UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
one)





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


For the
fiscal year ended January 3,
2009





 ̈ 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.





(Exact
name of registrant as specified 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





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o





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





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





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





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 27, 2009,
was $8,316,256.





The
number of shares of the issuer’s Common Stock outstanding as of March 27, 2009
is 9,344,108.




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.













TABLE
OF CONTENTS


PageFORWARD-LOOKING
      STATEMENTS.........................................................................................................................................................................................................................................................................................................
            1PART
      I...................................................................................................................................................................................................................................................................................................................................................
            2Item
      1.
            Business...............................................................................................................................................................................................................................................................................................................
            2Item
      1A.
            Risk
      Factors............................................................................................................................................................................................................................................................................................................
            6Item
      2.
            Properties...............................................................................................................................................................................................................................................................................................................
            12Item
      3.
            Legal
      Proceedings....................................................................................................................................................................................................................................................................................................
            12Item
      4.
            Submission
      of Matters to a Vote of Security
      Holders......................................................................................................................................................................................................................................................
            12PART
      II....................................................................................................................................................................................................................................................................................................................................................
            13Item
      5.
            Market
      for Our Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity
      Securities..................................................................................................................................................
            13Item
      7.
            Management’s
      Discussion and Analysis of Financial Conditions and Results of
      Operations.................................................................................................................................................................
            14Item
      8.
            Financial
      Statements and Supplementary Data
      ...............................................................................................................................................................................................................................................................
            21Item
      9.
            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure...............................................................................................................................................................
            21Item
      9A.
            Controls
      and
      Procedures...........................................................................................................................................................................................................................................................................................
            21Item
      9B.
            Other
      Information.....................................................................................................................................................................................................................................................................................................
            22PART
      III...................................................................................................................................................................................................................................................................................................................................................
            23Item
      10.
            Directors,
      Executive Officers and Corporate
      Governance.................................................................................................................................................................................................................................................
            23Item
      11.
            Executive
      Compensation............................................................................................................................................................................................................................................................................................
            23Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder
      Matters.......................................................................................................................................................
            23Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.....................................................................................................................................................................................................................
            23Item
      14.
            Principal
      Accountant Fees and
      Services.......................................................................................................................................................................................................................................................................
            23PART
      IV...................................................................................................................................................................................................................................................................................................................................................
            24Item
      15.
            Exhibits....................................................................................................................................................................................................................................................................................................................
            24Signatures...............................................................................................................................................................................................................................................................................................................
            28








-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 federal charter permitting us to offer
      stored value cards in various states;·
            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 of
      Financial Condition and Results of
Operations.”





Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our Company, as well
as other public reports filed with the United States Securities and Exchange
Commission. You should not place undue reliance on any forward-looking statement
as a prediction of actual results or developments. We are not obligated to
update or revise any forward-looking statement contained in this annual report
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 annual report are in
U.S. dollars unless otherwise stated.















PART
I




Item 1. Business.





BUSINESS
OVERVIEW




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




We
operate two divisions: (i) the nFinanSe Card Division, which issues prepaid gift
cards, reloadable general spend prepaid cards and payroll 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 our SVCs or those of
other issuers with which we have agreements.




In August
2004, we completed a reverse merger and recapitalization with a publicly traded
company, Pan American Energy Corp., (“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.  Pan American changed its
name to Morgan Beaumont, Inc., and adopted our business plans and strategies. In
2006, we changed our name from Morgan Beaumont, Inc. to nFinanSe
Inc.




In 2005, we began selling wholesale
telecommunications services and we launched prepaid phone cards in an effort to
develop brand recognition in the credit challenged or cash-based consumer
market. However, the phone card operation struggled with unacceptable operating
losses which were draining resources from our core SVC
business.  Additionally, we had re-directed our strategy on the retail
sale of SVCs by focusing on established pre-paid card distributors who provide
direct channels into large numbers of retail outlets for sale and loading of our
SVCs.  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 this business
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”.





During
fiscal 2006, we added Western Union® and MoneyGram® to our fund loading network
and signed an agreement with DFS Services LLC (“DFS”) to issue Discover®
Network-branded SVCs.  In June 2007, we extended this agreement with
DFS, executed a Program Sponsor Agreement, whereby we sell bank-issued Discover®
Network branded SVCs, and executed an Incentive Agreement with DFS 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 sells Discover branded, bank-issued reloadable
general spend and gift SVCs.  These SVCs are sold directly to
consumers through our distribution partners’ network of retail
locations.  The Card Division also sells payroll SVCs directly to
companies.  Currently we have over 10,000 retail agent locations where
our cards are currently sold.





Card
      Product
            Description
            
            Uses
            
            BenefitsReloadable
      General Spend SVC
            A
      prepaid SVC primarily for the unbanked cash-based consumer that is
      reloadable at nFinanSe Network 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. Also can be used to load Automated Clearing House
      payroll deposits.
            
            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 to make purchases wherever Discover Cards are
      accepted.Payroll
      SVC
            A
      prepaid SVC for the loading of an employee’s payroll. The SVC is
      reloadable through the web or from the client’s payroll department via
      direct deposit.
            
            Payroll
      distribution targeting companies with a large number of employees that
      receive payroll and commission checks.
            
            Eliminates
      costly check preparation and distribution and reduces the loss of employee
      productivity and associated costs in cashing payroll
    checks.





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 (no waiting for the card to arrive by
mail), balance reporting and real-time authorization. We believe that most
non–Discover® Network cards cannot provide all of these
features.




Additionally,
we believe that there is a tremendous growth opportunity in offering Discover®
Network–branded payroll SVCs. These programs are customizable and can be
customized for large employers on an as-needed basis. We believe our SVCs can
eliminate costly check production and distribution for employers and offer
security, 24 hours a day and seven days a week “free of course” customer
service, and eliminate costly payroll cashing fees for employees. We believe
these services make our program attractive to companies and their
employees.




nFinanSe
NetworkTM




We have
developed our nFinanSe NetworkTM, which connects the Company with our load
locations. As of January 3, 2009, we had approximately 80,000 nFinanSe NetworkTM
locations consisting primarily of Western Union® and MoneyGram® locations and
over 10,000 retail agent locations where our cards are currently
sold.




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 large retailers, either directly or through their designated
provider and by selecting distributors who are connected to their participating
retailers.  We believe the nFinanSe NetworkTM is compliant with federal
and state legal requirements (including the PATRIOT Act). Currently, the
nFinanSe NetworkTM enables us to issue and service our own reloadable general
spend SVCs while directly controlling all aspects of the cardholder experience
such as customer service and web portal access.  We believe this
should enable SVC holders to reload their card at many sites, increasing
customer satisfaction, reducing churn and increasing card usage. This makes the
nFinanSe NetworkTM one of our key strategic assets.





3




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 DFS Financial Services LLC 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 to Discover certain program, authorization and settlement
fees and Discover pays to the issuing bank the interchange revenue earned on
sales transactions from SVCs that we sponsor.




●      Issuing
Banks.  Our business plan involves using federally
chartered banks to issue Discover branded SVCs.  Until we complete our
state licensing initiative, using a federally chartered bank is 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, 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,
to act as the processor. Metavante has all necessary regulatory and banking
approvals to conduct transactions from point-of-sale (“POS”) terminals, and from
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 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 load value on cards concurrently with the collection
of funds by the retailer.  The retailer 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/Emida, ViaOne and Now Prepay. These distributors represent more than
100,000 retail locations that could potentially offer our SVCs. During December
2008, over 9,000 InComm retail locations began to offer our SVCs.  We
expect over the next 12 months that our distributors will market our cards in
more than 20,000 of their retail locations.





· Large Retailers.
Certain larger retailers prefer to integrate directly to our network or
designate a specialized third party provider to integrate to our network. When
the SVC is sold, the retailer activates the SVC by swiping it through a POS
terminal which communicates directly to us or through their designated
provider.  We load value on cards concurrently with the collection of
funds by the retailer.  The retailer remits the load value on the card
and pays our wholesale fees based on the terms of our agreement.  We
have not executed any direct agreements as of January 3, 2009 although we are in
discussions with several large retailers that wish to proceed in this
manner.





●      Third-Party Load
Locations. We have important relationships with Western Union® and
MoneyGram® that allow these two companies to load reloadable SVCs on the
nFinanSe Network. 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.







4





LICENSING
REQUIREMENTS





We
have obtained a United States Treasury Federal Money Services business license,
which is required by some states to conduct our operations.  In
addition, 44 states, along with the District of Columbia, have established laws
or regulations requiring entities that load money on cards or process 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 that have such federal or state banking charters,
on October 2, 2007, we created our wholly-owned subsidiary, nFinanSe Payments
Inc., for the express purpose of acquiring the required state licenses. We now
have the requisite license from 35 states and the District of Columbia and have
applications pending in seven states. We do not plan to offer cards in the
remaining two states (Vermont and Hawaii) that require licenses and have not
applied for a license in either state.





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 existing and potential clients who already have or may develop their own
product offerings.





We
believe our competitive advantages are:





●
            the
      attributes of the Discover® Network–branded card, including:
              ●    instant
      issuance
              ●    all
      transactions preauthorized
              ●    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.




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 from third parties the proprietary rights required to conduct our
business from third parties.


5





Our
proprietary intellectual property consists of:




●
            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 January 3, 2009, we had 60
full-time employees, of which eight are officers and executives, nine are
engaged in sales, two are engaged in marketing, eight are engaged in technology
research and development, twenty-two are engaged in customer service, five are
engaged in operations, three are engaged in finance and three 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.





Item
1A.  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, despite our rollout of
SVCs in December 2008, we will continue to incur losses through the first two
quarters of fiscal 2009.




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 fiscal year ended January 3, 2009, and losses since inception were
approximately $14.8 million and $50.3 million, respectively.  The
extent to which we continue to 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, generate net income or
ultimately achieve cash flow levels sufficient to support our
operations.





We
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 approximately $3 million of additional capital
during the first half of fiscal 2009.  Additionally, although we completed
a revolving accounts receivable credit facility which we use to fund the face
amount of gift cards and the load amounts on general spend cards on a daily
basis, we anticipate that we will need this type of facility for 12 to 18 months
longer than the current commitment due to the extended amount of time it has
taken us to begin our business implementation.  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 licenses 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 not be able to continue as a going
concern.





6


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 will
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 current 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.




Future
sales of our common stock, or the perception that such sales may occur, could
cause our stock price to fall.





Sales of
substantial amounts of our common stock in the public market, or the perception
that such sales may occur, could harm the market price of our common stock and
could materially impair our ability to raise capital in the future through
offerings of our common stock or securities convertible into our common
stock.





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




Forty-four
states along with the District of Columbia have established laws or regulations
requiring entities that load money on cards or process such transactions, to be
licensed by the state unless that entity has a federal or state banking
charter.  We currently hold a license in 35 states and the District of
Columbia and we have license applications pending in the seven remaining states
in which we plan to conduct business. We do not plan to conduct operations
in the remaining two states which require such licenses (Vermont and
Hawaii).  In the interim, in states in which we have a pending
application, we intend to rely upon the licenses of our federally-chartered card
issuing banks.  Additionally, prior to applying for a license, we were
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 do not
presently know if we will be able to obtain all of the remaining licenses. 
We do not believe our inability to obtain all licenses 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.  The initial amounts of the various state bonds totaled
more than $7 million.  We posted these bonds in early 2008 and have
renewed these bonds for 2009.  As we add retail locations, certain
states are demanding that we increase the face amount of the applicable bond.
With our limited operations, the surety is requiring approximately 10% of the
face amount of the bonds in collateral.  We funded the first $500,000
of collateral in February 2009 in the form of a letter of credit arranged and
collateralized by Jeffrey Porter, one of our major stockholders. We expect the
surety bond company may request an increase in the amount of this letter of
credit as operations commence in various states.  On February 1, 2009,
we entered into a Guaranty and Indemnification Agreement with Mr. Porter which
indemnifies him from loss and compensates him at the rate of 2% per quarter on
the amount of the letter of credit.





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 increase and become more complicated. Regulatory-
and tax-intensive states may adopt complex and heavily regulated schemes.
Although we cannot predict the legislative or regulatory proposals that will be
adopted or the 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.




7


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




As part
of our license requirements, we are required to have agency agreements with each
of our load centers. Among other things, the agreements require our agents to
comply with the Patriot Act and anti-money-laundering
laws.   Although 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. Because our common stock is subject to the penny stock rules, the market
liquidity of our common stock is limited and is likely to remain
so.




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.





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 birth
dates, addresses, 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:


8





●
            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.





Although
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 by BT INS, Inc., an international PCI audit firm,
on May 21, 2008 and we maintained our Level One Payment Service Provider
certification for our nFinanSe NetworkTM, which we originally received on May 6,
2007.  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 standards, processes and relationships.





We are a
developmental company building our networks and relationships. In the course of
this development of our 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
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.





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.


9


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 (“BSA”) and
the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act (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.





Although
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 reflect
transactions in 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, confirm 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, cardholders may lose access to
fund loading, balance review, transaction ability or 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.





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





We are
required to maintain reserve deposit accounts with both Discover (if we directly
issue cards)  and our card 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 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 SVC
business focuses solely on the Discover® Network hologram
card.  Discover® Network cards can be instantly issued at the POS;
real-time authorization of transactions mitigates fraud as 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.


10


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 to 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.





Difficult
conditions in the economy generally may materially adversely affect our business
and results of operations, and we do not expect these conditions to improve in
the near future.





Our
results of operations are materially affected by conditions in the economy
generally. The capital and credit markets have been experiencing extreme
volatility and disruption for more than twelve months at unprecedented levels.
Recently, concerns over inflation, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining U.S.
real estate market have contributed to increased volatility and diminished
expectations for the economy and consumer spending. These factors, combined with
volatile oil prices, declining business and consumer confidence and increased
unemployment, have precipitated an economic slowdown and national recession.
These events and the continuing market upheavals may have an adverse effect on
us because we are dependent upon customer and consumer behavior. Our revenues
are likely to decline in such circumstances. In addition, in the event of
extreme and prolonged market events, such as the global credit crisis, we could
incur significant losses.





Factors
such as consumer spending, business investment, the volatility and strength of
the capital markets, and inflation all affect the business and economic
environment and, ultimately, the amount and profitability of our business. In an
economic downturn characterized by higher unemployment, lower family income,
lower corporate earnings, lower business investment and lower consumer spending,
the demand for our SVC products and services could be adversely affected.
Adverse changes in the economy could affect our results negatively and could
have a material adverse effect on our business and financial condition. The
current mortgage crisis and economic slowdown has also raised the possibility of
future legislative and regulatory actions that could further impact our
business. We cannot predict whether or when such actions may occur, or what
impact, if any, such actions could have on our business, results of operations
and financial condition.





There
can be no assurance that actions of the U.S. government, Federal Reserve and
other governmental and regulatory bodies for the purpose of stabilizing the
financial markets will achieve the intended effect.





In
response to the financial crises affecting the banking system and financial
markets and going concern threats to banks and other financial institutions, the
federal government, Federal Reserve and other governmental and regulatory bodies
have taken or are considering taking numerous actions to address these financial
crises. There can be no assurance as to the actual impact of these government
actions on the financial markets or on us. The failure of these programs to help
stabilize the financial markets and a continuation or worsening of current
financial market conditions could materially and adversely affect our business,
financial condition, results of operations, access to credit or the trading
price of our common stock.


11


The
soundness of other institutions and companies could adversely affect
us.





