate for which changes are reflected
in the period that they are determined to be necessary.





Long-Lived
Assets




In
accordance with Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," or FAS 144, we evaluate the
recoverability of long-lived assets and the related estimated remaining lives
when events or circumstances lead management to believe that the carrying value
of an asset may not be recoverable.  At December 29, 2007, we believe
our long-lived assets are recoverable.





Convertible
Debt and Equity Securities Issued with Registration Rights
Agreements




In
connection with the sale of debt or equity securities, we may enter into
registration rights agreements that generally require us to file registration
statements with the SEC to register common shares that may be issued on
conversion of debt or preferred stock to permit resale of common shares
previously sold under an exemption from registration or to register common
shares that may be issued on exercise of outstanding options or warrants. The
agreements typically require us to pay damages, in the form of contractually
stipulated penalties, for any delay in filing the required registration
statements or in the registration statements becoming effective, maintaining
effectiveness or, in some instances, maintaining a listing of our common stock.
These damages are usually expressed as a fixed percentage, per month, of the
original proceeds we received on issuance of the debt, preferred stock, common
shares, options or warrants. We account for any such penalties as
contingent liabilities, applying the accounting guidance of Financial Accounting
Standard No. 5, "Accounting
for Contingencies," or FAS 5.  This
accounting is consistent with FASB Staff Position FSP EITF 00-19-2, "Accounting for Registration Payment
Arrangements,"
which was issued on December 21, 2006. Accordingly, we recognize any damages
when it becomes probable that they will be incurred and when amounts are
reasonably estimable.




-25-


Impact
of Recently Issued Accounting Pronouncements




In June
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes," or FIN 48, which clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with FAS 109, "Accounting for
Income Taxes". This interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. This statement of this
statement did not have a significant effect on our financial
statements.





In
September 2006, the FASB issued Financial Accounting Standard No. 157, “Fair Value Measurements,” or
FAS 157. This Statement defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
and expands disclosures about fair value measurements. This statement applies
under other accounting pronouncements that require or permit fair value
measurements as the FASB previously concluded in those accounting pronouncements
that fair value is a relevant measurement attribute. Accordingly, this Statement
does not require us to develop or report any new fair value measurements. This
Statement is effective for financial statements for fiscal years beginning after
November 15, 2007. Earlier application is permitted provided that the reporting
entity has not yet issued financial statements for that fiscal year. This
statement is not expected to have a significant effect on our financial
statements.




On
February 15, 2007, the FASB issued Financial Accounting Standard No. 159,
“The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115”, or FAS 159, which creates a fair-value option
allowing an entity to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and financial liabilities,
with changes in fair value recognized in earnings as they occur. FAS 159 also
requires an entity to report those financial assets and financial liabilities
measured at fair value in a manner that separates those reported fair values
from the carrying amounts of assets and liabilities measured using another
measurement attribute on the face of the statement of financial position.
Lastly, FAS 159 requires an entity to provide information that would allow users
to understand the effect on earnings of changes in the fair value on those
instruments selected for the fair-value election. FAS 159 is effective for
fiscal years beginning after November 15, 2007, with early adoption
permitted. We have not yet determined the effect that the implementation of FAS
159 will have on our results of operations or financial condition.





In
December 2007, the FASB issued Financial Accounting Standard No. 160,"Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51," or
FAS 160.  FAS 160 requires that a noncontrolling interest in a
subsidiary be reported as equity and the amount of consolidated net income
specifically attributable to the noncontrolling interest be identified in the
consolidated financial statements. It also calls for consistency in the manner
of reporting changes in the parent’s ownership interest and requires fair value
measurement of any noncontrolling equity investment retained in a
deconsolidation.  FAS 160 is effective for fiscal years beginning
after December 15, 2008, with early adoption prohibited. This statement is
not expected to have a significant effect on our financial
statements.




In
December 2007, the FASB issued Financial Accounting Standard No. 141
(revised 2007), Business
Combinations (“FAS 141R”). FAS 141R broadens the guidance of FAS 141,
extending its applicability to all transactions and other events in which one
entity obtains control over one or more other businesses. It broadens the fair
value measurement and recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations. FAS 141R also
expands on required disclosures to improve the statement users’ abilities to
evaluate the nature and financial effects of business combinations.
FAS 141R applies prospectively to business combinations consummated in
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. FAS 141R is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. This statement is not
expected to have a significant effect on our financial statements.




-26-


Item
7.  Financial Statements.




The
audited financial statements of the Company for the year ended December 29,
2007, the three month period ended December 30, 2006 and the year
ended September 30, 2006, and the reports thereon of Kingery & Crouse,
P.A. are included in this annual report following the Exhibit Index to this
annual report.




Item
8.  Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.




None.




Item
8A.  Controls and Procedures.




Evaluation
of Disclosure Controls and Procedures




As
required by Rule 13a-15 under the Exchange Act, we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures as of December 29, 2007.  This evaluation was carried out
under the supervision and with the participation of our Chief Executive Officer
and our Chief Financial Officer.  In assessing the effectiveness of
our internal control over financial reporting we utilized the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission as
published in "Internal Control
over Financial Reporting – Guidance for Smaller Public
Companies."  Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report were effective,
although we did identify certain significant deficiencies.




The SEC
has defined “significant deficiency” in a final rule release as a deficiency, or
a combination of deficiencies, in internal control over financial reporting that
is less severe than a material weakness, yet important enough to merit attention
by those responsible for oversight of the registrant’s financial
reporting.    In this regard, we (i) initially failed to
provide disclosures void of errors or omissions in the notes to our consolidated
financial statements prior to the distribution of these financial statements to
our Audit Committee and independent accountants and (ii) have a small number of
accounting and financial resources with limited redundancies considered
necessary to adequately support our financial reporting requirements due to our
size and limited operating history.  These deficiencies have been
and/or will be remediated as follows:




·
            our
      accounting and financial staff received additional continuing
      education prior to year end and will continue to receive additional formal
      training subsequent to December 29, 2007 relative to our financial
      reporting responsibilities; and




·
            during
      fiscal 2008 we plan to increase our accounting resources to augment our
      financial reporting requirements.




We
understand that remediation of disclosure controls is a continuing work in
progress due to the issuance of new standards and promulgations.  However,
remediation of the significant deficiencies described above is among our
highest priorities.  Our management and Audit Committee will
periodically assess the progress and sufficiency of our ongoing initiatives and
make adjustments as and when necessary.  As of the date of this
report, our management believes that our efforts will remediate the significant
deficiencies in internal control over financial reporting as described
above.


Notwithstanding
these deficiencies which are described below, our management performed
additional analyses, reconciliations and other post-closing procedures and has
concluded that the Company’s consolidated financial statements for the periods
covered by and included in this Annual Report on Form 10-KSB are fairly stated
in all material respects in accordance with generally accepted accounting
principles in the U.S. for each of the periods presented
herein.




-27-


Inherent
Limitations Over Internal Controls




The Company's internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. The Company's internal control over financial reporting includes
those policies and procedures that:




(i)
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the Company's
      assets;





(ii)
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that the Company's receipts and expenditures
      are being made only in accordance with authorizations of the Company's
      management and directors; and





(iii)
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company's assets that
      could have a material effect on the financial
  statements.





Management,
including the Company's Chief Executive Officer and Chief Financial Officer,
does not expect that the Company's internal controls will prevent or detect all
errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of internal controls
can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected. Also, any evaluation of the effectiveness of
controls in future periods are subject to the risk that those internal controls
may become inadequate because of changes in business conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.




Management's
Report on Internal Control Over Financial Reporting




Our management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the company as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. Our internal control over financial reporting is designed to provide
reasonable assurance regarding the (i) effectiveness and efficiency of
operations, (ii) reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles, and (iii) compliance with applicable laws and
regulations. Our internal controls framework is based on the criteria set forth
in the Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).




Management,
including our Chief Executive Officer and Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over the
Company's financial reporting.




Management
assessed the effectiveness of our internal control over financial reporting as
of December 29, 2007, utilizing the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission as published in "Internal Control over Financial
Reporting – Guidance for Smaller Public Companies."  Based on
the assessment by management, we determined that our internal control over
financial reporting was effective as of December 29, 2007.




As a non-accelerated smaller reporting
filer, management's assessment of the effectiveness of our internal control over
financial reporting as of December 29, 2007 is not required to be audited
by Kingery & Crouse PA, our independent registered public accountant until
our fiscal year ending January 2, 2010.




Changes
in Internal Control of Financial Reporting




During
the quarters ended December 29, 2007 and March 29, 2008, there were no changes
in our internal control over financial reporting that have materially affected,
or are reasonably likely to affect, our internal control over financial
reporting.




Item
8B.  Other Information.




None.




-28-




PART
III




Item
9.   Directors, Executive Officers, Promoters, Control Persons and
Corporate Governance; Compliance with Section 16(a) of the Exchange Act.


The
information called for by Item 9 of Form 10-KSB will be set forth under the
caption “Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act” in our definitive
proxy statement, to be filed within 120 days after the end of the fiscal year
covered by this annual report on Form 10-KSB, and is incorporated herein by
reference.





Item
10.   Executive Compensation.




The
information called for by Item 10 of Form 10-KSB will be set forth under the
caption “Executive Compensation” in our definitive proxy statement, to be filed
within 120 days after the end of the fiscal year covered by this annual report
on Form 10-KSB, and is incorporated herein by reference.




Item
11.   Security Ownership of Certain Beneficial Owners and Management
and Related  Stockholder Matters.


The
information called for by Item 11 of Form 10-KSB will be set forth under the
caption “Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters” in our definitive proxy statement, to be filed
within 120 days after the end of the fiscal year covered by this annual report
on Form 10-KSB, and is incorporated herein by reference.





Item
12.   Certain Relationships and Related Transactions, and Director
Independence.




The
information called for by Item 12 of Form 10-KSB will be set forth under the
caption “Certain Relationships and Related Transactions, and Director
Independence” in our definitive proxy statement, to be filed within 120 days
after the end of the fiscal year covered by this annual report on Form
10-KSB, and is incorporated herein by reference.












-29-





Item
13.  Exhibits.




Exhibit
      No.
            Description
      of Exhibit3.1
            Amended
      and Restated Articles of Incorporation of the Company (filed as Exhibit
      99.1 to the Company’s Current Report on Form 8-K filed on December 27,
      2006 and incorporated by reference herein).3.2
            By-Laws
      of the Company (filed as Exhibit 3.2 to the Company’s Annual Report on
      Form 10-KSB filed on December 29, 2004 and incorporated by reference
      herein).3.3
            Certificate
      of Designations, Rights and Preferences of Series A Convertible Preferred
      Stock, as filed with the Secretary of State of the State of Nevada on
      December 27, 2006 (filed as Exhibit 99.3 to the Company’s Current Report
      on Form 8-K filed on January 4, 2007 and incorporated by reference
      herein).3.4
            Certificate
      of Designations, Rights and Preferences of Series B Convertible Preferred
      Stock, as filed with the Secretary of State of the State of Nevada on June
      29, 2007 (filed as Exhibit 99.3 to the Company’s Current Report on Form
      8-K filed on July 5, 2007 and incorporated by reference
      herein).4.1
            Form
      of Senior Secured Convertible Promissory Note, as executed by the Company
      and the holders thereof on September 29, 2006 and November 8, 2006 (filed
      as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on
      October 5, 2006 and incorporated by reference herein).4.2
            Form
      of Securities Exchange Agreement, as executed by the Company and holders
      of the Company’s Senior Secured Convertible Promissory Notes on September
      29, 2006 (filed as Exhibit 99.1 to the Company’s Current Report on Form
      8-K filed on October 5, 2006 and incorporated by reference
      herein).4.3
            Form
      of Joinder, as executed on November 8, 2006, by the Company and those
      holders of Senior Secured Convertible Promissory Notes, all dated as of
      November 8, 2006, who were not originally parties to the Securities
      Exchange Agreements, dated as of September 29, 2006 (filed as Exhibit 99.3
      to the Company’s Current Report on Form 8-K filed on November 13, 2006 and
      incorporated by reference herein).4.4
            Form
      of Securities Exchange Agreement, as executed by the Company and the
      investors signatory thereto on December 28, 2006 (filed as Exhibit 99.1 to
      the Company’s Current Report on Form 8-K filed on January 4, 2007 and
      incorporated by reference herein).4.5
            Form
      of Stock Purchase Agreements, as executed by the Company and the
      purchasers signatory thereto on December 28, 2006 (filed as Exhibit 99.2
      to the Company’s Current Report on Form 8-K filed on January 4, 2007 and
      incorporated by reference herein).4.6
            Form
      of Securities Purchase Agreement, as executed by the Company and the
      investors signatory thereto on June 29, 2007 (filed as Exhibit 99.1 to the
      Company’s Current Report on Form 8-K filed on July 5, 2007 and
      incorporated by reference herein).4.7
            Form
      of Warrant, as issued by the Company to certain investors on June 29, 2007
      (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
      on July 5, 2007 and incorporated by reference
  herein).





-30-




10.1
            Swift
      Pay Service Agreement, dated as of March 18, 2005, by and between Western
      Union and the Company (filed as Exhibit 8.1.1 to the Company’s Current
      Report on Form 8-K filed on June 24, 2005 and incorporated by reference
      herein).10.2
            ExpressPayment
      (TM) Service Agreement, dated as of October 31, 2006, by and between
      MoneyGram Payment Systems, Inc. and the Company (filed as Exhibit 8.1.1 to
      the Company’s Current Report on Form 8-K filed on November 18, 2005 and
      incorporated by reference herein).10.3
            Stored
      Value Card Issuer Agreement, dated as of May 10, 2006, by and between
      Discover Financial Services LLC and the Company (filed as Exhibit 8.1.1 to
      the Company’s Current Report on Form 8-K filed on May 11, 2006 and
      incorporated by reference herein).10.4
            Stored
      Value Prepaid Card Sponsorship Agreement, dated as of October 20, 2006,
      and Addendum to Stored Value Prepaid Card Sponsorship Agreement, dated as
      of November 10, 2006, by and between Palm Desert National Bank and the
      Company (filed as Exhibit 10.4 to the Company’s Annual Report on Form
      10-KSB filed on December 29, 2006 and incorporated by reference
      herein).10.5
            Stored
      Value Card Processing Agreement, dated as of June 14, 2006, by and between
      Metavante Corporation and the Company (filed as Exhibit 10.4 to the
      Company’s Annual Report on Form 10-KSB filed on December 29, 2006 and
      incorporated by reference herein).10.6**
            Employment
      Agreement, dated as of September 5, 2006, by and between Jerry R. Welch
      and the Company (filed as Exhibit 99.1 to the Company’s Current Report on
      Form 8-K filed on September 15, 2006 and incorporated by reference
      herein).10.7**
            Nonqualified
      Stock Option Agreement, dated as of September 5, 2006, by and between
      Jerry R. Welch and the Company (filed as Exhibit 99.2 to the Company’s
      Current Report on Form 8-K filed on September 15, 2006 and incorporated by
      reference herein).10.8**
            Employment
      Agreement, dated as of September 5, 2006, by and between Raymond P.
      Springer and the Company (filed as Exhibit 99.3 to the Company’s Current
      Report on Form 8-K filed on September 15, 2006 and incorporated by
      reference herein).10.9**
            Nonqualified
      Stock Option Agreement, dated as of September 5, 2006, by and between
      Raymond P. Springer and the Company (filed as Exhibit 99.4 to the
      Company’s Current Report on Form 8-K filed on September 15, 2006 and
      incorporated by reference herein).10.10**
            Employment
      Agreement, dated as of October 1, 2005, by and between Mr. Clifford Wildes
      and the Company(filed as Exhibit
      10.4 to the Company’s Annual Report on Form 10-KSB filed on December 29,
      2006 and incorporated by reference herein).10.11
            Commercial
      Lease Agreement, dated as of January 10, 2005, by and between The 6015,
      LLC and the Company (filed as Exhibit 10.4 to the Company’s Annual Report
      on Form 10-KSB filed on December 29, 2006 and incorporated by reference
      herein).10.12
            Sublease
      Agreement, dated as of August 5, 2005, by and between GEBO Corporation USA
      and the Company (filed as Exhibit 5.3 to the Company’s Quarterly Report on
      Form 10-QSB filed on August 15, 2005 and incorporated by reference
      herein).10.13
            2004
      Amended Stock Incentive Plan (filed as Exhibit 10.4 to the Company’s
      Annual Report on Form 10-KSB filed on December 29, 2006 and incorporated
      by reference herein).





