U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


____________________




FORM
10-K


_____________________





(Mark
      One)x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              FOR
      THE FISCAL YEAR ENDED JUNE 30, 2008ORr
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              FOR
      THE TRANSITION PERIOD FROM________________TO
      ____________________




COMMISSION
FILE NUMBER: 0-28749





FREESTAR
TECHNOLOGY CORPORATION


(Name of
small business issuer in its charter)





Nevada
            88-0446457(State
      or Other Jurisdiction of Incorporation
      or Organization)
            (I.R.S.
      Employer Identification
      No.)








31 Mespil Road, Ballsbridge,Dublin2Ireland


(Address
of Principal Executive Offices)





Issuer's
telephone number: 353
1 6185 060





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




Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $0.001 Par Value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


r Yes         
xNo





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. r




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


xYes       rNo





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. r




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
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
      accelerated filer  r
            Accelerated
      filer  rNon-accelerated
      filer    r   (Do
      not check if a smaller reporting company)
            Smaller
      reporting company  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  r Yes       xNo





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
September 26, 2008  was $9,343,027.





428,671,694
shares of our common stock were issued and outstanding as of September 26,
2008.




Documents
incorporated by reference: None.







Table of Contents







TABLEOF
CONTENTS




PAGEPART
      I.ITEM
      1.
            BUSINESS
            3ITEM
      1A.
            RISK
    FACTORS
            12ITEM
      2.
            PROPERTIES
            16ITEM
      3.
            LEGAL
      PROCEEDINGS
            16ITEM
      4.
            SUBMISSION OF MATTERS TO A VOTE OF
      SECURITY HOLDERS
            16PART
      II.ITEM
      5.
            MARKET FOR COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES
            17ITEM
      7.
            MANAGEMENT'S DISCUSSION AND ANALYSIS
      OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
            18ITEM
      8.
            CONSOLIDATED FINANCIAL STATEMENTS AND
      SUPPLEMENTARY DATA
            25ITEM
      9.
            CHANGES IN AND DISAGREEMENTS WITH
      ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE
            25ITEM
      9A.
            CONTROLS AND
      PROCEDURES
            26ITEM
      9B
            OTHER
      INFORMATION
            26PART
      III.ITEM
      10.
            DIRECTORS, EXECUTIVE OFFICERS AND
      CORPORATE GOVERNANCE
            27ITEM
      11.
            EXECUTIVE
      COMPENSATION
            28ITEM
      12.
            SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS
            32ITEM
      13.
            CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS AND DIRECTORINDEPENDENCE
            34ITEM
      14.
            PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
            35PART
      IV.ITEM
      15.
            EXHIBITS
            36SIGNATURES
            37







Table of Contents




PART
I.





ITEM 1. BUSINESS





Recent Events: Proposed Name
Change and Proposed Reverse Stock Split





On August
15, 2008, Freestar Technology Corporation (the “Company”, “we” or “our”) filed a
definitive Proxy Statement seeking shareholder approval of proposed amendments
to the our Articles of Incorporation to change our name to “Rahaxi, Inc.” and to
implement a 3-1 reverse stock split. Results are still
pending.





Overview




We are a
provider of electronic payment processing services, including credit and debit
card transaction processing, point-of-sale related software applications and
other value-added services. We currently process on average approximately
1,600,000  transactions per month and serve in excess of
2,500, merchant locations. We provide transaction processing support for
all major credit cards, including Visa, MasterCard, American Express, Diners
Club and JCB, and all bank-issued Finnish debit cards. We enable merchants and
financial institutions to accept, and their consumers to utilize, electronic
payments using credit and debit cards to purchase goods and services. Our role
is to serve as an intermediary in the exchange of information and funds that
must occur between parties so that a payment transaction can be completed. We
provide merchants with various transaction processing services, including
authorizing card transactions at the merchant’s retail location (also known as
the point-of-sale), and capturing and transmitting transaction data. Through
agreements with Hypercom Corporation, the world's second largest
manufacturer of payment terminals, Spectra Technologies, a leading Chinese
electronic payment solution provider, and Thyron Systems, we also offer our
customers point-of-sale terminals, which are integrated with our software
products to provide merchants with a complete solution for credit and debit card
transaction processing.





Our role
in a transaction is to serve as a link between the merchant and the merchant's
bank, known as the acquiring bank, and the bank that issued the consumer’s
credit or debit card, known as the issuing bank. The electronic authorization
process for a credit card transaction begins when the merchant "swipes" or
inserts the card into its point-of-sale terminal and enters the amount of the
purchase. After capturing the data, the point-of-sale terminal transmits the
authorization request through our switching center, where the data is
routed to the issuing bank (typically via the Interchange Network, a
telecommunication network operated by international card corporations) for
authorization. The issuing bank confirms that the credit card is authentic and
whether a transaction will cause the cardholder to exceed defined limits. The
approval or disapproval of the transaction is transmitted back to our switching
center, where it is routed to the appropriate merchant’s acquiring
bank.





We are
incorporated under the laws of the State of Nevada





PLC Acquisition





In
November 2006, we acquired 50% of the outstanding capital stock of Project Life
Cycle Partners, Ltd. (“PLC”), a consulting firm located in Dublin,
Ireland.  PLC Partners is a niche project consulting firm specializing in
the management and implementation of information systems projects.  PLC
Partners has international experience within the financial services and
telecommunications sectors.





Business
Description





Our
switching and transaction processing platform is operated by our
wholly-owned subsidiary, Rahaxi, which is located in Finland. We are one of the
leading players in the Finnish transaction processing market,
serving approximately 2100 merchants each day and processing on
average approximately 1,600,000 transactions per month.




Our
primary revenue streams include (i) transaction fees we receive from processing
credit and debit card transactions through point-of-sale terminals at a
merchant’s retail location, (ii) revenue from sales of point-of-sale terminals,
and (iii) consulting fees, which include revenue from our subsidiary, Project
Life Cycle Partners Limited (“PLC”), as well as customization of software
applications for merchants and other customers. Other anticipated revenue
streams include additional processing fees from processing dynamic currency
conversion through our agreement with Global Refund Group and
Monex.  In fiscal year 2008, the period from July 1, 2008 through June
30, 2008, transaction fees from point-of-sale terminal transactions were
primarily from merchants and customers based in Finland. We also derived nominal
revenue from transaction fees from clients in Estonia, Spain and Iceland. PLC
generated revenues from consulting and development fees from our customers in
Finland, Sweden, the United Kingdom, Dominican Republic and
Ireland.





3
 Table of Contents




Products and
Services





Our main
product and service offering includes:





(1)                 Authorization





Transaction
fees from processing point-of-sale terminal transactions make up a significant
portion of our total revenues. Our card processing payment engine captures,
configures and routes credit, debit, charge, and private label card transactions
to the applicable banks and card issuers for authorization and
settlement.





We
provide transaction processing support for Visa, MasterCard, American Express,
Diners Club, JCB and all bank-issued Finnish debit cards. Our network currently
supports approximately 5,000 point-of-sale appliances, including integrated cash
registers and stand-alone/desk terminals. Our authorization and transaction fees
are primarily priced based on a specified amount per transaction, although we
offer flat fee pricing packages as well.





Our
processing payment engine is also designed to acquire transactions from
merchants and route to cross border financial institutions. For example, our
system is directly linked to a financial institution in Estonia and acquires
transactions from Estonian-based terminals. We have also established
relationships with financial institutions and multi-national merchants in Sweden
to expand on our proven cross-border capabilities.





(2)                 EMV
Compliant Point-of-Sale Solutions





EMVCo,
LLC, a consortium formed by Europay, MasterCard and Visa, has designated
standards to increase transaction processing security. The EMV standard utilizes
integrated circuit card technology, also known as chip cards or chip and PIN
based technology, to replace the magnetic stripe on credit cards. The purpose
and goal of the EMV standard is to allow secure interoperation between EMV
compliant cards and EMV compliant credit card payment point-of-sale terminals.
The major benefit to moving to EMV based credit card payment systems is improved
security and associated fraud reduction.





EMV
financial transactions are more secure against fraud than traditional credit
card payments, which use the magnetic stripe data encoded on the back of a
credit card. This is due to the use of encryption algorithms to provide
authentication of the card, the processing terminal and the transaction
processing center.




Although
not the only possible method, the majority of implementations of EMV cards and
terminals confirm the identity of the cardholder by requiring the entry of a PIN
(Personal Identification Number) rather than signing a paper receipt. The
increased protection from fraud has allowed banks and credit card issuers to
push through a “liability shift” such that merchants in the Nordic region and
other countries in Europe are now liable (as of January 2005) for any fraud that
results from non-EMV transactions on their systems. In light of this incentive,
we believe that the majority of merchants will begin to migrate their systems in
Europe to EMV-compliant systems.




We have
developed an EMV compliant processing platform to provide merchants with this
enhanced fraud protection for European credit card transactions.  We
are currently EMV-certified in Finland and are seeking certification in other
countries.We intend to offer end-to-end merchant processing solutions. Through
our strategic relationships with Thyron, Spectra Technologies and Hypercom, we
offer high performance, integrated/hybrid point-of-sale terminals that are able
to process both magnetic stripe cards and chip cards operating under the EMV
standard. These terminals are ideal for retailers that desire speed, security,
compliance with the most recent specifications, and acceptance of all leading
payment cards in one easy to use device.





Our
strategic relationships allow us to assist merchants in various categories and
sizes with advanced and proven point-of-sale terminals from globally recognized
manufacturers, integrated with our robust transaction processing and switching.
We are not a “one-size-fits-all” organization, but instead aim to provide
suitable solutions for establishments across verticals.





(3)                 "Partners
in Business" Philosophy




We strive
to form relationships with important market participants with the aim of
providing our customers with the best products and services in the market. This
“Partners in Business Philosophy” includes relationships with both manufacturers
of payment devices and financial institutions, as well as our
customers.





For
example, we entered into an agreement with Global Refund Holdings pursuant to
which we developed a software system that allows multiple applications at the
point-of-sale terminal, such as Value Added Tax (VAT) refund services and
dynamic currency conversion services, in addition to payment services. The
software and terminal will be sold and marketed by Global Refund Group, and
deployed and maintained by us through our payment hardware
suppliers.





We have
agreements with Hypercom, Thyron Systems and Spectra Technologies to
deploy fully EMV compliant terminals in the Finnish market. These point-of-sale
terminal offerings, core competencies and transaction processing expertise allow
us to support all major credit-charge-debit cards, as well as private label
cards. We offer our solutions and services to small, medium, and large retailers
across retailing segments. The Company began deriving revenue from the sale of
point-of-sale terminals in fiscal 2007, and we expect an increasing percentage
of our revenues to be derived from point-of-sale terminal sales in fiscal
2009.




4
 Table of Contents




(4)                 Dynamic
Currency Conversion





We
entered into a contract with First Currency Choice, or FCC, and Global Refund
Holdings, which have a client base of over 200,000 merchants. In an effort to
enhance FCC’s and Global Refund’s offering to the existing merchant base and to
their partner acquiring banks, FCC and Global Refund are bringing a product to
market that allows the cardholder to conduct the transaction in the currency of
origin. In order to provide real time, dynamic currency conversion quotes, the
point-of-sale terminal must send a currency transaction request to the client's
host. FCC and Global Refund have engaged us to be the processor for all
transactions conducted in currency of origin. For example, if a point-of-sale
device sitting at a merchant location in Spain is conducting a transaction for a
cardholder with a card issued in the U.S., that cardholder may request the
transaction to be conducted in U.S. currency. At that time the terminal will
switch to our network and servers, and we will provide the currency conversion
data that we retrieve from the client's host.




Once the
rates are presented to the customer through the point-of-sale terminal and
accepted, the authorization request is then routed to us to be switched to the
appropriate issuing and acquiring banks. We will provide transaction gateway
services and settlement with the participating banking institutions. This
relationship with FCC and Global Refund has the potential to significantly
expand our terminal base and increase transaction volumes when fully
implemented. FCC and Global Refund have begun the initial product roll-out with
dynamic currency conversion in Spain, and has recently expanded into Iceland and
Denmark, with plans to expand to additional countries in 2008 and 2009.. We
derived fairly limited processing revenue from our relationship with FCC and
Global Refund in fiscal 2007 and 2008, and expect to continue to receive revenue
in fiscal 2009 from this strategic relationship.





(5)                 Software
Development / PLC / Consulting Fees





We also
offer consulting and development services to financial institutions and
merchants.  The development of the software system for FCC and Global
Refund described earlier is one example of a consulting assignment carried out
by us that involved the development sophisticated, custom software
applications.





Through
our acquisition of fifty percent of the capital stock of Project Life Cycle
Partners Limited (PLC) in fiscal 2007, we have increased our consulting and
development revenues.  PLC is a project consultant firm that manages
and implements information systems projects for banking and financial services
institutions, with most of its revenues derived from customers in
Ireland.





PLC helps
their clients to fast-track critical projects, partnering closely with them to
ensure that all stakeholders share a vision for the project and are working
towards common goals. By taking a holistic view of each project and by
understanding the perspective of all affected by it PLC aim to maximize the
human as well as the economic benefits for their clients. PLC consider the full
life cycle of every project they manage, taking into account the impact the
project will have on the client organization, its customers and its stakeholders
both during the project and after it is completed.





By
creating positive benefits in terms of employee morale, customer loyalty,
team-development and ultimately profitability, the PLC approach strives to adds
value to every project. Key to its success is the emphasis PLC places on
communications, and keeping key players informed, on track and enthused. PLC are
experienced team-builders, accomplished negotiators and skilled in coaching and
mentoring.





PLC
manages projects of any various size and complexity, from a single project to a
portfolio of projects. PLC undertakes project work both in Ireland and
internationally, and is comfortable working with organizations of all
sizes.





(6)                 Private
Label Cards





We
believe that the market for private label programs has significantly different
needs than bankcard programs in terms of marketing, services and processing
requirements. Private label, or closed loop, programs require flexibility and
unique processing capabilities. We are capable of supporting the requirements of
private label programs with several authorization and verification methods,
flexible parameterization, real-time processing, transaction logging, and
database updates. Our processing engine easily handles advanced remote data
collection, data dissemination on demand, data scheduling, transaction
monitoring, and new interface formats.





As
example of our success with private label programs is the IKEA Hej Card. In
August 2004, we were chosen by IKANO Rahoitus Oy., a member of The IKANO Group,
as the transaction management provider for the IKEA Hej Card. After a rigorous
proposal process and consideration of other electronic payments providers, we
exhibited fast time to market, highly configurable processing logic, low risk,
and competitive pricing. By leveraging our existing relationship with IKEA for
acquisition and routing, we met or exceeded IKANO's requirements for the
processing of the IKEA private label Hej Card. The IKANO Group is a diversified
Scandinavian financial services organization. IKANO Rahoitus is a strategic
business unit of the Finance Division, focusing on processing large volumes of
financial and associated products.







5
 Table of Contents




Market
Overview





Market
Participants





The
market for card payment transactions comprises several market participants. In a
typical transaction, a consumer uses a card to pay for goods or services from a
merchant. In order for this transaction to work, the merchant needs to be sure
that the consumer can pay for his products or services.





Once the
consumer has presented his card to the merchant at the point of sale, or
point-of-sale, the merchant's bank, also known as the acquiring bank, must
make contact with the consumer’s bank, also known as the issuing bank, in order
to verify the authenticity of the card and to confirm that the consumer can
pay for the merchant’s product or service. The contact between the acquiring
bank and the issuing bank, which includes authorization and transaction data, is
facilitated by the Interchange Network. The Interchange Network is a
worldwide computer and telecommunication network operated by international card
corporations, such as Visa, MasterCard and Amex. Once the acquiring bank has
received authorization from the issuing bank, the merchant is authorized at the
point-of-sale to proceed with the purchase.





Our role
in this payment process is to serve as the link between the merchant and its
acquiring bank and the issuing bank (typically via the Interchange Network). Our
customer is usually the merchant, to whom we provide a total payment
processing solution so that the merchant can accept credit cards as a
method of payment. Our services include providing the merchant with necessary
point-of-sale terminals and software and switching and processing of
point-of-sale terminal transactions.





The
routing, control and settlement of credit card payment transactions is a complex
activity due to the large number of locations and variety of sources from which
transactions can be generated, the large number of issuers in the market, high
transaction volumes, geographically dispersed networks, differing types of
authorization and varied reporting requirements. These activities are typically
performed online and must be conducted 24 hours a day, seven days a
week.




Market
Growth





Card
payments are expected to continue to increase at the expense of cash payments.
Major international card companies such as Visa, MasterCard and American Express
have shown strong growth over the last several years, indicating that card
payments are winning terrain over cash payments.





For
example, during the period of 2001-2004, the number of American Express and Visa
cards in force has, on average, grown by 15% and 11% annually, respectively. The
card sales volume for American Express and Visa cards has on average grown by 9%
and 6% annually, respectively, during the same period.





The
increase in card payments is due to, among other things, merchants' increasing
focus on online retailing, a continued improved e-payment infrastructure, both
in terms of ease of use and security, as well as the increasing Internet
penetration.





Europe





Credit card
usage in Europe has grown significantly. For example, gross dollar volume in
2007, as reported by MasterCard’s customers, increased by 16.2% over 2006. 
This can be compared to 5.8% in the USA. Due to card fraud, European nations and
card associations have focused on developing and implementing next-generation
security measures.





Emerging
Markets





Certain
regions, such as Eastern Europe, Latin America, and Asia, and certain countries
in particular, including Russia, India and China, are experiencing rapid growth
in the usage of card-based payments. In China, Visa and MasterCard purchase
volume increased 34% from 2002 to 2003, from about $6.8 billion to about $9.1
billion.





Despite
this strong growth, the emerging markets have a long way to go until they reach
the same level in terms of card usage as in the Western world. For example,
cards are used in only 3 percent of all retail sales in China, compared with a
global norm of about 30 percent. The increasing adoption of electronic payments
in these regions is driven primarily by strong economic growth, improving
infrastructure development, strong support from governments seeking to increase
VAT and sales tax collection, and the expanding presence of wireless
networks.





Market
Drivers





Payment
card operations are an ever-changing industry. New, emerging and converging
technologies as well as marketplace demands are changing the landscape of this
global industry. As a result, every participant in the chain of payments
processing is adjusting to both opportunities and challenges. Some factors
impacting the industry include:





Evolving
Standards and EMV





Evolving
standards have implications to all participants in the payment industry. The
introduction of the smart card technology for all credit and debit products is
the first major change and challenge in payment card operating structure since
the magnetic stripe came to market over 30 years ago. The international card
companies, through their jointly owned body EMVCo, have promoted and encouraged
the industry, members banks, retailers and processors to convert to the
integrated chip-based technology.





6
 Table of Contents




The key
driver behind the conversion to chip cards is the significant reduction of
fraud. Since magnetic stripe cards are relatively easy to replicate, migrating
to complex chip cards will make counterfeiting much harder. In addition, card
issuers, retailers and merchant acquirers are expected to benefit from improved
card/cardholder authentication and validation at the point of sale, better data
storage and opportunities for multiple applications on one card.





EMVCo was
conceived by Europay, MasterCard and Visa - hence the acronym EMV - to introduce
integrated circuit card technology, also called chip card or smart card
technology, for all credit and debit products. This chip card standards
organization has prescribed specifications for certification of all new and
existing electronic payment systems. EMV is expected to be the de facto standard
in the area of credit/debit card systems managed by EMVCo. EMVCo's objective is
to manage, enhance and maintain EMV chip card specifications. The EMV standard
also satisfies card issuer's business requirements for accommodating single to
multiple applications on one payment card regardless of system operator. The EMV
standard ensures global interoperability across cards, platforms and devices,
establishes the magnetic stripe to chip migration path and an open platform for
payment cards.





EMV is
also gaining momentum in Asia and America, and promises complete global
interoperability of bankcards for consumers. We believe that all payment
processors will have to be able to accept payments mediated by chip cards in
order to remain competitive, and meeting EMV compliance has major implications
for all aspects of the payment handling process.





This
standard is expected to drive additional growth in sales of next-generation
electronic payment systems.





EMV
Changed Liability Rules





In the
Nordic region and other European countries, from January 1, 2005, liability
rules have changed to provide greater protection against fraud to merchants who
have deployed EMV compliant point-of-sale terminals. In practical terms,
liability shift refers to a transaction authorized at the point of sale by a
merchant fulfilling its obligations by honoring a chip payment card with an
EMV-enabled and certified device. If the merchant uses an EMV compatible and
certified point-of-sale terminal for end-to-end processing, the transaction
cannot be charged-back. If the EMV authorized transaction is later determined to
be fraudulent or the card was lost or stolen at the time of transaction
authorization, the merchant faces no liability for the loss and keeps the funds
for the transaction. However, if a merchant's payment processing device is not
EMV compatible, then the merchant must absorb the transaction loss due to fraud
plus any ancillary charges, such as chargeback penalty fees assessed by its
acquiring bank.