Our
ability to engage in loading and purchasing transactions could be adversely
affected by the actions and failure of other institutions and companies,
including Metavante, our card issuing banks and the retailers and distributors
that carry our SVCs.  As such, we have exposure to many different
industries and counterparties. As a result, defaults by, or even questions or
rumors about, one or more of these institutions or companies could lead to
losses or defaults by us or other institutions. Losses related to these defaults
or failures could materially and adversely affect our results of
operations.





A
prolonged economic downturn could reduce our customer base and demand for our
products.





We are in
uncertain economic times, including uncertainty with respect to financial
markets that have been volatile as a result of sub-prime mortgage related and
other matters. Our success significantly depends upon the growth of demand of
our products from a growing customer base. If the communities in which we
operate do not grow, or if prevailing economic conditions locally, nationally or
internationally are unfavorable, our business may not succeed. A prolonged
economic downturn would likely contribute to the deterioration of the demand for
SVC’s and our products and services, which in turn would hurt our business. A
prolonged economic downturn could, therefore, result in losses that could
materially and adversely affect our business.





Item
2.  Properties.




Our
offices are located at 3923 Coconut Palm Drive, Suite 107, Tampa, Florida
33619.  The lease, which commenced in October 2007, calls for
aggregate future minimum rentals of approximately $563,000 (exclusive of sales
tax and common area maintenance charges that we are also required to pay) to be
paid over a five year period.  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.  These sales office leases call for
future minimum rentals of approximately $23,600.





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 Tampa office. All of our equipment is in good operating condition and repair
(subject to normal wear and tear).





Item
3.  Legal Proceedings.





We may
become involved in certain litigation from time to time in the ordinary course
of business. However, as of January 3, 2009, to the best of our knowledge, no
such litigation exists or is threatened.





Settlement
Of 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. claimed damages in excess of $50,000 and sought 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 deemed just.  On December 16, 2008, the Company
and Bedlington entered into a settlement agreement, in which the Company
admitted no wrongdoing in the matter.  As full and final settlement of
any claims of any kind or character whatsoever by Bedlington against the
Company, the Company issued 50,000 restricted shares of its common stock to
Bedlington on December 23, 2008.  The value of this settlement was
included as “Other income (expense)- loss on litigation” in the January 3,
2009 Statement of Operations.





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





None.


12


PART
II





Item
5.  Market for Our Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.





Market
Information





Shares of
our common stock are quoted on the OTC Bulletin Board under the symbol
“NFSE.”   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 two most recent fiscal years were as
follows:





Quarter
      Ended
            High
            LowJanuary
      3, 2009
            $0.90
            $0.80September
      27, 2008
            $2.30
            $2.10June
      28, 2008
            $2.40
            $2.20March
      29, 2008
            $2.80
            $2.60December
      29, 2007
            $4.95
            $3.15September
      29, 2007
            $3.80
            $2.98June
      30, 2007
            $4.49
            $2.96March
      31, 2007
            $5.05
            $1.30





Holders
of Record of Common Stock





As of
March 16, 2009, there were approximately 102 holders of record of our common
stock.





Dividends





Our Series A Convertible Preferred
Stock (“Series A Preferred Stock”) accrues dividends of 5% per annum, which can
be satisfied in cash or shares of common stock.  Unless and until
these dividends are declared and paid in full, the Company is prohibited from
declaring any dividends on its common stock.  Pursuant to the
Company’s Loan and Security Agreement dated June 10, 2008 (see our consolidated
financial statements Note C – Loan and Security Agreement), the Company is
limited to paying $500,000 in any fiscal year for cash dividends or other cash
distributions to the holders of shares of Series A Preferred
Stock.  There are no dividend requirements related to our Series B
Convertible Preferred Stock or on our Series C Convertible Preferred
Stock.





In January 2008, dividends on the
Series A Preferred Stock for the period from December 28, 2006 through the
dividend payment date of December 31, 2007 were declared and satisfied through
the issuance of 104,252 shares of our Common Stock.  In August 2008,
dividends for the period from December 31, 2007 through the dividend payment
date of June 30, 2008 were declared and satisfied through the issuance of 76,626
shares of our Common Stock.  Dividends owed but not declared on our
Series A Preferred Stock were $192,136 as of January 3, 2009.  In
January 2009, the dividends due through December 31, 2008 were declared and
satisfied through the issuance of 198,779 shares of our common
stock.  During the fiscal year ended January 3, 2009, dividends were
also paid on the voluntary conversion of 320,000 shares of Series A Preferred
Stock into 320,000 shares of Common Stock, in the form of 1,301 shares of Common
Stock.








13


Equity
Compensation Plan Information





The
following table provides information concerning our equity compensation plans as
of January 3, 2009:





Plan
      Category
            
            Number
      of securities
              to
      be issued upon exercise
              of
      outstanding options
            
            
            Weighted-average
              exercise
      price of
              outstanding
      options
            
            
            Number of
      securities remaining available for future
      issuance under equity compensation plans (excluding securities reflected
      in column (a))(a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved by security holders
            
            
            2,641,779
            
            
            $
            3.57
            
            
            
            1,363,404Equity
      compensation plans not approved by security holders
            
            
            --
            
            
            
            --
            
            
            
            --Total
            
            
            2,641,779
            
            
            $
            3.57
            
            
            
            1,363,404





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





Business.





See Item 1 – Business in this annual
report for a description and discussion of our business.





Fiscal Year End.





Because
our distributor arrangements generally operate on a weekly cycle, our fiscal
year ends on the Saturday closest to December 31 of each year.




Discontinued
Operations.





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





Results of
Operations.





Our principal operations commenced in
2001.  However, to date, we have had limited revenues. Financial
Accounting Standards Board Statement No. 7 (“FAS 7”) sets forth guidelines for
identifying an enterprise in the development stage and the standards of
financial accounting and reporting applicable to such an enterprise. In the
opinion of management, our activities from our inception through January 3, 2009
fall within the referenced guidelines. Accordingly, we report our activities in
this report in accordance with FAS 7.





Lack of Profitability of Business
Operations since 2001.





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


14





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





In late 2006, we developed a new
go-to-market strategy centered on marketing bank-issued Discover®
Network-branded SVCs through well-established prepaid card distributors combined
with the load performing ability of the nFinanSe NetworkTM.  In 2007,
we secured agreements with several prepaid card distributors including
Interactive Communications (“InComm”), which distributes prepaid card products
to retailers with more than 100,000 locations throughout the United
States.  We had to source a new bank to issue cards for InComm’s
retailers and we began the task of integrating our network with
InComm’s.  Additionally, the issuing bank required that we immediately
begin making applications for licenses in those states claiming jurisdiction
over SVCs. The general spend card is a relatively new product for most
distributors and it has taken time to integrate with distributors and to market
to their retail partners. During the fourth quarter of 2008, several large
InComm retailers began marketing our cards.





At January 3, 2009, there were over
80,000 locations where our SVCs could be loaded (mostly Western Union® and
Moneygram® locations) and approximately 10,000 retail locations currently
offering our SVCs for sale and for reload services.





The
following discussion compares the operations of the business for the fiscal
years ended January 3, 2009, a 53 week period, and December 29, 2007, a 52 week
period.





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





·
            Wholesale
      fees, which arise when our SVCs are sold and activated and when the
      nFinanSe Network TM
      is used to reload a card.


·
            Transaction
      fees, which arise when our SVCs are used in a purchase or ATM
      transaction.


·
            Maintenance
      fees, which arise when a card with a cash balance is charged for monthly
      maintenance.


·
            Interest
      revenue, on overnight investing of card balances by our card-issuing
      bank.





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





Revenues
for the years ended January 3, 2009 and December 29, 2007 were $33,409 and
$32,763, respectively.  Revenue was up approximately 2% in the year
ended January 3, 2009 compared to the year ended December 29,
2007  Revenues in both fiscal years were restricted due to delays in
getting cards for sale into retail locations.  These delays stem from
the distributors inability to (i) timely certify their equipment, (ii)
successfully complete pilots, (iii) market, train and make sales to their
retailers of the Company’s products, and (iv)  roll out cards prior to
the fourth quarter holiday season, a traditional blackout time for system or
product initiatives.  During fiscal 2008, our retail focus was mainly
on implementing the InComm distribution agreement, getting licensed in over 40
states that require licenses and in which we intend to do business and executing
agency agreements with retailers to sell and load our SVCs. InComm imposed
several delays in implementation of our agreement while they negotiated a
potential sale of their company to First Data Corporation, which consumed a
large portion of 2008. Once that proposed sale transaction was abandoned, we
were able to negotiate Agency Agreements and rollout cards in late 2008 to Winn
Dixie, Murphy Oil and Dollar General, representing approximately 10,000 retail
locations.





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.


15








Description
            
            For
      the fiscal
              year
      ended
              January
      3, 2009
            
            
            For
      the fiscal
              year
      ended
              December
      29, 2007SVC
      card cost, program and transaction expenses
            
            $
            1,131,704
            
            
            $
            533,865Inventory
      disposals and reserves
            
            
            371,383
            
            
            
            68,300Stock
      based compensation
            
            
            399
            
            
            
            2,210Customer
      service expenses
            
            
            898,508
            
            
            
            449,497Transaction and operating expenses
            
            $
            2,401,994
            
            
            $
            1,053,872





Transaction
and operating expenses increased 128% to $2,401,994 in the year ended January 3,
2009 from $1,053,872 in the year ended December 29, 2007.  This
increase of $1,348,122 was primarily the result of an increase of approximately
$576,000 in the costs charged by our processor to maintain our increased card
inventory on their system.  In addition, our continued initiative to
develop a 24/7 customer service department to support our SVC products and
programs increased our costs by approximately $449,000.  Inventory
disposals and reserves increased $303,083 to $371,383 for the year ended January
3, 2009 from $68,300 for the year ended December 29, 2007 due primarily to a
$224,400 inventory impairment charge for gift cards printed in 2006 that have an
expiration date of less than twelve months prior to their projected dates of
deployment and increased inventory reserves of $78,646 for our increases in
inactive SVC inventory.





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 fiscal
              year
      ended
              January
      3,2009
            
            
            For
      the fiscal
              year
      ended
              December
      29,2007Advertising
      and marketing expenses
            
            $
            1,528,808
            
            
            $
            547,996Sales
      force expenses
            
            
            1,936,372
            
            
            
            1,535,291Stock
      based compensation
            
            
            218,165
            
            
            
            181,148Selling
      and marketing expenses
            
            $
            3,683,345
            
            
            $
            2,264,435





Selling
and marketing expenses increased 63%, or $1,418,910, to $3,683,345 in the year
ended January 3, 2009 from $2,264,435 in the year ended December 29,
2007.  Advertising and marketing expenses were $980,812 higher due to
increases in trade magazine advertising, trade show attendance and promotional
materials. Higher sales force expenses of $401,081 were incurred in connection
with the hiring of 10 additional personnel and related business
expenses.  Stock based compensation was higher for the year ended
January 3, 2009 primarily due to the additional fiscal 2008 sales personnel
hires.







16


General and Administrative
Expenses.  General and administrative expenses increased
$1,070,457 to $7,932,942 for the year ended January 3, 2009 from $6,862,485 for
the year ended December 29, 2007.  The components of expense
are:





Description
            
            For
      the fiscal
              year
      ended
              January
      3,2009
            
            
            For
      the fiscal
              year
      ended
              December
      29,2007Payroll,
      benefits and  taxes
            
            $
            3,069,113
            
            
            $
            2,446,225Stock-based
      compensation
            
            
            1,701,872
            
            
            
            1,813,237Professional
      legal and licensing expense
            
            
            1,442,546
            
            
            
            1,004,892Office
      and occupancy expenses
            
            
            1,003,084
            
            
            
            1,079,537Impairment
      expense
            
            
            149,743
            
            
            
            99,348Other
      administrative expense
            
            
            566,584
            
            
            
            419,246General
      and Administrative Expenses
            
            $
            7,932,942
            
            
            $
            6,862,485





The
increase was primarily due to:





·
            increased
      staffing in administration, engineering, and
  finance;


·
            costs
      associated with our state money transmission licensing
      initiative;


·
            legal
      and professional fees;


·
            recruiting
      and consulting expense;


·
            telecommunications
      expense; and


·
            impairment
      of asset charges of $149,743 to write-down the expected value of a
      marketing incentive agreement compared with impairment in the prior year
      of $99,348 related to the remaining lease costs of our former corporate
      office and the write off of dormant card program
  costs.





Such
increase was offset slightly by decreases in:





·
            office
      and occupancy expenses; and


·
            stock
      based compensation.





Loss Before Other Income
(Expense).  As a result of the above, the losses before other
income (expense) for the years ended January 3, 2009 and December 29, 2007 were
$13,984,872 and $10,148,029, respectively.





Other
Income (Expense).





Interest income.Interest
income decreased $159,141 from $183,325 for the fiscal year ended December 29,
2007 to $24,185 for the fiscal year ended January 3, 2009.  This
decrease is primarily attributable to the lower bank balances available for
overnight investment in fiscal 2008 and lower interest rates.





Interest expense. Interest
expense increased from $1,895 for the fiscal year ended December 29, 2007, to
$308,497 for the fiscal year ended January 3, 2009.  In fiscal 2008,
the majority of our interest expense represented amortization of non-cash costs
recorded for the value of warrants issued to lenders participating in certain
financing transactions.  In fiscal 2008, our cash interest expense was
$82,919 that was incurred for bond collateral guarantees, advances against our
existing line of credit, amortization of cash deferred financing costs, and
insurance premium financing.





Loss on Derivative Financial
Instruments. In March and May 2008,
we entered into certain Securities Purchase Agreements which included an
exchange provision, permitting the investors to exchange the securities they
received for the securities sold by us in a subsequent offering, if such an
offering occurred within six months.  A portion of the proceeds
received was allocated to recognize a derivative liability related to that
exchange feature.  The derivative liability is measured at fair value
and was initially valued at $163,968.  On June 12, 2008, the exchange
feature was triggered and the derivative liability was settled as a result of
the exchange.  At that time, the fair value of the derivative
liability was estimated to be $560,000.  As a result, for the year
ended January 3, 2009, we recorded a loss related to the derivative liability of
$396,032 ($560,000 less the $163,968 initially allocated to the
liability).  At January 3, 2009, the Company did not have any
remaining items to be measured at fair value and does not have any remaining
derivative liabilities.  During fiscal 2007, there were no derivative
financial instrument liabilities outstanding and, accordingly, we had no gains
or losses on such instruments during the year ended December 29,
2007.




Loss from Continuing
Operations. Loss from continuing operations was $14,771,475 for the
fiscal year ended January 3, 2009 or $4,741,748 higher than the loss from
continuing operations of $9,939,356 for the fiscal year ended December 29,
2007.





17


Liquidity
and Capital Resources.





From
inception to January 3, 2009, we have raised net proceeds of approximately $40.5
million from financing activities. We used these proceeds to fund operating and
investing activities.  We had a cash balance of approximately $400,000
as of March 20, 2009.





Net cash
used in operating activities was approximately $13.6 million and $8.5 million
for the fiscal years ended January 3, 2009 and December 29, 2007,
respectively.  The increase in cash used in operations was primarily
the result of increased losses from operations and increases in our card
inventory.





Net cash
provided by investment activities for the fiscal year ended January 3, 2009 was
approximately $569,000, consisting of the redemption of our short-term
investment of $725,000, offset by approximately $156,000 for purchases of
property and equipment, primarily for additional computer hardware and software
for new employees and the nFinanSe NetworkTM.  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 the
nFinanSe NetworkTM.