-31-




10.14**
            Separation
      Agreement and Release of Claims, dated as of January 29, 2007, by and
      between the Company and Clifford Wildes (filed as Exhibit 99.1 to the
      Company’s Current Report on Form 8-K filed on February 2, 2007 and
      incorporated by reference herein).10.15**
            Offer
      of Employment, dated April 24, 2007, by and between the Company and Jerome
      Kollar (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K
      filed on May 18, 2007 and incorporated by reference
    herein).10.16**
            Incentive
      Stock Option Grant, dated May 14, 2007, by and between the Company and
      Jerome Kollar (filed as Exhibit 99.2 to the Company’s Current Report on
      Form 8-K filed on May 18, 2007 and incorporated by reference
      herein).10.17
            Commercial
      Lease Agreement, dated as of April 16, 2007, by and between FLA Owner LLC
      and the Company (filed as Exhibit 10.1 to the Company’s Quarterly Report
      on Form 10-QSB filed on November 9, 2007 and incorporated by reference
      herein)10.18
            Letter
      of Credit Accommodation (together with a sample Irrevocable Letter of
      Credit to be issued thereunder), dated February 14, 2008, between the
      Company and National Penn Bank (filed as Exhibit 99.1 to the Company’s
      Current Report on Form 8-K filed on February 22, 2008 and incorporated by
      reference herein).10.19
            Guaranty
      and Indemnification Agreement, dated February 15, 2008, by and between the
      Company and Jeffrey Porter (filed as Exhibit 99.2 to the Company’s Current
      Report on Form 8-K filed on February 22, 2008 and incorporated by
      reference herein).10.20
            Guaranty
      and Indemnification Agreement, dated February 19, 2008, by and between the
      Company and Bruce E. Terker (filed as Exhibit 99.3 to the Company’s
      Current Report on Form 8-K filed on February 22, 2008 and incorporated by
      reference herein).10.21
            Warrant
      to Purchase Common Stock, dated February 19, 2008, issued by the Company
      to Bruce E. Terker (filed as Exhibit 99.4 to the Company’s Current Report
      on Form 8-K filed on February 22, 2008 and incorporated by reference
      herein).14.1
            Code
      of Ethics (filed as Exhibit 10.4 to the Company’s Annual Report on Form
      10-KSB filed on December 29, 2006 and incorporated by reference
      herein).21.1*
            List
      of the Company’s Subsidiaries31.1*
            Certifications
      of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934.31.2*
            Certifications
      of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934.32.1*
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section
    1350.32.2*
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section
    1350.




*   Filed
herewith.


**   Management
contract or compensatory plan or arrangement.




-32-





Item
14.  Principal Accounting Fees and Services.




The
information called for by Item 14 of Form 10-KSB will be set forth under the
caption “Principal Accounting Fees and Services” in our definitive proxy
statement, to be filed within 120 days after the end of the fiscal year covered
by this annual report on Form 10-KSB, and is incorporated herein by
reference.





















-33-




SIGNATURES






In
accordance with Section 13 or 15(d) of the Exchange Act, we caused this report
to be signed on our behalf by the undersigned, thereunto duly
authorized.




nFinanSe
Inc.




By:
            /s/ Jerry R.
      WelchJerry
      R. Welch, Chief Executive Officer and DirectorDate:
            March
      28, 2008




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




By:
            /s/Jerry R.
      WelchJerry
      R. Welch, Chief Executive Officer and Director(Principal
      Executive Officer)Date:
            March
      28, 2008By:
            /s/Raymond P.
      SpringerRaymond
      P. Springer, Secretary and Chief Financial Officer(Principal
      Financial Officer)Date:
            March
      28, 2008By:
            /s/ Jerome A.
      KollarJerry
      A. Kollar, Principal Accounting OfficerDate:
            March
      28, 2008By:
            /s/ Ernest W.
      SwiftErnest W. Swift,
DirectorDate:
            March
      28, 2008By:
            /s/ Benjamin
      BondBenjamin
      Bond, DirectorDate:
            March
      28, 2008By:
            /s/ Mark
      BrewerMark
      Brewer, DirectorDate:
            March
      28, 2008By:
            /s/ Joseph HudginsJoseph
      Hudgins, DirectorDate:
            March 28,
      2008By:
            /s/Bruce
      TerkerBruce
      Terker, DirectorDate:
            March
      28, 2008






-34-





EXHIBITS
INDEX







Exhibit
      No.
            Description
      of Exhibit3.1
            Amended
      and Restated Articles of Incorporation of the Company (filed as Exhibit
      99.1 to the Company’s Current Report on Form 8-K filed on December 27,
      2006 and incorporated by reference herein).3.2
            By-Laws
      of the Company (filed as Exhibit 3.2 to the Company’s Annual Report on
      Form 10-KSB filed on December 29, 2004 and incorporated by reference
      herein).3.3
            Certificate
      of Designations, Rights and Preferences of Series A Convertible Preferred
      Stock, as filed with the Secretary of State of the State of Nevada on
      December 27, 2006 (filed as Exhibit 99.3 to the Company’s Current Report
      on Form 8-K filed on January 4, 2007 and incorporated by reference
      herein).3.4
            Certificate
      of Designations, Rights and Preferences of Series B Convertible Preferred
      Stock, as filed with the Secretary of State of the State of Nevada on June
      29, 2007 (filed as Exhibit 99.3 to the Company’s Current Report on Form
      8-K filed on July 5, 2007 and incorporated by reference
      herein).4.1
            Form
      of Senior Secured Convertible Promissory Note, as executed by the Company
      and the holders thereof on September 29, 2006 and November 8, 2006 (filed
      as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on
      October 5, 2006 and incorporated by reference herein).4.2
            Form
      of Securities Exchange Agreement, as executed by the Company and holders
      of the Company’s Senior Secured Convertible Promissory Notes on September
      29, 2006 (filed as Exhibit 99.1 to the Company’s Current Report on Form
      8-K filed on October 5, 2006 and incorporated by reference
      herein).4.3
            Form
      of Joinder, as executed on November 8, 2006, by the Company and those
      holders of Senior Secured Convertible Promissory Notes, all dated as of
      November 8, 2006, who were not originally parties to the Securities
      Exchange Agreements, dated as of September 29, 2006 (filed as Exhibit 99.3
      to the Company’s Current Report on Form 8-K filed on November 13, 2006 and
      incorporated by reference herein).4.4
            Form
      of Securities Exchange Agreement, as executed by the Company and the
      investors signatory thereto on December 28, 2006 (filed as Exhibit 99.1 to
      the Company’s Current Report on Form 8-K filed on January 4, 2007 and
      incorporated by reference herein).4.5
            Form
      of Stock Purchase Agreements, as executed by the Company and the
      purchasers signatory thereto on December 28, 2006 (filed as Exhibit 99.2
      to the Company’s Current Report on Form 8-K filed on January 4, 2007 and
      incorporated by reference herein).4.6
            Form
      of Securities Purchase Agreement, as executed by the Company and the
      investors signatory thereto on June 29, 2007 (filed as Exhibit 99.1 to the
      Company’s Current Report on Form 8-K filed on July 5, 2007 and
      incorporated by reference herein).4.7
            Form
      of Warrant, as issued by the Company to certain investors on June 29, 2007
      (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
      on July 5, 2007 and incorporated by reference
  herein).





-35-




10.1
            Swift
      Pay Service Agreement, dated as of March 18, 2005, by and between Western
      Union and the Company (filed as Exhibit 8.1.1 to the Company’s Current
      Report on Form 8-K filed on June 24, 2005 and incorporated by reference
      herein).10.2
            ExpressPayment
      (TM) Service Agreement, dated as of October 31, 2006, by and between
      MoneyGram Payment Systems, Inc. and the Company (filed as Exhibit 8.1.1 to
      the Company’s Current Report on Form 8-K filed on November 18, 2005 and
      incorporated by reference herein).10.3
            Stored
      Value Card Issuer Agreement, dated as of May 10, 2006, by and between
      Discover Financial Services LLC and the Company (filed as Exhibit 8.1.1 to
      the Company’s Current Report on Form 8-K filed on May 11, 2006 and
      incorporated by reference herein).10.4
            Stored
      Value Prepaid Card Sponsorship Agreement, dated as of October 20, 2006,
      and Addendum to Stored Value Prepaid Card Sponsorship Agreement, dated as
      of November 10, 2006, by and between Palm Desert National Bank and the
      Company (filed as Exhibit 10.4 to the Company’s Annual Report on Form
      10-KSB filed on December 29, 2006 and incorporated by reference
      herein).10.5
            Stored
      Value Card Processing Agreement, dated as of June 14, 2006, by and between
      Metavante Corporation and the Company (filed as Exhibit 10.4 to the
      Company’s Annual Report on Form 10-KSB filed on December 29, 2006 and
      incorporated by reference herein).10.6**
            Employment
      Agreement, dated as of September 5, 2006, by and between Jerry R. Welch
      and the Company (filed as Exhibit 99.1 to the Company’s Current Report on
      Form 8-K filed on September 15, 2006 and incorporated by reference
      herein).10.7**
            Nonqualified
      Stock Option Agreement, dated as of September 5, 2006, by and between
      Jerry R. Welch and the Company (filed as Exhibit 99.2 to the Company’s
      Current Report on Form 8-K filed on September 15, 2006 and incorporated by
      reference herein).10.8**
            Employment
      Agreement, dated as of September 5, 2006, by and between Raymond P.
      Springer and the Company (filed as Exhibit 99.3 to the Company’s Current
      Report on Form 8-K filed on September 15, 2006 and incorporated by
      reference herein).10.9**
            Nonqualified
      Stock Option Agreement, dated as of September 5, 2006, by and between
      Raymond P. Springer and the Company (filed as Exhibit 99.4 to the
      Company’s Current Report on Form 8-K filed on September 15, 2006 and
      incorporated by reference herein).10.10**
            Employment
      Agreement, dated as of October 1, 2005, by and between Mr. Clifford Wildes
      and the Company(filed as Exhibit
      10.4 to the Company’s Annual Report on Form 10-KSB filed on December 29,
      2006 and incorporated by reference herein).10.11
            Commercial
      Lease Agreement, dated as of January 10, 2005, by and between The 6015,
      LLC and the Company (filed as Exhibit 10.4 to the Company’s Annual Report
      on Form 10-KSB filed on December 29, 2006 and incorporated by reference
      herein).10.12
            Sublease
      Agreement, dated as of August 5, 2005, by and between GEBO Corporation USA
      and the Company (filed as Exhibit 5.3 to the Company’s Quarterly Report on
      Form 10-QSB filed on August 15, 2005 and incorporated by reference
      herein).10.13
            2004
      Amended Stock Incentive Plan (filed as Exhibit 10.4 to the Company’s
      Annual Report on Form 10-KSB filed on December 29, 2006 and incorporated
      by reference herein).





-36-




10.14**
            Separation
      Agreement and Release of Claims, dated as of January 29, 2007, by and
      between the Company and Clifford Wildes (filed as Exhibit 99.1 to the
      Company’s Current Report on Form 8-K filed on February 2, 2007 and
      incorporated by reference herein).10.15**
            Offer
      of Employment, dated April 24, 2007, by and between the Company and Jerome
      Kollar (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K
      filed on May 18, 2007 and incorporated by reference
    herein).10.16**
            Incentive
      Stock Option Grant, dated May 14, 2007, by and between the Company and
      Jerome Kollar (filed as Exhibit 99.2 to the Company’s Current Report on
      Form 8-K filed on May 18, 2007 and incorporated by reference
      herein).10.17
            Commercial
      Lease Agreement, dated as of April 16, 2007, by and between FLA Owner LLC
      and the Company (filed as Exhibit 10.1 to the Company’s Quarterly Report
      on Form 10-QSB filed on November 9, 2007 and incorporated by reference
      herein)10.18
            Letter
      of Credit Accommodation (together with a sample Irrevocable Letter of
      Credit to be issued thereunder), dated February 14, 2008, between the
      Company and National Penn Bank (filed as Exhibit 99.1 to the Company’s
      Current Report on Form 8-K filed on February 22, 2008 and incorporated by
      reference herein).10.19
            Guaranty
      and Indemnification Agreement, dated February 15, 2008, by and between the
      Company and Jeffrey Porter (filed as Exhibit 99.2 to the Company’s Current
      Report on Form 8-K filed on February 22, 2008 and incorporated by
      reference herein).10.20
            Guaranty
      and Indemnification Agreement, dated February 19, 2008, by and between the
      Company and Bruce E. Terker (filed as Exhibit 99.3 to the Company’s
      Current Report on Form 8-K filed on February 22, 2008 and incorporated by
      reference herein).10.21
            Warrant
      to Purchase Common Stock, dated February 19, 2008, issued by the Company
      to Bruce E. Terker (filed as Exhibit 99.4 to the Company’s Current Report
      on Form 8-K filed on February 22, 2008 and incorporated by reference
      herein).14.1
            Code
      of Ethics (filed as Exhibit 10.4 to the Company’s Annual Report on Form
      10-KSB filed on December 29, 2006 and incorporated by reference
      herein).21.1*
            List
      of the Company’s Subsidiaries31.1*
            Certifications
      of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934.31.2*
            Certifications
      of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
      the Securities Exchange Act of 1934.32.1*
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section
    1350.32.2*
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section
    1350.




*   Filed
herewith.