EMV –
Mandatory Implementation





In
addition to the liability shift described above, EMV compliant terminals have
now  become mandatory for merchants most European
countries.  We believe that this presents the Company with a major
opportunity to expand our market share in Finland if we can successfully fund
and implement our business plans.  One major barrier to gaining new
accounts and expanding market share is convincing merchants to incur the time
and expense of changing terminals and software.  When the EMV
standards will become mandatory, merchants who do not yet have EMV-compliant
terminals will be required to upgrade their systems.  This creates a
unique opportunity for us to target a significant number of merchants for whom
upgrading their payment processing services and equipment will be mandatory,
lowering one of the most significant barriers for acquiring new
accounts.  Management believes we currently account for approximately
5% of the transaction processing market in Finland, and will have an opportunity
to significantly increase that market share after the EMV standards become
mandatory.





SEPA
/ Regulatory Changes





The
Single Euro Payments Area (SEPA) initiative for the European financial
infrastructure is designed to improve the efficiency of European cross border
payments and implement a uniform set of standards across fragmented national
markets for electronic euro payments (credit, ATM and card payments). The SEPA
project includes the development of common financial instruments, standards,
procedures, and infrastructure to enable economies of scale.





SEPA
consists of:





- a
single set of euro payment instruments : credit transfers, direct debits and
card payments;





-
efficient processing infrastructures for euro payments;





- common
technical standards and common business practices.





SEPA has
three phases: the design phase, which is substantially completed, and the
implementation phase and migration phase.  SEPA’s goal is to have a
critical mass of migrations to the SEPA standard by the end of
2010.





Though
cross-border standardization, SEPA is designed to result in increased
competition across each country in the European Union, with a higher number of
competitors and fewer niches or special fields or incompatibilities. SEPA’s
intended benefits include:





-
reduction of costs of electronic money and of payment transactions through
competition at the side of payment providers and banks;


-
reduction of cash and increase of electronic payments through reduction of
costs;


-
increasing surveillance of (electronic) money flow particularly regarding money
laundering and terrorism funding.





7
 Table of Contents




We
believe that SEPA will present the Company with an opportunity to expand our
service offering into other countries in Europe in a cost efficient
manner.  Presently, each country has local rules, regulations,
standards and/or required certifications for electronic payment processing.
Therefore, there are significant costs to develop compliant applications for
individual countries, creating substantial barriers to entry.





If SEPA
is broadly adopted, we will be able to implement a single set of protocols and
standards across multiple countries in Europe. This would allow us to expand are
service offerings into additional countries in a more cost effective manner by
avoiding the substantial cost and time required to customize applications for
every local set of rules and regulations.





Although
SEPA standards may also increase the number of competitors we face in Finland,
as well as any countries we may expand into, management believes that Finland
already has some of the lowest payment processing fees in
Europe.  Thus, we believe that we should be able to offer
cost-effective solutions in additional European countries while defending our
current market share.





Other
regulatory changes on national, regional and global levels could affect
participants in the payment industry as well. Governmental concern regarding
funding of international terrorism, international fraud as well competition and
world trade issues all contribute to new laws and regulations affecting the
payment industry.





PCI-DSS
Compliance





In June
2005, American Express, Discover Financial Services, JCB, MasterCard Worldwide
and Visa International founded the PCI Security Council. These requirements are
based on an internationally recognized standard for information security
practices.  The main tasks of the PCI council are:




-
            Creating,
      owning and managing PCI for credit card
data


-
            Classifying
      a common audit requirement to certify
compliance


-
            Overseeing
      a certification process for security assessors and network scanning
      vendors


-
            Instituting
      minimum qualification requirements


-
            Retaining
      and publishing a list of certified assessors and
  vendors




Under the
Payment Card Industry Data Security (PCI DSS) standards, a business or
organization should be able to assure their customers that its credit card
data/account information and transaction information is safe from hackers or any
malicious system intrusion.





Rahaxi’s
payment card processing systems and procedures are PCI-DSS compliant, which we
believe provides us with a competitive advantage over other processing companies
that are not PCI-DSS compliant.





New
Card Features and Functionality





Industry
participants are increasingly developing value-added payment applications and
features, i.e. pre-paid cards, gift card and loyalty card programs as well as
multi-currency conversion applications such as tax free shopping applications.
These applications and features expand the range of services and functionality
offered by electronic payments systems. Payment processors and electronic
payment systems require testing and recertification when new value-added payment
applications and features are added. Staying ahead of competition requires close
monitoring and swift adoption to trends and changes in the card application and
features area.




Risk
Management Controls





Risk
management controls drive many participants in the international payment
industry. Banks and other financial institutions constantly review and implement
changes of their systems, which affect all other participants in the payment
chain.





Competition





The
market for electronic payment systems and point-of-sale systems is intensely
competitive and we expect competition to continue to increase. Our competitors
for point-of-sale systems include VeriFone and Ingenico amongst others, and
companies such as Global Payments, First Data and Euroconnex for our electronic
payment software. In Finland, we face competition from companies such as Point,
which is the largest terminal vendor in the Finnish market, as well as companies
such as Screenway and Altdata, which are point-of-sale software vendors. In
addition, the companies with whom we have strategic relationships could develop
products or services that compete with our products or services.





In
addition some competitors in our market have longer operating histories,
significantly greater financial, technical, marketing and other resources, and
greater brand recognition than we do. We also expect to face additional
competition as other established and emerging companies enter the market for
electronic payment solutions. To be competitive, we believe that we must, among
other things, invest significant resources in developing new products, improve
our current products and maintain customer satisfaction. Such investment will
increase our expenses and affect our profitability. In addition, if we fail to
make this investment, we may not be able to compete successfully with our
competitors, which could have a material adverse effect on our revenue and
future profitability.





8
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Strategy





Payment
card operations are an ever-changing industry. New, emerging and converging
technologies as well as marketplace demands are changing the landscape of this
global industry. As a result, every participant in the industry is adjusting to
both opportunities and challenges. Some factors impacting the industry include
evolving standards, such as the EMV standard; new card features and
functionality, such as the dynamic currency conversion application; regulatory
changes, such as SEPA; as well as consolidation and risk management controls.
All these factors are drivers for change industry-wide.





Our
objective is to provide solutions and services that enable secure and real-time
movement of financial transactions incorporating hardware and software to enable
credit, debit and ATM cards with PIN transactions. The key elements of our
strategy are to:





(1)         Increase
Market Share in Finland and Expand Into Other Scandinavian and European
Countries








We
believe we are well placed to capitalize on the various standards and regulatory
changes taking place in the payment industry. We continue to focus heavily on
our current base market in the Finnish region, as well as looking for
opportunities in other European markets.  As described above, with the
implementation of EMV standards, we believe we will have a significant
opportunity to increase our market share in Finland, if we successfully execute
of business plans.





In
addition, we believe that the SEPA standards will also lower barriers to entry
in other countries.  As SEPA standards are implemented, we will
carefully review other countries in the European market, such as Sweden, where
current processing rules and standards have limited competition and increased
processing fees paid by banks and merchants.





(2)         Dominican
Republic





We
continue to roll out our product offering in the Dominican
Republic.  We currently serve have deployed over 1,000 terminals
to   merchants in the Dominican Republic and have implemented POS
terminal sales.  We believe the terminal landscape to be in excess of
40,000 units and are aggressively targeting this market.





(3)         Offer
Additional Value-Added Services to Current Customers





Our
customer base includes established blue chip customers, predominantly in
Finland. In order to maintain and increase our customer base as well as to
increase the margin per customer, it is imperative for us to offer additional
value-added services to our current customers. By introducing new value added
services to merchants, their perception of the point of sale terminal as a cost
center is changing to a profit center. Additional value added services include
multi-currency accounts, dynamic currency conversion, tax-free shopping
applications and loyalty cards.





(4)         Capitalize
on High Growth Opportunities in Emerging Markets / CUP





We intend
to capitalize on high growth opportunities in emerging markets. The credit and
debit card market in China, for example, has expanded dramatically in recent
years as the country races to adopt and integrate global standards and
technologies.  Our strategy to exploit the growth in credit card usage
growth among Chinese cardholders has been to target the Chinese tourist market
in Europe.





In August
2006, we entered into an agreement to become a Third Party Services Provider for
China Unionpay Co., LTD., Shanghai, P.C., which we refer to as China Unionpay.
Under this agreement, we have an opportunity to provide transaction processing
services to China Unionpay credit card holders traveling in
Europe.  Through our agreement with the French bank Natixis Paiements,
we processed our first live transaction for CUP in June, 2008 in Paris,
France.  We are actively pursuing additional banking relationships to
allow us to expand our market for CUP transactions in Europe.




(5)         Secure
Relationships with Additional European Merchant Banks





In order
for us to increase our transaction processing volume outside of Finland, our
ongoing goal is to secure relationships with an additional two to three European
merchant banks, also known as acquiring banks. These banks, which are certified
to accept credit card transactions on behalf of merchants, conduct a very
substantial volume of traffic and have shown what we believe is an increasing
trend to outsource their payment processing, creating a market opportunity for
us.  We successfully implemented a relationship with the French bank
Natixis Paiements with regard to our CUP offering, and continue to pursue
additional merchant bank relationships.






9
 Table of Contents




Sales





We sell
both directly to merchants as well as indirectly through resellers. Our internal
sales force is targeting three segments:




·    Large
merchants such as retail chains




·    Point-of-sale
providers, meaning any companies providing transaction processing related
hardware or services, but requiring switching, authorization or other processing
services to complete their offerings.
  ·    Payment
terminal vendors





Large
Merchants





Larger
merchants select their switching and processing services from companies
providing the best services. Their existing systems are either run by their own
IT departments or by a strategic partner on an outsourced basis. We are
positioned to leverage on both the outsourcing trend among large merchants as
well as the need for EMV migration. In order to be successful in this segment,
it is imperative for us to provide ours customers with a robust payment service
and demonstrate cross-border capabilities. We are currently capable of offering
payment services to large merchants in Finland, the Baltics, Sweden and
Denmark, Poland and Germany.





Point-of-Sale
Providers and Vendors





While big
merchants carefully select their providers of payment services, small merchants
tend to choose the payment provider that is recommended by the point-of-sale
provider(s) they use. As a consequence, we are focusing to develop business
relations with key point-of-sale providers and vendors that have their own
customer base. This is done through a reseller program, which offers monetary
compensation to resellers and explores common marketing strategies. We are
constantly marketing to this fragmented segment in order to locate cooperation
possibilities.




Marketing





Our
marketing strategy has three major objectives: (1) to increase our profile and
name recognition in the market; (2) to improve our position in our current
customer field; and (3) to introduce us as a value-added partner to our
resellers.





The first
objective has been implemented by creating our overall image through basic
one-to-one sales, new sales presentations and engaging web search companies to
introduce us among the first hits when searching for payment providers. The work
we are doing in this regard has resulted in new customers, who may contact us
without sales personnel having to contact them first. In order to meet the
second objective, we are actively working on printed information sheets, which
are sent to current and potential customers. The third objective is being
addressed by helping our resellers in both the commercial and technical fields;
we have introduced a reseller program and are frequently meeting with our
resellers.





Our board
of directors believes that we are well positioned to take advantage of the
various opportunities for growth in the market if  we have adequate
capital to implement our business plans.  We are active in a growth
market and we enjoy certain competitive advantages. During fiscal 2008, we
generated on average approximately 1,600,000 transactions per month. 
Management estimates that, due to new business wins and new service offerings,
the average monthly transaction volume will amount to 8 million transactions by
the end of calendar year 2009.





Technical
Infrastructure





We
completed a major hardware and software upgrade in December 2003, and migrated
our business critical systems to the latest Hewlett-Packard ("HP") NonStop
servers and BASE24 electronic payment processing software. HP NonStop servers
are estimated to run approximately 95% of the world's secure transactions,
making the NonStop platform the backbone for the world's most demanding and
critical environments and offering us a secure, continuously available
processing platform. A vastly scalable platform, HP NonStop provides us with the
ability quickly respond to changing business needs, such as managing the
expected growing number of transactions and the resulting need for increased
capacity.





BASE24
software from ACI Worldwide provides us with a fast, powerful authorization
system. BASE24 software offers high data integrity for mission-critical
environments. ACI and HP have a strong and long-standing relationship in
electronic payment implementations worldwide.





These
systems have enabled us to meet the latest Visa and MasterCard standards and
have paved the way for EMV compliance certification. We received
EMV-certification for Visa®, MasterCard® and all domestic Finnish cards used
with our Rahaxi-OTI(TM) Point Of Sale (point-of-sale) middleware solution from
Luottokunta in Finland. We also  received the Finnish EMV
certification required to sell Hypercom's Optimum range of  card
payment terminals in Finland.





We are
also capable of supporting the latest Visa 3D secure payment
technology.  Management believes that with our investment in the
upgraded NonStop systems running the newest ACI software, we can meet our
projected increasing capacity needs. We are currently licensed to process
8,000,000 transactions per month and can increase this capacity with the
addition of further licenses.




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Research and
Development





Our
long-term growth strategy requires continued development of new processing
products and adoption of new and changing standards. We believe that the timely
development of new applications and enhancements is essential to maintain our
competitive position in the market. We work closely with our customers to design
systems and processes that meet their planned technical and production
requirements. Our product development efforts focus on new products and improved
versions of existing products. We do not conduct any pure research, and we
purchase much of our software in off-the-shelf form from a third party software
vendor. We invested in excess of $973,000 for fiscal 2008 and approximately
$1,620,000 for fiscal 2007, which includes software costs which were expensed as
incurred and costs which have been capitalized. Key development activities
during fiscal 2008 included:




·
            Introduction
      of card payment technology that detects VAT refund eligibility and
      converts currency in real time in connection with Global Refund and
      Hypercom at the Cartes 2005;


·
            Introduced
      OTI, Open terminal interface, a turnkey solution for point-of-sale
      equipment


·
            Introduced
      Rahaxi-oti(tm) (open terminal interface), an in-house developed and
      managed middleware solution for point of sale equipment
      vendors


·
            Finnish
      EMV certifications of its in-house developed point-of-sale middleware
      software solution Rahaxi-OTI and the Hypercom T2100 Point-of-Sale payment
      terminal;


·
            EMV
      certification with its long-term partner, leading Finnish Electronic Cash
      Register vendor CPU Oy; and


·
            EMV
      certification from MasterCard for MasterCard Securecode online payment
      processing.




Customers





We have
approximately 2,100 customers. Our clients include IKEA, Global
Refunds, Finnair and Stockman. A significant percentage of our revenue is still
being derived from a limited number of our customers, primarily Finnish
customers for our transaction processing products.  We had one customer
that accounted for approximately 45% of sales for the year ended June 30, 2008.
Our two largest customers accounted for approximately 50% of our sales for the
year ended June 30, 2008.





Suppliers





Our
processing system integration activities consist primarily of assembling various
commercial and proprietary components into finished processing systems in
Helsinki, Finland. We use numerous vendors to supply hardware and software
components and modules for the production and support of our payment processing
products. Although we make reasonable efforts to assure that components and
modules are available from multiple qualified suppliers, this is not always
possible; accordingly, some key modules and components may be obtained only from
a single supplier or a limited group of suppliers. We have sought, and will
continue to seek, to minimize the risk of production and service interruptions
by constantly improving our relationships with key suppliers and monitoring the
financial stability of those key suppliers. Our key suppliers
include:





ACI
Worldwide - BASE24 Software License


Altamedius
- GSM and eWallet Enhancements


Fujitsu -
Multi-Banking Link Software


HP Invent
- Hardware Systems


Hypercom
- point-of-sale manufacturer


InterMart
Corporation - Hybrid Card Based Solutions


Sonera -
X.25 and Telecom Lines


Spectra
Technologies - point-of-sale manufacturer


TietoEnator
- Hardware Housing


Thyron
- point-of-sale manufacturer





11
 Table of Contents




Acquiring and Issuing
Banks





We are
switching and processing electronic payment transactions for all the leading
banks in Finland and have a contract with SEB/Euroline in
Sweden, China Unionpay in China and Natisis Paiements in
France.  We intend to link our customers to more banks in Europe
during the course of fiscal 2008. We currently have links (electronic
communications) in place with the following acquiring banks:





Luottokunta


Handelsbanken


SEB/Euroline


CEKAB


Nordea


Oko


Sampo


Alandsbanken


Samlink


PKK


Natixis
Paiements





Employees




As of
June 30, 2008, we had 54 full-time employees, as well as several consultants in
various specialties. Of the total, four are senior management, four in finance
and accounting, 10 in software development, two in project management, eight in
office administration, eleven in sales and marketing, two in legal, four in
business development, eight  in customer support and one in Investor
relations.





Miscellaneous





There is
no need for any government approval of our principal products and services in
the markets we serve. There are no existing or, to our knowledge, probable
governmental regulations on our business. We are not aware of any compliance
issues with any environmental laws in connection with our business.




ITEM 1A.  RISK FACTORS





We
Have Never Been Profitable and Will Need to Raise Additional Capital to Continue
our Operations





Since our
incorporation, we have not achieved profitability. We have incurred substantial
costs to build the foundations of our business. From our inception to the date
of this report we have retained a deficit. We expect our operating losses and
negative cash flows to continue into the future. Even if we do become
profitable, we cannot assure you that we can sustain or increase profitability
on a quarterly or annual basis in the future. If our revenues grow slower than
we anticipate, or if our operating expenses exceed our projected levels and
cannot be adjusted appropriately, our business will be materially and adversely
affected.





The
financial statements included in this report have been prepared on the basis
that we will continue as a going concern, which assumes the realization of
assets and the satisfaction of liabilities in the normal course of business. We
have incurred accumulated losses of $97,569,812 as of June 30, 2008. We do not
expect to generate sufficient revenue to meet our cash requirements for the next
twelve months. We will need to raise additional capital to continue meeting
operational expenses. Our independent auditors have added an explanatory
paragraph to their report of our financial statements for the year ended June
30, 2008 stating that our net losses, lack of revenues and dependence on our
ability to raise additional capital to continue our existence, raise substantial
doubt about our ability to continue as a going concern. If we are not successful
in raising sufficient additional capital, we may we may not be able to continue
as a going concern, our stockholders may lose their entire investment in
us.





Technological
and Market Changes





The
markets in which we compete are characterized by rapid technological change,
frequent new product introductions, evolving industry standards and changing
needs of customers. There can be no assurance that our existing products will
continue to be properly positioned in the market or that we will be able to
introduce new or enhanced products into the market on a timely basis, or at all.
Currently, we are focusing on upgrading and introducing new products and
entering new geographic markets.  There can be no assurance that
enhancements to existing products or new products will receive customer
acceptance. As competition in the electronic payments industry increases, it may
become increasingly difficult for us to be competitive.





Risks
associated with the development and introduction of new products include delays
in development and changes in payment processing, and operating system
technologies that could require us to modify existing products. There is also
the risk that there may be delays in initial shipments of new products. Further
risks inherent in new product introductions include the uncertainty of
price-performance relative to products of competitors, competitors' responses to
the introductions and the desire by customers to evaluate new products for
longer periods of time.




12
 Table of Contents




New
Versions of Our Products May Contain Errors or Defects





Our
electronic payment software products and point of sale devices are complex and,
accordingly, may contain undetected errors or failures when first introduced or
as new versions are released. This may result in the loss of, or delay in,
market acceptance of our products. We have in the past discovered software
errors in our new releases and new products after their introduction. We have
experienced delays in release, lost revenues and customer frustration during the
period required to correct these errors. We may in the future discover errors
and additional scalability limitations in new releases or new products after the
commencement of commercial shipments or be required to compensate customers for
such limitations or errors, as a result of which our business, cash flow,
financial condition and results of operations could be materially adversely
affected.





No
Assurance of Successful and Timely Product Development





Our
products and proposed enhancements are at various stages of development and
additional development and testing will be required in order to determine the
technical feasibility and commercial viability of the products.





There can
be no assurance that our product development efforts will be successfully
completed. Our proposed development schedule may be affected by a variety of
factors, many of which will not be within our control, including technological
difficulties, access to proprietary technology of others, delays in regulatory
approvals, international operating licenses, and the availability of necessary
funding. In light of the foregoing factors, there can be no assurance that we
will be able to complete or successfully commercialize our products. Our
inability to successfully complete the development of new products or to do so
in a timely manner, could force us to scale back operations, or cease operations
entirely.