During
the fiscal year ended January 3, 2009, our financing activities included net
cash of approximately $10.2 million through sales of certain of our equity and
borrowings of $1.2 under our credit facility offset by approximately $459,600 in
deferred financing costs incurred in connection with our credit
facility.  During theyear ended December 29,
2007, we secured net cash provided by financing activities of approximately $8.4
million from sales of equity instruments.





On February 19, 2008, the Company
completed the funding of collateral amounting to approximately $1.8 million
required for the performance bonds issued in connection with our state licensing
efforts. The collateral, in the form of a one-year letter of credit issued by 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 member of our Board of Directors and
a major stockholder.  Of the total collateral amount, Mr. Porter
arranged for approximately $1 million, and the remainder was provided by Mr.
Terker. In connection with this accommodation, the Company and Messrs. Porter
and Terker entered into respective Guaranty and Indemnification Agreements.
Accordingly, we were contingently liable for the face amount of the letter of
credit of approximately $1.8 million, which expired in February 2009. Mr. Porter
was compensated in cash at 2% per quarter paid in arrears. Mr. Terker agreed to
be compensated in the form of warrants to purchase 33,912 shares of our common
stock at a purchase price of $3.35 per share. The Guarantee and Indemnification
Agreements were cancelled in February 2009.





On February 1, 2009, the Company
completed a partial funding of collateral amounting to approximately $0.5
million (ultimately 10% of the face amount of the bonds issued) for performance
bonds issued in connection with our state licensing efforts, replacing the
aforementioned funding.  The collateral, in the form of a letter of
credit arranged by Mr. Porter, was issued by a bank and placed with the
insurance company that issued the various bonds aggregating to a face amount of
approximately $7.3 million.  Mr. Porter entered into a Guarantee and
Indemnification Agreement with the Company dated February 1,
2009.  Accordingly, we are contingently liable for the face amount of
the letter of credit of approximately $0.5 million. Mr. Porter will be
compensated in cash at 2% of the average outstanding amount of the letter of
credit per quarter paid in arrears. The Guarantee and Indemnification Agreement
can be cancelled by the Company upon receiving a more favorable arrangement from
another party.





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 approximately $3 to $5 million of additional capital
during the first half of fiscal 2009.  We expect to finance this
through public or private equity offerings and have retained investment bankers
to assist.  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.





18


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





Off-Balance
Sheet Arrangements





Operating
Leases





We are obligated under various
operating lease agreements for our facilities.  Future minimum lease
payments and anticipated common area maintenance charges under all of our
operating leases are approximately as follows at January 3, 2009:




Fiscal
      year ending
            
            Amounts2009
            
            $
            219,9002010
            
            
            200,6002011
            
            
            205,0002012
            
            
            156,3002013
            
            
            -Total
            
            $
            781,800





Employment
Agreements





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





In connection with their initial
employment agreements (see Note F – Commitments and Contingencies), our Chief
Executive Officer, Jerry R. Welch, and our Chief Financial Officer, Raymond P.
Springer, received stock options to purchase approximately 603,400 and 284,000
shares, respectively, of common stock at $1.50 per share, which were valued
using the Black-Scholes option pricing model at aggregate fair values of
approximately $845,000 and $400,000, respectively.  These amounts were
recognized as stock-based compensation expense as the options vested. The grants
were equal to 4.25% and 2.00%, respectively, 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 options were
divided into 28 equal installments, with the first six installments vesting on
February 28, 2007 and additional installments vest on the final day of each
month through December 31, 2008.  At January 3, 2009, all options have
vested and all compensation expense related to these options has been
recognized.





On July 12, 2007, Messrs. Welch and
Springer were awarded 197,855 and 93,108 stock options, respectively, at $3.40
per share, which were valued using the Black-Scholes option pricing model at
aggregate fair values of approximately $619,000 and $291,000,
respectively.  These amounts were recognized as stock-based
compensation expense as the options vested.  These grants were equal
to approximately 4.25% and 2.0% of the shares of our total stock and warrants
issued under the Securities and Purchase Agreements, dated June 29, 2007,
between the Company and certain investors. These options vested in 28 equal
installments with the first eleven installments vesting on July 31, 2007 and
additional installments vesting on the final day of each month through December
31, 2008.  At January 3, 2009, all options have vested and all
compensation expense related to these options has been recognized.





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





Service
and Purchase Agreements





We have entered into renewable
contracts with DFS Services LLC, our card network, Palm Desert National Bank,
(“PDNB”), 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.   Because the majority of the fees to be paid are
contingent primarily on card volume, it is not possible to calculate the amount
of the future commitment on these contracts. The Metavante and FNB&T
agreements also require a minimum payment of $5,000 and $7,500 per month,
respectively.  During the fiscal years ended January 3, 2009 and
December 29, 2007, we made aggregate payments of approximately $594,200 and
$117,800, respectively to Metavante, $2,100 and $6,800, respectively to PDNB and
$111,500 and $0, respectively, to FNB&T under these agreements.





19




Critical
Accounting Policies





Revenue
Recognition





We generate the following types of
revenues:





●
            Wholesale
      fees, which arise when our SVCs are sold and activated and when the
      nFinanSe Network TM is used to reload a
card.


●
            Transaction
      fees, which arise when our SVCs are used in a purchase or ATM
      transaction.


●
            Maintenance
      fees, which arise when an SVC with a cash balance is charged for monthly
      maintenance.


●
            Interest
      revenue, on overnight investing of SVC balances by our card issuing
      bank.





Our revenue recognition policy is
consistent with the criteria set forth in SEC Staff Accounting Bulletin 104,
“Revenue Recognition in
Financial Statements” (“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.  Certain
periodic card costs are recognized as incurred.





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 (1) we will be able to raise and
generate sufficient cash to continue as a going concern, (2) all long-lived
assets are recoverable, and (3) our inventory is properly valued and
recoverable.  In addition, stock-based compensation expense represents
an estimate of management.  The markets for our products are
characterized by intense competition, rapid technological development, evolving
standards and regulations and short product life cycles, all of which could
impact the future realization of our assets. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the period
that they are determined to be necessary. It is at least reasonably possible
that our estimates could change in the near term with respect to these
matters.




Stock-Based
Compensation




We apply Financial Accounting Standards
No. 123R, “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.





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 No. 96-18.  Pursuant to this
standard, the value of these options is estimated at each reporting date 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 each period.
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.





Long-Lived
Assets




In
accordance with Financial Accounting Standard No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” 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.  At January 3, 2009, we believe our remaining 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 stock shares that may be issued on
conversion of debt or preferred stock to permit resale of common stock shares
previously sold under an exemption from registration or to register common stock
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
stock 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,".  This accounting is
consistent with FASB Staff Position FSP EITF 00-19-2, "Accounting for Registration Payment
Arrangements,".
Accordingly, we recognize any damages when it becomes probable that they will be
incurred and when amounts are reasonably estimable.


20





Impact
of Recently Issued Accounting Pronouncements





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. All our
subsidiaries are wholly owned. Accordingly, this statement is not expected to
have any 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 the 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.  This statement
is not expected to have a significant effect on our financial
statements.




In March
2008, the FASB issued Financial Accounting Standard No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133” (“FAS 161”).  FAS 161 requires entities that utilize
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives.  FAS 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of Financial Accounting Standard No.
133, “Accounting for
Derivative Instruments and Hedging Activities”, have been applied, and
the impact that hedges have on an entity’s financial position, financial
performance, and cash flows.  FAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged.  The Company currently provides an abundance of
information about its use of derivatives in its quarterly and annual filings
with the SEC, including many of the disclosures contained within FAS
161.  Thus, the Company currently does not anticipate the adoption of
FAS161 will have a material impact on the disclosures already
provided.  The Company does not currently utilize derivatives to hedge
any of its financial instruments.




In May
2008, the FASB issued Financial Accounting Standard No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“FAS 162”). FAS 162 provides a framework for
selecting accounting principles for financial statements that are presented in
conformity with GAAP. The Company does not expect that the provisions of FAS 162
will result in any change in accounting principles for the Company.





In May 2008, the FASB issued Financial
Accounting Standard No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60”, (“FAS
163”).  FAS 163, which is effective for fiscal years beginning after
December 15, 2008, is not expected to have any effect on our financial
statements.





Item
8.  Financial Statements and Supplementary Data.





The
audited financial statements of the Company for the fiscal year (53 week
period) ended January 3, 2009 and the fiscal year (52 week period)
ended December 29, 2007, and the report thereon of Kingery & Crouse,
P.A., our independent accountants, are included in this annual report following
the Exhibit Index to this annual report.





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





None.




Item
9A.  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 January 3, 2009.  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.


21




The SEC
has defined “significant deficiency” 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 continue to have a small
number of accounting and financial personnel with fairly limited redundancies
which redundancies could be considered necessary to adequately support our
financial reporting requirements. This deficiency is due to our small size and
limited operating history. During fiscal 2009, as we implement our business
plan, we expect 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 any known deficiency 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 the implementation of our business plan and
the concomitant increase in our accounting and financial resources will
remediate any deficiency in internal control over financial
reporting.





Notwithstanding
the aforementioned deficiency, our management performed additional analyses,
reconciliations and other procedures and has concluded that the Company’s
consolidated financial statements for the periods covered by and included in
this annual report 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.





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 is 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.





As stated
above, management assessed the effectiveness of our internal control over
financial reporting as of January 3, 2009, 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 January 3, 2009.





Changes
in Internal Control over Financial Reporting.





During
the fiscal quarter ended January 3, 2009, 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
9B.  Other Information.





None.


22


PART
III









Item
10.   Directors, Executive Officers and Corporate
Governance.


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





Item
11.   Executive Compensation.





The
information called for by Item 11 of Form 10-K 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,
and is incorporated herein by reference.






Item 12.   Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.


The
information called for by Item 12 of Form 10-K 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, and is incorporated herein by reference.





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





The
information called for by Item 13 of Form 10-K 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, and is
incorporated herein by reference.





Item
14.   Principal Accountant Fees and Services.





The
information called for by Item 14 of Form 10-K will be set forth under the
caption “Principal Accountant 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, and is incorporated herein by reference.







23


PART IV


Item
15.  Exhibits.





Exhibit
      No.
            Description
      of Exhibit3.1
            Amended
      and Restated Articles of Incorporation of the Company (filed as
      Exhibit 3.1 to the Company’s Annual Report on Form 10-KSB filed on
      December 29, 2006 and incorporated by reference
herein).3.2
            Certificate
      of Amendment to 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).3.3
            By-Laws,
      as amended, of the Company (filed as Exhibit 3 to the Company’s
      Registration Statement on Form SB-2/A filed on November 28, 2001 and
      incorporated by reference herein).3.4
            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).3.5
            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).3.6
            Certificate
      of Amendment to Certificate of Designation For Nevada Profit Corporation,
      Series A Preferred Stock, as filed with the Secretary of State of the
      State of Nevada on June 12, 2008 (filed as Exhibit 99.4 to the Company’s
      Current Report on Form 8-K filed on June 16, 2008 and incorporated by
      reference herein).3.7
            Certificate
      of Amendment to Certificate of Designation For Nevada Profit Corporation,
      Series B Preferred Stock, as filed with the Secretary of State of the
      State of Nevada on June 12, 2008 (filed as Exhibit 99.5 to the Company’s
      Current Report on Form 8-K filed on June 16, 2008 and incorporated by
      reference herein).3.8
            Certificate
      of Designations, Rights and Preferences of Series C Convertible Preferred
      Stock, as filed with the Secretary of State of the State of Nevada on June
      12, 2008 (filed as Exhibit 99.6 to the Company’s Current Report on Form
      8-K filed on June 16, 2008 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).






24






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).4.8
            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).4.9
            Form
      of Securities Purchase Agreement, as executed by the Company and Bruce E.
      Terker on March 21, 2008 (filed as Exhibit 99.1 to the Company’s Current
      Report on Form 8-K filed on March 28, 2008 and incorporated by reference
      herein).4.10
            Form
      of Warrant, as issued by the Company to Bruce E. Terker on March 21, 2008
      (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
      on March 28, 2008 and incorporated by reference
herein).4.11
            Form
      of Securities Purchase Agreement, as executed by the Company and the
      purchasers signatory thereto on March 28, 2008 and March 31, 2008 (filed
      as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March
      31, 2008 and incorporated by reference herein).4.12
            Form
      of Warrant, as issued by the Company to certain investors on March 28,
      2008 and March 31, 2008 (filed as Exhibit 99.2 to the Company’s Current
      Report on Form 8-K filed on March 31, 2008 and incorporated by reference
      herein).4.13
            Form
      of Securities Purchase Agreement, as executed by the Company and Bruce E.
      Terker on May 16, 2008 (filed as Exhibit 99.1 to the Company’s Current
      Report on Form 8-K filed on May 22, 2008 and incorporated by reference
      herein).4.14
            Form
      of Warrant, as issued by the Company to Bruce E. Terker on May 16, 2008
      (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
      on May 22, 2008 and incorporated by reference herein).4.15
            Form
      of Securities Purchase Agreement, as executed by the Company and the
      purchasers signatory thereto on June 12, 2008 (filed as Exhibit 99.1 to
      the Company’s Current Report on Form 8-K filed on June 16, 2008 and
      incorporated by reference herein).4.16
            Form
      of Warrant, as issued by the Company to certain investors on June 12, 2008
      (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
      on June 16, 2008 and incorporated by reference herein).4.17
            Form
      of Securities Exchange Agreement, as executed by the Company and the
      investors signatory thereto on June 12, 2008 (filed as Exhibit 99.3 to the
      Company’s Current Report on Form 8-K filed on June 16, 2008 and
      incorporated by reference herein).






25




4.18
            Form
      of Amendment No. 1 to Warrant, as issued by the Company to certain lenders
      on November 26, 2008 (filed as Exhibit 99.2 to the Company’s Current
      Report on Form 8-K filed on December 3, 2008 and incorporated by reference
      herein).4.19
            Form
      of Warrant, as issued by the Company to certain lenders on November 26,
      2008 (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K
      filed on December 3, 2008 and incorporated by reference
      herein).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 10.5 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
      10.10 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 10.11 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).






26




10.13
            2004
      Amended Stock Incentive Plan (filed as Exhibit 10.13 to the Company’s
      Annual Report on Form 10-KSB filed on December 29, 2006 and incorporated
      by reference herein).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
            Loan
      and Security Agreement, dated as of June 10, 2008, among the Company,
      nFinanSe Payments Inc., and the lenders party thereto and Ballyshannon
      Partners, L.P., as agent (filed as Exhibit 99.7 to the Company’s Current
      Report on Form 8-K filed on June 16, 2008 and incorporated by reference
      herein).10.22
            Amended
      and Restated Loan and Security Agreement, dated as of November 26, 2008,
      among the Company, nFinanSe Payments Inc., and the lenders party thereto
      and Ballyshannon Partners, L.P., as agent (filed as Exhibit 99.1 to the
      Company’s Current Report on Form 8-K filed on December 3, 2008 and
      incorporated by reference herein).14.1
            Code
      of Ethics (filed as Exhibit 14.1 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.





27


SIGNATURES





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





nFinanSe
Inc.





By:
            /s/ Jerry R.
      WelchJerry
      R. Welch, Chief Executive Officer and DirectorDate:
            March
      30, 2009





In accordance with the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.