**   Management
contract or compensatory plan or arrangement.


-37-





nFinanSe
Inc.
 (A Development StageEnterprise)
 
 Consolidated
Financial Statements
 as
of December 29, 2007 and for various periods ended
 December
29, 2007, the three months ended December 30, 2006
 and
the year ended September 30, 2006, and
 Report
of Independent Registered Public Accounting Firm
                       F-1
  nFinanSe
Inc.
 (A Development StageEnterprise)
  TABLE OF
CONTENTS
  PageReport
      of Independent Registered Public Accounting
      Firm......................................................................................................................................................
              F-3Consolidated
      Financial Statements:Consolidated
      Balance Sheet as of December 29,
      2007..............................................................................................................................................................
              F-4Consolidated
      Statements of Operations for the year ended December 29, 2007, the three
      months ended December 30, 2006, the year ended September 30, 2006 and the
      period July 10, 2000 (inception) to December 29,
      2007.....................................................................................................................................................
              F-5Consolidated
      Statements of Stockholders’ Equity (Deficit) for the year ended
      December 29, 2007, the three months ended December 30, 2006, the year
      ended September 30, 2006 and various periods between July 10, 2000
      (inception) to September 30, 2005
      .........................................................................................................
              F-6Consolidated
      Statements of Cash Flows for the year ended December 29, 2007, the three
      months ended December 30, 2006, the year ended September 30, 2006 and the
      period July 10, 2000 (inception) to December 29,
      2007.......................................................................................................................................................
              F-11Notes
      to Consolidated Financial
      Statements...........................................................................................................................................................................
              F-13
 
 
 
 
 F-2
   [LETTERHEAD OF KINGERY &
CROUSE, P.A.]
 
 
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
  
 To
the Board of Directors and Stockholders of nFinanSe Inc. and
Subsidiaries:
 
 We
have audited the accompanying consolidated balance sheet of nFinanSe Inc. and
subsidiaries, formerly known as Morgan Beaumont, Inc. (the “Company”), a
development stage enterprise, as of December 29, 2007, and the related
consolidated statements of operations, stockholders’ equity (deficit) and cash
flows for the year then ended, the three months ended December 30, 2006, the
year ended September 30, 2006 and the period July 10, 2000 (date of
incorporation) to December 29, 2007. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 29, 2007, and the results of its operations and cash flows for the year
then ended, the three months ended December 30, 2006, the year ended September
30, 2006 and the period July 10, 2000 (date of incorporation) to December 29,
2007, in conformity with accounting principles generally accepted in the United
States of America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes A and B to
such financial statements, the Company is in the development stage, has suffered
recurring losses from operations and has ongoing requirements for additional
capital investment. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note B. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
 
 Kingery
& Crouse, P.A. s/s
 
 March
4, 2008 (except for the first bullet of Note B and the third and fourth
paragraphs of Note L as to which the date is March 28, 2008)
 Tampa,
FL
 F-3
  nFinanSe
Inc.
 (A Development Stage
Enterprise)
 
 CONSOLIDATED
BALANCE SHEET
 AS
OF DECEMBER 29, 2007
 
 
 ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              $
              2,497,365Short
      term investment
              
              728,000Receivables:Accounts
      (net of allowance for doubtful accounts of $0)
              
              10,957Other
              
              19,027Prepaid
      expenses and other current assets (including prepaid marketing costs of
      approximately $312,000)
              
              705,608Inventories
              
              1,942,206Total
      current assets
              
              5,903,163PROPERTY
      AND EQUIPMENT, NET
              
              759,261OTHER
      ASSETS
              
              338,160TOTAL
              $
              7,000,584LIABILITIES AND
      STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable
              $
              139,635Accrued
      personnel costs
              
              130,804Accrued
      inventory liability
              
              593,431Accrued
      lease obligation
              
              117,483Deferred
      revenues
              
              106,250Other
      accrued liabilities
              
              474,624Total
      current liabilities
              
              1,562,227COMMITMENTS  AND
      CONTINGENCIES (SEE NOTE E)STOCKHOLDERS’
      EQUITY:Preferred
      stock - $.001 par value:  25,000,000 shares authorized;
      8,820,484  outstanding as follows:Series
      A Convertible Preferred Stock – 9,327,934 shares authorized; 7,820,484
      shares  issued and outstanding with a liquidation value of
      $8,213,651 (including undeclared accumulated dividends in arrears of
      $393,167 at December 29, 2007)
              
              7,820Series
      B Convertible Preferred Stock – 1,000,010 shares authorized; 1,000,000
      shares issued and outstanding with a liquidation value of $3,000,000 at
      December 29, 2007
              
              1,000Common
      stock - $0.001 par value: 200,000,000 shares authorized; 7,371,929 shares
      issued and outstanding
              
              7,372Additional
      paid-in capital
              
              42,002,195Deficit
      accumulated during the development stage
              
              (36,580,030)Total
      stockholders’ equity
              
              5,438,357TOTAL
              $
              7,000,584
 See notes
to consolidated financial statements.
  F-4
  nFinanSe
Inc.
 (A Development Stage
Enterprise)
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 For
      the year
                ended
                December
      29, 2007
              
              
              For
      the three months ended
                December
      30, 2006
              
              
              For
      the year
                ended
                September
      30, 2006
              
              
              For
      the period July 10, 2000
                (inception)
      to December 29, 2007REVENUES
              
              $
              32,763
              
              
              $
              19,518
              
              
              $
              77,833
              
              
              $
              1,206,168OPERATING
      EXPENSESTransaction
      and operating expenses
              
              
              1,053,872
              
              
              
              76,115
              
              
              
              819,181
              
              
              
              2,588,634Selling
      and marketing expenses
              
              
              2,264,435
              
              
              
              388,335
              
              
              
              1,134,399
              
              
              
              4,356,631General
      and administrative expenses
              
              
              6,862,485
              
              
              
              1,345,822
              
              
              
              6,311,239
              
              
              
              22,346,217Total
      operating expenses
              
              
              10,180,792
              
              
              
              1,810,272
              
              
              
              8,264,819
              
              
              
              29,291,482Loss
      before other income (expense)
              
              
              (10,148,029
              )
              
              
              (1,790,754
              )
              
              
              (8,186,986
              )
              
              
              (28,085,314
              )Other
      income (expense):Interest
      expense
              
              
              (1,895
              )
              
              
              (169,698
              )
              
              
              (1,499,630
              )
              
              
              (1,688,264
              )Interest
      income
              
              
              183,325
              
              
              
              868,540
              
              
              
              17,737
              
              
              
              1,140,240Gain
      on derivative instruments
              
              
              -
              
              
              
              -
              
              
              
              3,465,948
              
              
              
              1,845,262Gain
      (loss) on debt extinguishment
              
              
              -
              
              
              
              452,299
              
              
              
              (5,137,817
              )
              
              
              (4,685,518
              )Registration
      rights penalties
              
              
              -
              
              
              
              -
              
              
              
              (98,649
              )
              
              
              (98,649
              )Other
      income (expense)
              
              
              27,243
              
              
              
              (30,001
              )
              
              
              -
              
              
              
              (93,856
              )Total
      other income (expense)
              
              
              208,673
              
              
              
              1,121,140
              
              
              
              (3,252,411
              )
              
              
              (3,580,785
              )Loss
      from continuing operations
              
              
              (9,939,356
              )
              
              
              (669,614
              )
              
              
              (11,439,397
              )
              
              
              (31,666,099
              )Loss
      from discontinued operations
              
              
              (8,738
              )
              
              
              (47,456
              )
              
              
              (3,350,244
              )
              
              
              (3,861,579
              )Net
      loss
              
              
              (9,948,094
              )
              
              
              (717,070
              )
              
              
              (14,789,641
              )
              
              
              (35,527,678
              )Dividends
      paid on Series A Convertible
      Preferred    Stock
              
              
              (52,352
              )
              
              
              (1,000,000
              )
              
              
              -
              
              
              
              (1,052,352
              )Undeclared
      and unpaid dividends on Series A Convertible Preferred
    Stock
              
              
              (393,167
              )
              
              
              -
              
              
              
              -
              
              
              
              (393,167
              )Net
      loss attributable to common stockholders
              
              $
              (10,393,613
              )
              
              $
              (1,717,070
              )
              
              $
              (14,789,641
              )
              
              $
              (36,973,197
              )Net
      loss per share - basic and diluted:Continuing
      operations
              
              $
              (1.95
              )
              
              $
              (0.44
              )
              
              $
              (3.23
              )Discontinued
      operations
              
              $
              -
              
              
              $
              (0.01
              )
              
              $
              (0.95
              )Total
      net loss per share
              
              $
              (1.95
              )
              
              $
              (0.45
              )
              
              $
              (4.18
              )Weighted
      average number of shares outstanding
              
              
              5,318,685
              
              
              
              3,826,417
              
              
              
              3,531,210
  See notes
to consolidated financial statements.
  F-5
  nFinanSe
Inc.
 (A Development StageEnterprise)
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 
 DeficitNote
              
              AccumulatedConvertible
              
              
              
              
              
              Additional
              
              Common
              
              Receivable
              
              During
      thePreferred
      Stock
              
              Common
      Stock
              
              Paid-In
              
              Stock
              
              from
              
              DevelopmentSeries
      A
              
              Series
      B
              
              Shares
              
              Par
      Value
              
              Capital
              
              Subscribed
              
              Stockholder
              
              Stage
              
              TotalBalances,
      July 10, 2000 (date of incorporation)
              $
              -
              $
              -
              
              -
              $
              -
              $
              -
              $
              -
              $
              -
              $
              -
              $
              -Common
      Stock subscription
              
              -
              
              -
              
              -
              
              -
              
              -
              
              100
              
              -
              
              -
              
              100Net
      loss
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -Balances,
      December 31, 2000
              
              -
              
              -
              
              -
              
              -
              
              -
              
              100
              
              -
              
              -
              
              100Issuance
      of Common Stock for cash:At
      $0.177  per share
              
              -
              
              -
              
              2,547
              
              3
              
              447
              
              (100)
              
              -
              
              -
              
              350At
      $0.126 per share
              
              -
              
              -
              
              39,802
              
              39
              
              4,961
              
              -
              
              -
              
              -
              
              5,000Issuance
      of Common Stock for servicesAt
      $1.57 per share
              
              -
              
              -
              
              77,853
              
              78
              
              122,172
              
              -
              
              -
              
              -
              
              122,250Net
      loss
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              (216,982)
              
              (216,982)Balances,
      December 31, 2001
              
              -
              
              -
              
              120,202
              
              120
              
              127,580
              
              -
              
              
              
              (216,982)
              
              (89,282)Issuance
      of Common Stock for cash:At
      $1.57 per share
              
              -
              
              -
              
              1,337
              
              1
              
              2,099
              
              -
              
              -
              
              -
              
              2,100At
      $2.62 per share
              
              -
              
              -
              
              64,766
              
              65
              
              169,435
              
              -
              
              -
              
              -
              
              169,500At
      $3.14 per share
              
              -
              
              -
              
              15,921
              
              16
              
              49,984
              
              -
              
              -
              
              -
              
              50,000Issuance
      of Common Stock for services:At
      $1.57 per share
              
              -
              
              -
              
              46,412
              
              46
              
              72,834
              
              -
              
              -
              
              -
              
              72,880At
      $2.62 per share
              
              -
              
              -
              
              75,465
              
              75
              
              197,816
              
              -
              
              -
              
              -
              
              197,891At
      $3.14 per share
              
              -
              
              -
              
              3,375
              
              3
              
              10,597
              
              -
              
              -
              
              -
              
              10,600Net
      loss
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              (451,646)
              
              (451,646)Balances,
      December 31, 2002
              
              -
              
              -
              
              327,478
              
              326
              
              630,345
              
              -
              
              -
              
              (668,628)
              
              (37,957)Issuance
      of Common Stock for cash:At
      $1.57 per share
              
              -
              
              -
              
              14,210
              
              14
              
              22,299
              
              -
              
              -
              
              -
              
              22,313At
      $3.14 per share
              
              -
              
              -
              
              12,737
              
              13
              
              39,987
              
              -
              
              -
              
              -
              
              40,000Issuance
      of Common Stock for servicesAt
      $3.14 per share
              
              -
              
              -
              
              189,289
              
              189
              
              594,276
              
              -
              
              -
              
              -
              
              594,465(Continued)







F-6





nFinanSe Inc.
              (A Development StageEnterprise)
              
              CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
              (Continued)DeficitNote
            
            AccumulatedConvertible
            
            
            
            
            
            Additional
            
            Common
            
            Receivable
            
            During
      thePreferred
      Stock
            
            Common
      Stock
            
            Paid-In
            
            Stock
            
            from
            
            DevelopmentSeries
      A
            
            Series
      B
            
            Shares
            
            Par
      Value
            
            Capital
            
            Subscribed
            
            Stockholder
            
            Stage
            
            TotalIssuance
      of Common Stock for assets of Typhoon Technologies at $3.14 per
      share
            
            -
            
            -
            
            71,068
            
            71
            
            223,119
            
            -
            
            -
            
            -
            
            223,190Net
      loss
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (954,974)
            
            (954,974)Balances,
      December 31, 2003
            
            -
            
            -
            
            614,782
            
            613
            
            1,510,026
            
            -
            
            -
            
            (1,623,602)
            
            (112,963)Issuance
      of Common Stock for cash at $1.57 per share
            
            -
            
            -
            
            13,183
            
            13
            
            20,687
            
            -
            
            -
            
            -
            
            20,700Issuance
      of Common Stock held in escrow
            
            -
            
            -
            
            17,513
            
            18
            
            (18)
            
            -
            
            -
            
            -
            
            -Common
      Stock issued for services at $3.14 per share
            
            -
            
            -
            
            4,521
            
            5
            
            14,195
            
            -
            
            -
            
            -
            
            14,200Issuance
      of Common Stock in exchange for net assets in a
      recapitalization
            
            -
            
            -
            
            1,351,250
            
            1,351
            
            2,967,649
            
            -
            
            (3,000,000)
            
            -
            
            (31,000)Collections
      on note receivable from stockholder
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,615,586
            
            -
            
            1,615,586Net
      loss
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (1,031,335)
            
            (1,031,335)Balances,
      September 30, 2004
            
            -
            
            -
            
            2,001,249
            
            2,000
            
            4,512,539
            
            -
            
            (1,384,414)
            
            (2,654,937)
            
            475,188Issuance
      of Common Stock and warrants for cash:
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -At
      $4.00 per share
            
            -
            
            -
            
            356,250
            
            356
            
            1,424,644
            
            -
            
            -
            
            -
            
            1,425,000At
      $8.00 per share (net of stock issuance costs)
            
            -
            
            -
            
            618,125
            
            618
            
            4,882,996
            
            -
            
            -
            
            -
            
            4,883,614(Continued)





F-7





nFinanSe Inc.
              (A Development StageEnterprise)
              
              CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
              (Continued)DeficitNote
            
            AccumulatedConvertible
            
            
            
            
            
            Additional
            
            Common
            
            Receivable
            
            During
      thePreferred
      Stock
            
            Common
      Stock
            
            Paid-In
            
            Stock
            
            From
            
            DevelopmentSeries
      A
            
            Series
      B
            
            Shares
            
            Par
      Value
            
            Capital
            
            Subscribed
            
            Stockholder
            
            Stage
            
            TotalAllocation
      of proceeds from sales of Common Stock to derivative financial instruments
      (warrants)
            
            -
            
            -
            
            -
            
            -
            
            (3,461,500)
            
            -
            
            -
            
            -
            
            (3,461,500)Allocation
      of proceeds from sales of Common Stock to derivative financial instruments
      (registration rights)
            
            -
            
            -
            
            -
            
            -
            
            (545,943)
            
            -
            
            -
            
            -
            
            (545,943)Value
      attributable to consulting and director options
            
            -
            
            -
            
            -
            
            -
            
            1,074,700
            
            -
            
            -
            
            -
            
            1,074,700Issuance
      of Common Stock for certain property and equipment  of
      MTel
            
            -
            
            -
            
            43,183
            
            43
            
            748,157
            
            -
            
            -
            
            -
            
            748,200Collections
      on note receivable from stockholder
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,384,414
            