Market
Acceptance





Our
success is dependent on the market acceptance of our products. Despite the
increasing demand for security devices, our products represent an advanced
approach to the industry, and market acceptance of our products will be
dependent, among other things, upon quality, ease of use, speed, reliability,
and cost effectiveness. Even if the advantages of our products are established,
we are unable to predict how quickly, if at all, the products will be accepted
by the marketplace.




Protection of Proprietary
Rights





Our
success and ability to compete will be dependent in part on the protection
of our potential patents, trademarks, trade names, service marks and other
proprietary rights. We intend to rely on trade secret and copyright laws to
protect the intellectual property that we plan to develop, but there can be no
assurance that such laws will provide sufficient protection, that others will
not develop a service that are similar or superior to ours, or that third
parties will not copy or otherwise obtain and use our proprietary information
without authorization. In addition, certain of our know-how and proprietary
technology may not be patentable.





We may
rely on certain intellectual property licensed from third parties, and may be
required to license additional products or services in the future, for use in
the general operations of our business plan. There can be no assurance that
these third party licenses will be available or will continue to be available to
us on acceptable terms or at all. The inability to enter into and maintain any
of these licenses could have a material adverse effect on our business,
financial condition or operating results.





There is
a risk that some of our products may infringe the proprietary rights of third
parties. In addition, whether or not our products infringe on proprietary rights
of third parties, infringement or invalidity claims may be asserted or
prosecuted against us and we could incur significant expense in defending them.
If any claims or actions are asserted against us, we may be required to
modify our products or seek licenses for these intellectual property
rights. We may not be able to modify our products or obtain licenses on
commercially reasonable terms, in a timely manner or at all. Our failure to do
so could have a negative affect on our business and revenues.





Dependence
on Suppliers





We depend
upon a number of suppliers for components of our products. There is an inherent
risk that certain components of our products will be unavailable for prompt
delivery or, in some cases, discontinued. We only have limited control over any
third-party manufacturer as to quality controls, timeliness of production,
deliveries and various other factors. Should the availability of certain
components be compromised, it could force us to develop alternative designs
using other components, which could add to the cost of goods sold and compromise
delivery commitments. If we are unable to obtain components in a timely manner,
at an acceptable cost, or at all, we may need to select new suppliers or
redesign or reconstruct processes used to build our security devices. In such an
instance, we would not be able to manufacture any security devices for a period
of time, which could materially adversely affect our business, results from
operations, and financial condition.




Key
Personnel





Our
success is largely dependent on the personal efforts and abilities of our senior
management. The loss of certain members of our senior management, including our
chief executive officer, or chief financial officer, could have a material
adverse effect on our business and prospects.





We will
likely need to recruit additional employees who are skilled in e-commerce,
payment, funds management, payment reconciliation, Internet and other
technologies. The failure to recruit these key personnel could have a material
adverse effect on our business. As a result, we may experience increased
compensation costs that may not be offset through either improved productivity
or higher revenue. There can be no assurances that we will be successful in
retaining existing personnel or in attracting and recruiting experienced
qualified personnel.




13
 Table of Contents




We
May Experience Problems Related to Our Growth





Our
future growth, if any, may cause a significant strain on our management,
operational, financial and other resources. Our ability to manage our growth
effectively will require us to implement and improve our operational, financial,
manufacturing and management information systems and to expand, train, manage
and motivate our employees. These demands may require the addition of new
management personnel and the development of additional expertise by management.
Any increase in resources devoted to research, product development and marketing
and sales efforts without a corresponding increase in our operational,
financial, and manufacturing and management information systems could have a
material adverse effect on our business, financial condition, and results of
operations.





Control
by Our Officers and Directors May Override Wishes of Other
Stockholders





Our
officers and directors currently own common stock and opotions equal to over 25%
of the outstanding shares of our common stock. As a result, such persons, acting
together, have the ability to exercise significant influence over all matters
requiring stockholder approval. In addition, all decisions with respect to our
management will be made exclusively by our officers and directors. Investors
will only have rights associated with stockholders to make decisions that affect
us. Accordingly, it could be difficult for the investors hereunder to effectuate
control over our affairs.





Therefore,
our success, to a large extent, will depend on the quality of our directors and
officers. Accordingly, no person should invest in the Company unless he is
willing to entrust all aspects of our management to our officers and
directors.





External
Factors May Affect Our Viability





Our
industry in general is a speculative venture necessarily involving some
substantial risk. There is no certainty that the expenditures to be made by us
will result in commercially profitable business. The marketability of our
services will be affected by numerous factors beyond our control. These factors
include market fluctuations, and the general state of the economy (including the
rate of inflation, and local economic conditions), which can affect companies'
spending. Factors that leave less money in the hands of our potential customers
will likely have an adverse effect on the Company. The exact effect of these
factors cannot be accurately predicted, but the combination of these factors may
result in the Company not receiving an adequate return on invested
capital.




Potential
Conflicts of Interest May Affect Ability of Officers and Directors to Make
Decisions in the Best Interests of Company





Conflicts
of interest may arise in the area of corporate opportunities that cannot be
resolved through arm's length negotiations. All of the potential conflicts of
interest will be resolved only through exercise by the directors of such
judgment as is consistent with their fiduciary duties.





Limitations
on Liability, and Indemnification, of Directors and Officers May Result in
Expenditures by us





Our
articles of incorporation and bylaws include provisions to the effect that the
Company may indemnify any director, officer, or employee. In addition,
provisions of the Nevada Revised Statutes law provide for such indemnification,
as well as for a limitation of liability of our directors for monetary damages
arising from a breach of their fiduciary duties as directors. Any limitation on
the liability of any director, or indemnification of directors, officer, or
employees, could result in substantial expenditures being made by the Company in
covering any liability of such persons or in indemnifying them.





Absence
of Cash Dividends May Affect Investment Value of Company's Stock





The Board
of Directors does not anticipate paying cash dividends on the common stock for
the foreseeable future and intends to retain any future earnings to finance the
growth of the Company's business. Payment of dividends, if any, will depend,
among other factors, on earnings, capital requirements and our general operating
and financial conditions as well as legal limitations on the payment of
dividends out of paid-in capital.





No
Assurance of Public Trading Market and Risk of Low Priced Securities May Affect
Market Value of Company's Stock





The SEC
has adopted a number of rules to regulate "penny stocks." Such rules include
Rule 3a51-1 and Rules 15g-1 through 15g-9 under the Securities Exchange Act of
1934, as amended. Because our securities may constitute "penny stocks" within
the meaning of the rules (as any equity security that has a market price of less
than $5.00 per share or with an exercise price of less than $5.00 per share,
largely traded in the Over the Counter Bulletin Board or the Pink Sheets), the
rules would apply to us and to our securities.





The SEC
has adopted Rule 15g-9 which established sales practice requirements for certain
low price securities. Unless the transaction is exempt, it shall be unlawful for
a broker or dealer to sell a penny stock to, or to effect the purchase of a
penny stock by, any person unless prior to the transaction: (i)the broker or
dealer has approved the person's account for transactions in penny stock
pursuant to this rule and (ii) the broker or dealer has received from the person
a written agreement to the transaction setting forth the identity and quantity
of the penny stock to be purchased. In order to approve a person's account for
transactions in penny stock, the broker or dealer must: (a) obtain from the
person information concerning the person's financial situation, investment
experience, and investment objectives; (b) reasonably determine that
transactions in penny stock are suitable for that person, and that the person
has sufficient knowledge and experience in financial matters that the person
reasonably may be expected to be capable of evaluating the risks of transactions
in penny stock; (c) deliver to the person a written statement setting forth the
basis on which the broker or dealer made the determination (i) stating in a
highlighted format that it is unlawful for the broker or dealer to affect a
transaction in penny stock unless the broker or dealer has received, prior to
the transaction, a written agreement to the transaction from the person; and
(ii) stating in a highlighted format immediately preceding the customer
signature line that (iii) the broker or dealer is required to provide the person
with the written statement; and (iv) the person should not sign and return the
written statement to the broker or dealer if it does not accurately reflect the
person's financial situation, investment experience, and investment objectives;
and (d) receive from the person a manually signed and dated copy of the written
statement. It is also required that disclosure be made as to the risks of
investing in penny stock and the commissions payable to the broker-dealer, as
well as current price quotations and the remedies and rights available in cases
of fraud in penny stock transactions. Statements, on a monthly basis, must be
sent to the investor listing recent prices for the Penny Stock and information
on the limited market.




14
 Table of Contents




The
regulations governing penny stocks, as set forth above, sometimes limit the
ability of broker-dealers to sell our common stock and thus, ultimately, the
ability of the investors to sell their securities in the secondary
market.





Potential
shareholders of the Company should also be aware that, according to SEC Release
No. 34-29093, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed
bid-ask differential and markups by selling broker-dealers; and (v) the
wholesale dumping of the same securities by promoters and broker dealers after
prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor
losses.





Failure
to Remain Current in Reporting Requirements Could Result in Delisting from the
Over the Counter Bulletin Board





Companies
trading on the Over the Counter Bulletin Board ("OTCBB"), such as the Company,
must be reporting issuers under Section 12 of the Securities Exchange Act of
1934, as amended, and must be current in their reports under Section 13, in
order to maintain price quotation privileges on the OTCBB. If we fail to remain
current in our reporting requirements, we could be delisted from the Bulletin
Board.





In
addition, the National Association of Securities Dealers, Inc. that operates the
OTCBB, recently adopted a change to its Eligibility Rule, in a filing with the
SEC. The change makes those OTCBB issuers that are cited for filing delinquency
in its Form 10-K's/Form 10-Q's three times in a 24-month period and those OTCBB
issuers removed for failure to file such reports two times in a 24-month period
ineligible for quotation on the OTCBB for a period of one year. Under this
proposed rule, a company filing with the extension time set forth in a Notice of
Late Filing (Form 12b-25) would not be considered late. This rule does not apply
to a company's Current Reports on Form 8-K.





As a
result of these rules, the market liquidity for our securities could be severely
adversely affected by limiting the ability of broker-dealers to sell our
securities and the ability of stockholders to sell their securities in the
secondary market.




We
may have problems obtaining our independent accounting firm’s report on our
compliance with Section 404 of the Sarbanes-Oxley Act.








The SEC,
as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules generally
requiring each public company to include a report of management on the company’s
internal controls over financial reporting in its annual report on Form 10-K
that contains an assessment by management of the effectiveness of the company’s
internal controls over financial reporting.  Commencing with our
annual report for the fiscal year ending June 30, 2009, our independent
registered accounting firm must attest to and report on management’s assessment
of the effectiveness of our internal controls over financial
reporting.





Our
auditors have not yet reviewed our Section 404 compliance.  How independent
auditors will apply these requirements and test companies’ internal controls, is
still reasonably uncertain. We have in the past discovered, and may in the
future discover, areas of our internal controls that need
improvement.





We expect
that we will need to hire and/or engage additional personnel and incur
additional costs in order to obtain the auditor report required by Section
404.  Our independent accountants may disagree with our assessment and may
issue a report that is qualified.




Failure
to Maintain Market Makers May Affect Value of Our Stock





If we are
unable to maintain one or more National Association of Securities Dealers,
Inc. member broker/dealers as market makers, the liquidity of the common stock
could be impaired, not only in the number of shares of common stock which could
be bought and sold, but also through possible delays in the timing of
transactions, and lower prices for the common stock than might otherwise
prevail. Furthermore, the lack of market makers could result in persons being
unable to buy or sell shares of the common stock on any secondary market. There
can be no assurance that we will be able to maintain such market
makers.





Shares
Eligible For Future Sale





Most of
the shares currently held by management have been issued in reliance on the
private placement exemption under the Securities Act of 1933. Such shares will
not be available for sale in the open market without separate registration
except in reliance upon Rule 144 under the Securities Act of
1933.  Due to recent changes to Rule 144, additional shares will
become available for resale without registration. Under revised Rule 144, the
holding period for non-affiliates was shorted from one year to six months and
volume restrictions were eliminated, provided that certain current public
information is then available. If a substantial number of the shares owned by
these shareholders were sold pursuant to Rule 144 or a registered offering, the
market price of the common stock at that time could be adversely
affected.





15
 Table of Contents




ITEM 2.  PROPERTIES





Offices





We lease
a 1,664 square foot office for our corporate headquarters in Dublin, Ireland for
$9,867 per month. The lease expires in January 2011.




We lease
5,527 square feet of office space in Helsinki, Finland for $11,525 per month.
This lease expires in February 2012. The lease contains provisions to increase
the monthly lease amount to $13,420 effective March 1, 2009; $13,735 on March 1,
2010; and $14,051 on March 1, 2011.





We lease
a 6,081 square foot office in Santo Domingo, Dominican Republic. This lease is
for five years and expires in September 2011. The current rent is $10,600 per
month.




All these
offices are currently adequate for our needs.




Furniture and Equipment,
Leasehold Improvements, and Computers





The
furniture and equipment, leasehold improvements and computers owned by us are
recorded at their acquisition cost, and are depreciated using the straight-line
and declining methods. This equipment, which is required for the day-to-day
operation of our business in our Finland, Dominican Republic, Ireland and Sweden
offices, is currently valued at $165,990 and $187,323, respectively, as of June
30, 2008 and 2007.





We lease
a telephone switchboard for our Helsinki offices; the cost is $3,200 per year,
and can be terminated at any time.




ITEM 3. LEGAL PROCEEDINGS





From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business.  However, litigation is
subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business.Other than as set forth
below, we are not a party to any material pending legal proceedings and, to the
best of our knowledge, no such action has been threatened against
us.





ACI
v. Rahaxi Processing Oy


On March
31, 2008, Rahaxi Processing Oy, a subsidiary of Freestar based in Helsinki,
Finland, received a summons detailing legal proceedings to be taken against it
by ACI Worldwide (EMEA) Limited (“ACI”), which is domiciled in Watford, United
Kingdom pursuant to a written complaint filed on the 26th February 2008 in
Helsinki District Court. ACI is claiming payment relating to outstanding
invoices for services provided to the Company such as license fees, maintenance
fees, support  and software fees and consultancy service fees pursuant
to various agreements between ACI and the Company.




The
Company has acknowledged that a certain amount of the fees claimed under summons
are due to ACI and in recognition of this fact the Company has paid a
significant portion of the monies due with respect to the uncontested invoices.
The Company will, however, be contesting a significant portion of the fees
claimed by under the summons when the preliminary hearing of the case takes
place in Helsinki District Court, expected to occur towards the end of
2008.




This
matter remains in the early stages of litigation and there can be no assurance
as to the outcome of the lawsuit. Litigation is subject to inherent
uncertainties, and unfavorable rulings could occur.  Were unfavorable
rulings to occur, there exists the possibility of a material adverse impact of
money damages on the Company’s financial condition.





ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.





16
 Table of Contents




PART II.




ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES





Market
Information





From
August 4, 2000 through March 2, 2001, our common stock was traded on the OTCBB
under the symbol "FRSH". From March 5, 2001 through February 26, 2003, our
common stock traded under the symbol "FSTI" (reflecting the name change from
"Freedom Surf, Inc." to "Freestar Technologies"). From February 27, 2003,
through November 7, 2004, our common stock traded under the symbol "FSRC"
(reflecting the name change from "Freestar Technologies" to "FresStar Technology
Corporation"). From November 8, 2004 to the present, our common stock has been
traded under the symbol "FSRT" (reflecting the one for seven reverse split of
common stock that occurred on November 8, 2004). The range of closing prices
shown below is reported while trading on the OTC Bulletin Board. The quotations
shown reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not necessarily represent actual transactions.




Per
      Share Common Stock Bid Prices by Quarter For
      the Fiscal Year Ended June 30, 2008High
            
            
            LowQuarter
      Ended June 30, 2008
            
            $
            0.14
            
            
            $
            0.05Quarter
      Ended March 31, 2008
            
            $
            0.15
            
            
            $
            0.04Quarter
      Ended December 31, 2007
            
            $
            0.20
            
            
            $
            0.11Quarter
      Ended September 30, 2007
            
            $
            0.24
            
            
            $
            0.14




Per
      Share Common Stock Bid Prices by Quarter For
      the Fiscal Year Ended June 30, 2007High
            
            
            LowQuarter
      Ended June 30, 2007
            
            $
            0.31
            
            
            $
            0.14Quarter
      Ended March 31, 2007
            
            $
            0.42
            
            
            $
            0.23Quarter
      Ended December 31, 2006
            
            $
            0.44
            
            
            $
            0.27Quarter
      Ended September 30, 2006
            
            $
            0.55
            
            
            $
            0.35





Holders of Common
Equity





As of
September 30, 2008, we had approximately 284 shareholders of record of our
common stock. The number of registered shareholders excludes any estimate by us
of the number of beneficial owners of common shares held in street
name.





Dividend
Information





We have
not declared or paid a cash dividend to stockholders since we were incorporated.
The board of directors presently intends to retain any earnings to finance our
operations and does not expect to authorize cash dividends in the foreseeable
future. Any payment of cash dividends in the future will depend upon our
earnings, capital requirements and other factors.





Sales of Unregistered
Securities





We made
the following issuances of unregistered (restricted) securities during the
fourth quarter of the fiscal year ended on June 30, 2008:





In April
and June 2008, we issued a total of 2,000,000 shares of common stock with a fair
value of $173,800 to nine employees of Rahaxi and Freestar Dominicana as a
bonus.





In April
2008, we sold 800,000 shares of common stock to an investor for cash of
$40,000.





In June
2008, we issued 7,710,000 shares of common stock to our Vice President and Chief
Financial Officer for the conversion of Series B Preferred stock.





In June
2008, we issued 20,000,000 shares of common stock with a fair value of
$1,000,000 to our President and Chief Executive Officer for
services.  Also in June 2008, we approved the issuance of 15,000,000
shares of common stock with a fair value of $750,000 to our Vice President and
Chief Financial Officer for services, which were issued subsequent to June 30,
2008.





17
 Table of Contents




In June
2008, we issued 2,996,000 shares of common stock in error. These shares were
cancelled subsequent to June 30, 2008.





Except as
noted above, we did not pay any cash commissions on the above listed
issuances.  We did not employ any form of general solicitation or
advertising in connection with the offer and sale of the securities described
below. Except as otherwise noted above, the offer and sale of the securities
listed below were made in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act Regulation D promulgated by the
Securities and Exchange Commission as transactions by an issuer not involving
any public offering or Regulation S relating to offshore offerings.





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS





The
following discussion and analysis of our financial condition and results of
operations is based upon, and should be read in conjunction with, our audited
consolidated financial statements and related notes included elsewhere in this
Form 10-K, which have been prepared in accordance with accounting principles
generally accepted in the United States.





Overview





The
electronic payment transaction industry is composed of debit and credit card
issuers, switch interchanges, transaction acquirers and transaction generators,
including Automated Teller Machine networks, retail merchant locations and the
Internet. The routing, control and settlement of electronic payments is a
complex activity due to the large number of locations and variety of sources
from





which
transactions can be generated, the large number of issuers in the market, high
transaction volumes, geographically dispersed networks, differing types of
authorization and varied reporting requirements. These activities must be
conducted 24 hours a day, seven days a week.





Our
products and services are primarily focused on facilitating electronic card
transactions. These products and services are used principally by financial
institutions, retailers, and payment processors, both in domestic and
international markets.





We intend
to increase revenue from our core payment processing products, which include:
(1) Authorization: transaction fees derived from processing point of sale
terminal transactions; (2) Dynamic Currency Conversion support services: we will
provide support for transaction gateway services and settlement of credit card
transactions utilizing dynamic currency conversion to merchants and
participating banking institutions; (3) Consulting and Software Development
Fees: consulting services and customized software development provided to
financial institutions and merchants and fees earned by PLC; (4) Sale of Point
of Sale solutions: sales of point of sale terminals; and (5) Private Label
Cards: transaction management services provided for a private label card issuer.
Our revenue for the year ended June 30, 2008 was primarily generated from
transaction fees, sales of point of sale terminals through our Finland
operations and consulting fees through PLC, as well as through customized
software development fees.





Effective
November 2006, the Company has acquired 50% of the outstanding capital stock of
Project Life Cycle Partners, Ltd. (“PLC”), a technology consulting firm located
in Dublin, Ireland.  PLC is a niche project consulting firm specializing in
the management and implementation of information systems projects.  PLC has
international experience within the financial services and
telecommunication sectors.