By:
            /s/Jerry R.
      WelchJerry
      R. Welch, Chief Executive Officer and Director(Principal
      Executive Officer)Date:
            March
      30, 2009By:
            /s/Raymond P.
      SpringerRaymond
      P. Springer, Secretary and Chief Financial Officer(Principal
      Financial Officer)Date:
            March
      30, 2009By:
            /s/
      Jerome A. KollarJerome
      A. Kollar, Principal Accounting OfficerDate:
            March
      30, 2009By:
            /s/ Ernest W.
      SwiftErnest
      W. Swift, DirectorDate:
            March
      30, 2009By:
            /s/
      BenjaminJ.BondBenjamin
      J. Bond, DirectorDate:
            March
      30, 2009By:
            /s/ MarkS.BrewerMark
      S. Brewer, DirectorDate:
            March
      30, 2009By:
            /s/
      JosephD.HudginsJoseph
      D. Hudgins, DirectorDate:
            March
      30, 2009By:
            /s/BruceE.TerkerBruce
      E. Terker, DirectorDate:
            March
      30, 2009





28


EXHIBITS
INDEX








Exhibit
      No.
            Description
      of Exhibit3.1
            Amended
      and Restated Articles of Incorporation of the Company (filed as
      Exhibit 3.1 to the Company’s Annual Report on Form 10-KSB filed on
      December 29, 2006 and incorporated by reference
herein).3.2
            Certificate
      of Amendment to 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).3.3
            By-Laws,
      as amended, of the Company (filed as Exhibit 3 to the Company’s
      Registration Statement on Form SB-2/A filed on November 28, 2001 and
      incorporated by reference herein).3.4
            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).3.5
            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).3.6
            Certificate
      of Amendment to Certificate of Designation For Nevada Profit Corporation,
      Series A Preferred Stock, as filed with the Secretary of State of the
      State of Nevada on June 12, 2008 (filed as Exhibit 99.4 to the Company’s
      Current Report on Form 8-K filed on June 16, 2008 and incorporated by
      reference herein).3.7
            Certificate
      of Amendment to Certificate of Designation For Nevada Profit Corporation,
      Series B Preferred Stock, as filed with the Secretary of State of the
      State of Nevada on June 12, 2008 (filed as Exhibit 99.5 to the Company’s
      Current Report on Form 8-K filed on June 16, 2008 and incorporated by
      reference herein).3.8
            Certificate
      of Designations, Rights and Preferences of Series C Convertible Preferred
      Stock, as filed with the Secretary of State of the State of Nevada on June
      12, 2008 (filed as Exhibit 99.6 to the Company’s Current Report on Form
      8-K filed on June 16, 2008 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).






29






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).4.8
            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).4.9
            Form
      of Securities Purchase Agreement, as executed by the Company and Bruce E.
      Terker on March 21, 2008 (filed as Exhibit 99.1 to the Company’s Current
      Report on Form 8-K filed on March 28, 2008 and incorporated by reference
      herein).4.10
            Form
      of Warrant, as issued by the Company to Bruce E. Terker on March 21, 2008
      (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
      on March 28, 2008 and incorporated by reference
herein).4.11
            Form
      of Securities Purchase Agreement, as executed by the Company and the
      purchasers signatory thereto on March 28, 2008 and March 31, 2008 (filed
      as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on March
      31, 2008 and incorporated by reference herein).4.12
            Form
      of Warrant, as issued by the Company to certain investors on March 28,
      2008 and March 31, 2008 (filed as Exhibit 99.2 to the Company’s Current
      Report on Form 8-K filed on March 31, 2008 and incorporated by reference
      herein).4.13
            Form
      of Securities Purchase Agreement, as executed by the Company and Bruce E.
      Terker on May 16, 2008 (filed as Exhibit 99.1 to the Company’s Current
      Report on Form 8-K filed on May 22, 2008 and incorporated by reference
      herein).4.14
            Form
      of Warrant, as issued by the Company to Bruce E. Terker on May 16, 2008
      (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
      on May 22, 2008 and incorporated by reference herein).4.15
            Form
      of Securities Purchase Agreement, as executed by the Company and the
      purchasers signatory thereto on June 12, 2008 (filed as Exhibit 99.1 to
      the Company’s Current Report on Form 8-K filed on June 16, 2008 and
      incorporated by reference herein).4.16
            Form
      of Warrant, as issued by the Company to certain investors on June 12, 2008
      (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
      on June 16, 2008 and incorporated by reference herein).4.17
            Form
      of Securities Exchange Agreement, as executed by the Company and the
      investors signatory thereto on June 12, 2008 (filed as Exhibit 99.3 to the
      Company’s Current Report on Form 8-K filed on June 16, 2008 and
      incorporated by reference herein).






30




4.18
            Form
      of Amendment No. 1 to Warrant, as issued by the Company to certain lenders
      on November 26, 2008 (filed as Exhibit 99.2 to the Company’s Current
      Report on Form 8-K filed on December 3, 2008 and incorporated by reference
      herein).4.19
            Form
      of Warrant, as issued by the Company to certain lenders on November 26,
      2008 (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K
      filed on December 3, 2008 and incorporated by reference
      herein).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 10.5 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
      10.10 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 10.11 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).






31




10.13
            2004
      Amended Stock Incentive Plan (filed as Exhibit 10.13 to the Company’s
      Annual Report on Form 10-KSB filed on December 29, 2006 and incorporated
      by reference herein).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
            Loan
      and Security Agreement, dated as of June 10, 2008, among the Company,
      nFinanSe Payments Inc., and the lenders party thereto and Ballyshannon
      Partners, L.P., as agent (filed as Exhibit 99.7 to the Company’s Current
      Report on Form 8-K filed on June 16, 2008 and incorporated by reference
      herein).10.22
            Amended
      and Restated Loan and Security Agreement, dated as of November 26, 2008,
      among the Company, nFinanSe Payments Inc., and the lenders party thereto
      and Ballyshannon Partners, L.P., as agent (filed as Exhibit 99.1 to the
      Company’s Current Report on Form 8-K filed on December 3, 2008 and
      incorporated by reference herein).14.1
            Code
      of Ethics (filed as Exhibit 14.1 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




















nFinanSe
Inc.


(A Development StageEnterprise)





Consolidated
Financial Statements


as
of and for the fiscal years ended January 3, 2009 and December 29,
2007


and
for the period July 10, 2000 (inception) to January 3, 2009,


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 Sheets as of January 3, 2009 and December 29,
      2007.................................................................................................................................................................................................
            F-4Consolidated
      Statements of Operations for the fiscal year ended January 3, 2009, the
      fiscal year ended December 29, 2007 and the period July 10, 2000
      (inception) to January 3, 2009..................................................
            F-5Consolidated
      Statements of Stockholders’ Equity (Deficit) for the fiscal year
      ended January 3, 2009, the fiscal year ended December 29, 2007 and each
      fiscal period from July 10, 2000 (inception) to December 30,
      2006....
            F-6Consolidated
      Statements of Cash Flows for the fiscal year ended January 3, 2009, the
      fiscal year ended December 29, 2007 and the period July 10, 2000
      (inception) to January 3, 2009...................................................
            F-11Notes
      to Consolidated Financial
      Statements...........................................................................................................................................................................................................................................
            F-13

















F-2







[LETTERHEAD OF KINGERY &
CROUSE, P.A.]








To
the Board of Directors and Stockholders of nFinanSe Inc. and
Subsidiaries:





We
have audited the accompanying consolidated balance sheets of nFinanSe Inc. and
subsidiaries (the “Company”), a development stage enterprise, as of January 3,
2009 and December 29, 2007, and the related consolidated statements of
operations, stockholders’ equity (deficit) and cash flows for the fiscal years
then ended and for the period July 10, 2000 (date of inception) to January 3,
2009. 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
January 3, 2009 and December 29, 2007, and the results of its operations and
cash flows for the fiscal years then ended and for the period July 10, 2000
(date of inception) to January 3, 2009, 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 consolidated 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.





/s/
Kingery & Crouse, P.A.





March
30, 2009


Tampa,
FL
















F-3





nFinanSe
Inc.


(A Development Stage
Enterprise)





CONSOLIDATED
BALANCE SHEETS





January
      3,
            
            
            December
      29,2009
            
            
            2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            475,608
            
            
            $
            2,497,365Restricted
      cash
            
            
            472,500
            
            
            
            -Short-term
      investment
            
            
            -
            
            
            
            728,000Receivables:Accounts
      (net of allowance for doubtful accounts of $0 and $0,
      respectively)
            
            
            52,078
            
            
            
            10,957Other
            
            
            25,776
            
            
            
            19,027Prepaid
      expenses and other current assets, ,including prepaid marketing
      costs
              of
      approximately $224,600 and $312,000, respectively
            
            
            402,505
            
            
            
            473,493Current
      portion of deferred financing costs (net of accumulated amortization of
      $38,300)
            
            
            421,306
            
            
            
            -Inventories
            
            
            2,885,779
            
            
            
            1,942,206Total
      current assets
            
            
            4,735,552
            
            
            
            5,671,048PROPERTY
      AND EQUIPMENT
            
            
            625,746
            
            
            
            759,261OTHER
      ASSETSDeferred
      financing costs ,net of accumulated amortization of
    $127,532
            
            
            1,402,849
            
            
            
            -Deferred
      cost of marketing incentive agreement warrants
              (net
      of accumulated amortization of $4,309 and $107,
    respectively)
            
            
            381,250
            
            
            
            535,195Other
      assets
            
            
            272,404
            
            
            
            35,080TOTAL
      ASSETS
            
            $
            7,417,801
            
            
            $
            7,000,584LIABILITIES AND
      STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            343,020
            
            
            $
            139,635Accrued
      personnel costs
            
            
            105,772
            
            
            
            130,804Accrued
      inventory liability
            
            
            210,159
            
            
            
            593,431Accrued
      lease and contractual obligations
            
            
            150,241
            
            
            
            220,809Credit
      facility loans outstanding
            
            
            1,200,000
            
            
            
            -Deferred
      revenues
            
            
            31,250
            
            
            
            106,250Other
      accrued liabilities
            
            
            522,113
            
            
            
            371,298Total
      current liabilities
            
            
            2,562,555
            
            
            
            1,562,227COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITY:Preferred
      stock - $.001 par value:  25,000,000 shares authorized;
      12,537,984 and 8,820,484  shares issued and outstanding on
      January 3, 2009 and December 29, 2007, respectively, as
      follows:Series
      A Convertible Preferred Stock – 9,330,514 shares authorized; 7,500,484 and
      7,820,484 shares  issued and outstanding with liquidation values
      of $7,692,620 and $8,213,651 (including undeclared accumulated dividends
      in arrears of $192,136 and $393,167) as of January 3, 2009 and December
      29, 2007, respectively
            
            
            7,500
            
            
            
            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
      January 3, 2009 and December 29, 2007,respectively
            
            
            1,000
            
            
            
            1,000Series
      C Convertible Preferred Stock – 4,100,000 shares authorized; 4,037,500
      shares issued and outstanding with a liquidation value of $8,075,000 at
      January 3, 2009
            
            
            4,038
            
            
            
            -Common
      stock - $0.001 par value: 200,000,000 shares authorized; 9,344,108 and
      7,371,929 shares issued and outstanding as of January 3, 2009 and December
      29, 2007, respectively
            
            
            9,344
            
            
            
            7,372Additional
      paid-in capital
            
            
            56,770,705
            
            
            
            42,002,195Deficit
      accumulated during the development stage
            
            
            (51,937,341
            )
            
            
            (36,580,030
            )Total
      stockholders’ equity
            
            
            4,855,246
            
            
            
            5,438,357TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            7,417,801
            
            
            $
            7,000,584





See notes
to consolidated financial statements.





F-4





nFinanSe
Inc.


(A Development Stage
Enterprise)





CONSOLIDATED
STATEMENTS OF OPERATIONS





For
      the fiscal year
              ended
              January
      3, 2009
            
            
            For
      the fiscal year
              ended
              December
      29, 2007
            
            
            For
      the period
              July
      10, 2000
              (inception)
      to
              January
      3, 2009REVENUES
            
            $
            33,409
            
            
            $
            32,763
            
            
            $
            1,239,577OPERATING
      EXPENSESTransaction
      and operating expenses
            
            
            2,401,994
            
            
            
            1,053,872
            
            
            
            4,766,191Selling
      and marketing expenses
            
            
            3,683,345
            
            
            
            2,264,435
            
            
            
            8,039,977General
      and administrative expenses
            
            
            7,932,942
            
            
            
            6,862,485
            
            
            
            30,503,596Total
      operating expenses
            
            
            14,018,281
            
            
            
            10,180,792
            
            
            
            43,309,764Loss
      before other income (expense)
            
            
            (13,984,872
            )
            
            
            (10,148,029
            )
            
            
            (42,070,187
            )Other
      income (expense):Interest
      expense
            
            
            (308,497
            )
            
            
            (1,895
            )
            
            
            (1,996,761
            )Interest
      income
            
            
            24,185
            
            
            
            183,325
            
            
            
            1,164,425Gain
      (loss) on derivative instruments
            
            
            (396,032
            )
            
            
            -
            
            
            
            1,449,230Loss
      from litigation
            
            
            (105,500
            )
            
            
            -
            
            
            
            (105,500
            )Loss
      on debt extinguishment
            
            
            -
            
            
            
            -
            
            
            
            (4,685,518
            )Registration
      rights penalties
            
            
            -
            
            
            
            -
            
            
            
            (98,649
            )Other
      income (expense)
            
            
            (758
            )
            
            
            27,243
            
            
            
            (94,614
            )Total
      other income (expense)
            
            
            (786,602
            )
            
            
            208,673
            
            
            
            (4,367,387
            )Loss
      from continuing operations
            
            
            (14,771,474
            )
            
            
            (9,939,356
            )
            
            
            (46,437,574
            )Loss
      from discontinued operations
            
            
            -
            
            
            
            (8,738
            )
            
            
            (3,861,579
            )Net
      loss
            
            
            (14,771,474
            )
            
            
            (9,948,094
            )
            
            
            (50,299,153
            )Dividends
      paid on Series A Convertible
      Preferred    Stock
            
            
            (190,527
            )
            
            
            (52,352
            )
            
            
            (1,638,189
            )Undeclared
      and unpaid dividends on Series A Convertible Preferred
    Stock
            
            
            (192,136
            )
            
            
            (393,167
            )
            
            
            (192,136
            )Net
      loss attributable to common stockholders
            
            $
            (15,154,137
            )
            
            $
            (10,393,613
            )
            
            $
            (52,129,478
            )Net
      loss per share - basic and diluted:Continuing
      operations
            
            $
            (1.74
            )
            
            $
            (1.95
            )Discontinued
      operations
            
            $
            -
            
            
            $
            -Total
      net loss per share
            
            $
            (1.74
            )
            
            $
            (1.95
            )Weighted
      average number of shares outstanding
            
            
            8,715,664
            
            
            
            5,318,685


See notes
to consolidated financial statements.





F-5





nFinanSe
Inc.


(A Development StageEnterprise)





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)





Common
      StockSubscribed
            
            
            DeficitConvertible
      Preferred Stock
            
            
            Common
      Stock
            
            
            Additional
              Paid-In
            
            
            and
      Note Receivable From
            
            
            Accumulated
      During the DevelopmentSeries
      A
            
            
            Series
      B
            
            
            Series
      C
            
            
            Shares
            
            
            Par
      Value
            
            
            Capital
            
            
            Stockholder
            
            
            Stage
            
            
            TotalBalances,
      July 10, 2000 (inception)
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -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
            
            
            
            -
            
            
            
            -
            
            
            
            594,465Issuance
      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
            )Continued








F-6




nFinanSe
Inc.