            -
            
            1,384,414Net
      loss
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (7,417,935)
            
            (7,417,935)Balances,
      September 30, 2005
            
            -
            
            -
            
            3,018,807
            
            3,017
            
            8,635,593
            
            -
            
            -
            
            (10,072,872)
            
            (1,434,262)Derivative
      liability related to warrants exercised for Common Stock
            
            -
            
            -
            
            -
            
            -
            
            5,254,468
            
            -
            
            -
            
            -
            
            5,254,468Reclassify
      derivative portion of registration rights damages
            
            -
            
            -
            
            -
            
            -
            
            (454,226)
            
            -
            
            -
            
            -
            
            (454,226)Warrants
      exercised for Common Stock at $4.00 per share
            
            -
            
            -
            
            618,125
            
            618
            
            2,471,882
            
            -
            
            -
            
            -
            
            2,472,500Exercise
      of vested stock options
            
            -
            
            -
            
            10,000
            
            10
            
            (10)
            
            -
            
            -
            
            -
            
            -Issuance
      of additional Common Stock to principal of MTel
            
            -
            
            -
            
            7,000
            
            7
            
            (7)
            
            -
            
            -
            
            -
            
            -Issuance
      of Common Stock to consultant
            
            -
            
            -
            
            10,000
            
            10
            
            (10)
            
            -
            
            -
            
            -
            
            -(Continued)









F-8





nFinanSe Inc.
                  (A Development StageEnterprise)
                  
                  CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
                  (Continued)DeficitNote
                
                AccumulatedConvertible
                
                
                
                
                
                Additional
                
                Common
                
                Receivable
                
                During
      thePreferred
      Stock
                
                Common
      Stock
                
                Paid-In
                
                Stock
                
                from
                
                DevelopmentSeries
      A
                
                Series
      B
                
                Shares
                
                Par
      Value
                
                Capital
                
                Subscribed
                
                Stockholder
                
                Stage
                
                TotalIssuance
      of Common Stock in connection with registration rights
      penalties
                
                -
                
                -
                
                101,345
                
                102
                
                652,523
                
                -
                
                -
                
                -
                
                652,625Issuance
      of Common Stock for consultant services
                
                -
                
                -
                
                58,750
                
                59
                
                453,175
                
                -
                
                -
                
                -
                
                453,234Issuance
      of warrants to consultants
                
                -
                
                -
                
                -
                
                -
                
                226,732
                
                -
                
                -
                
                -
                
                226,732Employee
      and director stock based award activity
                
                -
                
                -
                
                -
                
                -
                
                1,272,263
                
                -
                
                -
                
                -
                
                1,272,263Cancellation
      of Common Stock received in litigation settlement with former
      employee
                
                -
                
                -
                
                (2,500)
                
                (2)
                
                2
                
                -
                
                -
                
                -
                
                -Correction
      of stock certificate
                
                -
                
                -
                
                1
                
                -
                
                -
                
                -
                
                -
                
                -
                
                -Issuance
      of Common Stock for shares in PBS
                
                -
                
                -
                
                7,500
                
                8
                
                83,992
                
                -
                
                -
                
                -
                
                84,000Reversal
      of investment in PBS
                
                -
                
                -
                
                -
                
                -
                
                (83,992)
                
                -
                
                -
                
                -
                
                (83,992)Record
      gain on warrants
                
                -
                
                -
                
                -
                
                -
                
                (9,000)
                
                -
                
                -
                
                -
                
                (9,000)Issuance
      of additional investment rights
                
                -
                
                -
                
                -
                
                -
                
                600,000
                
                -
                
                -
                
                -
                
                600,000Net
      loss
                
                -
                
                -
                
                -
                
                -
                
                -
                
                -
                
                -
                
                (14,789,641)
                
                (14,789,641)Balances,
      September 30, 2006
                
                -
                
                -
                
                3,829,028
                
                3,829
                
                19,103,385
                
                -
                
                -
                
                (24,862,513)
                
                (5,755,299)Cancellation
      of  PBS Common Stock
                
                -
                
                -
                
                (7,539)
                
                (8)
                
                
                
                -
                
                -
                
                -
                
                (8)Employee
      and directors stock based award activity
                
                -
                
                -
                
                -
                
                -
                
                125,056
                
                -
                
                -
                
                -
                
                125,056Amortization
      and adjustment of registration rights penalties
                
                -
                
                -
                
                -
                
                -
                
                203,689
                
                -
                
                -
                
                -
                
                203,689Issuance
      of Series A Convertible Preferred Stock
                
                9,328
                
                -
                
                -
                
                -
                
                10,507,985
                
                -
                
                -
                
                -
                
                10,517,313(Continued)
  F-9





nFinanSe Inc.
              (A Development StageEnterprise)
              
              CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY
              (Continued)DeficitNote
            
            AccumulatedConvertible
            
            
            
            
            
            Additional
            
            Common
            
            Receivable
            
            During
      thePreferred
      Stock
            
            Common
      Stock
            
            Paid-In
            
            Stock
            
            From
            
            DevelopmentSeries
      A
            
            Series
      B
            
            Shares
            
            Par
      Value
            
            Capital
            
            Subscribed
            
            Stockholder
            
            Stage
            
            TotalDividends
      on Series A Convertible Preferred Stock
            
            
            
            
            
            
            
            
            
            1,000,000
            
            
            
            
            
            (1,000,000)
            
            -Accrued
      interest satisfied via the issuance of Series A Convertible Preferred
      Stock
            
            -
            
            -
            
            
            
            -
            
            68,000
            
            -
            
            
            
            -
            
            68,000Net
      loss
            
            -
            
            -
            
            -
            
            
            
            
            
            
            
            -
            
            (717,070)
            
            (717,070)Balances,
      December 30, 2006
            
            9,328
            
            -
            
            3,821,489
            
            3,821
            
            31,008,115
            
            -
            
            -
            
            (26,579,583)
            
            4,441,681Employee
      and director stock based award activity
            
            -
            
            -
            
            -
            
            -
            
            1,996,595
            
            -
            
            -
            
            -
            
            1,996,595Issuance
      of PBS warrants
            
            -
            
            -
            
            -
            
            -
            
            5,600
            
            -
            
            -
            
            -
            
            5,600Issuance
      of Series B Convertible Preferred Stock
            
            -
            
            1,000
            
            -
            
            -
            
            2,787,125
            
            -
            
            -
            
            -
            
            2,788,125Private
      placement of Common Stock
            
            -
            
            -
            
            2,023,199
            
            2,023
            
            5,608,889
            
            -
            
            -
            
            -
            
            5,610,912Issuance
      of Common Stock in connection with the conversion of Series A Convertible
      Preferred Stock to Common Stock
            
            (1,508)
            
            -
            
            1,507,450
            
            1,508
            
            -
            
            -
            
            -
            
            -
            
            -Issuance
      of Common Stock in lieu of cash dividends on Series A Convertible
      Preferred Stock that was converted into Common Stock
            
            -
            
            -
            
            15,125
            
            15
            
            52,325
            
            -
            
            -
            
            (52,353)
            
            (13)Issuance
      of DFS Services LLC warrants
            
            -
            
            -
            
            -
            
            -
            
            535,302
            
            -
            
            -
            
            
            
            535,302Exercise
      of vested stock options
            
            -
            
            -
            
            4,666
            
            5
            
            8,244
            
            -
            
            -
            
            -
            
            8,249Net
      loss
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (9,948,094)
            
            (9,948,094)Balances,
      December 29, 2007
            $
            7,820
            $
            1,000
            
            7,371,929
            $
            7,372
            $
            42,002,195
            $
            -
            $
            -
            $
            (36,580,030)
            $
            5,438,357





See
      notes to consolidated financial
statements.





F-10





nFinanSe
Inc.


(A Development StageEnterprise)





CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
      the year ended December
                29,
      2007
              
              
              For
      the three months ended December
                30,
      2006
              
              
              For
      the
                year
      ended
                September
                30,
      2006
              
              
              For
      the period
                July
      10, 2000
                (inception)
      to
                December
                29,
      2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (9,948,094
              )
              
              $
              (717,070
              )
              
              $
              (14,789,641
              )
              
              $
              (35,527,678
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              261,161
              
              
              
              60,501
              
              
              
              432,640
              
              
              
              962,233Provision
      for inventory obsolescence
              
              
              24,463
              
              
              
              -
              
              
              
              494,393
              
              
              
              518,856Provision
      for bad debts
              
              
              -
              
              
              
              2,726
              
              
              
              369,246
              
              
              
              461,972Amortization
      of intangible assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              15,485Stock
      based compensation and consulting
              
              
              1,996,595
              
              
              
              125,056
              
              
              
              1,952,229
              
              
              
              6,174,366Purchased
      in process research and development
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              153,190Gain
      on derivative instruments
              
              
              -
              
              
              
              169,171
              
              
              
              (3,465,948
              )
              
              
              (1,845,262
              )Gains
      (losses) on debt extinguishments
              
              
              -
              
              
              
              (452,299
              )
              
              
              5,137,817
              
              
              
              4,685,518Loss
      (gain)  on disposal of assets
              
              
              (1,633
              )
              
              
              30,001
              
              
              
              -
              
              
              
              28,368Loss
      from impairment of assets
              
              
              99,348
              
              
              
              -
              
              
              
              741,401
              
              
              
              1,095,903Forgiveness
      of indebtedness as a result of
      litigation   settlement
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (50,000
              )Non-cash
      interest expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,579,020Amortization
      of discount on convertible promissory note
              
              
              -
              
              
              
              (863,049
              )
              
              
              1,409,849
              
              
              
              (863,049
              )Value
      of Product Benefits Systems Corporation (“PBS”) warrant
              
              
              5,707
              
              
              
              -
              
              
              
              -
              
              
              
              5,707Changes in assets and
      liabilities, net:Receivables
              
              
              28,166
              
              
              
              (46,269
              )
              
              
              103,978
              
              
              
              (332,196
              )Inventories
              
              
              (1,751,633
              )
              
              
              -
              
              
              
              (253,207
              )
              
              
              (2,106,410
              )Prepaid
      expenses and other current assets
              
              
              (240,330
              )
              
              
              (437,114
              )
              
              
              36,968
              
              
              
              (719,264
              )Other
      assets
              
              
              18,199
              
              
              
              (1,000
              )
              
              
              25,158
              
              
              
              (11,214
              )Assets
      of discontinued operations
              
              
              -
              
              
              
              106,431
              
              
              
              1,790,325
              
              
              
              (229,060
              )Accounts
      payable and accrued  liabilities
              
              
              764,464
              
              
              
              383,746
              
              
              
              185,040
              
              
              
              1,637,939Accrued
      registration rights penalties
              
              
              -
              
              
              
              -
              
              
              
              98,649
              
              
              
              98,649Deferred
      revenues
              
              
              46,250
              
              
              
              50,000
              
              
              
              10,000
              
              
              
              106,250Liabilities
      of discontinued operations
              
              
              (87,411
              )
              
              
              (131,431
              )
              
              
              (1,749,026
              )
              
              
              -NET
      CASH USED IN OPERATING ACTIVITIES
              
              
              (8,784,748
              )
              
              
              (1,720,600
              )
              
              
              (7,470,129
              )
              
              
              (24,160,677
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
              
              
              (583,796
              )
              
              
              (86,782
              )
              
              
              (491,991
              )
              
              
              (1,954,334
              )Purchase
      of short-term investment
              
              
              (728,000
              )
              
              
              -
              
              
              
              -
              
              
              
              (728,000
              )Investment
      in Product Benefits Systems Corporation
              
              
              -
              
              
              
              -
              
              
              
              (15,737
              )
              
              
              (15,737
              )Cash
      advanced under note receivable
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (202,000
              )Other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (15,000
              )NET CASH USED IN INVESTING
      ACTIVITIES
              
              
              (1,311,796
              )
              
              
              (86,782
              )
              
              
              (507,728
              )
              
              
              (2,915,071
              )


(Continued)





F-11





nFinanSe
Inc.


(A Development StageEnterprise)





CONSOLIDATED
STATEMENTS OF CASH FLOWS





(Continued)


For
      the year ended December
              29,
      2007
            
            
            For
      the three months ended December
              30,
      2006
            
            
            For
      the
              year
      ended
              September
              30,
      2006
            
            
            For
      the period
              July
      10, 2000
              (inception)
      to
              December
              29,
      2007CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of Series A Preferred Stock
            
            
            -
            
            
            
            4,000,000
            
            
            
            -
            
            
            
            4,000,000Proceeds
      from issuance of Series B Preferred Stock
            
            
            3,000,000
            
            
            
            -
            
            
            
            -
            
            
            
            3,000,000Proceeds
      from borrowings
            
            
            -
            
            
            
            1,200,000
            
            
            
            4,067,250
            
            
            
            5,365,162Repayments
      of notes payable
            
            
            -
            
            
            
            -
            
            
            
            (100,000
            )
            
            
            (147,912
            )Collections
      on note receivable from stockholder
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            3,000,000Payment
      for stock issuance costs
            
            
            (670,561
            )
            
            
            (142,600
            )
            
            
            
            
            
            
            (813,161
            )Proceeds
      from the exercise of vested stock options
            
            
            8,249
            
            
            
            -
            
            
            
            -
            
            
            
            8,249Proceeds
      from the issuance of Common Stock
            
            
            6,069,598
            
            
            
            -
            
            
            
            2,472,500
            
            
            
            15,160,775NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            8,407,286
            
            
            
            5,057,400
            
            
            
            6,439,750
            
            
            
            29,573,113





NET
      CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            (1,689,258
            )
            
            
            3,250,018
            
            
            
            (1,538,107
            )
            
            
            2,497,365CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            4,186,623
            
            
            
            936,605
            
            
            
            2,474,712
            
            
            
            -CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            2,497,365
            
            
            $
            4,186,623
            
            
            $
            936,605
            
            
            $
            2,497,365SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
            
            $
            1,895
            
            
            $
            527
            
            
            $
            7,184
            
            
            $
            16,996Income
      taxes paid
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -SUPPLEMENTAL
      DISLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Acquisition
      of assets by issuance of Common Stock
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            818,200Reclassification
      of proceeds from sales of common stock to derivative financial instrument
      liabilities
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4,007,443Issuance
      of common stock for net assets of Pan American Energy Corporation in a
      recapitalization  - see Note A
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,969,000Issuance
      of common stock in lieu of cash payment of registration
      penalties
            
            $
            -
            
            
            $
            -
            
            
            $
            652,625
            
            
            $
            652,625Reclassification
      of long-lived assets to assets of discontinued telecom
      operations
            
            $
            -
            
            
            $
            -
            
            
            $
            100,000
            
            
            $
            100,000Warrants
      Issued to DFS Services, LLC
            
            $
            535,302
            
            
            $
            -
            
            
            $
            -
            
            
            $
            535,302Conversion
      of Series A Preferred Stock to Common Stock
            
            $
            1,508
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,508Dividends
      on Series A Convertible Stock Preferred Stock
            
            $
            52,352
            
            
            $
            1,000,000
            
            
            $
            -
            
            
            $
            1,052,352Conversion
      of Senior Secured Convertible Promissory Notes and accrued interest to
      Series A Convertible Preferred Stock
            
            $
            -
            
            
            $
            5,327,934
            
            
            $
            -
            
            
            $
            5,327,934







See notes
to consolidated financial statements.