Due to
our systems upgrade in December 2003 to the latest Hewlett-Packard NonStop
servers and BASE24 e-payment processing software, we do not anticipate the need
for any similar significant systems upgrades within the next 12 months. 
However, we are continuously reviewing our product and service offering to
ensure we maintain our competitive position in our target markets.




Our
business is continually evolving. Market conditions may require us to react
quickly to problems and opportunities as they arise, and we may incur costs that
we do not currently anticipate. Our business strategy to maximize growth and
shareholder value may include future strategic acquisitions where we believe
such acquisitions will help us quickly move forward in achieving our
goals.





Management
believes that our primary short and medium-term growth opportunities will be
derived form the European marketplace and a significant portion of our
resources, both financial and personnel, will be directed towards developing
those opportunities. We believe that our anticipated growth and ultimate
profitability will depend in large part on the ability to promote our services,
gain clients and expand our relationship with current clients. Accordingly, we
intend to invest in marketing, strategic relationships, and development of our
client base.





Results of
Operations





Revenue





Transaction processing and
related revenue





Transaction
processing and related revenue was $2,076,309 for the year ended June 30, 2008,
compared to $1,945,512 during the prior year,  an increase of $130,797
or approximately 7%.  The Company process a total of 19,019,055
transactions during the year ended June 30, 2008, a decrease of 414,944 compared
to  19,443,999 transactions processed during the prior
year.  The primary reason for this was the loss of one customer but we
expect to increase the number of transactions processed  throughout
fiscal 2009 as we continue to expand our customer base.





18
 Table of Contents




Consulting
services revenue





Consulting
services revenue was $2,904,708 for the year ended June 30, 2008, compared to
$1,349,963 during the prior year, an increase of $1,554,745 or approximately
115%. Consulting services revenue is primarily generated by
the  Company’s subsidiary PLC.   The Company
consolidated the results of PLC effective November 21, 2006.   We
expect to report increased revenue from consulting services in the fiscal year
ending June 30, 2009.




Hardware sales and
related  revenue





Hardware
sales and related revenue was $1,278,690 during the year ended June 30, 2008,
compared to $484,860 during the prior year, an increase of $793,830 or
approximately 164%. The Company began selling processing terminals and related
equipment in





December
2006.  We expect to report increased hardware and related sales in the
year ending June 30, 2008 as we not only increase actual hardware sales to our
expanding customer base, but began to recognize revenue from annual maintenance
fees and service initiation fees, which we began to recognize at June 30,
2007.





For the
reasons above, total revenue for the year ended June 30, 2008 was
$6,259,707 compared to $3,780,335 for the year ended June 30, 2007, an increase
of $2,479,372 or approximately 66%.





We expect
revenue levels to increase throughout the next twelve months as we continue to
increase our client base and introduce service offerings, such as EMV
transaction processing, dynamic currency conversion, sales of point of sale
terminals and consulting fees. However, there can be no guarantee that our
products will be accepted in the marketplace or that its sales efforts will be
successful.





All of
our revenue for the year ended June 30, 2008 has been derived from a limited
number of its customers, primarily Finnish customers for its transaction
processing products. Approximately 55% of our total revenue was attributable to
our ten largest customers. The future loss of any major customer could have a
material adverse effect on our business, financial condition and results of
operations. We believe that this customer concentration will continue for much
of fiscal 2008. We believe that this customer concentration will be diluted in
the latter half of fiscal 2009 as we pursues operations outside of Finland. All
of our revenues for the twelve months ended June 30, 2008 have been generated by
our operations outside of the United States, and our future growth rate is, in
part, dependent on continued growth in international markets. We expect this
trend to continue through fiscal year 2009.




Cost
of Revenue





Cost of transaction
processing and related revenue





Cost of
transaction processing and related revenue was $2,313,929 for the year ended
June 30, 2008, compared to $2,330,561 for the prior year ended June 30, 2007,
a  decrease of $16,632 or approximately 1%. The reason for the
decrease is the impairment charge for our software that we recorded during the
year ended June 30, 2008.  We no longer charge the amortization of
software or software licenses to cost of goods sold.  We expense all
costs associated with maintaining, and many of the costs of improving, our
processing and customer support capabilities. These costs do not always change
in direct relation to sales, and in fact often increase in advance of any
potential increase in sales which they may support.




Cost of consulting
services





Cost of
consulting services revenue was $2,146,766 for the year ended June 30, 2008,
compared to $816,122 for the prior year ended June 30, 2007. an increase of
$1,330,644 or approximately 163%.  Consulting services revenue is
primarily generated by our subsidiary company PLC Partners, Ltd. We began to
consolidate the results of PLC Partners, Ltd. effective November 21,
2006.





Cost of hardware and
related revenue





Cost of
hardware and related revenue was $834,950 during the year ended June 30, 2008,
compared to $589,472 during the prior year, an increase of $245,478 or
approximately 42%. The Company began selling processing terminals and related
equipment in December 2006.  Included in cost of hardware revenue are
terminals shipped to customers as test and demonstration units, as well as items
replaced or returned.





For the
reasons above, total cost of revenue was $5,295,645 for the year ended June 30,
2008, compared to $3,736,155 for the year ended June 30, 2007, an increase of
$1,559,490 or approximately 42%.





We expect
cost of revenue to increase in the coming year as we continue our current
trend of increasing sales and expanding our product offering. As our service
offerings and business mix changes, gross margin as a percent of sales may not
remain constant.





19
 Table of Contents




Selling,
General and Administrative Expenses





Selling,
general and administrative expenses were $19,737,217 for the year ended June 30,
2008 compared to $16,251,713 for the year ended June 30, 2007, an increase of
$3,485,504 or approximately 21%. The primary components of selling, general, and
administrative expenses for the year ended June 30, 2008 were: consulting fees
of $9,427,248 to service providers for financial consulting and other
professional services; $9,063,697 of this amount consists of non-cash
compensation in the form of stock, stock options, and warrants. Other components
of selling, general, and administrative expenses for fiscal year 2008 included
payroll and related costs of $7,509,789; $2,632,088 of this amount consists
of non-cash compensation to management and employees in the form of stock and
stock options; facilities expense (rent, telephone, utilities, and maintenance)
of $1,160,657; travel and entertainment costs of $508,072; legal and accounting
fees of $343,802; depreciation and amortization of $807,047; investor relations
of $18,200; $44,526 for recruiting, $56,082 for freight and delivery, $120,872
for advertising and marketing, and $24,810 for repair and
maintenance.





The
amount of future selling, general, and administrative expenses will largely
depend on the pace of our growth in the market for payment processing products
and upon the cost of outside services and professional fees, including legal
fees relating to litigation and acquisitions. We fully expect these costs to
increase as we continues our expected rollout of product offerings. We also
intend to continue to build out our infrastructure, which may include adding
support staff and branch offices. Selling expenses may also continue to increase
due to increased focus on obtaining new customers. We intends to focus
additional resources in the areas of sales personnel salaries, trade show
participation, and other promotional expenses. In addition, we may pursue
further acquisitions in order to facilitate our growth and exploit market
opportunities, which would further drive up legal and accounting fees, payroll,
and travel costs.




Impairment
of Software





Cost of
impairment of software was $4,086,502 for the year ended June 30, 2008
representing the cost of capitalized software and software
licenses.  There was no such charge during the year ended June 30,
2007.





Additional
Cost of  Acquisition





During
the year ended June 30, 2008, the Company issued an additional 1,111,110 shares
of common stock with a fair value of $192,555 pursuant to the terms of the
acquisition of PLC Partners, Ltd.  There was no such charge during the
year ended June 30, 2007.





Interest Expense





Interest
income (expense) net was ($47,374) for the year ended June 30, 2008, compared to
($3,018) for the year ended June 30, 2007, an increase of ($44,356) or
approximately 1470%. The increase is due primarily to interest cost associated
with vendor financing.




Currently,
we are utilizing equity financing partly in order to avoid the interest charges
associated with debt financing. Accordingly, we do not expect interest expense
to materially increase in the coming year. There can be no guarantee that this
will be the case, however, as the market for our common stock could change,
forcing us to pursue alternative methods of financing our cash needs. In
addition, we could receive an offer of attractive debt financing or could
undertake additional financing with regard to an acquisition, in which cases
interest expense would significantly increase.





Minority
Interest in Net Income of Subsidiary





The
Company recorded the minority interest in the net income of its subsidiary PLC
Partners, Ltd. of $39,855 during the year ended June 30, 2008, compared to
$62,991 during the year ended June 30, 2007, a decrease of $23,136 or
approximately 37%.





Net
Loss





For the
reasons stated above, we recorded a net loss of $23,150,901 for the year ended
June 30, 2008 compared to $16,305,197 for the year ended June 30, 2007, an
increase of $6,845,704 or approximately 42%.





We may
continue to incur losses on both a quarterly and annual basis. In addition, we
expect to continue to incur significant costs of services and substantial
operating expenses. Therefore, we will need to significantly increase revenues
to achieve profitability and a positive cash flow. We may not be able to
generate sufficient revenues to achieve profitability. We expect losses to
continue for at least the next twelve months.





20
 Table of Contents




Commitments





Our total
commitments under non-cancelable operating leases at June 30, 2008 are as
follows:





Years ending June
      30,2009
            
            $
            427,4882010
            
            $
            407,9072011
            
            $
            362,3592012
            
            $
            138,9092013
            
            $
            --Total
            
            $
            1,336,663




Operating
Activities





The net
cash used in operating activities was $3,713,921 for the year ended June 30,
2008 compared to $5,686,036 for the year ended June 30, 2007, an decrease of
$1,972,115 or approximately 35%. The primary reason for the decrease in cash
used in operating activities was a change in the components of working capital,
which had the effect of reducing cash outflow: current assets (other than cash)
decreased by $326,587, and current liabilities increased by
$1,899,986.   The primary components of cash used in operating
activities during the current period are the net loss of ($23,150,901),
partially offset by the non-cash charges of non-cash compensation of
$11,695,785; depreciation and amortization of $807,047; impairment of intangible
assets of $4,086,502; and bad debt expense of $51,203.





Investing
Activities





Net cash
used in investing activities was $470,589 during the year ended June 30, 2008
compared to $1,289,457 for the year ended June 30, 2007, a decrease of $818,868
or approximately 64%. This decrease was primarily due to lower costs related to
software enhancement of our transaction processing system, and lower
acquisition-related costs of PLC Partners, LLC.





Financing
Activities





Net cash
provided by financing activities was $4,694,474 for the year ended June 30,
2008, compared to $4,353,061 for the year ended June 30, 2007, an increase of
$341,413 or approximately 8%.  The reason for the increase was due to
increased costs associated with expanding our customer base .




Liquidity and Capital
Resources




As of
June 30, 2008, we had total current assets of $2,140,258 and total current
liabilities of $4,665,496, resulting in a working capital deficiency of
$(2,525,238). We had cash and cash equivalents of $692,802 at June 30, 2008, and
an accumulated deficit of $97,569,812.





The
independent auditors report on our June 30, 2008 financial statements included
in this Form 10-K states that our difficulty in generating sufficient cash flow
to meet our obligations and sustain operations raise substantial doubts about
the our ability to continue as a going concern.




The
accompanying financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of
business.  However, our ability to continue as a going
concern will be dependent upon our ability to generate sufficient cash flow
from operations to meet our obligations on a timely basis, to obtain additional
financing, and ultimately attain profitability.





Recent
Financings





In the
past, we have been successful in obtaining cash resources through private
placements and the exercise of options. Financing activities provided cash of
$4,694,474 during the year ended June 30, 2008 compared to $4,353,061 for the
year ended June 30, 2007, an increase of $341,413 or approximately
8%.





21
 Table of Contents





Prior
Financing





On
January 27, 2006, the Company signed subscription agreements with a group of
offshore investors for the sale of an aggregate of $9.2 million in Company
common stock, plus warrants (the “January Financing”). Due to the failure of the
investment group to timely fund in full the first payment required for the
purchase of shares and warrants, the Company terminated the January Financing;
all shares and warrants issued thereunder were returned by the escrow holder to
the Company for cancellation, and any funds received pursuant to the January
Financing were returned by the escrow holder to the investors.





In March
2006, a group of European investors (collectively, the “March Investors”), lead
by Olympia Holding AS, informed the Company that they were willing to invest on
the same terms and conditions that were negotiated for the now-terminated
January Financing, and the Company agreed to this financing transaction with the
March Investors (the “March Financing”).





Pursuant
to the March Financing, the Company agreed to issue 46 million shares of
restricted common stock under Regulation S at $0.20 per share, plus warrants to
purchase 50 million shares of common stock with two-year exercise periods and
strike prices ranging from $1.50 to $8.50, as set forth below. The shares which
will be held in escrow by Carl Hessel ("Escrow Holder"), a director and major
stockholder of the Company based in Geneva, Switzerland, along with the
warrants.  Pursuant to the terms of the March Financing, the first
payment of $4.6 million is due immediately, with a second payment of $4.6
million due within three months thereafter.





As of
June 30, 2008, the Company had received cash in the net amount $8,134,924
pursuant to the March Financing, and had issued 45,850,000 shares of common
stock and warrants to purchase an additional 49,836,957
shares.  Warrants to purchase 24,836,957 shares expired on March 31,
2008, and warrants to purchase 25,000,000 shares remain outstanding at June 30,
2008, as detailed in the table below.





The
Company also issued to consultants 4,600,000 shares of unregistered common stock
and warrants to purchase an additional 13,000,000 shares of common stock at a
price of $0.20 per share as a commission for work performed on the March
Financing.  These warrants to purchase 13,000,000 shares expired on
March 31, 2008.





The
warrants to be issued pursuant to the investors in the March Financing are as
follows:





OutstandingTotal
            
            
            
            
            
            atExercise
      Price
            
            
            Number
            
            
            
            
            
            June
      30,Per
      Share
            
            
            Issued
            
            
            Expired
            
            
            2008$
            1.50
            
            
            
            13,954,348
            
            
            
            (6,954,348
            )
            
            
            7,000,000$
            2.50
            
            
            
            10,964,130
            
            
            
            (5,464,130
            )
            
            
            5,500,000$
            4.50
            
            
            
            6,977,174
            
            
            
            (3,477,174
            )
            
            
            3,500,000$
            5.50
            
            
            
            6,977,174
            
            
            
            (3,477,174
            )
            
            
            3,500,000$
            6.50
            
            
            
            6,977,174
            
            
            
            (3,477,174
            )
            
            
            3,500,000$
            8.50
            
            
            
            3,986,957
            
            
            
            (1,986,957
            )
            
            
            2,000,00049,836,957
            
            
            
            (24,836,957
            )
            
            
            25,000,000








All
warrants have a two-year exercise period from the date of issuance of the
warrants. No registration rights were granted to the Investors in connection
with the March Financing and the shares and warrants issued in the March
Financing will be restricted securities, subject to the applicable restrictions
set forth in Regulation S promulgated under the Securities Act of 1933, as
amended.





PLC
Acquisition





Effective
November 21, 2006, the Company has acquired 50% of the outstanding capital stock
of Project Life Cycle Partners, Ltd. (“PLC”), a technology consulting firm
located in Dublin, Ireland. Total consideration for the transaction was
$1,000,000, consisting of $200,000 cash and 2,222,220 shares of the Company’s
common stock, valued at $0.36 per share based upon a 30-day average closing
price per share. In accordance with the PLC purchase agreement, the Company
issued an additional 1,111,110 shares since the 30-day average closing price per
share of the Company’s stock was less than $0.36 on the on-year anniversary of
the PLC acquisition. No additional shares or earn-outs are required to be paid
for the PLC acquisition.





22
 Table of Contents


Additional Financing
Required





Management
plans to continue raising additional capital through a variety of fund raising
methods during fiscal 2009 and to pursue all available financing alternatives in
this regard. Management may also consider a variety of potential partnership or
strategic alliances to strengthen its financial position. Although we have been
successful in the past in raising capital, no assurance can be given that these
sources of financing will continue to be available to us and/or that demand for
our equity/debt instruments will be sufficient to meet our capital needs, or
that financing will be available on terms favorable to us. The financial
statements do not include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should we be unable
to continue as a going concern.





If
funding is insufficient at any time in the future, we may not be able to take
advantage of business opportunities or respond to competitive pressures, or may
be required to reduce the scope of our planned product development and
marketing efforts, any of which could have a negative impact on our business and
operating results. In addition, insufficient funding may have a material adverse
effect on our financial condition, which could require us to:





·
            curtail
      operations significantly;


·
            sell
      significant assets;


·
            seek
      arrangements with strategic partners or other parties that may require us
      to relinquish significant rights to products, technologies or markets;
      or


·
            explore
      other strategic alternatives including a merger or
  sale;




To the
extent that we raise additional capital through the sale of equity or
convertible debt securities, the issuance of such securities may result in
dilution to existing stockholders. If additional funds are raised through the
issuance of debt securities, these securities may have rights, preferences and
privileges senior to holders of common stock and the terms of such debt could
impose restrictions on our operations. Regardless of whether our cash assets
prove to be inadequate to meet our operational needs, we may seek to compensate
providers of services by issuance of stock in lieu of cash, which may also
result in dilution to existing shareholders.





Certain
Indebtedness





Paul Egan
and Ciaran Egan have delayed payment of a portion of their salary in order to
conserve our cash. At June 30, 2008, $317,385 and $147,123 of accrued salaries
were owed to Paul Egan and Ciaran Egan, respectively.  At June 30,
2007, $49,901 and $81,649 of accrued salaries were owed to Paul Egan and Ciaran
Egan, respectively.





Paul Egan
has also advanced the funds to the Company. These advances accrue interest at
the rate of 7% per annum.  At June 30, 2008, the Company owned the
amount of $217,613 to Paul Egan for advances, plus $9,179 of accrued
interest.





Pursuant
to Paul Egan’s and Ciaran Egan’s employment agreements, the Company provides the
officers a car allowance. These allowance have not been paid during the year
ended June 30, 2008. At June 30, 2008, the Company has accrued the amount of
$30,786 to Paul Egan and $30,786 to Ciaran Egan for car allowances.





Exchange
Rates





Our
operations are principally conducted in Finland through our subsidiary Rahaxi,
which operates in its local currency, the Euro. We also have operations in the
Dominican Republic under the name ePayLatina S.A., and Freestar Dominicana, Inc.
operating in its local currency, the Dominican Republic Peso. All assets and
liabilities are translated at exchange rates in effect at the end of the year.
Accounts for consolidated statements of operations are translated at weighted
average rates for the year. Gains and losses from translation of foreign
currency into U.S. dollars are included in other comprehensive income
(loss). The accumulated foreign currency translation adjustment was $108,352 for
the year ended June 30, 2008.





A
significant portion of our revenues and expenses is denominated in currencies
other than U.S. dollars; Rahaxi generates its revenue in Euros. Any significant
change in exchange rates may have a favorable or negative effect on both our
revenues and operational costs. In particular, the value of the U.S. dollar to
the Euro impacts our operating results. Our expenses are not necessarily
incurred in the currency in which revenue is generated, and, as a result, we are
required from time to time to convert currencies to meet our obligations. In
addition, a significant portion of our financial statements are prepared in Euro
and translated to U.S. dollars for consolidation.





Inflation





The
impact of inflation on our costs, and the ability to pass on cost increases to
our customers over time is dependent upon market conditions. We are not aware of
any inflationary pressures that have had any significant impact on our
operations over the past fiscal year, and we do not anticipate that inflationary
factors will have a significant impact on future operations.





23
 Table of Contents




Off-Balance Sheet
Arrangements





We do not
maintain off-balance sheet arrangements nor do we participate in non-exchange
traded contracts requiring fair value accounting treatment.





Other





We do not
provide post-retirement or post-employment benefits requiring charges under
Statements of Financial Accounting Standards No. 106 and No. 112.





Critical Accounting
Policies





The SEC
has issued Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting companies
provide additional disclosure and commentary on their most critical accounting
policies. In FRR 60, the Commission has defined the most critical accounting
policies as the ones that are most important to the portrayal of a company's
financial condition and operating results, and require management to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
our most critical accounting policies include: (a) use of estimates in the
preparation of financial statements; (b) stock-based compensation arrangements;
(c) revenue recognition; and (d) long-lived assets. The methods, estimates and
judgments we use in applying these most critical accounting policies have a
significant impact on the results we report in our financial
statements.




Use of Estimates in the Preparation
of Financial Statements





The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate these estimates, including those related to revenue
recognition and concentration of credit risk. We base our estimates on
historical experience and on various other assumptions that is believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.