(A Development StageEnterprise)





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)





Common
      StockSubscribed
            
            
            DeficitConvertible
      Preferred Stock
            
            
            Common
      Stock
            
            
            Additional
      Paid-In
            
            
            and
      Note Receivable From
            
            
            Accumulated
      During the DevelopmentSeries
      A
            
            
            Series
      B
            
            
            Series
      C
            
            
            Shares
            
            
            Par
      Value
            
            
            Capital
            
            
            Stockholder
            
            
            Stage
            
            
            TotalIssuance
      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
            
            
            
            -
            
            
            
            -
            
            
            
            4,883,614Allocation
      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
            )Continued











F-7





nFinanSe
Inc.


(A Development StageEnterprise)





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)





Common
      StockSubscribed
            
            
            DeficitConvertible
      Preferred Stock
            
            
            Common
      Stock
            
            
            Additional
      Paid-In
            
            
            and
      Note Receivable From
            
            
            Accumulated
      During the DevelopmentSeries
      A
            
            
            Series
      B
            
            
            Series
      C
            
            
            Shares
            
            
            Par
      Value
            
            
            Capital
            
            
            Stockholder
            
            
            Stage
            
            
            TotalDerivative
      liability related to warrants exercised for Common Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,254,486
            
            
            
            -
            
            
            
            -
            
            
            
            5,254,486Reclassify
      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
            )
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      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
            )Continued





F-8




nFinanSe
Inc.


(A Development StageEnterprise)





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


Common
      StockSubscribed
              
              
              DeficitConvertible
      Preferred Stock
              
              
              Common
      Stock
              
              
              Additional
                Paid-In
              
              
              and
      Note Receivable From
              
              
              Accumulated
      During the DevelopmentSeries
      A
              
              
              Series
      B
              
              
              Series
      C
              
              
              Shares
              
              
              Par
      Value
              
              
              Capital
              
              
              Stockholder
              
              
              Stage
              
              
              TotalCancellation
      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
              
              
              
              -
              
              
              
              -
              
              
              
              10,517,313Dividends
      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
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,508,958Issuance
      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
              )
              
              
              5,438,357Continued





F-9








nFinanSe
Inc.


(A Development StageEnterprise)





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)





Common
      StockSubscribed
            
            
            DeficitConvertible
      Preferred Stock
            
            
            Common
      stock
            
            
            Additional
      Paid-In
            
            
            and
      Note Receivable From
            
            
            Accumulated
      During the DevelopmentSeries
      A
            
            
            Series
      B
            
            
            Series
      C
            
            
            Shares
            
            
            Par
      Value
            
            
            Capital
            
            
            Stockholder
            
            
            Stage
            
            
            TotalEmployee
      and director stock based award activity
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,920,436
            
            
            
            -
            
            
            
            -
            
            
            
            1,920,436Issuance
      of Series C Convertible Preferred Stock
            
            
            -
            
            
            
            -
            
            
            
            4,038
            
            
            
            -
            
            
            
            -
            
            
            
            7,565,242
            
            
            
            -
            
            
            
            -
            
            
            
            7,569,280Private
      placement of Common Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,420,000
            
            
            
            1,420
            
            
            
            2,660,720
            
            
            
            -
            
            
            
            -
            
            
            
            2,662,140Issuance
      of Common Stock in connection with the conversion of Series A Convertible
      Preferred Stock to Common Stock
            
            
            (320
            )
            
            
            -
            
            
            
            -
            
            
            
            320,000
            
            
            
            320
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
      of Common Stock in lieu of cash dividends on Series A Convertible
      Preferred Stock that was converted into Common Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            182,179
            
            
            
            182
            
            
            
            585,504
            
            
            
            -
            
            
            
            (585,837
            )
            
            
            (151
            )Shares
      issued as settlement without admission of fault for Bedlington Securities
      litigation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            50,000
            
            
            
            50
            
            
            
            50,450
            
            
            
            -
            
            
            
            -
            
            
            
            50,500Derivative
      liability related to exchange feature in the Securities Purchase
      arrangement.
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            396,032
            
            
            
            -
            
            
            
            -
            
            
            
            396,032Warrants
      issued in connection with Credit Facility Agreements
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,530,381
            
            
            
            -
            
            
            
            -
            
            
            
            1,530,381Warrants
      issued as compensation for providing collateral on surety
      bonds
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            59,745
            
            
            
            -
            
            
            
            -
            
            
            
            59,745Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (14,771,474
            )
            
            
            (14,771,474
            )Balances,
      January 3, 2009
            
            $
            7,500
            
            
            $
            1,000
            
            
            $
            4,038
            
            
            
            9,344,108
            
            
            $
            9,344
            
            
            $
            56,770,705
            
            
            $
            -
            
            
            $
            (51,937,341
            )
            
            $
            4,855,246





See notes
to consolidated financial statements.









F-10





nFinanSe
Inc.


(A Development StageEnterprise)





CONSOL
IDATED STATEMENTS OF CASH FLOWS





For
      the fiscal
              year
      ended
              January
      3, 2009
            
            
            For
      the fiscal
              year
      ended
              December29,
      2007
            
            
            For
      the period
              July
      10, 2000
              (inception)
      to
              January
      3, 2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (14,771,474
            )
            
            $
            (9,948,094
            )
            
            $
            (50,299,153
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            288,571
            
            
            
            261,161
            
            
            
            1,250,804Provision
      for inventory obsolescence
            
            
            146,952
            
            
            
            24,463
            
            
            
            665,808Provision
      for bad debts
            
            
            -
            
            
            
            -
            
            
            
            461,972Amortization
      of intangible assets
            
            
            -
            
            
            
            -
            
            
            
            15,485Stock
      based compensation and consulting
            
            
            1,920,436
            
            
            
            1,996,595
            
            
            
            8,094,802Purchased
      in process research and development
            
            
            -
            
            
            
            -
            
            
            
            153,190Loss
      (gain) on derivative instruments
            
            
            396,032
            
            
            
            -
            
            
            
            (1,449,230
            )Loss
      on debt extinguishments
            
            
            -
            
            
            
            -
            
            
            
            4,685,518Loss
      (gain)  on disposal of assets
            
            
            394
            
            
            
            (1,633
            )
            
            
            28,762Loss
      from impairment of assets
            
            
            374,180
            
            
            
            99,348
            
            
            
            1,470,083Forgiveness
      of indebtedness as a result of
      litigation   settlement
            
            
            -
            
            
            
            -
            
            
            
            (50,000
            )Non-cash
      interest expense
            
            
            187,277
            
            
            
            -
            
            
            
            903,248Value/expense
      of third party warrants
            
            
            4,202
            
            
            
            5,707
            
            
            
            9,909Changes in assets and
      liabilities, net:Restricted
      cash
            
            
            (472,500
            )
            
            
            -
            
            
            
            (472,500
            )Receivables
            
            
            (45,367
            )
            
            
            28,166
            
            
            
            (377,563
            )Inventories
            
            
            (1,314,962
            )
            
            
            (1,751,633
            )
            
            
            (3,421,372
            )Prepaid
      expenses and other current assets
            
            
            133,765
            
            
            
            (240,330
            )
            
            
            (585,501
            )Other
      assets
            
            
            (210,379
            )
            
            
            18,199
            
            
            
            (221,592
            )Assets
      of discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            (229,060
            )Accounts
      payable and accrued  liabilities
            
            
            (124,823
            )
            
            
            764,464
            
            
            
            1,513,118Accrued
      registration rights penalties
            
            
            -
            
            
            
            -
            
            
            
            98,649Deferred
      revenues
            
            
            (75,000
            )
            
            
            46,250
            
            
            
            31,250Liabilities
      of discontinued operations
            
            
            -
            
            
            
            (87,411
            )
            
            
            -NET
      CASH USED IN OPERATING ACTIVITIES
            
            
            (13,562,696
            )
            
            
            (8,784,748
            )
            
            
            (37,723,373
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (156,371
            )
            
            
            (583,796
            )
            
            
            (2,110,705
            )Redemption
      (purchase) of short-term investment
            
            
            725,496
            
            
            
            (728,000
            )
            
            
            (2,504
            )Cash
      advanced under note receivable
            
            
            -
            
            
            
            -
            
            
            
            (202,000
            )Other
            
            
            -
            
            
            
            -
            
            
            
            (30,737
            )NET CASH PROVIDED BY (USED
      IN) INVESTING ACTIVITIES
            
            
            569,125
            
            
            
            (1,311,796
            )
            
            
            (2,345,946
            )


(Continued)





F-11





nFinanSe
Inc.


(A Development StageEnterprise)





CONSOLIDATED
STATEMENTS OF CASH FLOWS





(Continued)


For
      the fiscal
              year
      ended
              January
      3, 2009
            
            
            For
      the fiscal
              year
      ended
              December29,
      2007
            
            
            For
      the period
              July
      10, 2000
              (inception)
      to
              January
      3, 2009CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of Series A Convertible Preferred Stock
            
            
            -
            
            
            
            -
            
            
            
            4,000,000Proceeds
      from issuance of Series B Convertible Preferred Stock
            
            
            -
            
            
            
            3,000,000
            
            
            
            3,000,000Proceeds
      from issuance of Series C Convertible Preferred Stock
            
            
            8,075,000
            
            
            
            -
            
            
            
            8,075,000Proceeds
      from borrowings
            
            
            1,200,000
            
            
            
            -
            
            
            
            6,565,162Repayments
      of notes payable
            
            
            -
            
            
            
            -
            
            
            
            (147,912
            )Collections
      on note receivable from stockholder
            
            
            -
            
            
            
            -
            
            
            
            3,000,000Payment
      for deferred financing costs
            
            
            (459,606
            )
            
            
            -
            
            
            
            (459,606
            )Payment
      for stock offering costs
            
            
            (683,580
            )
            
            
            (670,561
            )
            
            
            (1,496,741
            )Proceeds
      from the exercise of vested stock options
            
            
            -
            
            
            
            8,249
            
            
            
            8,249Proceeds
      from the issuance of Common Stock
            
            
            2,840,000
            
            
            
            6,069,598
            
            
            
            18,000,775NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            10,971,814
            
            
            
            8,407,286
            
            
            
            40,544,927





NET
      CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            (2,021,757
            )
            
            
            (1,689,258
            )
            
            
            475,608CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            2,497,365
            
            
            
            4,186,623
            
            
            
            -CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            475,608
            
            
            $
            2,497,365
            
            
            $
            475,608SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Interest
      paid
            
            $
            541,527
            
            
            $
            1,895
            
            
            $
            558,523Income
      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
            
            $
            -
            
            
            $
            -
            
            
            $
            652,625Reclassification
      of long-lived assets to assets of discontinued telecom
      operations
            
            $
            -
            
            
            $
            -
            
            
            $
            100,000Warrants
      Issued to DFS Services, LLC
            
            $
            -
            
            
            $
            535,302
            
            
            $
            535,302Warrants
      Issued to Lenders
            
            $
            1,530,381
            
            
            $
            -
            
            
            $
            1,530,381Conversion
      of Series A Preferred Stock to Common Stock
            
            $
            320
            
            
            $
            1,508
            
            
            $
            1,828Dividends
      on Series A Convertible Stock Preferred Stock
            
            $
            585,837
            
            
            $
            52,352
            
            
            $
            1,638,189Conversion
      of Senior Secured Convertible Promissory Notes and accrued interest to
      Series A Convertible Preferred Stock
            
            $
            -
            
            
            $
            -
            
            
            $
            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 (“SVCs”) 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 SVCs.





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.  Because our distributor arrangements generally operate on a
weekly cycle, in 2006, we changed our year end to the Saturday closest to
December 31 of each year.





In 2005,
we began selling wholesale telecommunications services and we launched prepaid
phone cards in an effort to develop brand recognition in the credit challenged
or cash-based consumer market. However, the phone card operation struggled with
unacceptable operating losses which were draining resources from our core SVC
business.  Accordingly, we made the decision in September 2006 to
abandon this line of business.  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 this business
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”.





During
fiscal 2006, we added Western Union® and MoneyGram® to our load network and
signed an agreement with DFS Services LLC (“DFS”) to issue Discover® Network
branded SVCs.  In June 2007, we extended this agreement with DFS,
executed a Program Sponsor Agreement, whereby we sell bank-issued Discover®
Network branded SVCs and executed an Incentive Agreement with DFS that provides
us with marketing funds for the sale of Discover® Network-branded
SVCs.





We
currently operate two divisions: (i) the nFinanSe Card Division, which issues prepaid gift
cards, reloadable general spend cards and payroll 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.







F-13








We have
obtained a United States Treasury, Federal Crime Enforcement Network Federal
Money Services Business License, which is required by some states to conduct our
operations.  In addition, 44 states, along with the District of
Columbia, have established laws or regulations requiring entities 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 that have such federal
or state banking charters, on October 2, 2007, we created our wholly owned
subsidiary, nFinanSe Payments Inc., for the express purpose of acquiring the
required state licenses. We now have the requisite license from 35 states and
the District of Columbia and have applications pending in seven states. We do
not plan to offer cards in the remaining two states (Vermont and Hawaii) that
require licenses and have not applied for a license in either
state.





Revenue
Recognition





We
generate the following types of revenues:


•
       Wholesale fees, charged to the card holder when our SVCs are sold
      and activated and when the nFinanSe Network TM
      is used to reload a card.


•
       Transaction fees, paid by the applicable networks and passed through
      by our card issuing banks when our SVCs are used in a purchase or ATM
      transaction.•
       Maintenance fees, charged to an SVC with a cash balance for monthly
      maintenance.•
       Interest revenue, on overnight investing of SVC balances by our card
      issuing bank.






Our
revenue recognition policy is consistent with the criteria set forth in SEC
Staff Accounting Bulletin 104, “Revenue Recognition in Financial
Statements” (“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.  Certain
periodic card costs are recognized as incurred.





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 loads are remitted in advance. Transaction fees and
interest income are paid to us by the card-issuing bank approximately two weeks
into the month following the booking of such fees or interest
income.  Maintenance fees are debited against active cards with
balances monthly in arrears each month based on the day of
activation.





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 amounts related to bad debts is 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.





F-14








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
(1) we will be able to raise and generate sufficient cash to continue as a going
concern (2) all long-lived assets are recoverable, and (3) our inventory is
properly valued and deemed recoverable.  In addition, stock-based
compensation expense represents an estimate of management.  The
markets for our products are characterized by intense competition, rapid
technological development, evolving standards and regulations and short product
life cycles, all of which could impact the future realization of our assets.
Estimates and assumptions are reviewed periodically and the effects of revisions
are reflected in the period that they are determined to be necessary. It is at
least reasonably possible that our estimates could change in the near term with
respect to these matters.





Cash and Cash
Equivalents





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





Restricted
Cash





Funds
classified as restricted cash as at January 3, 2009 relate to loan advances on
our credit facility, as described in Note C – Loan and Security
Agreement.