F-12





nFinanSe
Inc.


(A Development Stage
Enterprise)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE A - FORMATION, BACKGROUND AND OPERATIONS
OF THE COMPANY





The
accompanying consolidated financial statements include the accounts of nFinanSe
Inc. (formerly Morgan Beaumont, Inc., which was originally incorporated under
the laws of the State of Florida on July 10, 2000) and those of its wholly-owned
subsidiaries, nFinanSe Payments Inc. and MBI Services Group, LLC (currently
dormant)  (collectively the “Company,” “we, ” “us, ”
“our”).  All significant intercompany accounts and balances have been
eliminated in consolidation. Because we are continuing to raise funds, and
because our revenues have been minimal, we are considered to be a development
stage enterprise as defined in Financial Accounting Standard No. 7.





We began
operations by developing a technology platform to enable us to sell stored value
cards to the un-banked and under-banked market. Typically, this market is
primarily comprised of “credit challenged” or “cash-based” consumers. Management
identified that a major barrier to the acceptance and use of stored value cards
was the inability to load additional funds on the card. To address this issue,
we shifted our focus during 2003 toward enhancing our network to enable
customers to load funds directly onto their stored value cards.





In August
2004, we consummated a merger and recapitalization with Pan American Energy Corp
(“PAEC”), a publicly traded company that was incorporated under the laws of the
State of Nevada on May 26, 2000. From a legal perspective, PAEC was the
surviving company and thus continued its public reporting obligations; however
for financial statement purposes, the transaction was treated as a reverse
merger and a recapitalization whereby we were deemed to be the acquirer and no
goodwill or other intangible assets were recorded. In connection with our merger
with PAEC, our fiscal year end was changed from December 31 to September
30.





In
addition to other items requiring stockholder approval, at a special
stockholder's meeting held on November 15, 2006, our stockholders approved
changing our fiscal year end to the Saturday closest to December 31 of each
year.  The change to December from September was done primarily to
align our fiscal year end with our clients. The change to Saturday was made to
close our physical year concurrently with the close of a fiscal week. Our
typical distributor agreement calls for cutting off a business week at 12
midnight on a Saturday.





In May
2005, through our subsidiary MBI Services Group, LLC, we commenced selling
traditional wholesale telecommunications services and during the fiscal year of
2005, we launched prepaid phone cards in an effort to develop brand recognition
within the credit challenged or cash-based consumer market. We originally made
the decision to enter the prepaid phone card business in order to gain exposure
with the targeted consumer group for our stored value cards.  The
phone card operation struggled with low margins and unacceptable operating
losses which were draining resources from our core stored value card
business.  Additionally, we had re-directed our strategy on the retail
sale of stored value cards by focusing on established prepaid card distributors
who provide direct channels into large numbers of retail outlets for sale and
loading of our stored value cards and making the continued offering of prepaid
phone cards an unnecessary component of our sales
strategy.  Accordingly, we made the decision to abandon this line of
business in the fourth quarter of fiscal 2006.  We accounted for this
discontinued operation using the component-business approach in accordance with
Financial Accounting Standard No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” As such, the results of MBI Services
Group, LLC have been eliminated from ongoing operations for all periods
presented and shown as a single line item on the statements of operations
entitled “Income (loss) from discontinued operations” for each period
presented.




F-13


During
fiscal 2006, we added Western Union® and MoneyGram® to our load network and
signed an agreement with DFS Services LLC to issue Discover® Network branded
stored value cards (“SVCs”).





We
currently operate two divisions: (i) the nFinanSe Card Division, which issues prepaid gift
cards, reloadable general spend cards, payroll cards, and promotional/incentive
cards; and (ii) the nFinanSe NetworkTM, which
is a network of convenient load locations whereby we can offer our customers the
ability to load additional cash on their reloadable SVCs.





At a
special stockholder's meeting held on November 15, 2006, our stockholders
approved an increase in our authorized shares of common stock from 170,000,000
to 200,000,000, and they authorized our board of directors to initiate a reverse
stock split ranging between 1-for-15 and 1-for-30.  Consequently, on
December 26, 2006 our board of directors approved a reverse split in which our
common stock underwent a 1-for-20 reverse stock split.  As a result,
every twenty shares of our common stock outstanding were combined into one
share. The reverse stock split affected all shares of outstanding common stock
including those shares underlying outstanding stock options and warrants. All
references to the number of shares in the accompanying consolidated financial
statements and notes thereto have been adjusted to reflect the reverse stock
split as though it occurred at the date of our incorporation.





We have
obtained a United States Treasury, FinCen, Federal Money Services Business
License, which is also required by some states.  In addition
approximately 45 states have established laws or regulations requiring entities
taking or loading money on cards or processing such transactions, to be licensed
by the state unless that entity has a federal or state banking charter. 
Although we offer our cards in conjunction with national banking institutions,
on October 2, 2007 we created our wholly owned subsidiary nFinanSe Payments Inc.
for the express purpose of acquiring these state licenses so that we can be in
compliance with various state laws and regulations that govern the sale and
loading of SVCs even though we do not believe that we are required to do
so.





Revenue
Recognition





We
generate the following types of revenues:





•
 Wholesale fees, which arise from sales and activation of our
SVCs.


•
 Transaction fees, which arise from the use and loading of cash for
SVCs.


•
 Maintenance fees, which arise from keeping the SVCs active on a monthly
basis.





Our
revenue recognition policy is consistent with the criteria set forth in SEC
Staff Accounting Bulletin 104, “Revenue Recognition in Financial
Statements,” or SAB 104, for determining when revenue is realized or
realizable and earned. In accordance with the requirements of SAB 104, we
recognize revenue when (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred; (3) our price to the buyer is fixed or determinable; and
(4) collectibility of the receivables is reasonably assured. We recognize the
costs of these revenues, including the cost of printing the cards, packaging and
collateral material, at the time revenue is recognized.





Accounts Receivable and
Allowance for Doubtful Accounts





Our
credit terms for our wholesale fees and the face amount of gift cards and the
load amount of the reloadable general spend cards vary by customer but are less
than two weeks. Payroll card and reward card loads, and related fees on both,
are usually paid in advance. Transaction fees and interest income  are
paid to us around the 15th of the
following month by the bank issuing the card.





F-14


Accounts
receivable are determined to be past due if payment is not made in accordance
with the terms of our contracts and receivables are written off when they are
determined to be uncollectible. We perform ongoing credit evaluations of our
customers and, with the exception of some minimum cash balances, we generally do
not require collateral.





We
evaluate the allowance for doubtful accounts on a regular basis for adequacy.
The level of the allowance account and related bad debts are based upon our
review of the collectibility of our receivables in light of historical
experience, adverse situations that may affect our customers’ ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.





Cash and Cash
Equivalents





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





Short-term
Investments





Short-term
investments are highly liquid investments with maturities between three months
and one year.  The December 29, 2007 balance arises from a certificate
of deposit that was pledged as collateral for bonds posted with certain states
in connection with our state licensing efforts.  Alternate collateral
was placed subsequent to year end (see Note L), and the certificate of deposit
was restored to our cash in March 2008.





Inventories





Inventories
are charged to operations using the first in, first out method. Our inventory
costs generally arise from costs incurred to produce SVCs, including costs for
plastic and packaging, embossing fees, printing fees and shipping.  At
December 29, 2007, approximately $1,764,000 of the inventory balance relates to
finished cards.





During
the year ended September 30, 2006, primarily because of our decision to
discontinue the prepaid phone card business, and because we determined various
other inventories were defective, we recorded a provision for obsolescence of
approximately $494,900.  In addition we recorded a provision for
inventory damages and obsolescence of approximately $24,400 at December 29, 2007
for inventories on hand at our distributors.





Use of
Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Estimates that are critical
to the accompanying consolidated financial statements arise from our belief that
we will generate adequate cash to continue as a going concern, that all
long-lived assets are recoverable and that the resolution of certain litigation
will not result in a significant loss (see Note E).  In addition,
stock-based compensation expense represents a significant estimate concerning
the future but unknown value of our common stock at some future date based on a
formula used by most companies in making the value determination.  The
markets for our products are characterized by intense price competition, rapid
technological development, evolving standards and regulations and short product
life cycles, all of which could impact the future realization of our assets.
Estimates and assumptions are reviewed periodically and the effects of revisions
are reflected in the period that they are determined to be necessary. It is at
least reasonably possible that our estimates could change in the near term with
respect to these matters.





F-15





Property and
Equipment





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





Long-Lived
Assets





In
accordance with Financial Accounting Standard No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” or FAS 144, we evaluate the
recoverability of long-lived assets and the related estimated remaining lives
when events or circumstances lead us to believe that the carrying value of an
asset may not be recoverable. During the years ended December 29, 2007 and
September 30, 2006, we determined that certain impairment losses were necessary
and charged operations for approximately $99,000 and $741,000, respectively. The
2006 impairment charge (which reduced the carrying value of certain telecom
property and equipment to its estimated fair value as determined by our
management) resulted from our decision to discontinue our prepaid phone card
business as discussed above, whereas the 2007 charges related to approximately
$58,000 of leasehold improvements, fixtures and equipment written off when we
abandoned our Bradenton location (see Note E) and approximately $41,000 of
write-offs of certain deposits for dormant card programs. The 2007 impairment
charges are included in general and administrative expenses in the accompanying
2007 statement of operations.  In accordance with FAS 144, the 2006
impairment loss has been included in the loss from discontinued operations in
the accompanying consolidated statement of operations.  At December
29, 2007, we believe our remaining long-lived assets are
recoverable.





Advertising
Costs





Advertising
expenses, which were approximately $263,000, $5,400 and $138,000 during the year
ended December 29, 2007, the three months ended December 30, 2006 and the year
ended September 30, 2006, respectively, are expensed as incurred. The majority
of advertising was related to promoting the sale of cards on our Internet
site.





Research and
Development





Research
and development costs, which approximated $880,000, $220,000 and $642,000 during
the year ended December 29, 2007, the three months ended December 30, 2006 and
the year ended September 30, 2006, respectively, are expensed as
incurred.  These costs are primarily related to network software
development, security compliance and systems maintenance.





Net Loss Per
Share





We
compute net loss per share in accordance with Financial Accounting Standard No.
128, “Earnings per
Share,” or FAS 128, and SEC Staff Accounting Bulletin No. 98, or SAB
98.  Basic net loss per share is computed by dividing the net loss
attributable to common stockholders for the period after deducting dividends on
our convertible preferred stock by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed by
dividing the net loss for the period by the number of common and common
equivalent shares outstanding during the period (common stock equivalents arise
from options, warrants and convertible preferred stock). Because of our net
losses, none of these common stock equivalents have been dilutive at any time
since our inception; accordingly basic and diluted net loss per share are
identical for each of the periods in the accompanying consolidated statements of
operations.





F-16


The
following table lists the total of common stock and our common stock equivalents
outstanding at December 29, 2007:





Description
            
            Shares
      of
              common
      stock
              and
      common
              stock
      equivalentsCommon
      stock outstanding
            
            7,371,929Series
      A Convertible Preferred Stock
            
            7,820,484Series
      B Convertible Preferred Stock
            
            1,000,000Stock
      options outstanding
            
            2,403,696Outstanding
      warrants
            
            2,195,028Total
            
            20,791,137





Income
Taxes





We
compute income taxes in accordance with Financial Accounting Standard No. 109,
“Accounting for Income
Taxes,” or FAS 109. Under FAS 109, deferred taxes are recognized for the
tax consequences of temporary differences by applying enacted statutory rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities. Also, the
effect on deferred taxes of a change in tax rates is recognized in income in the
period that included the enactment date. Significant temporary differences arise
primarily from accounts payable and accrued liabilities that are not deductible
for tax reporting until they are paid.





Financial Instruments and
Concentrations





Financial
instruments, as defined in Financial Accounting Standard No. 107, “Disclosures about Fair Values of
Financial Instruments,” consist of cash, evidence of ownership in an
entity and contracts that both (1) impose on one entity a contractual obligation
to deliver cash or another financial instrument to a second entity, or to
exchange other financial instruments on potentially unfavorable terms with the
second entity, and (2) conveys to that second entity a contractual right (a) to
receive cash or another financial instrument from the first entity or (b) to
exchange other financial instruments on potentially favorable terms with the
first entity. Accordingly, our financial instruments consist primarily of cash
and cash equivalents, short term investment(s), accounts receivable, accounts
payable and accrued liabilities.  The carrying values of our cash and
cash equivalents, receivables and accounts payable and accrued and other
liabilities approximate their respective fair values due to their short-term
nature.





Financial
instruments, which potentially subject us to significant concentrations of
credit risk, consist primarily of cash and cash equivalents. We frequently
maintain such balances in excess of federally insured limits. We have not
experienced any losses in such accounts.





Stock-Based
Compensation





Prior to
January 1, 2006, we used Financial Accounting Standard No. 148 “Accounting for Stock-Based
Compensation - Transition and Disclosure” (“FAS 148”)  to account
for our stock based compensation arrangements.  This statement amended
the disclosure provisions of  Financial Accounting Standard No. 123,
“Accounting for Stock Based
Compensation”,  (“FAS 23”) to require prominent disclosure
about the effects on reported net income of an entity’s accounting policy
decisions with respect to stock-based employee compensation. Through December
31, 2005, as permitted by FAS 123 and FAS 148, we used the intrinsic value
method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” to account for our stock-based employee compensation
arrangements.





F-17




Effective
January 1, 2006, we began applying Financial Accounting Standards No. 123R (“FAS
123 (Revised)”), “Share-Based
Payments” (“FAS 123(R)”) to account for our stock based compensation
arrangements. This statement requires us to recognize compensation expense in an
amount equal to the fair value of shared-based payments such as stock options
granted to employees.  We elected to apply FAS 123(R) on a modified
prospective method for awards existing at the date of adoption. This method
requires us to record compensation expense as such awards continue to
vest.  The effect of adopting this statement was to increase our net
loss by approximately $1,996,600, $125,100 and $1,272,200 during the year ended
December 29, 2007, the three months ended December 30, 2006 and the year ended
September 30, 2006, respectively.





The
following table summarizes stock based compensation charged to operations and
discontinued operations.


Stock
      based compensation charged to:
            
            For
      the year ended December 29, 2007
            
            
            For
      the three months ended December 30, 2006
            
            
            For
      the year ended September 30, 2006Transaction
      and operating expenses
            
            $
            2,210
            
            
            $
            1,506
            
            
            $
            7,545Selling
      and marketing expenses
            
            
            181,148
            
            
            
            58,027
            
            
            
            161,440General
      and administrative expenses
            
            
            1,813,237
            
            
            
            65,523
            
            
            
            991,835Total
      stock based compensation included in loss from continuing
      operations
            
            
            1,996,595
            
            
            
            125,056
            
            
            
            1,160,820Stock
      based compensation charged to discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            111,443Total
      stock based compensation
            
            $
            1,996,595
            
            
            $
            125,056
            
            
            $
            1,272,263





Had our
compensation expense for stock-based awards previously been determined based
upon grant date fair values, our net loss and net loss per share amounts for the
year ended September 30, 2006 would have increased to $15,291,255 and $4.33,
respectively.