Stock-Based
Compensation Arrangements





The
Company intends to issue shares of common stock to various individuals and
entities for management, legal, consulting and marketing services. These
issuances will be valued at the fair market value of the service provided and
the number of shares issued is determined, based upon the open market closing
price of common stock as of the date of each respective transaction. These
transactions will be reflected as a component of selling, general and
administrative expenses in the accompanying statement of
operations.





Revenue
Recognition





The
Company recognizes revenues from contracts in which the Company provides only
consulting services as the services are performed. The contractual terms of the
agreements dictate the recognition of revenue by the Company. 
 Payments received in advance are deferred until the service is
provided.





Contract
costs include all direct equipment, material, and labor costs and those indirect
costs related to contract performance, such as indirect labor. Selling, general
and administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in contract performance, contract conditions, and
estimated profitability that may result in revisions to costs and income are
recognized in the period in which the revisions are determined.




For
revenue from product sales, the Company recognizes revenue in accordance with
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which
superseded SAB No. 101, "Revenue Recognition in Financial Statements." SAB No.
101 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the selling price is fixed and determinable; and (4)
collectability is reasonably assured. Determination of criteria (3) and (4) are
based on management's judgments regarding the fixed nature of the selling prices
of the products delivered and the collectability of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances, and
other adjustments are provided for in the same period the related sales are
recorded. The Company defers any revenue for which the product has not been
delivered or is subject to refund until such time that the Company and the
customer jointly determine that the product has been delivered or no refund will
be required. SAB No. 104 incorporates Emerging Issues Task Force ("EITF") No.
00-21, "Multiple-Deliverable Revenue Arrangements." EITF No. 00-21 addresses
accounting for arrangements that may involve the delivery or performance of
multiple products, services and/or rights to use assets. The effect of
implementing EITF No. 00-21 on the Company's consolidated financial position and
results of operations was not significant. This issue addresses determination of
whether an arrangement involving more than one deliverable contains more than
one unit of accounting and how the arrangement consideration should be measured
and allocated to the separate units of accounting. EITF No. 00-21 became
effective for revenue arrangements entered into in periods beginning after June
15, 2003. For revenue arrangements occurring on or after August 1, 2003, the
Company revised its revenue recognition policy to comply with the provisions of
EITF No. 00-21.


24
 Table of Contents


For those
contracts which contain multiple deliverables, management must first determine
whether each service, or deliverable, meets the separation criteria of EITF No.
00-21. In general, a deliverable (or a group of deliverables) meets the
separation criteria if the deliverable has standalone value to the customer and
if there is objective and reliable evidence of the fair value of the remaining
deliverables in the arrangement. Each deliverable that meets the separation
criteria is considered a "separate unit of accounting." Management allocates the
total arrangement consideration to each separate unit of accounting based on the
relative fair value of each separate unit of accounting. The amount of
arrangement consideration that is allocated to a unit of accounting that has
already been delivered is limited to the amount that is not contingent upon the
delivery of another separate unit of accounting. After the arrangement
consideration has been allocated to each separate unit of accounting, management
applies the appropriate revenue recognition method for each separate unit of
accounting as described previously based on the nature of the arrangement. All
deliverables that do not meet the separation criteria of EITF No. 00-21 are
combined into one unit of accounting, and the appropriate revenue recognition
method is applied.




Processing
fee revenue is earned based upon the actual number of transactions processed
through the Company's processing system. Transaction processing fees are
recognized in the period that the service is performed. These fees are typically
charged on a per transaction basis, depending on the arrangement with the
customer.




Long-lived
Assets





Long-lived
assets to be held and used are analyzed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. We evaluate at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment. If there are
indications of impairment, we use future undiscounted cash flows of the related
asset or asset grouping over the remaining life in measuring whether the assets
are recoverable. In the event such cash flows are not expected to be sufficient
to recover the recorded asset values, the assets are written down to their
estimated fair value. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value of asset less the cost to
sell.





Forward Looking
Statements





This Form
10-K contains "forward looking statements" within the meaning of Rule 175 of the
Securities Act of 1933, as amended, and Rule 3b-6 of the Securities Act of 1934,
as amended. When used in this Form 10-K, the words "expects," "anticipates,"
"believes," "plans," "will" and similar expressions are intended to identify
forward-looking statements. These are statements that relate to future periods
and include, but are not limited to, statements regarding the adequacy of our
capital resources, need and ability to obtain additional financing, the features
and benefits of our services, our operating losses and negative cash flow, and
our critical accounting policies.





Forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this report, and in particular, the risks discussed in Item 1,
Risk Factors.




These
forward-looking statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in its expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.





Our
operating results can vary significantly depending upon a number of factors,
many of which are outside our control. In addition to the Risk Factors set forth
in Item 1, general factors that may affect our operating results
include:





·
            market
      acceptance of and changes in demand for products and
    services;


·
            a
      small number of customers account for, and may in future periods account
      for, substantial portions of our revenue, and revenue could decline
      because of delays of customer orders or the failure to retain
      customers;


·
            gain
      or loss of clients or strategic
relationships;


·
            announcement
      or introduction of new services and products by us or by our
      competitors;


·
            price
      competition;


·
            the
      ability to upgrade and develop systems and infrastructure to accommodate
      growth;


·
            the
      ability to introduce and market products and services in accordance with
      market demand;


·
            changes
      in governmental regulation; and


·
            reduction
      in or delay of capital spending by clients due to the effects of
      terrorism, war and political
instability.




ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTART
DATA





Consolidated
financial statements as of and for the fiscal year ended June 30, 2008 and for
the fiscal year ended June 30, 2007 are presented in a separate section of this
report following Item 14.





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





Not
applicable.





25
 Table of Contents




ITEM9A. CONTROLS AND PROCEDURES





Internal Control Over
Financial Reporting – Management’s Annual Report on Internal Control over
Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) of
the Exchange Act. Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or
detected.  Under the supervision and with the participation of our
management, including Mr. Paul Egan, our Chief Executive Officer, and Mr.
Ciaran Egan, our Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based upon the
framework in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).





Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our internal control over financial reporting was not effective.
Please see the subsection “Significant Deficiencies In Disclosure Controls And
Procedures Or Internal Controls” below.





This
annual report does not include an audit report of our registered public
accounting firm regarding internal control over financial reporting. In
addition, Management's report on internal control over financial reporting was
not subject to attestation by our registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only management's report in
this annual report.





Changes in internal
controls




Except as
described below, there were no changes in internal controls over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially effect, our internal
control over financial reporting. As described below, as a result of our
evaluation of our





Changes in internal
controls




Except as
described below, there were no changes in internal controls over financial
reporting that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially effect, our internal
control over financial reporting. As described below, as a result of our
evaluation of our internal control over financial reporting as of June 30, 2008,
we determined that our controls and procedures are not effective and subsequent
to the period of this report, began to implement changes to our internal
controls.




Significant Deficiencies In
Disclosure Controls And Procedures Or Internal Controls




We have
determined there were errors in accounting for the status of certain shares of
the Company’s common stock which had been issued pursuant to a financing
agreement. The Company previously reported that these shares of stock had been
held in escrow, when in fact these shares were improperly in the possession of
third parties.




The
Company completed its review in order to design enhanced controls and procedures
to remedy this deficiency, and determined that such escrows should be avoided in
the future where possible, or an outside third-party escrow should be utilized.
The Company is not aware of any other deficiencies in its system of disclosure
controls and procedures.





ITEM9B. OTHER INFORMATION





None.




26
 Table of Contents




PART
III.





ITEM10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE





Directors and Executive
Officers





The
names, ages, and respective positions of our directors, executive officers, and
key employees are set forth below. The directors named below will serve until
the next annual meeting of our stockholders or until their successors are duly
elected. Officers will hold their positions at the will of the board of
directors, subject to any employment agreements. There are no arrangements,
agreements or understandings between non-management shareholders and management
under which non-management shareholders may directly or indirectly participate
in or influence the management of our affairs.





Paul
Egan, President/Chief Executive Officer/Director





Mr. Egan,
age 45, has served as our Chief Executive Officer and President since August
2001. Mr. Egan founded ePayLatina S.A., which developed the PaySafeNow system
and was acquired by Freestar in August 2001. Before founding ePayLatina, Mr.
Egan was the vice-president of Inter-Leisure, S. A. Mr. Egan also worked with
the South African firm ENGEN to oversee the new project division after their
acquisition of Mobil Oil South Africa and to implement their construction
projects and corporate identity. He studied construction management in
Birmingham, England and worked for Trafalger House Construction Division on
major projects in London Banking Districts. Mr. Egan attended Teenier College
Dublin.





Ciaran
Egan, Secretary/Treasurer/Chief Financial Officer/Director





Mr. Egan,
age 44, has served as our Chief Financial Officer since August 2001. Mr. Egan
joined ePayLatina S.A. in May 2001 where he took the position of vice president.
From 1994 to 2001, he was employed by Midiron International Recruitment based in
Johannesburg, South Africa, as managing director, with the central focus on
establishing new markets in the Middle East, United Kingdom and Ireland. He was
successful in obtaining and completing contracts with the Ministry of Defense
and Aviation in Saudi Arabia and the United Arab Emirates. He also implemented
contracts with the National Health Services in the United Kingdom as well as
several private institutions in Ireland. Prior to that, Mr. Egan was the
National Sales Director for Sellrange Ltd (Ireland). Mr. Egan graduated from
Terenure College Dublin in 1982.





Fionn
Stakelum, Director





Mr.
Stakelum, age 38, was appointed to our board of directors in October 2002. Since
2003, he has also served as our Director of European Operations. Mr.
Stakelum is an Irish national who holds a Bachelor of Commerce Degree (Hons)
with a major in Systems Analysis obtained from University College Galway in
1990. His experience includes a position as a technical support engineer for the
Corel Corporation, which he held from 1994 to 1996. Mr. Stakelum's experience
also includes the position of localization software engineer, also for the Corel
Corporation, for the period 1996 to 1997. He moved to Lotus Inc. in 1997 and
remained there until 1999, when he joined Microsoft Inc. as a lead software
development engineer (a position he held until the latter part of 2001). From
that time to the present, Mr. Stakelum has functioned as an independent
consultant. He was previously involved in the localization of MSOffice 2000 and
XP in over 20 languages.





Carl M.
Hessel, Director





Mr.
Hessel, age 45, was appointed to our board of directors in April 2004. He
founded Margaux Investment Management Group in 2001, which focuses on brokerage
advisory and proprietary management services to international high-net-worth
investors and their intermediaries. Prior to that, Bear Stearns employed Mr.
Hessel from 1997 to 2001. He was employed as a vice president at Merrill Lynch
from 1996 to 1997, where he was responsible for creating a global high-net-worth
wealth management platform. Mr. Hessel began his career at Goldman Sachs
International in 1993 and was employed there until 1996, where he was
responsible for expanding its Scandinavian ultra high-net-worth market. Mr.
Hessel received his MBA from Wharton Business School, University of
Pennsylvania, with a degree in Finance and Management. He has also been awarded
the Marcus Wallenberg Foundation Scholarship.





Killian
McGrath, Director




Mr.
McGrath, age 33,  joined our board of directors in June 2008.  Mr
McGrath was educated at the Carmelite College in Castlemarter, Co Cork, and
at St. Augustus College in Durgavan County, Waterford, Republic of Ireland.
Mr McGrath set up and founded  construction companies in Germany,
United States of America and in the  Republic of Ireland. He has been
Managing Director of these various  international and domestic
construction for more than 10  years and  these companies
were involved in the development of major residential  and commercial
developments in Europe and the United States. Through his involvement in the
construction industry over the last 18  years he has also developed
extensive contacts within the financial  services industry in
Europe.


Key
Employees





Jose
Enrique Perez - Chief Technical Officer





Mr.
Perez, age 48, joined Freestar as Chief Technical Officer in September 2006. His
responsibilities are as head of our technology development and deployments, and
will be in charge of developing new products and services. Previously, Mr. Perez
was senior vice president, chief of global offshore development, and general
manager of SIA Hypercom Latvia. Hypercom Corp. is a global leader in electronic
payment products and services, headquartered in Phoenix. Mr. Perez was
responsible for driving Hypercom's global offshore software strategy, delivering
competitive software products worldwide, managing its development centers in
Latvia and Russia and managing the SIA Hypercom Latvia operations. Prior to his
14 years in technology development and management at Hypercom, Mr. Perez was an
Adjunct Professor at the Florida Computer and Business School. He is
currently completing a Ph.D. in International Business at
Kennedy-Western University, Agoura Hills, California. Mr. Perez is fluent
in English, Russian, Spanish and Portuguese.





27
 Table of Contents




Family
Relationships





Mr.
Stakelum is the brother-in-law of Paul Egan and Ciaran Egan. Paul Egan and
Ciaran Egan are brothers.





Compliance with Section
16(a) of the Exchange Act





Section
16(a) of the Exchange Act requires executive officers and directors, and persons
who beneficially own more than 10% of any class of our equity securities to file
initial reports of ownership and reports of changes in ownership with the SEC.
Executive officers, directors and beneficial owners of more than 10% of any
class of our equity securities are required by SEC regulations to furnish us
with copies of all Section 16(a) forms they file.





To our
knowledge, based solely on the review of copies of such reports furnished to us
during the year ended June 30, 2008, we are not aware of any reports which were
not timely filed except as follows: (i) a Form 5 filed late on September 26,
2007 by Paul Egan reporting the conversion of Series B Preferred Stock into
shares of Common Stock, (ii) a Form 4 filed late on February 21, 2008 by Carl
Hessel reporting a stock option issuance and exercise by his spouse, Donna
Hessel, (iii) Form 4 filed late on April 16, 2008 by Carl Hessel reporting
grants of shares, (iv) a Form 4 filed late on July 23, 2008 by Paul Egan
reporting a grant of shares, (v)  a Form 4 filed late on July 23, 2008
by Ciaran Egan reporting a grant of shares and the conversion of Series B
Preferred Stock into shares of Common Stock, (vi) a Form 4 filed late on August
7, 2008 by Fionn Stakelum reporting the conversion of Series B Preferred Stock
into shares of Common Stock, (vii) a Form 4  filed late on October 14,
2008 reporting the grant of options to Paul Egan, (viii) a Form 4 filed late on
October 14, 2008 reporting the grant of options to Ciaran Egan and (ix) Killian
McGrath failed to timely file a Form 3  in connection with his
appointment to our Board of Directors. We expect the Form 3 filing to be made
shortly after the filing of this Form 10-K.  All of these documents
have been prepared and filed with the SEC. Other than these, we are not aware of
any other required reports that were not timely filed with regard to the fiscal
year ended June 30, 2008.




Code of
Ethics





We have
adopted a Code of Ethics that applies to our directors and senior officers,
including our principal executive, financial and accounting officers. A copy of
the Code of Ethics is attached as an exhibit to this Annual Report on Form 10-K
and is also available on our website at www.freestartech.com. We intend to
disclose on our website amendments to, or waivers from, any provision of our
Code of Ethics which applies to our Chief Executive Officer, Chief Financial
Officer, principal accounting officer and persons performing similar functions
and amendments to, or waivers from, any provision which relates to any element
of our Code of Ethics described in Item 406(b) of Regulation S-B.





Committees of the Board Of
Directors





We
presently do not have a compensation committee, nominating committee, an
executive committee of our board of directors, stock plan committee or any other
committees, except for an audit committee.





Audit
Committee





Our audit
committee consists of Paul Egan, Ciaran Egan, and Carl Hessel. The audit
committee has not adopted a written charter. Our board of directors has
determined that we do not have an audit committee financial expert serving on
our audit committee; we have been unable to secure the services of such a
person.





The
primary responsibility of the audit committee is to oversee our financial
reporting process on behalf of our board of directors and report the result of
their activities to the board. Such responsibilities include, are not limited
to, the selection, and if necessary the replacement, of our independent
auditors, review and discuss with such independent auditors (i) the overall
scope and plans for the audit, (ii) the adequacy and effectiveness of the
accounting and financial controls, including our system to monitor and manage
business risks, and legal and ethical programs, and (iii) the results of the
annual audit, including the financial statements to be included in our annual
report on Form 10-K.




ITEM11. EXECUTIVE COMPENSATION





Summary Compensation
Table





The
following table sets forth information concerning the compensation for services
in all capacities rendered to us for the two fiscal years ended June 30, 2008
and June 30, 2007, of our Chief Executive Officer and our other two executive
officers whose annual compensation exceeded $100,000 in the fiscal year ended
June 30, 2008. We refer to the Chief Executive Officer and these other officers
as the named executive officers.





28
 Table of Contents




SUMMARY
COMPENSATION TABLE








Name
      and Principal Position
            
            Year
            
            
            Salary
      ($)
            
            
            
            Bonus
      ($)
            
            
            
            Stock
      Awards ($)(7)
            
            
            
            Options
      Awards ($)(7)
            
            
            
            Non-Equity
      Incentive Plan Compensation ($)
            
            
            
            Nonqualified
      Deferred Compensation on Earnings ($)
            
            
            
            All
      Other Compensation ($)
            
            
            
            Total
      ($)Paul
      Egan CEO/President / Director
            
            (1)
      2008
            
            $
            440,788
            
            
            $
            -
            
            
            $
            1,000,000
            
            
            $
            134,629
            
            
            $
            -
            
            
            $
            -
            
            
            $
            26,447
            
            
            $
            1,601,864(2)
      2007
            
            $
            276,301
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,002
            
            
            $
            278,303Ciaran
      Egan
              CFO/
      Secretary / Treasurer / Director
            
            (3)
      2008
            
            $
            440,788
            
            
            $
            -
            
            
            $
            750,000
            
            
            $
            134,629
            
            
            $
            -
            
            
            $
            -
            
            
            $
            26,447
            
            
            $
            1,351,864(4)
      2007
            
            $
            254,405
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,002
            
            
            $
            256,407Fionn
      Stakelum Director / Director of European Operations
            
            (5)
      2008
            
            $
            105,789
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            105,789(6)
      2007
            
            $
            84,967
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            84,967








(1) 2008
amounts for Paul Egan included the following:  salary consists of
$440,788 from Mr. Egan's role as Chief Executive Officer of Freestar Technology;
20,000,000 shares of common stock with a fair value of $1,000,000; options to
purchase 6,000,000 shares of common stock at a price of $0.05 per share, with a
fair value of $134,629; and a car allowance (accrued but unpaid) of
$26,447.





(2) 2007
amounts for Paul Egan included the following:  salary consists of
$262,004 from Mr. Egan's role as Chief Executive Officer of Freestar Technology
and $14,297 from Mr. Egan's position as Chief Executive Officer of our
subsidiary Freestar Dominicana; and car allowance of $2,002 (accrued but
unpaid).  During the year ended June 30, 2007, Paul Egan converted a
total of 2,000,000 shares of preferred stock into a total of 13,700,000 shares
of common stock.  There was no expense to the Company or income to
Paul Egan as a result of these conversions.





(3) 2008
amounts for Ciaran Egan include salary of $440,788 from Mr. Egan's role as Chief
Financial Officer of Freestar Technology; 15,000,000 shares of common stock with
a fair value of $750,000, accrued but unissued at June 30, 2008; options to
purchase 6,000,000 shares of common stock at a price of $0.05 per share, with a
fair value of $134,629; and a car allowance (accrued and unpaid) in the amount
of $26,447.





(4) 2007
amount for Ciaran Egan include the following: salary consists of $240,109 from
Mr. Egan's role as Chief Financial Officer of Freestar Technology and $14,298
from Mr. Egan's position as Chief Financial Officer of our subsidiary Freestar
Dominicana.





(5) 2008
amounts include $105,789 from Mr. Stakelum's role as Director of European
Operations for Freestar Technology.





(6) 2007
amounts include $84,967 from Mr. Stakelum's role as Director of European
Operations for Freestar Technology.  During the year ended June 30,
2007, Mr. Stakelum converted a total of 500,000 shares of preferred stock into a
total of 855,000 shares of common stock.  There was no expense to the
Company or income to Fionn Stakelum as a result of these
conversions.





(7)  With
respect to equity compensation, the dollar amounts shown above reflect the value
of such awards under SFAS 123R as recognized in the financial
statements.  With respect to stock awards, the value was calculated as
the number of shares multiplied by the closing price on the grant
date.





The
following table provides information on exercisable and unexercisable options
and unvested stock awards held by the named executive officers on June 30,
2008.