Short-term
Investments





Short-term
investments are highly liquid investments with maturities between three months
and one year.  At December 29, 2007, we had a certificate of deposit
that was pledged as collateral for bonds posted with certain states in
connection with our state licensing efforts.  Subsequently, alternate
collateral was placed subsequent to year end (see Note F – Commitments and
Contingencies), and the certificate of deposit was liquidated 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.  Inventories consist of the following:





January
      3, 2009
            
            
            December
      29, 2007Finished
      cards
            
            $
            2,582,661
            
            
            $
            1,763,893Inventory
      in process
            
            
            474,533
            
            
            
            202,7763,057,194
            
            
            
            1,966,669Reserve
      for damaged and obsolete inventory at distributors
            
            
            171,415
            
            
            
            24,463Total
      Inventories
            
            $
            2,885,779
            
            
            $
            1,942,206








F-15








During
the fiscal year ended January 3, 2009, in addition to increasing our reserve for
damaged and obsolete inventory at distributors, we also recorded a $224,400
inventory impairment charge for gift cards printed in 2006 that have an
expiration date of less than twelve months prior to their projected date of
deployment.  The inventory impairment charge is included transaction
and operating expenses in the accompanying statement of operations.





Property and
Equipment





Property
and equipment are stated at cost. Major additions are capitalized and 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 term, 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,” 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 fiscal year ended December 29, 2007, we determined that
certain impairment losses had occurred and recognized impairment losses of
approximately $99,000, which related to approximately $58,000 of leasehold
improvements, fixtures and equipment written off when we abandoned our Bradenton
location and approximately $41,000 of write-offs of certain deposits for dormant
card programs. During the fiscal year ended January 3, 2009, we recognized an
impairment loss of $149,743 arising from a portion of an amortizable intangible
asset related to the deferred cost of warrants issued in connection with a
marketing incentive agreement.  These impairment charges are included
in general and administrative expenses in the accompanying statements of
operations.





At
January 3, 2009, we believe our remaining long-lived assets are
recoverable.





Advertising
Costs





Advertising
expenses, which were approximately $1,200,500 and $263,000 during the fiscal
years ended January 3, 2009 and December 29, 2007, respectively, are expensed as
incurred. The majority of advertising for the fiscal year ended January 3, 2009
was related to national trade print advertising for our general spend and
payroll SVC products, and the majority of advertising for the year ended
December 29, 2007 was related to promoting the sale of SVCs on our Internet
site.  At January 3, 2009 and December 29, 2007, we had approximately
$224,600 and $312,000, respectively, in prepaid marketing of which the majority
is related to prepaid distributor incentive programs amortized over the contract
periods.





Research and
Development





Research
and development costs, which approximated $1,243,800 and $880,000 during the
fiscal years ended January 3, 2009 and December 29, 2007, 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,” and SEC Staff Accounting Bulletin No. 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 January 3, 2009:





Description
            
            Shares
      of Common Stock and Common Stock EquivalentsCommon
      Stock outstanding
            
            
            9,344,108Series
      A Convertible Preferred Stock outstanding
            
            
            7,500,484Series
      B Convertible Preferred Stock outstanding
            
            
            1,000,000Series
      C Convertible Preferred Stock outstanding
            
            
            4,037,500Stock
      options outstanding
            
            
            2,641,779Warrants
      outstanding
            
            
            6,244,509Total
            
            
            30,768,380





Income
Taxes





We
compute income taxes in accordance with Financial Accounting Standard No. 109,
“Accounting for Income
Taxes,” (“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. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. Significant temporary differences arise
primarily from accounts payable and accrued liabilities that are not deductible
for tax reporting until they are paid. See Note D – Income Taxes.





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, accrued liabilities and credit facilities.  The carrying
values of our cash and cash equivalents, receivables, accounts payable, accrued
and other liabilities and credit facilities 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 and accounts
receivable. We frequently maintain such balances in excess of federally insured
limits. We have not experienced any losses in such accounts.  In
addition, our revenues and accounts receivable balance is and is expected to be
primarily composed of amounts generated from our largest distributor,
Interactive Communications (“InComm”).  We have not experienced any
losses from receivables due from InComm.





Stock-Based
Compensation





We apply
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.




F-17






The
following table summarizes stock-based compensation all of which was charged to
continuing operations.


Stock-based
      compensation charged to:
            
            For
      thefiscal
              year
      ended
              January
      3, 2009
            
            
            For
      the fiscal
              year
      ended
              December
      29, 2007Transaction
      and operating expenses
            
            $
            399
            
            
            $
            2,210Selling
      and marketing expenses
            
            
            218,165
            
            
            
            181,148General
      and administrative expenses
            
            
            1,701,872
            
            
            
            1,813,237Interest
      expense
            
            
            59,745
            
            
            
            -Total
      stock-based compensation
            
            $
            1,980,181
            
            
            $
            1,996,595





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 No.
96-18.  Pursuant to this standard, the value of these options is estimated
at each reporting date 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 each period. 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 (“Series A Preferred Stock”) accrues
dividends of 5% per annum, which can be satisfied in cash or Common
Stock.  Unless and until these dividends are declared and paid in
full, the Company is prohibited from declaring any dividends on its Common
Stock.  Pursuant to the Company’s Loan and Security Agreement dated
June 10, 2008 (see Note C – Loan and Security Agreement), the Company is limited
to paying $500,000 in any fiscal year for cash dividends or other cash
distributions to the holders of shares of Series A Preferred
Stock.  There are no dividend requirements on either our Series B
Convertible Preferred Stock or on our Series C Convertible Preferred
Stock.





In
January 2008, dividends on the Series A Preferred Stock for the period from
December 28, 2006 through the dividend payment date of December 31, 2007 were
declared and satisfied through the issuance of 104,252 shares of our Common
Stock.  In August 2008, dividends for the period from December 31,
2007 through the dividend payment date of June 30, 2008 were declared and
satisfied through the issuance of 76,626 shares of our Common
Stock.  Dividends owed but not declared on our Series A Preferred
Stock were $192,136 as of January 3, 2009.  In January 2009, the
dividends due through December 31, 2008 were declared and satisfied through the
issuance of 198,779 shares of our common stock.  During the fiscal
year ended January 3, 2009, dividends were also paid on the voluntary conversion
of 320,000 shares of Series A Preferred Stock into 320,000 shares of Common
Stock, in the form of 1,301 shares of Common Stock.




Fair
Value Measurements





In September 2006, the FASB issued Financial Accounting
Standard No. 157, “Fair Value
Measurements”(“FAS 157”), and we
adopted FAS 157 on December 30, 2007, the first day of our 2008 fiscal
year. FAS 157 defines fair value, establishes a methodology for measuring fair
value, and expands the required disclosure for fair value measurements. On
February 12, 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement
No. 157,” which amended FAS 157 by delaying its effective date by
one year for non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis. Therefore, beginning on December 30, 2007, this
standard applies prospectively to new fair value measurements of financial
instruments and recurring fair value measurements of non-financial assets and
non-financial liabilities. On January 4, 2009, the beginning of our 2009
fiscal year, the standard will also apply to all other fair value
measurements.





F-18


In
February 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” (“FAS 159”). We adopted FAS 159 on
December 30, 2007, the first day of our 2008 fiscal year. This standard
permits entities to choose to measure many financial instruments and certain
other items at fair value. Although FAS 159 became effective for our 2008
fiscal year, we did not elect the fair value measurement option for any of our
financial assets or liabilities.




At
January 3, 2009, the Company did not have any items to be measured at fair
value.





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 stock shares that may be issued on
conversion of debt or preferred stock, to permit resale of common stock shares
previously sold under an exemption from registration or to register common stock
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
stock 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".  This accounting is
consistent with FASB Staff Position FSP EITF 00-19-2, "Accounting for Registration Payment
Arrangements".  Accordingly, we
recognize any damages when it becomes probable that they will be incurred and
when amounts are reasonably estimable.





Reclassifications





Certain
amounts in the inception-to-date financial statements have been reclassified to
conform to the current year presentation.





Recently Issued Accounting
Pronouncements





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. All our
subsidiaries are wholly owned. Accordingly, this statement is not expected to
have any 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 the 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.  This statement
is not expected to have a significant effect on our financial
statements.




In March
2008, the FASB issued Financial Accounting Standard No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133” (“FAS 161”).  FAS 161 requires entities that utilize
derivative instruments to provide qualitative disclosures about their objectives
and strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within
derivatives.  FAS 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the
financial statements, how the provisions of Financial Accounting Standard No.
133, “Accounting for
Derivative Instruments and Hedging Activities”, have been applied, and
the impact that hedges have on an entity’s financial position, financial
performance, and cash flows.  FAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
encouraged.  The Company currently provides an abundance of
information about its use of derivatives in its quarterly and annual filings
with the SEC, including many of the disclosures contained within FAS
161.  Thus, the Company currently does not anticipate the adoption of
FAS161 will have a material impact on the disclosures already
provided.  The Company does not currently utilize derivatives to hedge
any of its financial instruments.





F-19




In May
2008, the FASB issued Financial Accounting Standard No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“FAS 162”). FAS 162 provides a framework for
selecting accounting principles for financial statements that are presented in
conformity with GAAP. The Company does not expect that the provisions of FAS 162
will result in any change in accounting principles for the Company.





In May
2008, the FASB issued Financial Accounting Standard No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” (“FAS
163”).  FAS 163, which is effective for fiscal years beginning after
December 15, 2008, is not expected to have any 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.  Our operations have
historically been funded primarily through equity capital and during the fiscal
year ended January 3, 2009, we secured net proceeds of approximately $10.2
million through sales of equity instruments, principally preferred
stock.  In addition, we obtained commitments for working capital loans
of up to $3.4 million, of which we had received loans of approximately $700,000
by January 3, 2009.  Because of our operating losses, at January 3,
2009, we have a cash balance of approximately $475,000 which amount is not
expected to be adequate to meet our anticipated cash commitments in
2009.  To meet our cash needs, we expect:


·
            To
      draw an additional $2.7 million under the working capital loan
      commitments, and





·
            To
      re-engage investment bankers to assist us in raising between $3 and $5
      million in additional net equity capital to fund our 2009 fiscal year
      operations. This additional equity is needed due to from the additional
      time needed to make our major retail distribution contracts operational
      and reach a critical mass of cards in the
  marketplace.





Although
we reasonably believe that we will be successful in raising the required equity
we need to fund our operations and cash commitments, no assurance can be given
that we will be able to do so.  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 – CREDIT FACILITY





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





F-20


The
maturity date of the Credit Facility is November 25, 2009, one year after the
initial borrowing.  The maturity date may be extended for an
additional six months upon the satisfaction of certain conditions set forth in
the Amended and Restated Loan Agreement.  The Credit Facility provides
for usual and customary events of default, including but not limited to (i) the
occurrence of a Material Adverse Change and (ii) the occurrence of a Change of
Control (as such terms are defined in the Amended and Restated Loan
Agreement).  The Credit Facility contemplates that, with Lenders’
consent, the maximum commitment may be increased to up to $20,000,000, and
additional lenders may be added.  As of March 3, 2009 the Borrowers
had drawn $3,400,000 under the Amended and Restated Loan
Agreement.  $2,900,000 of this amount consisted of Accommodation
Loans.





The
Lenders received warrants dated July 21, 2008 (the “Original Warrants”)
entitling the Lenders to purchase up to an aggregate of 1,007,500 shares of
Common Stock at an exercise price of $2.30 per share, which exercise price is
subject to customary adjustments for Common Stock splits and reverse stock
splits.  The warrants expire after five years and may be exercised by
means of a “cashless exercise.”  In the event that the Company
consolidates with or merges 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 changes its Common Stock into property or other securities (each, a
“Triggering Transaction”), the warrants terminate and thereafter represent only
the right to receive the cash, evidences of indebtedness or other property as
the Lenders would have received had they been the record owner, at the time of
completion of a Triggering Transaction, of that number of shares of Common Stock
receivable upon exercise of the warrants in full, less the aggregate exercise
price payable in connection with the full exercise of the Original
Warrants.  The Warrants are not exercisable by the Lenders to the
extent that, if exercised, they or any of their affiliates would beneficially
own in excess of 9.99% of the then issued and outstanding shares of Common
Stock.  The warrants were valued using the Black-Scholes option
pricing model at an aggregate fair value of approximately $1.4 million, which
amount was recorded as deferred financing costs and is being amortized over the
twelve month period to the initial maturity of the Original Loan Agreement on
November 25, 2009.





As
consideration for providing the Initial Accommodation Loans, the Company agreed
to amend the Original Warrants held by the participation Accommodation Loan
Lenders such that the exercise price was reduced from $2.30 per share to $1.00
per share.  In order to effect such amendment to the exercise price,
the Company issued an Amendment No. 1 to Warrant to each of the participating
Accommodation Loan Lenders (the “Warrant Amendments”).  Pursuant to
the terms and conditions of the Warrant Amendments, other than the amendment to
the Exercise Price, the Original Warrants shall remain unchanged and in full
force and effect.  The Warrant Amendments were valued using the
Black-Scholes option pricing model and the resulting aggregate fair value of
$34,648 was recorded as an increase to deferred financing costs.





As
further consideration for providing the Accommodation Loans, the Company issued
warrants (the “Accommodation Loan Warrants”) to the participating Lenders (the
“Accommodation Loan Lenders”) which entitle the Accommodation Loan Lenders to
purchase that number of shares of Common Stock equal to 50% of the amount of
such Accommodation Lender’s Accommodation Loans, at a per share price of $2.00,
which exercise price is subject to customary adjustments for Common Stock splits
and reverse stock splits. The Accommodation Loan Warrants were valued using the
Black-Scholes option pricing model amounted to an increase in the aggregate fair
value of approximately $40,775 recorded by us to deferred financing
costs.





The
Accommodation Loan Warrants expire after one year; however, in the event the
Company and the Accommodation Loan Lenders extend the maturity of the Credit
Facility from one year to 18 months, the exercise period of the Accommodation
Loan Warrants will automatically extend to the 18 month anniversary of the date
of the Accommodation Loan Warrants.  The Accommodation Loan Warrants
may not be exercised by means of a “cashless exercise.”  In the event
of a Triggering Transaction, the Accommodation Loan Warrants will terminate and
thereafter represent only the right to receive the cash, evidences of
indebtedness or other property as the Accommodation Loan Lenders would have
received had they been the record owner, at the time of completion of a
Triggering Transaction, of that number of shares of Common Stock receivable upon
exercise of the Accommodation Loan Warrants in full, less the aggregate exercise
price payable in connection with the full exercise of the Accommodation Loan
Warrants.  The Accommodation Loan Warrants are not exercisable by the
Accommodation Loan Lenders to the extent that, if exercised, they or any of
their affiliates would beneficially own in excess of 9.99% of the then issued
and outstanding shares of Common Stock.





F-21








Collins
Stewart LLC and Emerging Growth Equities, Ltd. acted as placement agents for the
above-described transactions and shared equally a $310,000 fee.  The
placement agent fees are reflected in deferred financing costs.





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





NOTE
D – 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.





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 years 2007 and 2008 are not disallowed by taxing
authorities because of such change in control provisions, at January 3, 2009 we
have total net operating loss carry forwards of approximately $24.7 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 ending December 31,
2028.  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 January 3, 2009:





Net
      current deferred income tax asset:Accounts
      payable and accrued liabilities
            
            $
            491,900Deferred
      revenues (net of receivables)
            
            
            (17,500
            )Prepaid
      expenses and other assets
            
            
            (307,100
            )Subtotal
            
            
            167,300Less
      valuation allowance
            
            
            (167,300
            )Net
      current deferred income tax asset
            
            $
            -Non-current
      deferred income tax asset:Intangibles
            
            $
            11,600Net
      operating loss carry forwards
            
            
            9,274,200Subtotal
            
            
            9,285,800Less
      valuation allowance
            
            
            (9,285,800
            )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 increased by approximately
$4,538,700 for the fiscal year ended January 3, 2009.