With
respect to non-employee stock options that vest at various times and have no
significant disincentives for non-performance and/or specific performance
commitments, we follow the guidance in Emerging Issues Task Force Issue (“EITF”)
No. 96-18. Pursuant to this standard, the value of these options is estimated at
various reporting dates and finally measured at the respective vesting date(s)
of the options (or the date on which the consultants’ performance is complete).
The expense for each group of options is recognized ratably over the vesting
period for each group, and the estimated value of any unvested options is
updated at such time. As a result, under these arrangements, our initial and
periodic recording of stock based compensation expense represents an estimate
for which changes are reflected in the period that they are determined to be
necessary.





Dividends on Preferred
Stock





Our
Series A Convertible Preferred Stock accrues dividends of 5% per annum. Unless
and until these dividends are declared and paid in full, the Company is
prohibited from declaring any dividends on its common stock. There are no
dividend requirements on our Series B Convertible Preferred Stock.





F-18


In
September 2007, dividends were paid on the voluntary conversion of 1,300,000
shares of Series A Preferred Stock into 1,300,000 shares of common stock, in the
form of 12,865 shares of common stock and cash for fractional shares of $11. In
December 2007, dividends were paid on an additional voluntary conversion of
207,450 shares of Series A Preferred Stock into 207,450 shares of common stock,
in the form of 2,260 shares of common stock.  As of December 29, 2007,
dividends owed but not declared on our Series A Convertible Preferred Stock were
$393,167.  In January 2008, these dividends were declared and
satisfied through the issuance of 104,252 shares of our common
stock.





Reclassifications





Certain
amounts in the September 30, 2006, December 30, 2006 and inception to date
financial statements have been reclassified to conform to the current year
presentation.





Recently Issued Accounting
Pronouncements





In June
2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes" (“FIN 48”) which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FAS 109, "Accounting for Income Taxes". This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of this statement did not have a significant effect on our
financial statements.





In
September 2006, the FASB issued Financial Accounting Standard No. 157, “Fair Value Measurements,” or
FAS 157. This Statement defines fair value, establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
and expands disclosures about fair value measurements. This statement applies
under other accounting pronouncements that require or permit fair value
measurements as the FASB previously concluded in those accounting pronouncements
that fair value is a relevant measurement attribute. Accordingly, this Statement
does not require us to develop or report any new fair value measurements. This
Statement is effective for financial statements for fiscal years beginning after
November 15, 2007. Earlier application is permitted provided that the reporting
entity has not yet issued financial statements for that fiscal year. This
statement is not expected to have a significant effect on our financial
statements.




On
February 15, 2007, the FASB issued Financial Accounting Standard No. 159,
“The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115”, or FAS 159, which creates a fair-value option
allowing an entity to irrevocably elect fair value as the initial and subsequent
measurement attribute for certain financial assets and financial liabilities,
with changes in fair value recognized in earnings as they occur. FAS 159 also
requires an entity to report those financial assets and financial liabilities
measured at fair value in a manner that separates those reported fair values
from the carrying amounts of assets and liabilities measured using another
measurement attribute on the face of the statement of financial position.
Lastly, FAS 159 requires an entity to provide information that would allow users
to understand the effect on earnings of changes in the fair value on those
instruments selected for the fair-value election. FAS 159 is effective for
fiscal years beginning after November 15, 2007, with early adoption
permitted. We have not yet determined the effect that the implementation of FAS
159 will have on our results of operations or financial condition.





In
December 2007, the FASB issued Financial Accounting Standard No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51 (“FAS
160”). FAS 160 requires that a noncontrolling interest in a subsidiary be
reported as equity and the amount of consolidated net income specifically
attributable to the noncontrolling interest be identified in the consolidated
financial statements. It also calls for consistency in the manner of reporting
changes in the parent’s ownership interest and requires fair value measurement
of any noncontrolling equity investment retained in a
deconsolidation.  FAS 160 is effective for fiscal years beginning
after December 15, 2008, with early adoption prohibited. This statement is
not expected to have a significant effect on our financial
statements.




F-19




In
December 2007, the FASB issued Financial Accounting Standard No. 141
(revised 2007), Business
Combinations (“FAS 141R”). FAS 141R broadens the guidance of FAS 141,
extending its applicability to all transactions and other events in which one
entity obtains control over one or more other businesses. It broadens the fair
value measurement and recognition of assets acquired, liabilities assumed, and
interests transferred as a result of business combinations. FAS 141R also
expands on required disclosures to improve the statement users’ abilities to
evaluate the nature and financial effects of business combinations.
FAS 141R applies prospectively to business combinations consummated in
fiscal years beginning after December 15, 2008., and interim periods within
those fiscal years. FAS 141R is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. This statement is not
expected to have a significant effect on our financial statements.




NOTE
B - GOING CONCERN





Our
consolidated financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going
concern, which contemplate the realization of assets and liquidation of
liabilities in the normal course of business.  At March 28, 2008, we
have cash of approximately $1.3 million, which amount is not expected to be
adequate to meet our anticipated cash commitments in 2008. As a result we
have:





·
            Engaged
      investment bankers to assist us in raising up to $7 million in additional
      equity capital to fund our 2008 fiscal year operations (we have recently
      closed on approximately $1.7 million of this equity raise and such amount
      is included in cash as of March 28, 2008).  This additional
      equity requirement results from the additional time needed to make our
      major retail distribution contracts operational and reach critical mass of
      cards in the marketplace.





·
            Engaged
      the aforementioned investment bankers to also assist us in sourcing
      short-term accounts receivable financing that we will need to fund the
      face amount of gift cards and the load amount of reloadable general spend
      cards prior to receiving the money from our
  distributors.





Although
we reasonably believe that we will be successful in raising the required equity
and debt capital we need to fund our operations and cash commitments, no
assurance can be given that our beliefs will come to
fruition.  Additionally, we have incurred significant losses and
negative cash flows from operations since our inception, and as a result no
assurance can be given that we will be successful in attaining profitable
operations, especially when one considers the problems, expenses and
complications frequently encountered in connection with entrance into
established markets and the competitive environment in which we
operate.





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





NOTE
C – INCOME TAXES





We
recognized losses for both financial and tax reporting purposes during each of
the periods in the accompanying consolidated statements of operations.
Accordingly, no provisions for income taxes or deferred income taxes payable
have been provided for in the accompanying consolidated financial
statements.





F-20


We
believe that on December 28, 2006, we triggered the “change in control”
provisions of the Internal Revenue Code limiting our $16.1 million operating
loss carry forwards up to that date, to approximately $242,000 per year until
such carryforwards expire. Assuming our additional net operating loss carry
forwards incurred in fiscal 2007 are not disallowed by taxing authorities
because of such change in control provisions, at December 29, 2007 we have total
net operating loss carry forwards of approximately $12.8 million for income tax
purposes (in addition to the reduction of operating loss carryforwards arising
from the change in control,  our net operating loss carry forwards
differ from our deficit primarily due to dividends paid on Series A Convertible
Preferred Stock and the loss on derivative financial instruments and certain
stock based compensation and impairment expenses that are considered to be
permanent differences between book and tax reporting). These loss carry forwards
expire in various years through the year ended December 29,
2027.  Components of our net current and non-current deferred income
tax assets, assuming an effective income tax rate of 39.5%, are approximately as
follows at December 29, 2007:





Net
      current deferred income tax asset:Accounts
      payable and accrued liabilities
            $
            229,300Deferred
      revenues (net of receivables)
            
            35,500Other
            
            (15,700)Subtotal
            
            249,100Less
      valuation allowance
            
            (249,100)Net
      current deferred income tax asset
            $
            -Non-current
      deferred income tax asset:Intangibles
            $
            12,700Net
      operating loss carry forwards
            
            4,810,200Subtotal
            
            4,822,900Less
      valuation allowance
            
            (4,822,900)Non-current
      deferred income tax asset
            $
            -





Our
deferred income tax assets are not recorded in the accompanying consolidated
balance sheet because we established valuation allowances to fully reserve them
as their realization did not meet the required asset recognition standard
established by FAS 109. The total valuation allowance decreased by approximately
$1,166,000; such decrease occurred despite our significant loss in 2007 because
our net operating loss carryforwards (and therefore the related valuation
allowance) were reduced because of the aforementioned change in control
provision.





NOTE
D - PROPERTY AND EQUIPMENT





Property
and equipment consists of the following at December 29, 2007:





Balances
            
            AmountsFurniture,
      fixtures and equipment
            $
            819,732Computer
      software
            
            195,797Leasehold
      improvements
            
            190,0381,205,567Less
      accumulated depreciation and amortization
            
            (446,306)Property
      and equipment – net
            $
            759,261








F-21








NOTE
E - COMMITMENTS AND CONTINGENCIES





Operating
Leases





We are
obligated under various operating lease agreements for our
facilities.  Future minimum lease payments and anticipated common area
maintenance charges under all of our operating leases are approximately as
follows at December 29, 2007:




Year
      ended
            
            
            Amounts2008
            $
            441,0002009
            
            196,3002010
            
            200,6002011
            
            205,1002012
            
            156,300Total
            $
            1,199,300





In
October 2007 we vacated our Bradenton, Florida lease premises which were
formerly our offices.   Unless we are able to sublease the space,
as of December 29, 2007, we remain liable for monthly rents of approximately
$12,200  through the lease expiration on December 31,
2008.   We were also leasing an additional 10,000 square feet on
the second floor of the same building, for which we paid a monthly rent of
approximately $11,780 through October 2007 (at which time our lessor released us
from future liability on such lease with minimal cost to us).  We made
the decision to relocate to Tampa primarily because we believe that our new
Tampa location will provide greater opportunity for us to hire both the
technical and customer support staff we anticipate needing to implement our
business model.





In
December 2007, we evaluated the ability to recover the minimum future lease
payments of $149,500 for our Bradenton location as well as leasehold
improvements, fixtures and equipment having a net book value of approximately
$58,000.  Our evaluation, taking into consideration the leasing market
in Bradenton and our recent experience concerning the second floor of the
Bradenton location, resulted in our recording a charge to operations of
approximately $176,000 for the fair value of the net future lease rentals (i.e.
the future minimum lease payments minus estimated sublease rentals we reasonably
can expect to receive) and the carrying value of leasehold improvements,
fixtures and equipment related to such facility.  This charge is
included in general and administrative expenses in the accompanying 2007
statement of operations.  We did not incur any other significant costs
as a result of our move to our new Tampa, Florida facility.





Rent
expense included in loss from continuing operations for the year ended December
29, 2007, the three months ended December 30, 2006 and the year ended September
30, 2006 approximated $332,600, $71,700 and $274,000, respectively.





Employment
Agreements





We are
obligated under the following employment agreements:





●
            The
      employment agreement with our Chief Executive Officer, Jerry R. Welch, has
      a term from September 5, 2006 to December 31, 2008 and provides him with
      an annual salary of $235,000 (raised to $275,000 in February 2008). The
      agreement is to be automatically renewed indefinitely for succeeding terms
      of two years unless otherwise terminated in accordance with the agreement.
      Additionally, Mr. Welch received the option to purchase approximately
      603,400 shares of our common stock at $1.50 per share (the “Welch Option
      Shares”), which when using Black-Scholes resulted in an aggregate fair
      value of approximately $845,000. This amount is being recognized as
      stock-based compensation expense on a straight line basis as the options
      vest. The grant was equal to 4.25% of the total of our outstanding shares,
      options and warrants as of December 28, 2006 (the date we completed the
      permanent financing required for the grant of such options). The Welch
      Option Shares are divided into 28 equal installments. The first six
      installments vested on February 28, 2007 and additional installments vest
      on the final day of each month through December 31,
  2008.


F-22
    On  July
      12, 2007, Mr. Welch was awarded 197,855 stock options at $3.40 per share,
      which when using Black-Scholes resulted in an aggregate fair value of
      approximately $619,000.  The grant was equal to approximately
      4.25% of the shares of our total stock and warrants issued under the June
      29, 2007 Securities and Purchase Agreements. These options vest in 28
      equal installments. The first eleven installments vested on July 31, 2007
      and accordingly at that time 11/28 of the aforementioned stock-based
      compensation was recognized as compensation expense.  The
      remaining compensation expense is being recognized on a straight line
      basis as additional installments vest on the final day of each month
      through December 31, 2008.


●
            The
      employment agreement with our Chief Financial Officer, Raymond Springer,
      has a term from September 5, 2006 to December 31, 2008 and provides him
      with an annual salary of $185,000 (raised to $200,000 in February 2008).
      Additionally, Mr. Springer received the option to purchase approximately
      284,000 shares of our common stock at $1.50 per share (the “Springer
      Option Shares”), which when using Black-Scholes resulted in an aggregate
      fair value of approximately $400,000. This amount is being recognized as
      stock-based compensation expense on a straight line basis as the options
      vest. This grant was equal to 2.0% of the total of our outstanding shares,
      options and warrants on December 28, 2006 (the date we completed the
      permanent financing required for the grant of such shares). The Springer
      Option Shares are divided into 28 equal installments. The first six
      installments vested on February 28, 2007, and additional installments vest
      on the final day of each month through December 31, 2008.
              
              On
      July 12, 2007, Mr. Springer was awarded 93,108 stock options at $3.40 per
      share, which when using Black-Scholes resulted in an aggregate fair value
      of approximately $291,000.  The grant was equal to approximately
      2.00% of the shares of our total stock and warrants issued under the June
      29, 2007 Securities and Purchase Agreements. These options vest in 28
      equal installments. The first eleven installments vested on July 31, 2007
      and accordingly at that time 11/28 of the aforementioned stock-based
      compensation was recognized as compensation expense.  The
      remaining compensation expense is being recognized on a straight line
      basis as additional installments vest on the final day of each month
      through December 31, 2008.





Notwithstanding
the above mentioned vesting schedules,  the options will be
immediately fully vested and exercisable in the event of a change in control (as
defined in the agreement), and/or the death or total disability of Mr. Welch or
Mr. Springer during the terms of their employment. To the extent the options are
not previously exercised, the options terminate on the earlier of (i) the date
ten years following the grant date or (ii) at the date 12 months following the
cessation of Mr. Welch’s and/or Mr. Springer’s employment with us.





Both Mr.
Welch and Mr. Springer also receive performance-based bonuses and certain
medical and other benefits.  If we terminate Mr. Welch or Mr. Springer
without cause, we will be required to pay severance to them in the amount of
compensation and benefits they would have otherwise earned in the remaining term
of their agreements or twelve months, whichever period is shorter.





In
addition to the above, at December 30, 2006, we were obligated under an
employment agreement with our previous Chairman of the Board of Directors and
Chief Executive Officer, Clifford Wildes. The agreement was terminated on
January 29, 2007. As consideration for such termination and accrued vacation
owed to Mr. Wildes of approximately $90,000, we agreed to pay him a total sum of
$250,000 over a period of six months.


At
December 29, 2007, the amounts owed to Mr. Wildes under this arrangement were
completely satisfied and there was no remaining liability.





Service and Purchase
Agreements





We have
entered into renewable contracts with DFS Services LLC, our card network, Palm
Desert National Bank, and First National Bank & Trust of Pipestone,
Minnesota (“FNB&T”) our card issuing banks and Metavante Corporation, our
processor, that have initial expiration dates from June 2009 through October
2011.   Since the majority of the fees to be paid are contingent
primarily on card volume, it is not possible to calculate the amount of the
future commitment on these contracts. The Metavante Corporation and FNB&T
agreements also require a minimum payment of $5,000 per month.  During
the year ended December 29, 2007, the three months ended December 30, 2006 and
the year ended September 30, 2006, we made aggregate payments of approximately
$117,800, $9,000 and $0, respectively to Metavante and no payments to FNB&T
under these arrangements.