29
 Table of Contents








OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END





Option
      AwardsName
            
            Number
      of securities underlying unexercised options
              (#)
              exercisable
            
            
            Number
      of securities underlying unexercised options
              (#)
              unexercisable
            
            
            Equity
      incentive plan awards: Number of securities underlying unexercised earned
      options
              (#)
            
            
            Option
      exercise price ($)
            
            
            Option
      Expiration DatePaul
      Egan
            
            
            6,000,000
            
            
            
            --
            
            
            
            --
            
            
            
            0.05
            
            
            
            6-17-2009Ciaran
      Egan
            
            
            6,000,000
            
            
            
            --
            
            
            
            --
            
            
            
            0.05
            
            
            
            6-17-2009Fionn
      Stakelum
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --








Employment Agreements;
Severance Agreements; Change of Control Agreements





We do not
have any change of control agreements with our named executive
officers.  On May 29, 2007, we entered into new employment agreements
with each of Paul Egan and Ciaran Egan, which replace their prior employment
agreements with the Company.  As described below, these agreements
provide certain severance benefits if employment is terminated under certain
circumstances.




Chief
Executive Officer:





In August
2001, we entered into an employment agreement with Paul Egan, our President and
Chief  Executive  Officer.  Under the terms of the
agreement, Mr. Egan was entitled to a minimum annual salary of $150,000 per
year. In addition, Mr. Egan received an automobile allowance not to exceed
$1,500 per
month.  This  employment  agreement  expired  in
August  2004,  at which time an addendum to
this  employment  contract was executed which (i) extended
all terms and conditions of this employment  contract to April 9,
2007, and (ii) provided that a review of Paul Egan’s remuneration take place on
or before December 31, 2004.  Effective January 1, 2006, Paul Egan’s
salary was increased to $264,000 per year.





On May
29, 2007, we entered into new employment agreement with Paul Egan that replaces
his prior employment agreement with the Company. Paul Egan’s employment
agreement has a five year term. Under the agreement, Paul Egan will continue to
serve in his current role of President and Chief Executive Officer of the
Company, reporting to the Board of Directors.  The Company will pay
Paul Egan €300,000 (approximately US$403,000, based on current exchange rates at
the time the agreement was executed) per year in base salary, plus an automobile
allowance of €1,500 (approximately US$2,000 based on current exchange rates at
the time the agreement was executed) per month and other
benefits.  The Board of Directors will review the annual base salary
each year, but may not reduce it below the initial base salary
level.  Paul Egan will be eligible for bonuses to be paid in stock or
stock options, with such bonuses to be determined by the Board of
Directors.  If Mr. Egan’s employment is terminated by the Company
Without Cause (as defined in the employment agreement) or by Mr. Egan for Good
Reason (as defined in the employment agreement), then Mr. Egan shall be entitled
to a lump sum payment equal to one year’s annual salary, plus any applicable
bonuses.





Effective
March 1, 2006, Paul Egan began to draw a salary of $25,000 per year for his
position as Chief Executive Officer of our subsidiary, Freestar
Dominicana.





On June
17, 2008, the Board of Directors approved the following equity compensation for
Paul Egan: (i) issuance of twenty million shares of fully vested common stock,
subject to resale restrictions under Rule 144; (ii)  grant of options
to purchase six million shares of restricted common stock at an exercise price
of $0.05 per share, with half of such options having with a net exercise, or
cashless exercise provision.





At June
30, 2008, the Company owed Paul Egan the amount of $317,385 in accrued salary,
and an additional $30,786 in accrued car allowance. Also at June 30, 2008, the
Company owed Mr. Egan $217,613 for cash advances he had made to the Company,
plus an additional $9,179 for interest due on these advances. At June 30, 2007,
the Company owed Paul Egan the amount of $49,901 in accrued salary, and an
additional $2,022 in accrued car allowance. Also at June 30, 2007, the Company
owed Mr. Egan $56,126 for cash advances he had made to the Company, plus an
additional $264 for interest due o on these advances.





30
 Table of Contents




Chief
Financial Officer:





In August
2001, we entered into an employment agreement with Ciaran Egan, our President
and Chief Executive Officer.  Under the terms of the agreement, we Mr.
Egan was entitled to receive a minimum annual salary of $120,000 per year. In
addition, Mr. Egan received an automobile allowance not to exceed $1,500 per
month.  This  employment  agreement  expired  in
August  2004,  at which time an addendum to
this  employment  contract was executed which (i) extended
all terms and conditions of this  employment  contract to
April 9, 2007, and (ii) provided that a review of Ciaran
Egan’s  remuneration  take place on or before December 31,
2004.  Effective January 1, 2006, Ciaran Egan’s salary was increased
to $240,000 per year.





On May
29, 2007, we entered into new employment agreement with Ciaran Egan that
replaces his prior employment agreement with the Company. Ciaran Egan’s
employment agreement has a five year term. Under the agreement, Ciaran Egan will
continue to serve in his current role as Chief Executive Officer of the Company,
reporting to the President. The Company will pay Ciaran Egan €300,000
(approximately US$403,000, based on current exchange rates at the time the
agreement was executed) per year in base salary, plus an automobile allowance of
€1,500 (approximately US$2,000 based on current exchange rates at the time the
agreement was executed) per month and other benefits.  The Board of
Directors will review the annual base salary each year, but may not reduce it
below the initial base salary level.  Ciaran Egan will be eligible for
bonuses to be paid in stock or stock options, with such bonuses to be determined
by the Board of Directors.  If Mr. Egan’s employment is terminated by
the Company Without Cause (as defined in the employment agreement) or by Mr.
Egan for Good Reason (as defined in the employment agreement), then Mr. Egan
shall be entitled to a lump sum payment equal to one year’s annual salary, plus
any applicable bonuses.





Effective
March 1, 2006, Ciaran Egan began to draw a salary of $25,000 per year for his
position as Chief Financial Officer of our subsidiary, Freestar
Dominicana.





On June
17, 2008, the Board of Directors approved the following equity compensation for
Ciaran Egan: (i) issuance of fifteen million shares of fully vested common
stock, subject to resale restrictions under Rule 144; (ii)  grant of
options to purchase six million shares of restricted common stock at an exercise
price of $0.05 per share, with half of such options having with a net exercise,
or cashless exercise provision.





At June
30, 2008, the Company owed Ciaran Egan the amount of $147,123 in accrued salary,
and an additional $30,786 in accrued car allowance. Also at June 30, 2008, the
Company owed Mr. Egan $19,268 for cash advances he had made to the Company, plus
an additional $2,069 for interest due on these advances.  At June 30,
2007, the Company owed Ciaran Egan the amount of $81,649 in accrued salary, and
an additional $2,022 in accrued car allowance.




DIRECTOR
COMPENSATION





Name
            
            Fees
      Earned
              or
      Paid in
              Cash
              ($)
            
            
            Stock
              Awards
              ($)
            
            
            Option
              Awards
              ($)
            
            
            Non-Equity
              Incentive
      Plan
              Compensation
              ($)
            
            
            Nonqualified
              Deferred
              Compensation
              Earnings
              ($)
            
            
            All
      Other
              Compensation
              ($)
            
            
            Total
              ($)Paul
      Egan
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Ciaran
      Egan
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Fionn
      Stakelum
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Killian
      McGrath
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Carl
      Hessel (1)
            
            $
            -
            
            
            $
            303,000
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            303,303






(1) In
fiscal 2008, we issued a total of 2,300,000 shares of common stock with a fair
value of $303,000 to Mr. Hessel as director compensation.





All
directors may be reimbursed for their reasonable expenses incurred in connection
with attending meetings of the board of directors or management committees.
Under our Non-Employee Directors and Consultants Retainer Stock Plan, our
directors are eligible for grants of stock of stock options for their service as
directors. In fiscal 2007, we adopted a Board compensation policy that provides
$50,000 per year in compensation to our independent directors. Only Mr. McGrath
qualified as an independent director.  Mr. McGrath joined the Board in
June 2008 and did not receive any compensation during fiscal year
2008.





Other
than Mr. McGrath, each of our directors also provides services as an employee or
consultant. See “Summary Compensation Table” above in this Item 10, along with
“Employment Agreements” below and Item 12 “Certain Relationships and Related
Transactions” for a description of compensation granted to our directors in
their capacities as employees and/or consultants and in the case of Mr. Hessel,
for certain transactions with his spouse.





31
 Table of Contents




Compensation Committee
Interlocks and Insider Participation





As noted
above, we do not have any compensation committee.  Our entire Board of
Directors, which includes our CEO - Paul Egan, CFO - Ciaran Egan, and Director
of European Operations - Fionn Stakelum, all participated in deliberations
regarding executive officer compensation. During fiscal year 2008, none of our
executive officers served on the compensation committee (or its equivalent) or
board of directors of another entity whose executive officer served on our Board
of Directors.





ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, AND RELATED STOCKHOLDER MATTERS.





The
following tables set forth information regarding the beneficial ownership of
shares of our Common Stock and Series A Preferred Stock by (i) all stockholders
known to the us to be beneficial owners of more than 5% of the outstanding
stock; and (ii) all directors, executive officers, and our key employees,
individually and as a group.  As of September 26, 2008 there were
428,671,694 shares of Common Stock issued and outstanding,
and  1,000,000 shares of Series A  preferred stock outstanding,
each share of which is convertible into 1.71 shares of common stock upon the
attainment of certain financial goals by the Company (which have not
occurred).


Class
      ofName
              
              Security
              
              Shares
              
              
              %
      of classPaul
      Egan (1)
              
              Common
              
              
              55,168,093
              
              
              
              12.7
              %31
      Mespil Road, BallsbridgeDublin
      2 IrelandCiaran
      Egan (2)
              
              Common
              
              
              41,549,794
              
              
              
              9.6
              %31
      Mespil Road, BallsbridgeDublin
      2 IrelandCarl
      M. Hessel (3)
              
              Common
              
              
              16,162,426
              
              
              
              3.8
              %31
      Mespil Road, BallsbridgeDublin
      2 IrelandFionn
      Stakelum
              
              Common
              
              
              2,357,143
              
              
              
              0.5
              %31
      Mespil Road, BallsbridgeDublin
      2 IrelandKillian
      McGrath
              
              Common
              
              
              3,000,200
              
              
              
              0.7
              %31
      Mespil Road, BallsbridgeDublin
      2 IrelandAll
      Directors & officers
              
              Common
              
              
              115,237,456
              
              
              
              26.8
              %as
      a group (5 persons) (4)





(1) Total
shares owned includes options to purchase 6,000,000 shares of common stock that
are exercisable within 60 days from the date hereof.1,000,000
shares of Series A Preferred Stock are not included since they are not
convertible until the Company attains certain financial goals, which have not
been achieved.





(2) Total
shares owned includes options to purchase 6,000,000 shares of common stock that
are exercisable within 60 days from the date hereof.





(3)
300,000 of the shares are held in the name of Isabella Hessel, Mr. Hessel’s
daughter. 7,300,000 of the shares are held in the name of Donna Hessel, Mr.
Hessel’s wife.





(4) Total
shares owned includes options to purchase 12,000,000 shares of common stock that
are exercisable within 60 days from the date hereof, as set forth in notes 1 and
2 above.






32
 Table of Contents





Class
      ofName
            
            Security
            
            Shares
            
            
            %
      of classPaul
      Egan
            
            Preferred
            
            
            1,000,000
            
            
            
            100.0
            %31
      Mespil Road, Ballsbridge
            
            Series
      ADublin
      2 IrelandCiaran
      Egan
            
            Preferred
            
            
            -
            
            
            
            0.0
            %31
      Mespil Road, Ballsbridge
            
            Series
      ADublin
      2 IrelandFionn
      Stakelum
            
            Preferred
            
            
            -
            
            
            
            0.0
            %31
      Mespil Road, Ballsbridge
            
            Series
      ADublin
      2 IrelandCarl
      M. Hessel
            
            Preferred
            
            
            -
            
            
            
            0.0
            %31
      Mespil Road, Ballsbridge
            
            Series
      ADublin
      2 IrelandKillian
      McGrath
            
            Preferred
            
            
            -
            
            
            
            0.0
            %31
      Mespil Road, Ballsbridge
            
            Series
      ADublin
      2 IrelandAll
      Directors & officers
            
            Preferred
            
            
            1,000,000
            
            
            
            100.0
            %as
      a group (5 persons) (4)
            
            Series
      A




Securities Authorized for
Issuance under Equity Compensation Plans





We have
adopted four equity compensation plans (none of which have been approved by our
shareholders):





(a)
Directors and Consultants Retainer Stock Plans
 
 On
October 25, 2001, the Company adopted a Non-Employee Directors and Consultants
Retainer Stock Plan (the Company adopted Amendment No. 4 to this plan on
December 20, 2004). The purposes of the plan are to enable the Company to
promote the interests of the company by attracting and retaining non-employee
directors and consultants capable of furthering the business of the Company and
by aligning their economic interests more closely with those of the Company’s
shareholders, by paying their retainer or fees in the form of shares of common
stock. A total of 75,000,000 shares of common stock have been registered under
this plan as a result of Form S-8’s filed with the SEC. Through June 30, 2008,
the Company had issued all 75,000,000 shares of common stock under this
plan.
 
 On
February 1, 2007, the Company adopted the 2007 Directors and Consultants Stock
Plan, authorizing an additional 35,000,000 shares of common stock for the same
purposes as the Non-Employee Directors and Consultants Retainer Stock Plan. On
April 17, 2008, the Company registered an additional 35,000,000 shares of common
stock under the 2007 Directors and Consultants Stock Plan for a total of
70,000,000 shares registered under this plan.  During the year ended
June 30, 2008, the Company issued 29,733,500  shares of common stock
under this plan and reserved an additional 3,029,271 shares for the exercise of
options.  At June 30, 2008, there is an aggregate of 30,985,222 shares
available for issuance under the 2007 Directors and Consultants Stock
Plan
 
 (b) Stock
Incentive Plans
 
 On
October 25, 2001, the Company adopted a Stock Incentive Plan (the company
adopted Amendment No. 3 to this plan on December 20, 2004). This plan is
intended to allow directors, officers, employees, and certain non-employees of
the Company to receive options to purchase company common stock. The purpose of
this plan is to provide these persons with equity-based compensation incentives
to make significant and extraordinary contributions to the long-term performance
and growth of the company, and to attract and retain employees. A total of
70,000,000 shares of common stock have been registered under this plan under
Form S-8’s filed with the SEC. Options granted under this plan are to be
exercisable for a period of ten years from the grant date at whatever price is
established by the board of directors, in its sole discretion, on the date of
the grant. Through June 30, 2008, the Company had issued all 70,000,000 shares
of common stock under this plan.
 
 On
February 1, 2007, the Company adopted the 2007 Stock Incentive Plan, authorizing
an additional 35,000,000 shares of common stock for the same purposes as the
Stock Incentive Plan. On April 17, 2008, the Company registered an additional
35,000,000 shares of common stock under the 2007 Stock Incentive Plan for a
total of 70,000,000 shares registered under this plan.   During
the year ended June 30, 2008, the Company issued 55,035,127  shares of
common stock under this plan and reserved an additional
1,075,000  shares for the exercise of options. At June 30, 2008, there
is an aggregate of 7,129,689 shares of common stock available for issuance under
the 2007 Stock Incentive Plan.




33
 Table of Contents





Equity
Compensation Plan Information


as
of June 30, 2008




Equity
      Compensation Plan Information
              As
      of June 30, 2008Plan
      Category
            
            Number
      of Securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            Weighted-average
      Exercise price of outstanding options, warrants and rights
    ($)
            
            Number
      of Securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in first
      column)Equity
      Compensation Plans approved by security holders
            
            None
            
            None
            
            NoneEquity
      Compensation Plans not approved by security holders
            
            (1)
      None(2)
      None(3)
            
            
            
            
            30,985,222(4)
            
            
            
            
            7,129,689Total(1)
      2001Non-Employee Directors and Consultants Retainer Stock
    Plan(2)
      2001 Stock Incentive Plan(3)
      2007 Directors and Consultants Stock Plan(4)
      2007 Stock Incentive Plan





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.





Certain Relationships and
Related Transactions





Other
than as set forth below, during the fiscal year ended June 30, 2008 there have
been no relationships, transactions, or proposed transactions to which we were
or are to be a party, in which any of the directors, executive officers, or 5%
or greater shareholders (or any immediate family thereof) had or is to have a
direct or indirect material interest.





(a) On
August 23, 2003, we entered into a consulting agreement with Margaux Investment
Management Group S.A., which is controlled by Carl Hessel, its president. Under
this consulting agreement, Margaux agreed to, among other things, provide advice
and counsel regarding strategic business and marketing plans, strategy and
negotiations with potential, clients/distributors, users/end-users, candidates,
joint ventures, corporate partners, investors and capitalists. Under this
agreement, we agreed to compensate Margaux the sum of 5,000,000 restricted
shares of common stock per year for the two-year term of this
agreement.  During the year ended June 30, 2007, we compensated
Margaux the amount of $240,000 cash as commission for equity
fundraising.





The 2003
consulting agreement expired and we entered into a new consulting agreement with
Margaux dated as of August 15, 2008, with the following material terms: (i) two
year term; (ii) Margaux to provide shareholder relations and public relation
services, capital market support, financial advisory and related services
regarding acquisitions or a sale of the company or its assets; and (iii) Margaux
Compensation: five million total shares of restricted common stock issuable in
two 2.5 million shares tranches at the execution of the Consulting Agreement and
upon the one-year anniversary thereof; and fully vested options to purchase
three million shares of restricted common stock at an exercise price of Two
Cents (U.S. $0.02) above the closing price of the shares on the date of issuance
of the options.




(b) The
Company’s president, Paul Egan, who is also a shareholder, had delayed payment
of a portion of his salary in order to conserve the Company’s cash. At June 30,
2008, $317,385 of accrued salaries were owed to Paul Egan, compared to $49,901
at June 30, 2007.  The Company also owed the amount of $30,786 to Paul
Egan for accrued automobile allowance.




34
 Table of Contents




(c) The
Company’s chief financial officer, Ciaran Egan, who is also a shareholder, had
delayed payment of a portion of his salary in order to conserve the Company’s
cash. At June 30, 2008, $147,123 of accrued salaries were owed to Ciaran Egan,
compared to $81,649 at June 30, 2007.  The Company also owed the
amount of $30,786 to Ciaran Egan for accrued automobile allowance




(d) Paul
Egan has advanced us funds for our operations. These amounts include advances of
$217,613 and accrued interest of $9,179 at June 30, 2008 and advances of $56,126
and accrued interest of $264 at June 30, 2007.





(e)  Ciaran
Egan has advanced us funds for our operations. These amounts include advances of
$19,238 and accrued interest of $2,069 at June 30, 2008 and advances of $56,126
and accrued interest of $264 at June 30, 2007.





(f) On
July 10, 2007, we entered into an agreement with Donna Hessel, the spouse of one
of our directors, Carl Hessel.  Mrs. Hessel has considerable
experience in the areas of finance and operations and provides the Company with
strategic and operational consulting services pursuant to the
agreement.  In connection with this consulting agreement, we issued
Mrs. Hessel options to purchase 7,000,000 shares of our common stock at an
exercise price equal to the current fair market value as of the date of the
issuance of the options.  The options were valued at $850,926. Mrs.
Hessel exercised those options in September, 2007.




(g) We
are provided office space in Geneva, Switzerland at no cost to us by Mr.
Hessel.





Policies and Procedures for
Related Party Transactions




The
Company conducts an appropriate review of all related party transactions that
are required to be disclosed pursuant to Regulation S-K, Item 404 for potential
conflict of interest situations on an ongoing basis and all such transactions
must be disclosed to and approved by the entire Board of Directors of the
Company.





DirectorIndependence





Our Board
of Directors is currently composed of five directors, of whom Killian McGrath
would qualify as an independent director based on the definition of independent
director set forth in Rule 4200(a)(15) of the Nasdaq Marketplace rules. Because
our common stock is traded on the NASD OTC Electronic Bulletin Board, which is
not a securities exchange, we are not subject to corporate governance rules that
require that a board of directors be composed of a majority of independent
directors.




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Audit
Fees




The
aggregate fees billed for each of the last two fiscal years for professional
services rendered by RBSM LLP (“Accountant”)  and Stonefield
Josephson, Inc. (collectively, "Accountants") for the audit of our annual
financial statements, and review of financial statements included in our Form
10-QSB's: 2008: $163,091; and 2007: $161,262.





Audit-Related
Fees





The
aggregate fees billed in each of the last two fiscal years for assurance and
related services by RBSM LLP that are reasonably related to the performance
of the audit or review of our financial statements and are not reported under
Audit Fees above:  2008:


$6,
362; and 2007: $18,560.