F-22





NOTE
E - PROPERTY AND EQUIPMENT





Property
and equipment consists of the following:





Description
            
            January
      3, 2009
            
            
            December
      29, 2007Furniture,
      fixtures and equipment
            
            $
            932,229
            
            
            $
            819,732Computer
      software
            
            
            200,462
            
            
            
            195,797Leasehold
      improvements
            
            
            196,840
            
            
            
            190,0381,329,531
            
            
            
            1,205,567Less
      accumulated depreciation and amortization
            
            
            (703,785
            )
            
            
            (446,306
            )Property
      and equipment – net
            
            $
            625,746
            
            
            $
            759,261





NOTE
F - 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 January 3, 2009:




Fiscal
      year ending
            
            Amounts2009
            
            $
            219,9002010
            
            
            200,6002011
            
            
            205,0002012
            
            
            156,3002013
            
            
            -Total
            
            $
            781,800





Rent
expense included in loss from continuing operations for the year ended January
3, 2009 and December 29, 2007, was approximately $362,300 and $332,600,
respectively.





Employment
Agreements





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





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





F-23








Service and Purchase
Agreements





We have
entered into renewable contracts with DFS Services LLC, our card network, Palm
Desert National Bank (“PDNB”), and First National Bank & Trust of Pipestone,
Minnesota (“FNB&T”), our card-issuing banks, and Metavante Corporation
(“Metavante”), our processor, that have initial expiration dates from June 2009
through October 2011.   Because the majority of the fees to be
paid are contingent primarily on card volume, it is not possible to calculate
the amount of the future commitment on these contracts. The Metavante and
FNB&T agreements also require a minimum payment of $5,000 and $7,500 per
month, respectively.  During the fiscal years ended January 3, 2009
and December 29, 2007, we made aggregate payments of approximately $594,200 and
$117,800, respectively to Metavante, $2,100 and $6,800, respectively to PDNB and
$111,500 and $0, respectively, to FNB&T under these agreements.





Our
agreements with PDNB and FNB&T require us to maintain certain reserve
balances for our card programs.  As of January 3, 2009, the reserve
balance held at PDNB was $10,000 and two reserve balances held at FNB&T
totaled $225,000.  These balances are included in Other
assets.




Pending or Threatened
Litigation





We may
become involved in certain litigation from time to time in the ordinary course
of business. However at January 3, 2009, to the best of our knowledge, no such
litigation exists or is threatened.





Bond
Collateral





On
February 19, 2008, the Company completed the funding of collateral amounting to
approximately $1.8 million required for the performance bonds issued in
connection with our state licensing efforts. The collateral, in the form of a
one-year letter of credit issued by 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 member of our Board of Directors and a current major
stockholder.  Of the total collateral amount, Mr. Porter arranged for
approximately $1 million, and the remainder was provided by Mr. Terker. In
connection with this accommodation, the Company and Messrs. Porter and Terker
entered into respective Guaranty and Indemnification Agreements. Accordingly, we
were contingently liable for the face amount of the letter of credit of
approximately $1.8 million, which expired February 2009. Mr. Porter was
compensated in cash at 2% of the $1 million in collateral per quarter paid in
arrears. Mr. Terker agreed to be compensated in the form of warrants to purchase
33,912 shares of our common stock at a purchase price of $3.35 per share, which
was earned ratably over the course of the year. The Guarantee and
Indemnification Agreements were cancelled in February 2009.





On
February 1, 2009, the Company completed a partial funding of collateral
amounting to approximately $0.5 million (ultimately 10% of the face amount of
the bonds issued) for performance bonds issued in connection with our state
licensing efforts, replacing the aforementioned funding.  The
collateral, in the form of a letter of credit arranged by Mr. Jeffrey Porter,
was issued by a bank was placed with the insurance company that issued the
various bonds aggregating to a face amount of approximately $7.3
million.  Mr. Porter entered into a Guarantee and Indemnification
Agreement with the Company dated February 1, 2009. Accordingly, we are currently
contingently liable for the face amount of the letter of credit of approximately
$0.5 million. Mr. Porter will be compensated in cash at 2% of the average
outstanding amount of the letter of credit per quarter paid in arrears. The
Guarantee and Indemnification Agreement can be cancelled by the Company upon
receiving a more favorable arrangement from another party





F-24





Accommodation Loan
Warrants





As
consideration for providing the Accommodation Loans, the Company is obligated to
issue Accommodation Loan Warrants to the Accommodation Loan Lenders which
entitle the Accommodation Loan Lenders to purchase that number of shares of
Common Stock equal to 50% of the amount of such Accommodation Lender’s
Accommodation Loans, at a per share price of $2.00, which exercise price is
subject to customary adjustments for Common Stock splits and reverse stock
splits.  As of January 3, 2009, the company had $3,050,000 of
available Accommodation Loans for which 1,525,000 Accommodation Loan Warrants
are committed to the Accommodation Loan Lenders upon borrowing of the available
Accommodation Loans.





NOTE
G - STOCK OPTIONS AND WARRANTS





On March
1, 2007, our stockholders approved the 2007 Omnibus Equity Compensation Plan
(the “2007 Plan”) which combined the 709,850 shares that were issued and
outstanding under the Company’s 2004 Stock Option Plan with the 2,300,000 shares
available for issuance under the 2007 Plan.  On May 8, 2008 at the
Company’s Annual Stockholders’ Meeting, the Company’s stockholders voted to
amend the 2007 Plan by increasing the number of authorized shares available for
issuance by 1,000,000 shares, thus providing a total of 4,009,850 shares for
issuance under the combined plans.  As of January 3, 2009, we had
1,363,404 shares available under the combined plans for future option grants and
2,641,779 total options outstanding, consisting of 2,567,971 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 2018.





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 January 3, 2009 and December 29,
2007:





Year
      ended
            
            
            Year
      endedJanuary
      3, 2009
            
            
            December
      29, 2007Expected
      Term in years
            
            
            5
            
            
            
            5Expected
      stock price volatility
            
            
            73%
      - 165
            %
            
            
            71%
      - 169
            %Risk
      free interest rate
            
            
            1.50%
      - 3.08
            %
            
            
            4.06%
      - 5.03
            %Dividend
      yield
            
            
            0
            %
            
            
            0
            %







The
following table summarizes our stock option activity during the fiscal years
ended January 3, 2009 and December 29, 2007:




Number
      of
              Options
            
            
            Weighted
      average
              exercise
              Price
      per share
              (price
      at date of grant)Outstanding
      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
            
            
            $
            3.59Granted
            
            
            510,750
            
            
            $
            3.33Cancelled
            
            
            (272,667
            )
            
            $
            3.34Outstanding
      at January 3, 2009
            
            
            2,641,779
            
            
            $
            3.57Options
      granted at or above market value during the year January 3,
      2009
            
            
            510,750






F-25




The
following table summarizes information regarding options that are outstanding at
January 3, 2009:





Options
      outstanding
              
              
              Options
      exercisableRange
      of
                exercise
      prices
              
              
              Number
                outstanding
              
              
              Weighted
                average
                remaining
                contractual
                life
      in years
              
              
              Weighted
                average
                exercise
                price
              
              
              Number
                Exercisable
              
              
              Weighted
                average
                exercise
                price
      per
                share$
              0.75-$1.60
              
              
              
              1,146,540
              
              
              
              8.1
              
              
              $
              1.47
              
              
              
              1,046,986
              
              
              $
              1.50$
              2.20-$3.75
              
              
              
              582,130
              
              
              
              6.9
              
              
              $
              3.29
              
              
              
              445,546
              
              
              $
              3.27$
              4.00-$7.00
              
              
              
              682,502
              
              
              
              4.5
              
              
              $
              4.19
              
              
              
              590,502
              
              
              $
              4.22$
              8.00-$32.00
              
              
              
              230,607
              
              
              
              2.2
              
              
              $
              12.83
              
              
              
              230,607
              
              
              $
              12.832,641,779
              
              
              
              6.4
              
              
              $
              3.57
              
              
              
              2,313,641
              
              
              $
              3.66


The
grant-date fair value of options granted during the years ended January 3, 2009
and December 29, 2007 was approximately $1.1 million and $3.8 million,
respectively.  The total fair value of shares vested during the year
ended January 3, 2009 was approximately $1.9 million.  At January 3,
2009, we estimate the aggregate stock-based compensation attributable to
unvested options was approximately $0.6 million, which amount is expected to be
recognized over a period of approximately three years.





Officer Stock
Options





In
connection with their initial employment agreements (see Note F – Commitments
and Contingencies), our Chief Executive Officer, Jerry R. Welch, and our Chief
Financial Officer, Raymond P. Springer, received stock options to purchase
approximately 603,400 and 284,000 shares, respectively, of Common Stock at $1.50
per share, which were valued using the Black-Scholes option pricing model at
aggregate fair values of approximately $845,000 and $400,000,
respectively.  These amounts were recognized as stock-based
compensation expense as the options vested. The grants were equal to 4.25% and
2.00%, respectively, 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 options were divided into 28 equal
installments, with the first six installments vesting on February 28, 2007 and
additional installments vesting on the final day of each month through December
31, 2008.  At January 3, 2009, all options have vested and all
compensation expense related to these options has been recognized.





On July
12, 2007, Messrs. Welch and Springer were awarded 197,855 and 93,108 stock
options, respectively, at $3.40 per share, which were valued using the
Black-Scholes option pricing model at aggregate fair values of approximately
$619,000 and $291,000, respectively.  These amounts were recognized as
stock-based compensation expense as the options vested. These grants were equal
to approximately 4.25% and 2.0% of the shares of our total stock and warrants
issued under the Securities and Purchase Agreements, dated June 29, 2007,
between the Company and certain investors. These options vested in 28 equal
installments, with the first eleven installments vesting on July 31, 2007 and
additional installments vesting on the final day of each month through December
31, 2008.  At January 3, 2009, all options have vested and all
compensation expense related to these options has been recognized.









F-26











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





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





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





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





At
various dates during fiscal 2008, the Company issued a total of 93,000 stock
options to other non-officer employees at exercises prices ranging from $1.30 to
$4.00.  The options vest one third at the one-year anniversary of the
grants and then ratably for the following 24 months. The options were valued
using the Black-Scholes option pricing model at an aggregate fair value of
approximately $192,000, which is being recognized as stock-based compensation
expense over the vesting period of the options.





Non Employee Director
Options





In May
2008, 60,000 options were granted to the non-employee members of our Board of
Directors. The options, which were 100% vested on the date of grant with an
exercise price of $2.20, were valued using the Black-Scholes option pricing
model at an aggregate fair value of approximately $83,000. This amount was
included in employee and director stock-based compensation in the statement of
operations for the year ended January 3, 2009.










F-27





Outstanding
Warrants





The
following table summarizes information on warrants issued and outstanding at
January 3, 2009 that allow the holder to purchase a like amount of 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, 2011Partial
      compensation for our placement agent in connection with the sale of our
      Series B Convertible Preferred Stock and Common Stock on June 29,
      2007
            
            
            120,928
            
            
            $
            3.30
            
            June
      29, 2012Pursuant
      to Securities Purchase Agreements dated June 29, 2007
            
            
            155,100
            
            
            $
            5.00
            
            June
      29, 2012Compensation
      for Mr. Bruce E. Terker in connection with the Guarantee and
      Indemnification Agreements for bond collateral required for our state
      licensing initiative1
            
            
            29,081
            
            
            $
            3.35
            
            3,716
      on April 1, 2013, 8,455 on June 30, 2013, 8,455
              on
      September 30, 2013 and
              8,455
      on December 31, 2013Pursuant
      to the exchanged securities issued pursuant to the Securities Purchase
      Agreements dated June 12, 20082
            
            
            700,000
            
            
            $
            2.30
            
            June
      12, 2013Pursuant
      to Securities Purchase Agreements dated June 29, 2007, as amended for
      participation in the June 12, 2008 Securities Purchase Agreements3
            
            
            1,356,500
            
            
            $
            2.30
            
            June
      29, 2012Pursuant
      to Securities Purchase Agreements dated June 12, 2008
            
            
            2,028,750
            
            
            $
            2.30
            
            June
      12, 2013Warrants
      held by DFS Services LLC dated November 12, 2007
            
            
            200,000
            
            
            $
            3.00
            
            November
      12, 2010Pursuant
      to Loan and Security Warrant Agreements dated July 21, 2008 4
            
            
            780,000
            
            
            $
            2.30
            
            July
      21, 2013Pursuant
      to Amended and Restated Loan and Security Warrant Agreements dated
      November 26, 2008 4&5
            
            
            227,500
            
            
            $
            1.00
            
            July
      21, 2013Accommodation
      Loan Warrant Agreements dated November 26, 2008 5
            
            
            175,000
            
            
            $
            2.00
            
            November
      26, 2009Partial
      compensation for our placement agents in connection with the sale of our
      Series C Convertible Preferred Stock and Common Stock on June 12, 2008
      6
            
            
            109,150
            
            
            $
            2.53
            
            June
      12, 2013Consulting
      services agreement dated April 1, 2006
            
            
            37,500
            
            
            $
            5.00
            
            Various
      dates through 2011Cooperation
      Agreement dated November 22, 2006
            
            
            5,000
            
            
            $
            1.20
            
            November
      22, 2011Total
      warrants and weighted average exercise price per share outstanding at
              January
      3, 2009
            
            
            6,244,509
            
            
            $
            2.32








F-28








1.           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.  Approximately $0.8 million of the collateral for the
letter of credit was provided by Mr. Bruce E. Terker. In connection with this
accommodation, the Company and Mr. Terker entered into a Guaranty and
Indemnification Agreement.  Mr. Terker agreed to be compensated in the
form of warrants to purchase 33,912 shares of the Common Stock at a purchase
price of $3.35 per share, which would be earned ratably over the course of the
year and expensed to interest expense as the warrants were earned.  As
of January 3, 2009, 29,081 of these warrants had been earned, and the
corresponding value was estimated using the Black-Scholes option pricing model
at $59,745, which was recognized as non-cash interest expense.





2.           On
June 12, 2008, pursuant to an exchange provision of the Securities Purchase
Agreements dated March 21, 2008, March 28, 2008, March 31, 2008 and May 16,
2008, warrants that were issued that allowed the holder to purchase 560,000
shares of Common Stock at a price per share of $3.25 and expiring three years
from the date of issuance, were replaced with warrants that allow the holders to
purchase 700,000 shares of Common Stock at $2.30 per share and expiring five
years from the date of issuance.





3.           As
part of the terms of the June 12, 2008 Securities Purchase Agreements, for each
investor who invested an amount equal to at least 50% of such investor’s
investment in the Company’s June 29, 2007 offer and sale of Common Stock, Series
B Convertible Preferred Stock and Warrants, such investor’s existing June 2007
Warrants were amended such that the exercise price per share of such investor’s
June 2007 Warrants was reduced from $5.00 per share to $2.30 per
share.  Except for the above-referenced amendment, the June 2007
Warrants remained unchanged and in full force and effect.