F-23
 Pending or Threatened
Litigation





On
December 10, 2007, Bedlington Securities, Inc., a Bahamian corporation, filed
suit against the Company in the Eighth Judicial District Court, Clark County,
Nevada, alleging securities fraud in connection with stock it purportedly
purchased between August 2004 and November 2006.  Bedlington
Securities, Inc. claims damages in excess of $50,000 and seeks a judgment for
general and special damages to be determined at the time of trial, punitive
damages, reasonable attorney fees and costs of suit and such other further
relief as the court may deem just.  The Company believes that
Bedlington Securities, Inc.'s claim is without merit and intends to defend the
suit.  The litigation is currently in the discovery stage and
accordingly the ultimate resolution of this matter cannot be determined at this
time.  As such, no effect has been given to any loss that might result
from the resolution of this matter in the accompanying consolidated financial
statements.





We may
also become involved in certain other litigation from time to time in the
ordinary course of business, however at December 29, 2007, no such litigation
exists or is threatened.





Purchase
Commitments





As of
December 29, 2007, we had non-cancelable purchase commitments for card
inventory, including plastic, collateral material and fees, totaling
approximately $1,000,000; substantially all of which is expected to be paid
by mid 2008. This amount includes approximately $670,000 that is recorded
in accounts payable and accrued inventory liability on the balance sheet as of
December 29, 2007.





NOTE
F - STOCK OPTIONS





On March
1, 2007, our stockholders approved the 2007 Omnibus Equity Compensation Plan
(the “2007 Plan”) which combines the 709,850 shares that were issued and
outstanding under the 2004 Stock Option Plan with the 2.3 million shares
available for issuance under the 2007 Plan. As of December 29, 2007, we had
2,403,696   total options outstanding, consisting of 2,329,888
options issued to employees and non-employee directors and 73,808 options issued
to consultants. Such options vest over various periods up to three years and
expire on various dates through 2017.





The fair
value of each option grant is estimated at the date of grant using the
Black-Scholes option valuation model with the following weighted average
assumptions for the years ended December 29, 2007 and September 2006 (there were
no options issued in the three month period ended December 30,
2006):





Year
      ended
            
            Year
      endedDecember
      29, 2007
            
            September
      30, 2006Expected
      Term in years
            5
            
            2
      and 5Expected
      stock price volatility
            71%
      - 169%
            
            77%
      – 207%Risk
      free interest rate
            4.06%
      - 5.03%
            
            4.18%
      - 5.30%Dividend
      yield
            0%
            
            0%





F-24




The
following table describes our stock option activity during the year ended
December 29, 2007, the three months ended December 30, 2006 and the year ended
September 30, 2006:




Number
      of
                Options
              
              Weighted average

                    exercise

                      Price
      per share(price
      at date of grant)Outstanding
      at September 30, 2005
              
              638,583
              $
              8.44Granted
              
              212,875
              $
              10.40Exercised
              
              (10,000)
              $
              4.00Cancelled
              
              (112,859)
              $
              8.58Outstanding
      at September 30, 2006
              
              728,599
              $
              7.78Granted
              
              -
              $
              -Cancelled
              
              (16,166)
              $
              2.77Outstanding
      at December 30, 2006
              
              712,433
              $
              7.89Granted
              
              1,820,865
              $
              2.25Exercised
              
              (4,667)
              $
              1.77Cancelled
              
              (124,935)
              $
              8.37Outstanding
      at December 29, 2007
              
              2,403,696
              $
              3.59Options
      granted at or above market value during the year December 29,
      2007
              
              1,820,865







The
following table summarizes information regarding options that are outstanding at
December 29, 2007:




Options
      outstanding
            
            Options
      exercisableRange
      of
              exercise
      prices
            
            Number
              outstanding
            
            Weighted
              average
              remaining
              contractual
              life
      in years
            
            Weighted
              average
              exercise
              price
            
            Number
              Exercisable
            
            Weighted
              average
              exercise
              price
      per
              share$1.50
            
            1,167,402
            
            9.0
            $
            1.50
            
            506,492
            $
            1.50$3.20-$7.00
            
            1,001,938
            
            5.3
            $
            3.88
            
            561,491
            $
            3.80$8.00-$13.80
            
            180,606
            
            3.5
            $
            10.50
            
            177,857
            $
            10.50$15.60-$32.00
            
            53,750
            
            2.4
            $
            20.34
            
            53,750
            $
            20.342,403,696
            
            6.9
            $
            3.59
            
            1,299,590
            $
            4.51






F-25




The
weighted average grant-date fair value of options granted during the years ended
December 29, 2007 and September 30, 2006 was approximately $3.8 million and $1.6
million, respectively.  The total fair value of shares vested during
the year ended December 29, 2007 was approximately, $2.0 million. We estimate
the aggregate stock-based compensation attributable to unvested options to be
approximately $1,990,000, which amount is expected to be realized over a period
of approximately three years.





Common
shares required to be issued upon the exercise of stock options and warrants
would be issued from our authorized and unissued shares.





In
addition to the options issued under the employment agreements discussed at Note
E, the 2007 and 2006 grants above include the following options issued to
officers and non-employee directors:





·
            232,500
      stock options to six officers on January 18, 2007 at an exercise price of
      $1.50 per share.  Using the Black-Scholes option valuation model
      an aggregate fair value of approximately $326,100 is expected to be
      recognized as stock based compensation over the vesting period of the
      options.  The options vest one third at the one year anniversary
      and then ratably for the following 24
months.





·
            220,000
      stock options to eight officers at various times during 2007 at exercise
      prices ranging from $3.05 to $4.80 per share.  Using the
      Black-Scholes option valuation model an aggregate fair value of
      approximately $748,600 is expected to be recognized as stock based
      compensation over the vesting period of the options   The
      options vest one third at the one year anniversary and then ratably for
      the following 24 months.





·
            70,000
      options to the non-employee members of our Board of Directors at an
      exercise price of $4.50 per share. The options, which were 100% vested on
      the date of grant, had a fair value of approximately
      $298,000.  This amount has been charged to operations during the
      year ended December 29, 2007.





·
            20,000
      options to the non-employee members of our Board of Directors in January
      2006 and April 2006 at exercise prices of $8.40 and $8.00 per share,
      respectively. The options, which were 100% vested on the date of grant,
      had a fair value of approximately $98,400. This amount was charged to
      operations during the year ended September 30,
  2006.





·
            22,500
      options to two officers in October 2005 and July 2006 at exercise prices
      of $13.60 and $8.20 per share, respectively.  Using the
      Black-Scholes option valuation model, an aggregate fair value of
      approximately $173,500 is being recognized as stock based compensation
      over the vesting periods of the options.   One third of the
      options vested after 90 days from grant, one third at the one year
      anniversary and the final one third are to be vested on the two year
      anniversary.





Finally,
on January 24, 2008, the Company’s Board of Directors awarded the following
stock options:





·
            Mr.
      Welch was awarded 95,000 stock options and Mr. Springer was awarded 45,000
      stock options at an exercise price of $4.00 per share. Using the
      Black-Scholes option valuation model an aggregate fair value of
      approximately $344,400 is expected to be recognized over the vesting
      periods of the options.  The first seventeen installments vested
      on January 28, 2008 and accordingly at that time 17/28 of the
      aforementioned stock-based compensation was recognized as compensation
      expense.  The remaining compensation expense will be recognized on a
      straight line basis as additional installments vest on the final day of
      each month through December 31,
2008.





·
            A
      total of 155,000 stock options were awarded to eight officers at an
      exercise price of $4.00 per share.  Using the Black-Scholes option
      valuation model an aggregate fair value of approximately $381,300 is
      expected to be recognized as stock based compensation over the vesting
      periods of the options.  The options for the eight officers vest
      one third at the one year anniversary and then ratably for the following
      24 months.





F-26




NOTE
G – OTHER STOCK-BASED COMPENSATION





In
addition to stock based compensation and consulting arising from the issuance of
options, we incurred other significant stock based consulting expenses as
follows during the years ended December 29, 2007 and September 30, 2006 (no
other stock based compensation and consulting was applicable during the three
months ended December 30, 2006):





2007





We issued
200,000 warrants to DFS Services LLC on November 12, 2007, which allow such
entity to purchase a like number of shares of our common stock at an exercise
price of $3.00 per share.  The warrants expire on November 12,
2010.  The fair value of the warrants was calculated as $535,300 and
classified as equity.  The value of the DFS Services LLC warrants is
being charged to operations over the next 18 months, $107 was recognized in
2007.  The balances in prepaid and other current assets and other
non-current assets for the year ended December 31, 2007, representing the
unamortized amounts, were $232,115 and $303,080, respectively.





2006





We issued
107,500 shares of our restricted common stock to consultants; 48,750 of which
were subsequently forfeited.  The shares were fully vested as of
September 30, 2006. Consulting expense of approximately $453,000 (which amount
represented the fair value of these shares) was charged to operations in fiscal
2006.





In
addition, we issued 60,000 warrants to a consulting entity, which allow such
entity to purchase a like number of shares of our common stock for $5.00 per
share.  Subsequently, approximately 22,500 of these warrants were
forfeited when we canceled the agreement.  The warrants expire at
various times in 2011.  We charged operations for the fair value of
these warrants (approximately $226,700) in fiscal 2006.





NOTE
H - SETTLEMENT OF LITIGATION





At
September 30, 2005, we were involved in litigation with a former employee. There
were many issues between the parties, including the former employee's claim of
damages in excess of $6,000,000. The former employee also made a claim outside
of the litigation that he was entitled to pre-merger shares valued at
approximately $5,200,000.  We paid cash of $75,000 to settle this
litigation in 2006.





At
September 30, 2006 we were involved in litigation with MTEL Communications and
Miguel Vasquez, its founder. The dispute involved an agreement to purchase
assets and a consulting agreement, both related to our discontinued telecom
operations. On November 22, 2006, the parties agreed to settle all matters and
we agreed to return certain discontinued telecom operations assets which had a
carrying value of $100,000 (after the impairment loss discussed at Note A). The
value of this settlement was included in the income (loss) from discontinued
operations in the September 30, 2006 statement of operations.






F-27





NOTE
I – PRIVATE PLACEMENTS OF COMMON STOCK WITH REGISTRATION RIGHTS





During
the year ended September 30, 2005, we completed two private placements of our
common stock as follows:




●
            In
      December 2004, we completed a private placement of 356,250 of shares of
      our common stock to certain accredited investors for
      $1,425,000.




●
            In
      July 2005, we completed the private placement of 618,125 shares of our
      common stock to certain accredited investors for $4,945,000 in an
      offering, agreed to on June 17, 2005. The purchasers also received a
      warrant exercisable for two years to purchase one share of common stock
      for $12.00 per share for each share of common stock
      purchased.  This price was subsequently decreased to $4.00 per
      share. All such warrants were exercised prior to September 30,
      2006.





We agreed
to register the shares and the shares underlying the warrants, and also agreed
to pay certain penalties if we failed to timely perform or provide for the
registration of these shares and warrants. Because we were not successful in
registering the shares in the agreed upon time frame, we incurred cumulative
penalties of $652,625 through September 30, 2006.




These
penalties were settled as follows:




●
            In
      March 2006, we issued 39,531 unregistered shares of our common stock in
      settlement of $158,125 in accrued penalties for the common stock sold by
      us in December 2004. The agreement to issue these shares stipulated that
      penalties related to this issuance of stock ceased on February 17,
      2006.





●
            In
      March 2006, we issued 61,814 unregistered shares of our common stock in
      settlement of $494,500 in accrued penalties for the common stock sold by
      us in June 2005. The agreement to issue these shares stipulated that
      penalties related to this issuance of stock continued to accrue until such
      time that the shares and warrants were registered, which registration
      became effective in June 2006.




The
agreements required us to maintain the effectiveness of the registration
statement until two years after the shares were originally sold to the
investors, at which point the shares could be freely sold by them without
registration.  As of September 30, 2006, we had accrued approximately
$203,700 of such penalties based on an estimate of the weighted probability of
our failure to maintain effectiveness.  However, as of December 30,
2006, in accordance with SFAS 5, we determined that such liability was no longer
needed;  consequently it was reversed and reflected as an increase in
additional paid in capital on such date.


NOTE
J – CONVERTIBLE PROMISSORY NOTES, CONVERTIBLE PREFERRED STOCK AND EXCHANGE
TRANSACTIONS




Interim
Financing


During
the third quarter of fiscal 2006, we issued $1,150,000 of 9.0% Convertible
Promissory Notes, plus warrants to purchase 213,450 shares of our common stock,
that was intended as interim financing (the “Interim
Financing”).


F-28




We
evaluated the terms of the convertible promissory notes and warrants issued in
connection with the Interim Financing and concluded that equity classification
was not afforded the warrants and certain derivative features embedded in the
convertible promissory notes. In these instances we are required to carry the
financial instruments at fair values on our balance sheet and record fair value
adjustments in our statement of operations. Accordingly, we allocated proceeds
from the Interim Financing to the detachable warrants and to a compound
derivative embedded in the convertible promissory notes in the amounts of
$1,333,836 and $274,400, respectively, based upon the fair values of these
financial instruments. This allocation resulted in a day-one loss amounting to
$458,236 because the aggregate fair values of the derivative financial
instruments of $1,608,236 exceeded the gross proceeds received from the
financing of $1,150,000.  As a result, the convertible promissory
notes were originally recorded at zero and the discount from the face amount of
the convertible promissory notes was amortized to operations through periodic
charges to interest expense using the effective interest method. Amortization of
this debt discount associated with the Interim Financing amounted to $1,085,340
during the period from transaction inception until the exchange transaction
described below.





Additional
Financing





On August
11, 2006, we issued additional debt financing in the form of 9.0% Senior Secured
Convertible Promissory Notes with a face value of $2,900,000, plus warrants to
purchase 580,000 shares of our common stock  (the “Additional
Financing”).  Also $1,050,000 of Interim Financing plus accrued
interest of $17,250 were converted into the new financing for a total face value
of $3,967,250.  The remainder of the Interim Financing of $100,000 was
repaid.





We
evaluated the terms of the Senior Secured Convertible Promissory Notes and
warrants issued in connection with the Additional Financing and concluded that
equity classification was not afforded the warrants and certain derivative
features embedded in the convertible promissory note. We also evaluated the
exchange of the Interim Financing debt instruments issued in the Additional
Financing and concluded that the Interim Financing balances required
extinguishment. Accordingly, we allocated proceeds from Additional Financing to
the detachable warrants and a compound derivative embedded in the promissory
notes in the amounts of $3,207,860 and $1,270,400, respectively, based upon the
fair values of these financial instruments. Because the aggregate fair values of
these derivative instrument liabilities of $4,478,260 exceeded the gross
proceeds of $2,900,000, we recognized a day-one loss amounting to
$1,578,260.