35
 Table of Contents




Tax Fees





The
aggregate fees billed in each of the last two fiscal years for professional
services rendered by RBSM LLP for tax compliance, tax advice, and tax
planning: $0.





All Other
Fees





The
aggregate fees billed in each of the last two fiscal years for products and
services provided by RBSM LLP, other than the services reported above:
$0.





Pre-Approval of Services by
Audit Committee





Our
policy is to have the audit committee pre-approve all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The independent auditors and management are
required to periodically report to the audit committee regarding the extent of
services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The audit
committee may also pre-approve particular services on a case-by-case basis. All
services performed by our independent auditors in fiscal 2008 and fiscal 2007
were approved in accordance with the audit committee’s pre-approval
policies.





PART
IV





ITEM 15. EXHIBITS





Exhibits
included or incorporated by reference in this document are set forth in the
Exhibit Index.






36
 Table of Contents







SIGNATURES





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




Freestar
      Technology CorporationDate: October 14,
      2008
            By:
            /s/ Paul
      EganPresident
      and Chief Executive Officer





KNOWN BY
ALL PERSONS THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Paul Egan and Ciaran Egan, or any one of them, their
attorneys-in-fact and agents with full power of substitution and
re-substitution, for him and his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.





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








Date:
October 14,
2008                              /s/ Paul
Egan


Paul
Egan, President, Chief Executive Officer (Principal Executive


Officer),
and Director








Date:
October 14,
2008                              /s/ Ciaran
Egan


Chief
Financial Officer, Secretary and Treasurer (Principal Financial


and
Accounting Officer) and Director








Date:
October 14,
2008                              /s/ Fionn
Stakelum


Fionn
Stakelum, Director








Date:  October 14,
2008                             /s/ Carl
Hessel


Carl
Hessel, Director






Date:   October 14,
2008                          
 /s/ Killian
McGrath


Killian McGrath, Director






37
 Table of Contents




EXHIBITINDEX




Number
            Description3.1
            Articles
      of Incorporation, dated November 17, 1999 (incorporated by reference to
      Exhibit 3.3 of the Form 10-SB filed on January 3,
2000).3.2
            Certificate
      of Amendment of Articles of Incorporation, dated September 8, 2000
      (incorporated by reference to Exhibit 3.4 of the Form S-8 filed on August
      17, 2001).3.3
            Certificate
      of Amendment to Articles of Incorporation, dated February 15, 2001
      (incorporated by reference to Exhibit 3.1 of the Form 8-K filed on
      February 20, 2001)3.4
            Certificate
      of Amendment to Articles of Incorporation, dated December 15, 2002
      (incorporated by reference to Exhibit 3.4 of the Form 10-QSB filed on
      March 12, 2003).3.5
            Certificate
      of Amendment to Articles of Incorporation, dated February 24, 2003
      (incorporated by reference to Exhibit 3.5 of the Form 10-QSB filed on
      March 12, 2003).3.6
            Bylaws,
      dated November 17, 1999 (incorporated by reference to Exhibit 3.2 of the
      Form 10-SB filed on January 3, 2000)3.7
            Bylaws,
      as amended June 16, 2008 (incorporated by reference to Exhibit 3.1 of Form
      8-K filed on June 18, 2008)4.1
            Certificate
      of Powers, Designations, Preferences and Rights of Series A Preferred
      Stock of the Company, dated August 10, 2001 (incorporated by reference to
      Exhibit 4 of the Form 8-K filed on August 14, 2001).4.2
            Amended
      and Restated Non-Employee Directors and Consultants Retainer Stock Plan
      (Amendment No. 4), dated December 20, 2004 (incorporated by reference to
      Exhibit 4.1 of the Form S-8 point-of-sale filed on January 26,
      2005).4.3
            Amended
      and Restated Stock Incentive Plan (Amendment No. 3), dated December 20,
      2004 (incorporated by reference to Exhibit 4.2 of the Form S-8
      point-of-sale filed on January 26,
2005).


4.4
            Form
      of Option to Purchase Shares of Common Stock, dated February 21, 2005
      (incorporated by reference to Exhibit 4.1 of the Form 8-K filed on May 12,
      2005).4.5
            2007
      Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the
      Form 8-K filed on February 1, 2007)4.6
            2007
      Stock Incentive Plan, as amended April 15, 2008 (incorporated by reference
      to Exhibit 10.1 of the Form 8-K filed on April 17,
2008)4.7
            Form
      of Stock Option Award Agreement under 2007 Stock Incentive Plan
      (incorporated by reference to Exhibit 10.2 of the Form 8-K filed on April
      17, 2008)4.8
            2007
      Directors and Consultants Stock Plan (incorporated by reference to Exhibit
      10.3 of the Form 8-K filed on February 1, 2007)4.9
            Form
      of Stock Agreement Award under 2007 Directors and Consultants Stock Plan
      (incorporated by reference to Exhibit 10.4 of the Form 8-K filed on
      February 1, 2007)4.10
            2007
      Directors and Consultants Stock Plan, as amended April 15, 2008
      (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on April
      17, 2008)4.11
            Certificate
      of Designation (Series A), dated June 9, 2005 (incorporated by reference
      to Exhibit 4.1 of the Form 8-K filed on October 20,
  2005).4.12
            Certificate
      of Designation (Series B), dated June 9, 2005 (incorporated by reference
      to Exhibit 4.2 of the Form 8-K filed on October 20,
  2005).






38
 Table of Contents






Number
            Description


10.1
      *
            Employment
      Agreement between the Company and Angel Pacheco, dated  April 1, 2005
      (incorporated by reference to Exhibit 10 of the Form 8-K filed on May
      10, 2005)10.2
            Lease
      Agreement dated December 13, 2006 for office space in Helsinki, Finland
      (incorporated by reference to Exhibit 10.7 of the Form 10-KSB filed
      on September 28, 2007)10.3
      *
            Consulting
      Agreement with Donna Hessel dated July 9,2007 (incorporated by reference to Exhibit 10.1 of the Form 10-Q
      filed on November 19, 2007)10.4
      *
            Employment
      Agreement between the Company and Paul Egan, dated May 29, 2007
      (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on June
      4, 2008).10.5
      *
            Employment
      Agreement between the Company and Ciaran Egan, dated May 29,
      2007  (incorporated by reference to Exhibit 10.2 of the Form 8-K
      filed on June 4, 2008).10.6
      *
            Consulting
      Agreement with Margaux Investment Management Group, S.A. dated August 15,
      2008 (filed herewith)10.7
      *
            Option
      Agreement between the Company and Paul Egan, dated June 18, 2008 (filed
      herewith)10.8
      *
            Option
      Agreement between the Company and Ciaran Egan, dated June 18, 2008 (filed
      herewith)21
            Subsidiaries
      of the Company (filed herewith).23
            Consent
      of Independent Registered Public Accounting Firm (filed
      herewith).24.1
            Power
      of attorney (included in signature page).31.1
            Rule 13a-14(a)/15d-14(a) Certification of Paul Egan
      (filed herewith).31.2
            Rule 13a-14(a)/15d-14(a) Certification of Ciaran Egan
      (filed herewith).32
            Certifications of Chief Executive Officer and Chief
      Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2003 (furnished
      herewith).





*
Indicates a management contract or compensatory plan or arrangement






39
 Table of Contents





WASHINGTON,
D.C. 20549








FINANCIAL
STATEMENTS


JUNE
30, 2008 AND 2007








FORMING
A PART OF ANNUAL REPORT


PURSUANT
TO THE SECURITIES EXCHANGE ACT OF 1934








FREESTAR
TECHNOLOGY CORPORATION










Table of Contents




FREESTAR
TECHNOLOGY CORPORATION


INDEX
TO FINANCIAL STATEMENTS






PageReport of Independent Registered
      Public Accounting Firm
            F-1Consolidated Balance Sheets at
      June 30, 2008 and 2007
            F-2Consolidated Statements of Losses
      for The Years Ended June 30, 2008 and 2007
            F-3Consolidated Statements of 
      Stockholders' Equity for The Two Years Ended June 30,
      2008
            F-4
      to F-5Consolidated Statements
      of Cash Flows for The Years Ended June 30, 2008 and
      2007
            F-6
      to F-8Notes to Consolidated Financial
      Statements
            F-9
      to F-30













Table of Contents







REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM











Board of
Directors


Freestar
Technology Corporation








We have
audited the accompanying consolidated balance sheets of
Freestar  Technology Corporation and subsidiaries (the "Company") as
of June 30, 2008 and 2007 and the related consolidated statements of losses and
comprehensive loss,  stockholders' equity (deficiency), and cash
flows for each of the two years in the period ended June 30, 2008. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.





We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit 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 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 consolidated financial position of the Company and
subsidiaries as of June 30, 2008 and 2007, and the results of its operations and
its cash flows for each of the two years in the period ended June 30, 2008 in
conformity with accounting principles generally accepted in the United States of
America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1, the Company is
experiencing difficulty in generating sufficient cash flow to meet it
obligations and sustain its operations, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to this
matter are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.











/s/RBSM
LLP





New York,
New York


October
14, 2008








F-1
 Table of Contents







FREESTARTECHNOLOGY CORPORATION


CONSOLIDATED
BALANCE SHEETS








ASSETSJune
      30,
            
            
            June
      30,2008
            
            
            2007Current
      assets:Cash
      and cash equivalents
            
            $
            692,802
            
            
            $
            466,408Accounts
      receivable, net of allowance for doubtful accounts of $91,483 and
      $54,903at
      June 30, 2008 and 2007,  respectively (note 3)
            
            
            724,944
            
            
            
            977,502Other
      current assets (note 4)
            
            
            143,482
            
            
            
            103,988Inventory
      (note 5)
            
            
            579,030
            
            
            
            918,947Total
      current assets
            
            
            2,140,258
            
            
            
            2,466,845Property,
      plant and equipment, net of accumulated depreciation andamortization
      of  $286,240 and $170,804 at June 30, 2008 and 2007,
      respectively  (note 6)
            
            
            165,990
            
            
            
            187,323Software
      license, net of accumulated amortization of  $1,194,422 and
      $1,027,457
            
            
            -
            
            
            
            1,233,699at
      June 30, 2008 and 2007, respectively (note 7)Customer
      relationships and contracts, net of accumulated amortization of
      $1,158,413
            
            
            1,790,836
            
            
            
            2,100,756and
      $848,493 at June 30, 2008 and 2007, respectively (note 7)Software,
      net of accumulated amortization of  $1,542,315 and
      $1,175,908
            
            
            -
            
            
            
            2,608,446at
      June 30, 2008 and 2007, respectively (note 7)Other
      long-term assets (note 8)
            
            
            -
            
            
            
            19,966Total
      assets
            
            $
            4,097,084
            
            
            $
            8,617,035LIABILITIES
      AND (DEFICIENCY IN) STOCKHOLDERS' EQUITY (DEFICIENCY)Current
      liabilities:Accounts
      payable and accrued expenses (note 9)
            
            $
            3,648,224
            
            
            $
            2,485,629Due
      to related parties (note 10)
            
            
            774,209
            
            
            
            191,984Deferred
      revenue
            
            
            243,063
            
            
            
            87,897Total
      current liabilities
            
            
            4,665,496
            
            
            
            2,765,510Commitments
      and contingencies (note 18)Minority
      interest
            
            
            476,528
            
            
            
            184,008Stockholders'
      Equity (Deficiency): (notes 12, 13, 14)Convertible
      preferred stock, series A, $0.001 par value,1,000,000
      shares  authorized; 1,000,000 shares issued and outstanding at
      June 30, 2008 and 2007
            
            
            1,000
            
            
            
            1,000Convertible
      preferred stock, series B, $0.001 par value, 4,000,000 shares
      authorized;0
      and 2,000,000 shares issued and outstanding at June 30, 2008 and 2007,
      respectively
            
            
            -
            
            
            
            2,000Additional
      paid-in capital - preferred stock
            
            
            432,058
            
            
            
            2,890,058Common
      stock, $0.001 par value, 500,000,000 shares authorized; 377,416,332 and
      233,783,452shares
      issued and outstanding at June 30, 2008 and
      2007,  respectively
            
            
            377,417
            
            
            
            233,783Additional
      paid-in capital - common stock
            
            
            95,450,783
            
            
            
            74,868,178Common
      stock subscriptions receivable
            
            
            (1,131,590
            )
            
            
            (600,000
            )Common
      stock subscribed
            
            
            1,195,457
            
            
            
            2,600,014Accumulated
      deficit
            
            
            (97,569,812
            )
            
            
            (74,418,911
            )Accumulated
      other comprehensive gain
            
            
            199,747
            
            
            
            91,395Total
      (deficiency in) stockholders' equity
            
            
            (1,044,940
            )
            
            
            5,667,517Total
      liabilities and (deficiency in) stockholders' equity
            
            $
            4,097,084
            
            
            
            8,617,035





The
accompany notes form an integral part of these consolidated financial
statements.








F-2
 Table of Contents








FREESTARTECHNOLOGY CORPORATION


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


FOR
THE YEARS ENDED JUNE 30, 2008 AND 2007








2008
            
            
            2007RevenueTransaction
      processing
            
            $
            2,076,309
            
            
            $
            1,945,512Consulting
      services
            
            
            2,904,708
            
            
            
            1,349,963Hardware
      and related
            
            
            1,278,690
            
            
            
            484,860Total
      revenue
            
            
            6,259,707
            
            
            
            3,780,335Cost
      of revenueTransaction
      processing
            
            
            2,313,929
            
            
            
            2,330,561Consulting
      services
            
            
            2,146,766
            
            
            
            816,122Hardware
      and related
            
            
            834,950
            
            
            
            589,472Total
      cost of sales
            
            
            5,295,645
            
            
            
            3,736,155Gross
      profit (loss)
            
            
            964,062
            
            
            
            44,180Impairment
      of intangible assets (note 7)
            
            
            4,086,502
            
            
            
            -Selling,
      general and administrative expenses
            
            
            19,737,217
            
            
            
            16,251,713Loss
      from operations
            
            
            (22,859,657
            )
            
            
            (16,207,533
            )Other
      income (expenses):Additional
      cost of acquisition (note 2)
            
            
            (192,555
            )
            
            
            -Interest
      expense, net
            
            
            (47,374
            )
            
            
            (3,018
            )Loss
      before income taxes and minority interest in subsidiaries
            
            
            (23,099,586
            )
            
            
            (16,210,551
            )Income
      taxes
            
            
            11,460
            
            
            
            31,655Minority
      interest in net income of subsidiaries
            
            
            39,855
            
            
            
            62,991Net
      Loss
            
            
            (23,150,901
            )
            
            
            (16,305,197
            )Other
      - Comprehensive income (loss):  Gain (Loss) on foreign
      exchange
            
            
            108,352
            
            
            
            200,758Comprehensive
      loss
            
            $
            (23,042,549
            )
            
            $
            (16,104,439
            )Loss
      per share - basic and diluted
            
            $
            (0.08
            )
            
            $
            (0.08
            )Weighted
      average shares outstanding - basic
            
            
            290,577,264
            
            
            
            196,749,780Weighted
      average shares outstanding - diluted
            
            
            298,291,550
            
            
            
            206,241,306





The
accompany notes form an integral part of these consolidated financial
statements.






F-3
 Table of Contents




FREESTARTECHNOLOGY CORPORATION
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR
THE TWO YEARS ENDED JUNE 30, 2008





Preferred
      stock
            
            
            Common
      stockSeries
      A
            
            
            Series
      BShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Additionalpaid-in
      capital
            
            
            Shares
            
            
            Amount
            
            
            Additionalpaid-in
      capital
            
            CommonStockSubscribed
            
            
            Subscriptionreceivable
            
            
            Accumulateddeficit
            
            
            AccumulatedOther
      CompInc
      ( Loss)
            
            
            TotalShareholdersDeficitBalance
      at June 30, 2006
            
            1,000,000
            
            
            
            1,000
            
            
            
            4,000,000
            
            
            
            4,000
            
            
            
            6,368,058
            
            
            
            183,367,427
            
            
            
            183,367
            
            
            
            58,206,589
            
            
            952,500
            
            
            
            (175,792
            )
            
            
            (58,113,714
            )
            
            
            (109,363
            )
            
            
            7,316,645Shares
      issued to employee for services,previously
    subscribed
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            750,000
            
            
            
            750
            
            
            
            351,750
            
            
            (352,500
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Shares
      issued to consultants for services to beperformed through June
      2008
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,199,997
            
            
            
            10,200
            
            
            
            2,989,699
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,999,899Shares
      issued for prepaid rent
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            180,000
            
            
            
            180
            
            
            
            75,420
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            75,600Fair
      value of stock options issued to consultants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,502,407
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,502,407Stock
      options exercised by consultants and employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,716,666
            
            
            
            13,717
            
            
            
            1,876,283
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            1,890,000Common
      stock subscribed under financing agreement
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,600,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,600,000Fair
      value of common stock issued to employees as bonuses
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,180,000
            
            
            
            2,180
            
            
            
            442,420
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            444,600Fair
      value of options issued to employee as compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            135,558
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            135,558Cancellation
      of shares previously issued to consultant
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (142,858
            )
            
            
            (143
            )
            
            
            (157,857
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (158,000
            )Shares
      issued for PLC acquisition
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,222,220
            
            
            
            2,222
            
            
            
            797,778
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            800,000Shares
      sold for cash, payment not yet received
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,000,000
            
            
            
            4,000
            
            
            
            596,000
            
            
            
            
            
            
            (600,000
            )
            
            
            
            
            
            
            
            
            
            
            -Shares
      issued, previously subscribed
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,000,000
            
            
            
            3,000
            
            
            
            597,000
            
            
            (600,000
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Shares
      of common stock issued for conversionof Series B preferred
      stock
            
            
            
            
            
            
            
            
            
            (2,000,000
            )
            
            
            (2,000
            )
            
            
            (3,478,000
            )
            
            
            13,700,000
            
            
            
            13,700
            
            
            
            3,466,286
            
            
            14
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Cash
      paid for commission on equity financing
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (240,000
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (240,000
            )Write-off
      subscriptions receivable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            175,792
            
            
            
            
            
            
            
            
            
            
            
            175,792Restricted
      common stock issued
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            610,000
            
            
            
            610
            
            
            
            (610
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Minority
      interest in acquired subsidiaryAdjust
      unearned and deferred compensation for the period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,229,455
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,229,455Loss
      for the twelve months ended June 30, 2007
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (16,305,197
            )
            
            
            200,758
            
            
            
            (16,104,439
            )Balance
      at June 30, 2007
            
            1,000,000
            
            
            
            1,000
            
            
            
            2,000,000
            
            
            
            2,000
            
            
            
            2,890,058
            
            
            
            233,783,452
            
            
            
            233,783
            
            
            
            74,868,178
            
            
            2,600,014
            
            
            
            (600,000
            )
            
            
            (74,418,911
            )
            
            
            91,395
            
            
            
            5,667,517






F-4
 Table of Contents




FREESTARTECHNOLOGY CORPORATION
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 FOR
THE TWO YEARS ENDED JUNE 30, 2008
 (CONTINUED)




Shares
      issued to consultants for services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            29,969,500
            
            
            
            29,970
            
            
            
            4,529,286
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,559,256Fair
      value of options granted to consultants
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,782,955
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,782,955Options
      exercised by consultants for cash
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            45,715,127
            
            
            
            45,716
            
            
            
            2,762,585
            
            
            
            (1,844
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,806,457Options
      exercised, not yet paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            9,320,000
            
            
            
            9,320
            
            
            
            270,280
            
            
            
            -
            
            
            
            (96,590
            )
            
            
            
            
            
            
            
            
            
            
            10Options
      exercised, shares not issued
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            447,287
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            630,287Shares
      issued to employees for services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,850,000
            
            
            
            2,850
            
            
            
            307,700
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            310,550Shares
      issued for conversion of preferred stock
            
            
            
            
            
            
            
            
            
            (2,000,000
            )
            
            
            (2,000
            )
            
            
            (2,458,000
            )
            
            
            8,567,143
            
            
            
            8,567
            
            
            
            2,451,433
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Shares
      issued pursuant to financing transaction,previously
    paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,000,000
            
            
            
            13,000
            
            
            
            2,587,000
            
            
            
            (2,600,000
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Shares  sold
      for cash in financing transaction
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,500,000
            
            
            
            2,500
            
            
            
            497,500
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            500,000Shares
      issued pursuant to financing transaction,not yet
paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,500,000
            
            
            
            7,500
            
            
            
            1,492,500
            
            
            
            
            
            
            
            (1,500,000
            )
            
            
            
            
            
            
            
            
            
            
            -Cash
      received for shares previously issuedin financing
      transaction
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            465,000
            
            
            
            
            
            
            
            
            
            
            
            465,000Shares
      sold for cash
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            800,000
            
            
            
            800
            
            
            
            39,200
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            40,000Shares
      issued to Director as compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,300,000
            
            
            
            2,300
            
            
            
            300,700
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            303,000Shares
      issued to officer as compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            20,000,000
            
            
            
            20,000
            
            
            
            980,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,000,000Shares
      to be issued to officer as compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            750,000
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            750,000Options
      issued for officer compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            268,538
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            268,538Amortization
      of deferred compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            599,770
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            599,770Amortization
      of unearned compensation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            121,701
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            121,701Shares
      issued for acquistion of PLC
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,111,110
            
            
            
            1,111
            
            
            
            191,444
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            192,555Cancellation
      of shares issued for subscription receivable
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (600,000
            )
            
            
            
            
            
            
            600,000
            
            
            
            
            
            
            
            
            
            
            
            -Adjust
      number of shares issuable to officer forconversion of
      preferred shares in prior period
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13
            
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13Loss
      for the twelve months ended June 30, 2008
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (23,150,901
            )
            
            
            108,352
            
            
            
            (23,042,549
            )1,000,000
            
            
            $
            1,000
            
            
            
            -
            
            
            $
            -
            
            
            $
            432,058
            
            
            
            377,416,332
            
            
            $
            377,417
            
            
            $
            96,450,783
            
            
            $
            1,195,457
            
            
            $
            (1,131,590
            )
            
            $
            (97,569,812
            )
            
            $
            199,747
            
            
            $
            (1,044,940
            )





The
accompany notes form an integral part of these audited consolidated financial
statements.