4.           As
part of the Loan and Security Agreement dated June 10, 2008, the Lenders
received warrants dated July 21, 2008, entitling the Lenders to purchase up to
an aggregate of 1,007,500 shares of Common Stock at an exercise price of $2.30
per share, which exercise price is subject to customary adjustments for Common
Stock splits and reverse stock splits.  Pursuant to an amendment,
227,500 warrant shares were repriced (see 5 below) to an exercise price of $1.00
per share. In addition, an additional 175,000 warrants were issued to purchase
an equal number or shares of Common Stock at an exercise price of $2.00 per
share.  The warrants were valued using the Black-Scholes option
pricing model at an aggregate fair value of $1,530,381, which amount was
recorded as deferred financing costs and is being amortized, beginning in fiscal
December 2008, over the twelve month period to the maturity of the Amended and
Restated Loan and Security Agreement on November 25, 2009.  See also
Note J – Subsequent Events.





5.           On
November 26, 2008, the Company amended the June 10, 2008 Loan and Security
Agreement and issued to the Accommodation Loan Lenders warrants entitling them
to purchase us to an aggregate of 175,000 shares of Common Stock at an exercise
price of $2.00 per share with an expiration date one year from
issuance.   The warrants were valued using the Black-Scholes
option pricing model at an aggregate fair value of $40,775.  In
addition, the warrants issued to the Accommodation Loan Lenders under the
original Loan and Security Agreement (see 4 above) were repriced from $2.30 to
$1.00.  The cost of repricing these warrants, using the Black-Scholes
option pricing model, was estimated at $34,648.  Both amounts were
recorded as deferred financing costs and are being amortized, beginning in
December 2008, over the twelve month period to the maturity of the Amended
Restated Loan and Security Agreement on November 25, 2009.





6.           Collins
Stewart LLC and Emerging Growth Equities, Ltd. acted as placement agents for the
June 12, 2008 Securities Purchase and Exchange Agreements transactions and
received, as partial compensation, warrants to purchase 109,150 shares of Common
Stock, exercisable at $2.53 per share and expiring on June 12, 2013, which were
valued using the Black-Scholes option pricing model at an aggregate fair value
of approximately $184,300.





F-29








NOTE
H - SETTLEMENT OF 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. claimed damages in excess of $50,000 and sought 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 deemed just.  On December 16, 2008, the Company
and Bedlington entered into a settlement agreement, in which the Company
admitted no wrongdoing in the matter.  As full and final settlement of
any claims of any kind or character whatsoever by Bedlington against the
Company, the Company issued 50,000 restricted shares of its common stock to
Bedlington on December 23, 2008.  The value of this settlement was
included in Other income (expense) - loss on litigation in our January 3, 2009
statement of operations.





NOTE
I – COMMON STOCK AND CONVERTIBLE PREFERRED STOCK TRANSACTIONS







The
Company has three series of convertible preferred stock, designated Series A,
Series B and Series C.





Dividends





Dividends
on the Series A Preferred Stock accrue and are 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 accumulates, and the dividends are 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
Series B and Series C Preferred Stock are not entitled to dividends





Voting





The
holders of the Series A, Series B and Series C 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
our Bylaws, 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, for the election of directors, voting together with the holders of
common stock as one class. Each holder of shares of Series A, Series B and
Series C Preferred Stock is entitled to vote on an as-converted
basis.





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, are entitled to designate and elect
one member of the Board.





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 is 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.







F-30




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.





At a
special meeting of holders of Series A and Series B Preferred Stock on June 2,
2008, the holders of Series A and Series B Preferred Stocks approved the
creation of a new series of convertible preferred stock, the Series C Preferred
Stock.  The holders of Series A Preferred Stock also approved the
Company entering into an accounts receivable line of credit.  The
holders of Series A and Series B Preferred Stocks also approved amendments to
their respective Certificates of Designations, Rights and Preferences, such that
the liquidation preferences of each of the Series A and Series B Preferred
Stocks will be paid on a pari passu basis with respect to each other and with
respect to the liquidation preference of the Series C Preferred
Stock.





Liquidation
Preference





In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company, or a Liquidation, before any distribution of our assets is made to
or set apart for the holders of the common stock, the holders of each Series of
Preferred Stock are entitled to receive payment 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); $3.00 per shares of
Series B Preferred Stock; and $2.00 per share of Series C Preferred Stock and
(ii) the amount such holder would have received if such holder had converted its
shares of Series A, Series B or Series C Preferred Stock to common stock,
subject to but immediately prior to such Liquidation. If our assets available
for distribution to the holders of each Series of Preferred Stock are not
sufficient to make in full such payment, such assets shall be distributed
pro-rata among the holders of Series A, Series B and Series C Preferred Stocks
based on the aggregate liquidation preferences of the shares of each Series of
Preferred Stock held by each such holder.





Conversion





Shares of
the Series A, Series B and Series C Preferred Stock are convertible at any time
into shares of common stock on a one-for-one basis. 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.









F-31








Issuance of Series A
Preferred Stock





On
December 28, 2006, we completed the exchange of all our then outstanding
Convertible Notes and all accrued but unpaid interest thereon, in the aggregate
amount of $5,327,934, into 5,327,934 shares of our 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 Convertible Notes. Because the market price of the
underlying common stock at that time was $1.25, we recognized a beneficial
conversion feature of $1,000,000, which was recorded as a preferred stock
dividend.





Emerging
Growth Equities, Ltd. acted as placement agent for the December 28, 2006
transaction and received a fee of $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, was 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 direct
compensation from EGE Holdings, Ltd. or Emerging Growth Equities, Ltd. related
to the Company’s sale of the Series A Preferred Stock.





As of
January 3, 2009, 1,827,450 shares of the Series A Preferred Stock have been
converted into a like number of shares of Common Stock and 7,500,484 shares of
the Series A Preferred Stock remain outstanding.





Issuance of Series B
Preferred Stock





On June
29, 2007, the Company entered into securities purchase agreements with several
institutional and accredited investors, pursuant to which the Company sold to
the investors an aggregate of (i) 1,000,000 shares of Series B Preferred Stock
(ii) 2,023,199 shares of Common Stock and (iii) warrants to purchase 1,511,600
shares of Common Stock at an exercise price of $5.00 per share, for an aggregate
purchase price of $9,069,597.





Emerging
Growth Equities, Ltd. acted as placement agent for the June 29, 2007 transaction
and received a fee of $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, was 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 direct
compensation from EGE Holdings, Ltd. or Emerging Growth Equities, Ltd. related
to the Company’s sale of the Series B Preferred Stock, Common Stock and
warrants. Mr. Bruce Terker, a member of our Board, controls two entities that
are investors in EGE Holdings, Ltd.





Issuance of Series C
Preferred Stock




On March
31, 2008 and on May 16, 2008, we entered into Securities Purchase Agreements
(the “Purchase Agreements”), with certain accredited investors pursuant to which
the Company sold to the investors an aggregate of (i) 240,000 shares of Common
Stock at a stated purchase price of $2.50 per share, and (ii) warrants to
purchase 120,000 shares of Common Stock at an exercise price of $3.25 per share,
for an aggregate purchase price of $600,000.  As part of the Purchase
Agreements executed on May 16, 2008, the Company sold to Bruce E. Terker (i)
200,000 shares of Common Stock, at a stated purchase price of $2.50 per share,
and (ii) Warrants to purchase 100,000 shares of Common Stock at an exercise
price of $3.25 per share, for an aggregate purchase price of
$500,000.  Mr. Terker is currently a member of the Company’s Board of
Directors and is also a stockholder of the Company.  On March 21,
2008, Mr. Terker and the Company had also entered into a Purchase Agreement
whereby Mr. Terker purchased 200,000 shares of Common Stock and 100,000 warrants
for an aggregate purchase price of $500,000.





F-32








Pursuant
to the terms of the Purchase Agreements, each Investor had a right to exchange
all of its Common Stock and warrants purchased under the Purchase Agreements for
securities (“Exchange Securities”) issued by the Company in connection with a
subsequent capital raising transaction (“Subsequent Issuance”) upon the same
terms and conditions offered to the purchasers in such Subsequent
Issuance.  The March 21, 2008 Purchase Agreement with Mr. Terker was
amended on March 31, 2008 to grant Mr. Terker the same exchange
right.





In the
event an investor exercised its exchange rights, such Investor was entitled to
exchange its Common Stock and warrants for the number of Exchange Securities
that it would have received in the Subsequent Issuance for the same investment
it had previously made under the Purchase Agreements.  The investors’
exchange rights under the Purchase Agreements automatically terminated if no
Subsequent Issuance occurred within six months following the date of the
Purchase Agreements.





On June
12, 2008, the Company entered into Securities Purchase Agreements (the “Series C
Purchase Agreements”), with several institutional and accredited investors
(collectively, the “Purchase Investors”), pursuant to which the Company sold to
the Purchase Investors an aggregate of (i) 832,500 shares of Common Stock, (ii)
3,225,000 shares of Series C Preferred Stock and (iii) Warrants to purchase
2,028,750 shares of Common Stock at an exercise price of $2.30 per share (the
“Purchase Warrants”), for an aggregate purchase price of
$8,115,000.





Pursuant
to the terms of the Series C Purchase Agreements, each Purchase Investor who
invested $500,000 or less received (i) shares of Common Stock at a purchase
price of $2.00 per share, and (ii) Purchase Warrants to purchase a number of
shares of Common Stock equal to 50% of the shares of Common Stock purchased by
such Purchase Investor; provided, however, that at such time as such Purchase
Investor, together with its affiliates, owned 750,000 shares of Common Stock,
each such Purchase Investor received (A) shares of Series C Preferred Stock at
the purchase price of $2.00 per share, and (B) Purchase Warrants to purchase a
number of shares of Common Stock equal to 50% of the Series C Preferred Stock
purchased by such Purchase Investor.  Each Purchase Investor who
invested over $500,000 received (x) Series C Preferred Stock at the purchase
price of $2.00 per share, and (y) Purchase Warrants to purchase a number of
shares of Common Stock equal to 50% of the Preferred Shares purchased by such
Purchase Investor.





Pursuant
to the terms of the Series C Purchase Agreements, in consideration for
participation in the offer and sale of the Common Stock, Series C Preferred
Stock and the Purchase Warrants, for each Purchase Investor who invested an
amount equal to at least 50% of such Purchase Investor’s investment in the
Company’s June 29, 2007 offer and sale of Common Stock, Series B Preferred Stock
and Warrants (described above under Issuance of Series B Preferred Stock) such
Purchase Investor’s June 2007 Warrants were amended as of the closing date of
the Series C Purchase Agreements such that the exercise price per share of such
Purchase Investor’s June 2007 Warrants was reduced from $5.00 per share to $2.30
per share.  Except for this amendment, the June 2007 Warrants remained
unchanged and in full force and effect.


Also on
June 12, 2008, the Company entered into Securities Exchange Agreements (the
“Exchange Agreements”), with several institutional and accredited investors (the
“Exchange Investors” and, together with the Purchase Investors, the
“Investors”).  Pursuant to the Exchange Agreements, the Company issued
(i) an aggregate of 587,500 shares of Common Stock and 812,500 shares of Series
C Preferred Stock in exchange for the surrender by the Exchange Investors of
1,120,000 shares of Common Stock purchased by the Exchange Investors from the
Company between March 21, 2008 and May 16, 2008, and (ii) Warrants to purchase
up to 700,000 shares of Common Stock at an exercise price of $2.30 per share
(“Exchange Warrants” and, together with the Purchase Warrants, the “Warrants”)
in exchange for the surrender by the Exchange Investors of Warrants to purchase
up to 560,000 shares of Common Stock at an exercise price of $3.25 per share
purchased by the Exchange Investors between March 21, 2008 and May 16,
2008.





F-33








Pursuant
to the terms of the Series C Purchase Agreements and the Exchange Agreements,
the Company is required, upon request from the Investors to file with the
Securities and Exchange Commission (the “SEC”), a registration statement (the
“Registration Statement”) to enable the resale by the Investors of the Common
Stock, and the shares of Common Stock into which the Series C Preferred Stock is
convertible and into which the Warrants are exercisable (collectively, the
“Conversion Shares”).  The Company is required to use its best efforts
to cause the Registration Statement to become effective and to file with the SEC
such amendments and other required filings as may be necessary to keep the
Registration Statement effective until the earliest of the date when (A) all
such Common Stock and Conversion Shares have been sold, (B) all such Common
Stock and Conversion Shares may be sold without volume or manner-of-sale
restrictions pursuant to Rule 144, or (C) the second anniversary of the closing
date of the Series C Purchase Agreements and Exchange Agreements.





The
Warrants entitle the Investors to purchase up to an aggregate of 2,728,750
shares of Common Stock at an exercise price of $2.30 per share, which exercise
price is subject to customary adjustments for Common Stock splits and reverse
stock splits.  The Warrants expire after a five-year term and may be
exercised by means of a “cashless exercise.”  In the event that the
Company consolidates with or merges with or into another person or entity, or
the Company sells, transfers or leases all or substantially all of its assets,
or the Company changes its Common Stock into property or other securities (each,
a “Triggering Transaction”), the Warrants will terminate and will thereafter
represent only the right to receive the cash, evidences of indebtedness or other
property as the Investors would have received had they been the record owner, at
the time of completion of a Triggering Transaction, of that number of shares of
Common Stock receivable upon exercise of the Warrants in full, less the
aggregate exercise price payable in connection with the full exercise of the
Warrants.  The Warrants are not exercisable by the Investors to the
extent that, if exercised, they or any of their affiliates would beneficially
own in excess of 9.99% of the then issued and outstanding shares of Common
Stock.  With respect to the securities purchased by Midsummer
Investment, Ltd. (“Midsummer”), the Company has agreed that the Series C
Preferred Stock and Purchase Warrants held by Midsummer will not be converted or
exercised (as the case may be) such that Midsummer or any of its affiliates
would own in excess of 4.9% of the then issued and outstanding shares of Common
Stock.





In the
aggregate, pursuant to the Purchase Agreements executed on March 28, 2008, the
Purchase Agreements executed on March 31, 2008, the Series C Purchase Agreements
executed on June 12, 2008 and the Purchase Agreements, dated as of March 21,
2008 and May 16, 2008, between the Company and Mr. Terker, as amended, the
aggregate purchase price paid for the Series C Preferred Stock, Common Stock and
Warrants was $10,915,000.





Collins
Stewart LLC and Emerging Growth Equities, Ltd. (“EGE”) acted as placement agents
for the above-described transactions and shared equally share a $535,600 fee and
a warrant to purchase 109,150 shares of Common Stock, exercisable at $2.53 per
share and expiring on June 12, 2013.  Robert A. Berlacher, a former
member of the Company’s Board of Directors and a current stockholder of the
Company, was a co-founder and director of EGE Holdings, Ltd. (“EGE Holdings”), a
holding company with a 100% ownership interest in EGE.  Mr. Berlacher
received no direct compensation from EGE Holdings or EGE related to the
Company’s sale or exchange of Common Stock, Series C Preferred Stock and the
Warrants.  Mr. Bruce Terker, a member of our Board, controls two
entities that are investors in EGE Holdings, Ltd.




NOTE
J –SUBSEQUENT EVENTS




On
February 3, 2009 as consideration for providing additional Accommodation Loans,
the Company amended certain existing warrant agreements such that the exercise
prices were reduced to $1.00 from various prices ranging from $2.00 to
$2.30.  The cost of this modification was estimated using the
Black-Scholes option pricing model at approximately $621,000, which amount was
recorded as deferred financing costs and will be amortized over the remaining
period to the maturity on November 25, 2009 of the Amended and Restated Loan and
Security Agreement.




NOTE
K –OTHER RELATED PARTY TRANSACTIONS





At
January 3, 2009, accounts payable and accrued personnel costs include
approximately $44,900 owed to various officers for accrued vacation and $41,250
owed to our directors.








End
of Financial Statements.












F-34