We also
evaluated the exchange of the Interim Financing debt instruments issued in the
Additional Financing and concluded that the Interim Financing balances required
extinguishment. We recognized fair values for the new convertible debt,
derivative warrants and a compound derivative embedded in the new note of
$1,106,699, $1,238,864 and $512,280, respectively.  Because the
aggregate fair values of these instruments of $2,857,843 exceeded the carrying
values of the Interim Financing notes and warrants that were exchanged, as well
as the compound embedded derivative, we recognized an extinguishment loss of
$482,814. The resulting discount from the face value of the Notes was amortized
to operations through periodic charges to interest expense using the effective
interest method until the date of their conversion to preferred stock in
December 2006. Amortization of debt discount associated with the Additional
Financing amounted to $348,398 during the period from inception until the
exchange transaction described below.





F-29


Exchange
Transaction


On
September 29, 2006, we entered into an exchange agreement with the note holders
whereby all the outstanding convertible promissory notes and warrants discussed
above were exchanged for new 9.0% Senior Secured Convertible Promissory Notes
(the “Convertible Notes”) with a face value of $3,967,250 and certain Additional
Investment Rights (“AIR”) to purchase an additional $1,000,000 face value of
Convertible Notes with the same terms and conditions as discussed below (the
“Exchange Transaction”).  On November 8, 2006, the investors exercised
their right to purchase the additional Convertible Notes for their face amount
of $1,000,000.





We
entered into the Exchange Transaction in order to establish a fixed conversion
price for the Convertible Notes, remove the anti-dilution provisions of the
Convertible Notes and to eliminate the warrants that previously
existed.  Because the Convertible Notes were convertible into a fixed
number of shares of our common stock, they were afforded the “Conventional
Convertible Debt” exemption in EITF Issue 00-19 and, accordingly, the embedded
conversion option was not required to be bifurcated and accounted for at fair
value as a derivative instrument liability.





Although
the Exchange Transaction was affected with existing debt holders and similar
face values and interest rates were present, we determined that other material
changes to the financial instruments resulted in an extinguishment of the
Additional and Interim Financing instruments. Accordingly, we recorded the
“newly issued” Convertible Notes and AIR at their fair values, which was
estimated to be $6,614,583 and $600,000, respectively, and which resulted in an
extinguishment loss of $4,655,003.





On
December 21, 2006, we issued an additional $200,000 in Convertible Notes to an
existing holder of the Convertible Notes.





Series A Convertible
Preferred Stock


On
December 28, 2006, we completed the exchange of all outstanding Convertible
Notes and all accrued but unpaid interest thereon, in the aggregate face amount
of $5,327,934 ($5,167,250 principal plus $160,684 of interest), into 5,327,934
shares of our Series A Convertible Preferred Stock (or Series A Preferred
Stock). Pursuant to the terms of the exchange, all of these notes were
surrendered and cancelled as consideration for the shares of Series A Preferred
Stock.





Further,
in a private placement occurring concurrently with the exchange, we sold an
additional 4,000,000 shares of our Series A Preferred Stock for aggregate gross
proceeds of $4,000,000 to certain accredited investors, including investors who
had been holders of the senior secured convertible promissory notes. Because the
market price of the underlying common stock was $1.25, we increased our deficit
for a  beneficial conversion feature of $1,000,000 (as a preferred
stock dividend) in connection with this sale.





On
December 27, 2006, we filed with the Secretary of State of the State of Nevada a
Certificate of Designations, Rights and Preferences of Series A Convertible
Preferred Stock, or the Series A Certificate, which sets forth the rights and
preferences of the Series A Preferred Stock. The Series A Certificate was filed
pursuant to Section 78.1955 of the Nevada Revised Statutes and was effective as
of December 27, 2006.




Pursuant
to the Series A Certificate, dividends on the Series A Preferred Stock shall
accrue and shall be cumulative from the date of issuance of the shares of Series
A Preferred Stock, whether or not earned or declared by the Board. Until paid,
the right to receive dividends on the Series A Preferred Stock shall accumulate,
and shall be payable semiannually at our option either in cash or in shares of
common stock, on June 30 and December 31 of each year, commencing on June 30,
2007, at a dividend rate on each share of Series A Preferred Stock of 5%. The
holders of the Series A Preferred Stock shall have full voting rights and powers
equal to the voting rights and powers of holders of common stock and shall be
entitled to notice of any stockholders meeting in accordance with our Bylaws, as
amended, and shall be entitled to vote, with respect to any question upon which
holders of common stock are entitled to vote, including, without limitation, for
the election of directors, voting together with the holders of common stock as
one class. Each holder of shares of Series A Preferred Stock shall be entitled
to vote on an as-converted basis. In addition, as long as at least 33% of the
shares of Series A Preferred Stock issued remain outstanding, the holders of at
least a majority of the outstanding Series A Preferred Stock, voting as a
separate class, shall be entitled to designate and elect one member of the
Board.




F-30


In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
our Company, or a Liquidation, before any distribution of our assets shall be
made to or set apart for the holders of the common stock or any other class of
preferred stock, the holders of Series A Preferred Stock shall be entitled to
receive payment out of such assets in an amount equal to the greater of (i)
$1.00 per share of Series A Preferred Stock, plus any accumulated but unpaid
dividends (whether or not earned or declared) on the Series A Preferred Stock,
and (ii) the amount such holder would have received if such holder had converted
its shares of Series A Preferred Stock to common stock, subject to but
immediately prior to such Liquidation. If our assets available for distribution
to the holders of Series A Preferred Stock shall not be sufficient to make in
full the payment herein required, such assets shall be distributed prorata among
the holders of Series A Preferred Stock based on the aggregate liquidation
preferences of the shares of Series A Preferred Stock held by each such
holder.




As long
as at least 33% of the shares of Series A Preferred Stock remain outstanding,
the consent of the holders of at least 50% of the shares of Series A Preferred
Stock at the time outstanding shall be necessary for effecting (i) any
amendment, alteration or repeal of any of the provisions of the Series A
Certificate in a manner that will adversely affect the rights of the holders of
the Series A Preferred Stock; (ii) the authorization or creation by us of, or
the increase in the number of authorized shares of, any stock of any class, or
any security convertible into stock of any class, or the authorization or
creation of any new class of preferred stock (or any action that would result in
another series of preferred stock), in each case, ranking in terms of
liquidation preference, redemption rights or dividend rights, pari passu with or
senior to, the Series A Preferred Stock in any manner; and (iii) our entrance
into any indebtedness in an amount greater than $1,000,000. These listed actions
by us will no longer require a vote of the holders of Series A Preferred Stock
at such time as we first earn an annual EBITDA (earnings before interest, tax,
depreciation and amortization) of at least $10,000,000 over any trailing
12-month period and Stockholder’s Equity as recorded on our balance sheet first
becomes at least $15,000,000.




Shares of
the Series A Preferred Stock are convertible at any time into shares of common
stock at the initial conversion price of $1.00 per share, which conversion price
is subject to customary adjustments related to stock dividends, subdivisions and
combinations. In addition, if 10% or less of the aggregate shares of Series A
Preferred Stock remain outstanding, or in the event of a sale, transfer or other
disposition of all or substantially all of our property assets or business to
another corporation, in which the aggregate proceeds to the holders of the
Series A Preferred Stock would be greater on an as-converted basis, all
remaining outstanding shares of Series A Preferred Stock mandatorily convert
into common stock.





Emerging
Growth Equities, Ltd. acted as placement agent for the December 27, 2006
transaction and received a fee equal to $117,600 and a warrant to purchase
320,000 shares of common stock, exercisable at $1.10 per share and expiring on
December 28, 2011.  Robert A. Berlacher, who served on the Company’s
Board of Directors from March 1, 2007 through October 25, 2007, is a co-founder
and director of EGE Holdings, Ltd., a holding company with a 100% ownership
interest in Emerging Growth Equities, Ltd.  Mr. Berlacher received no
compensation from EGE Holdings, Ltd. or Emerging Growth Equities, Ltd. related
to the Company’s sale of the Series A Preferred Stock.





Series B Convertible
Preferred Stock





The
Company entered into securities purchase agreements, dated as of June 29, 2007,
with several institutional and accredited investors (the “Investors”), pursuant
to which the Company issued and sold to the Investors an aggregate of (i)
1,000,000 shares of its Series B Convertible Preferred Stock, $0.001 par value
per share ( or Series B Preferred Stock), (ii) 2,023,199 shares of its common
stock and (iii) warrants to purchase 1,511,600 shares of common stock, for an
aggregate purchase price of $9,069,597.





F-31


Pursuant
to the Series B Preferred Stock Certificate of Designation, the holders of the
Series B Preferred Stock  have full voting rights and powers equal to
the voting rights and powers of holders of common stock and are entitled to
notice of any stockholders meeting in accordance with the Bylaws of the Company,
as amended, and are entitled to vote, with respect to any question upon which
holders of common stock are entitled to vote, including, without limitation, the
right to vote for the election of directors, voting together with the holders of
common stock as one class. Each holder of shares of Series B Preferred Stock are
entitled to vote on an as-converted basis.





In
addition, as long as at least 33% of the shares of Series B Preferred Stock
remain outstanding, the holders of at least a majority of the outstanding Series
B Preferred Stock, (provided at least two holders of the shares of Series B
Preferred Stock at the time outstanding agree in such requisite vote), voting as
a separate class, shall be necessary for effecting, whether by merger,
consolidation or otherwise (i) any amendment, alteration or repeal of any of the
provisions of the Certificate of Designation in a manner that will adversely
affect the rights of the holders of the Series B Preferred Stock; provided
however, that no such consent shall be required for the Company to amend the
Company’s Articles of Incorporation to increase the Company's shares of common
stock or undesignated preferred stock; and (ii) the authorization or creation by
the Company of, or the increase in the number of authorized shares of, any stock
of any class, or any security convertible into stock of any class, or the
authorization or creation of any new class of preferred stock (or any action
which would result in another series of preferred stock), in each case, ranking
in terms of liquidation preference or redemption rights, pari passu with or
senior to, the Series B Preferred Stock in any manner; provided, however, that
no such consent shall be required for the Company to amend the Company’s
Articles of Incorporation to increase the Company's shares of common stock or
undesignated Preferred Stock.





In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company (a “Liquidation”), after any distribution of assets of the Company
to the holders of then outstanding shares of the Company’s Series A Preferred
Stock, but before any distribution of assets of the Company shall be made to or
set apart for the holders of the common stock or any other class of preferred
stock, the holders of Series B Preferred Stock shall be entitled to receive
payment out of such assets of the Company in an amount equal to the greater of
(i) $3.00 per share of Series B Preferred Stock, and (ii) the amount such holder
would have received if such holder had converted its shares of Series B
Preferred Stock to common stock, subject to but immediately prior to such
Liquidation. If the assets of the Company available for distribution to the
holders of Series B Preferred Stock shall not be sufficient to make in full the
payment herein required, such assets shall be distributed pro-rata among the
holders of Series B Preferred Stock based on the aggregate liquidation
preferences of the shares of Series B Preferred Stock held by each such
holder.





Emerging
Growth Equities, Ltd. acted as placement agent for the June 29, 2007 transaction
and received a fee equal to $634,872 and a warrant to purchase 120,928 shares of
common stock, exercisable at $3.30 per share and expiring on June 29,
2012.  Robert A. Berlacher, who served on the Company’s Board of
Directors from March 1, 2007 through October 25, 2007, is a co-founder and
director of EGE Holdings, Ltd., a holding company with a 100% ownership interest
in Emerging Growth Equities, Ltd.  Mr. Berlacher received no
compensation from EGE Holdings, Ltd. or Emerging Growth Equities, Ltd. related
to the Company’s sale of common stock, Series B Preferred Stock and
warrants.





F-32








NOTE
K – OUTSTANDING WARRANTS





At
December 29, 2007, we have the following outstanding warrants which allow the
holders to acquire a like number of shares of our common stock:




Warrants
      issued in connection with/as:
            
            Number
              outstanding
            
            Exercise
              price
      per
              share
            
            Expiration
      datePartial
      compensation for our placement agent in connection with the sale of our
      Series A Convertible Preferred Stock on December 28, 2006
            
            320,000
            
            $1.10
            
            December
      28, 2011Securities
      Purchase Agreements dtd June 29, 2007
            
            1,511,600
            
            $5.00
            
            June
      29, 2012Partial
      compensation for our placement agent in connection with the Securities
      Purchase Agreement dtd June 29, 2007
            
            120,928
            
            $3.30
            
            June
      29, 2012DFS
      Services LLC warrants dated November 12, 2007
            
            200,000
            
            $3.00
            
            November
      12, 2010Consulting
      services agreement
            
            37,500
            
            $5.00
            
            Various
      dates through 2011Cooperation
      Agreement on November 22, 2006
            
            5,000
            
            $1.20
            
            November
      22, 2011Total
      warrants and weighted average exercise price
            
            2,195,028
            
            $4.15










NOTE
L –SUBSEQUENT EVENTS




On
February 19, 2008, we completed the funding of collateral required for bonds
issued in connection with our state licensing efforts amounting to approximately
$1.8 million. The collateral, which was in the form of a one year letter of
credit from a bank, was placed with the insurance company that issued the
various bonds aggregating to a face amount of approximately $7.2 million. The
issuing bank required that the letter of credit be guaranteed by Jeffrey Porter
and Bruce E. Terker in addition to the Company. In this case, approximately $1
million of the collateral for the letter of credit was arranged by Mr. Porter,
one of our major stockholders, and the remaining collateral for the letter of
credit was provided by Mr. Terker, a current member of our Board of Directors,
who is also a major stockholder. In connection with this accommodation, the
company and Messrs. Porter and Terker entered into a Guaranty and
Indemnification Agreement. In one instance, Mr. Terker, who put up the $1
million of collateral, agreed to a compensation of 2% per quarter paid in
arrears in cash. In the other instance, Mr. Terker agreed to be compensated in
the form of warrants to purchase 33,912 shares of the Company’s common stock at
a purchase price of $3.35 per share, which would be earned ratably over the
course of the year. The Agreement can be cancelled by the Company in certain
circumstances in 30 days.  After one year, it is expected that the
Company will have the ability to fund the collateral requirement, if any,
without the assistance of the guarantors.




In
February 2008, we completed the registration process for up to 2,195,028 shares
of common stock issuable upon exercise of outstanding warrants on Form
S-1.  This registration will permit certain warrant holders to
exercise their warrants and immediately sell registered common stock if they so
choose.  We paid all costs, expenses and fees in connection with the
registration of these shares.  If all of these warrants were
exercised, we would receive approximately $9,100,000.




F-33






On March
21, 2008, the Company entered into a securities purchase agreement with Bruce E.
Terker, a current member of our Board of Directors, pursuant to which the
Company sold to Mr. Terker 200,000 shares of common stock and a warrant to
purchase 100,000 shares of common stock, exercisable at $3.25 per share and
expiring on March 21, 2011, for an aggregate purchase price of
$500,000.





As of
March 28, 2008, the Company entered into securities purchase agreements with
certain accredited investors, pursuant to which the Company sold (i) 490,000
shares of common stock at $2.50 per share, and (ii) warrants to purchase 245,000
shares of common stock, exercisable at $3.25 per share and expiring on March 28,
2011, for an aggregate purchase price of approximately $1.2
million.




NOTE
M –OTHER RELATED PARTY TRANSACTIONS





At
December 29, 2007, accounts payable and accrued personnel costs include
approximately $31,000 owed to various officers for accrued vacation and $38,000
owed to our directors.










End
of Financial Statements.
















F-34