F-5
 Table of Contents





FREESTARTECHNOLOGY CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS








Twelve
            
            
            TwelveMonths
      Ended
            
            
            Months
      EndedJune
      30,
            
            
            June
      30,2008
            
            
            2007Cash
      flows used for operating activities:Net
      loss
            
            $
            (23,150,901
            )
            
            $
            (16,305,197
            )Minority
      interest in income loss of subsidiary
            
            
            39,855
            
            
            
            62,991Adjustments
      to reconcile net loss to net cashprovided
      by (used for) operating activities:Bad
      debt expense
            
            
            51,203
            
            
            
            33,403Write-off
      subscriptions receivable
            
            
            -
            
            
            
            175,792Depreciation
      and amortization
            
            
            807,047
            
            
            
            866,412Impairment
      of intangible assets
            
            
            4,086,502
            
            
            
            -Non-cash
      compensation
            
            
            11,695,785
            
            
            
            8,913,918Changes
      in assets and liabilities:(Increase)
      decrease in assetsAccounts
      receivable
            
            
            62,451
            
            
            
            (236,586
            )Inventory
            
            
            223,040
            
            
            
            (813,167
            )Long
      term deposits and prepaid rent
            
            
            
            
            
            
            (19,966
            )Other
      current assets
            
            
            (25,058
            )
            
            
            100,211Increase
      (decrease) in liabilitiesAccounts
      payable and accrued expenses
            
            
            1,758,764
            
            
            
            1,256,271Deferred
      revenue
            
            
            155,166
            
            
            
            87,897Advances
      by officers
            
            
            -
            
            
            
            56,390Payment
      of accrued salary to officers
            
            
            -
            
            
            
            135,594Accrual
      of salary to officers
            
            
            582,225
            
            
            
            -Total
      adjustments
            
            
            19,436,980
            
            
            
            10,619,160Net
      cash used in operating activities
            
            
            (3,713,921
            )
            
            
            (5,686,036
            )Cash
      flows provided by (used for) investing activities:Purchase
      of fixed assets
            
            
            (50,464
            )
            
            
            (138,348
            )Purchase
      of software and capitalized software cost
            
            
            (420,125
            )
            
            
            (973,372
            )Investment
      in PLC, net of cash acquired
            
            
            -
            
            
            
            (177,737
            )Net
      cash used in investing activities
            
            
            (470,589
            )
            
            
            (1,289,457
            )Cash
      flows provided by (used for) financing activities:Proceeds
      from sale of common stock
            
            
            1,002,742
            
            
            
            2,600,000Comissions
      for sale of common stock
            
            
            -
            
            
            
            (240,000
            )Proceeds
      from exercise of stock options/warrants
            
            
            3,439,011
            
            
            
            1,890,000Cash
      contributed by officer of subsidiary
            
            
            252,721
            
            
            
            103,061Net
      cash provided by financing activities
            
            
            4,694,474
            
            
            
            4,353,061Net
      increase (decrease) in cash and cash equivalents
            
            
            509,964
            
            
            
            (2,622,432
            )Foreign
      currency translation adjustments
            
            
            (283,570
            )
            
            
            119,705Cash
      and cash equivalents, beginning of period
            
            
            466,408
            
            
            
            2,972,135Cash
      and cash equivalents, end of period
            
            $
            692,802
            
            
            $
            469,408




F-6
 Table of Contents






Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            -
            
            
            $
            -Income
      tax paid
            
            $
            31,655
            
            
            $
            7,961Shares
      of  common stock issued to consultants for
    services
            
            $
            4,559,256
            
            
            $
            3,204,499Shares
      of common stock issued to employees as compensation
            
            $
            310,550
            
            
            $
            158,600Adjustment
      of unearned common stock for the period
            
            $
            121,701
            
            
            $
            36,899Adjustment
      of deferred compensation for the period
            
            $
            599,770
            
            
            $
            2,192,555Shares
      of common stock issued for subscriptions receivable
            
            $
            1,500,000
            
            
            $
            600,000Shares
      of common stock issued to a director for services
            
            $
            303,000
            
            
            $
            0Options
      issued as executive compensation
            
            $
            268,538
            
            
            $
            -Common
      stock to be issued as executive compensation
            
            $
            750,000
            
            
            $
            -Common
      stock issued as executive compensation
            
            $
            1,000,000
            
            
            $
            -Cancellation
      of shares of common stock
            
            $
            -
            
            
            $
            (158,000
            )Shares
      issuable to an employee for services
            
            $
            -
            
            
            $
            -Fair
      value of options issued to consultants and employees
            
            $
            3,502,407
            
            
            $
            3,637,966Shares
      issued, previously subscribed for cash
            
            $
            2,600,000
            
            
            $
            600,000






F-7
 Table of Contents




Cancellation
      of 25,000,000 shares of common stock issuedin
      a financing transaction
            
            $
            -
            
            
            $
            25,000Shares
      issued for exercise of options,  cash not
    received
            
            $
            96,590
            
            
            $
            -Shares
      of common stock issued for prepaid rent
            
            $
            -
            
            
            $
            75,600Shares
      issued, previously subscribed for services
            
            $
            -
            
            
            $
            352,500Shares
      of common stock issued to acquire interest in subsidiary
            
            $
            192,555
            
            
            $
            800,000Conversion
      of preferred stock to common stock
            
            $
            2,460,000
            
            
            $
            3,478,000Cancellation
      of shares issued for subscription receivable
            
            $
            600,000
            
            
            $
            -Acquisition
      of PLC Partners, LTD:Accounts
      receivable
            
            $
            -
            
            
            $
            273,740Property
      and equipment
            
            
            -
            
            
            
            2,381Customer
      relationships and contracts
            
            
            -
            
            
            
            982,045Current
      liabilities
            
            
            -
            
            
            
            (262,423
            )Minority
      interest
            
            
            -
            
            
            
            (17,956
            )Net
      Assets
            
            $
            -
            
            
            $
            977,787Common
      stock Issued
            
            $
            -
            
            
            
            800,000Cash
      paid
            
            
            -
            
            
            
            200,000Cash
      balance upon acquisition
            
            
            -
            
            
            
            (22,213
            )Net
      Assets
            
            $
            -
            
            
            $
            977,787Fair
      value of additional shares issued  for PLC
      Acquisition:
            
            $
            192,555
            
            
            $
            -





The
accompany notes form an integral part of these audited consolidated financial
statements.






F-8
 Table of Contents





FREESTARTECHNOLOGY CORPORATION




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




June
30, 2008 AND 2007







1. NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Nature of
Operations





The
Company (formerly Freestar  Technologies) was formed on November 17,
1999 as a
Nevada  corporation.  The  Company  is
a  provider  of  payment  services  and
processing.  Its principal offices are in Dublin,  Ireland;
the Company also has offices in Helsinki, Finland;  and Santo Domingo,
the Dominican Republic.





On July
10, 2007, Freestar Technology Corporation (the “Company”) issued a press release
announcing that the Company’s Board of Directors has approved a proposed
amendment to the Company’s Articles of Incorporation to change the Company’s
name to Rahaxi, Inc.  The Board of Directors has recommended that the
name change amendment be adopted by the shareholders of the Company and directed
the Company to take appropriate action to obtain shareholder approval of the
name change amendment.





The  Company  intends  to  derive  revenues  from  its
core  payment  processing products,  which
include:  (1) Authorization / Transaction Fees:  transaction
fees it receives from processing point of sale terminal
transactions;  (2) Hardware Sales / Point of Sale Terminals: sales of
“Point of Sale” terminals and related maintenance and service initiation fees;
(3) Dynamic  Currency  Conversion:  in addition to
transaction authorization, the Company offers certain clients real-time, dynamic
currency conversion, allowing a customer to pay for a product or service with
their credit card in their local currency;  (4) Private Label
Cards:  transaction  management services provided for a
private label card issuer;  and
(5)  Consulting  Fees:  consulting  services  provided
to financial institutions  and  merchants.





Going
Concern





The   accompanying   consolidated   financial   statements
have been  prepared in conformity with
accounting  principles generally accepted in the United States of
America,  which  contemplate  continuation of the
Company as a going concern. However,  the Company has reported a net
loss of $23,150,901 for the year ended  June 30, 2008
and  $16,305,197 for the year ended June 30, 2007, and had an
accumulated deficit of $97,569,812  as of June 30, 2008, and
$74,418,911 as of June 30, 2007.





The
Company believes that anticipated revenues from operations will be insufficient
to satisfy its ongoing capital  requirements for at least the next 12
months.  If
the  Company’s  financial  resources  are
insufficient, the Company will
require  additional  financing in order to execute its
operating plan and continue as a going  concern.  The
Company cannot predict whether this  additional  financing
will be in the form of equity or debt, or be in another form. The Company may
not be able to obtain the necessary  additional capital on a
timely  basis,  on  acceptable  terms,  or
at all.  In any of these events,  the Company may be unable
to implement its current plans for expansion,
repay  its  debt  obligations  as
they  become due,
or  respond  to  competitive
pressures,  any of which  circumstances  would
have a material adverse effect on its business, prospects, financial condition
and results of operations.





Management
plans to take the following steps that it believes will be sufficient
to  provide  the  Company  with
the  ability  to  continue  as a
going  concern. Management  intends to raise
financing  through the sale of its stock in private placements
to  individual  investors.  Management  may
also raise funds in the public markets.  Management believes that with
this financing, the Company will be able to generate additional revenues that
will allow the Company to continue as a
going  concern.  This will be accomplished by hiring
additional  personnel and focusing sales and marketing efforts on the
distribution of product through key marketing  channels currently
being  developed  by
the  Company.  The  Company  may
also  pursue  the acquisition of certain strategic industry
partners where appropriate.





Principles of
Consolidation





The
accompanying  consolidated  financial statements include the
accounts of the Company and its wholly
owned  subsidiaries  Rahaxi  Processing Oy
(“Rahaxi”);   Freestar  Technologies  Ireland,
Ltd. (“Freestar Ireland”) (and its wholly owned subsidiary Freestar Processing
Oy. (“Freestar  Finland”)); and Sysnet Ireland, Inc. (“Sysnet
Ireland”) as well as it’s 50% owned subsidiary, Project Life Cycle Partners,
Ltd. (”PLC”).  The consolidation of Rahaxi was
effective  January 16, 2003; the consolidation of Freestar Ireland was
effective April 2002; the  consolidation  of
Freestar  Finland was effective October 2002; and the consolidation of
PLC was effective November 15, 2006. All
material  intercompany  transactions have been eliminated
upon consolidation of these entities.





Use of
Estimates





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




F-9
 Table of Contents




Revenue
Recognition





The
Company  recognizes  revenues from  contracts in
which the Company  provides only consulting services as the services
are performed. The contractual terms of
the  agreements  dictate
the  recognition  of revenue by
the  Company.  Payments received in advance are deferred
until the service is provided.





Contract
costs include all direct equipment, material, and labor costs and those indirect
costs related to contract performance, such as indirect labor. Selling, general
and administrative costs are charged to expense as
incurred.  Provisions for estimated  losses
on  uncompleted  contracts are made in the period in which
such  losses  are  determined.   Changes  in  contract   performance,   contract
conditions,  and estimated  profitability  that
may result in revisions to costs and income are recognized in the period in
which the revisions are determined.





For
revenue from product  sales,  the
Company  recognizes  revenue in accordance with Staff
Accounting  Bulletin (“SAB”) No.
104,  “Revenue  Recognition,”  which
superseded  SAB No.
101,  “Revenue  Recognition  in
Financial  Statements.”  SAB
No.101  requires  that four
basic  criteria  must be met
before  revenue  can be recognized:  (1)
persuasive  evidence of an arrangement exists; (2) delivery has
occurred; (3) the selling price is fixed and determinable; and (4)
collectability
is  reasonably  assured.  Determination  of  criteria  (3)
and (4) are  based on
management’s  judgments  regarding the fixed nature of the
selling prices of the products  delivered and
the  collectability  of
those  amounts.  Provisions  for discounts and
rebates to customers,  estimated returns and allowances, and other
adjustments  are provided for in the same period the related sales are
recorded. The Company  defers any revenue for which the product has
not been  delivered or is subject to refund until such time that the
Company and the  customer  jointly determine that the
product has been delivered or no refund will be required. SAB
No.  104   incorporates   Emerging   Issues  Task  Force   (“EITF”)  No.  00-21,
“Multiple-Deliverable Revenue Arrangements.” EITF No. 00-21 addresses accounting
for  arrangements  that may
involve  the  delivery  or  performance  of
multiple products,  services and/or rights to use assets. The effect
of implementing EITF No.  00-21 on
the  Company’s  consolidated  financial  position  and  results
of operations was not significant. This issue addresses determination of whether
an arrangement  involving more than one
deliverable  contains more than one unit of
accounting  and  how  the  arrangement  consideration  should  be  measured  and
allocated to the separate units of accounting.  EITF No. 00-21
became  effective for revenue  arrangements entered into in
periods beginning after June 15, 2003.
For  revenue  arrangements  occurring  on
or after  August 1, 2003,  the Company revised its revenue
recognition policy to comply with the provisions of EITF No. 00-21.





For those
contracts which contain multiple  deliverables,  management
must first determine whether each service, or deliverable, meets the separation
criteria of EITF No. 00-21. In general, a deliverable (or a group of
deliverables) meets the separation  criteria if the deliverable has
standalone value to the customer and if there is objective  and
reliable  evidence of the fair value of the remaining
deliverables  in
the  arrangement.  Each  deliverable  that
meets the separation criteria is considered a “separate unit of accounting.”
Management allocates the total arrangement consideration to each separate unit
of accounting based on the
relative  fair  value  of  each  separate  unit
of  accounting.  The  amount  of
arrangement  consideration  that is allocated to a unit
of  accounting  that has already been delivered is limited
to the amount that is not contingent  upon the
delivery  of  another  separate  unit  of  accounting.   After  the  arrangement
consideration has been allocated to each separate unit of accounting, management
applies
the  appropriate  revenue  recognition  method
for each separate unit of accounting as described  previously based on
the nature of the arrangement.  All deliverables  that do
not meet the  separation  criteria  of EITF
No.  00-21 are combined into one unit of accounting,  and
the appropriate  revenue  recognition method is applied
under SAB No. 101. Processing fee revenue is earned based   upon
the actual  number of
transactions  processed  through the
Company’s  processing  system.  Transaction
processing  fees are  recognized  in the period
that the  service is  performed. These fees are
typically  charged on a per
transaction  basis,  depending on the arrangement with the
customer.  Maintenance fees for processing terminals are recognized
over the period for which maintenance is provided.





Cash and Cash
Equivalents.





Cash
equivalents include all highly liquid debt instruments with original maturities
of three months or less which are not securing any corporate obligations. The
Company places its cash with credit quality institutions. At times, such cash
concentrations may be in excess of the FDIC insurance limit.




Accounts
Receivable





The
Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company’s estimate is based on historical collection
experience and a review of the current status of trade accounts receivable. It
is reasonably possible that the Company’s estimate of the allowance for doubtful
accounts will change. Accounts receivable are presented net of an allowance for
doubtful accounts of $91,483 and $54,903 as of June 30, 2008 and 2007,
respectively.





Inventories





Inventory
consists of finished goods, and is stated at the lower of cost,  using
the average cost method, or market.





Segment
information





The
company adopted Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS 131) upon the
first date of required adoption. SFAS 131 establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS 131 also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the chief
operating decision maker, or decision-making group, in making decisions
regarding the allocation of resources and asset performance. The information
disclosed herein materially represents all of the financial information related
to the company’s principal operating segment.




F-10
 Table of Contents





Property and
Equipment





Property
and  equipment  are valued at
cost.  Depreciation  is provided over the
estimated  useful lives up to four years using the
straight  line and  declining balance
methods.  Leasehold improvements are depreciated on a straight-line
basis over the term of the lease. The estimated service lives of property and
equipment are as follows:





Computer
      equipment:
            3
      to 4 yearsFurniture
      and office equipment:
            3
      to 5 yearsLeasehold
      improvements:
            3
      years





Research and
Development





Research,  development,
and engineering costs are expensed in the year incurred. These  costs
were $390,988 for the year ended June 30,  2008
and  $692,888 for the year ended June 30, 2007.





Long-Lived
Assets.





In
accordance with SFAS No. 144, long-lived assets to be held and used are analyzed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 144 relates to
assets that can be amortized and the life determinable. The Company evaluates at
each balance sheet date whether events and circumstances have occurred that
indicate possible impairment. If there are indications of impairment, the
Company uses future undiscounted cash flows of the related asset or asset
grouping over the remaining life in measuring whether the assets are
recoverable. In the event such cash flows are not expected to be sufficient to
recover the recorded asset values, the assets are written down to their
estimated fair value. Long-lived assets to be disposed of are reported at the
lower of carrying amount or fair value of asset less the cost to sell. During
the years ended June 30, 2008 and 2007, there were no such write-offs.




Goodwill
and Purchased Intangible Assets.





In July
2001, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
Effective for fiscal years beginning after December 15, 2001, SFAS No. 142
requires goodwill to be tested for impairment on an annual basis and between
annual tests in certain circumstances, and written down when impaired, rather
than being amortized as previous accounting standards required. Furthermore,
SFAS No. 142 requires purchased intangible assets other than goodwill to be
amortized over their useful lives unless these lives are determined to be
indefinite. Intangible assets, consisting of software licenses and customer
relationships and contracts, are amortized on a straight-line basis over 10
years, representing the remaining life of the assets.





During
the year  ended June 30, 2008, the Company recorded an impairment of
its capitalized software and software licenses in the amount of $4,086,502 (note
7).


Advertising





The
Company expenses advertising costs when incurred.  Advertising expense
was $120,872 and $67,046 for the years ended June 30, 2008 and 2007,
respectively.





Income
Taxes





Deferred
tax assets and  liabilities are recognized for the future tax
consequences  attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets, including tax loss and credit
carryforwards, and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.





Deferred
income tax expense represents the change during the period in the deferred tax
assets and deferred tax liabilities. The components of the deferred tax assets
and liabilities are  individually  classified as current and
non-current based on their characteristics. Realization of the deferred tax
asset is dependent on generating sufficient taxable income in future years.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.





Fair Value of Financial
Instruments





The
carrying amount of the Company’s cash and cash equivalents, accounts receivable,
notes payable, bank overdraft, line of credit, accounts payable and accrued
expenses, none of which is held for trading, approximates their estimated fair
values due to the short-term maturities of those financial
instruments.





F-11
 Table of Contents




Comprehensive
Income





SFAS No.
130, “Reporting Comprehensive Income,” establishes standards for the reporting
and display of comprehensive income and its components in the financial
statements. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. As of June 30, 2008 and 2007,
and for the years then ended, the Company reported the foreign currency
translation adjustment as other comprehensive income (loss) in the consolidated
financial statements.





Basic and Diluted Loss Per
Share





In
accordance with SFAS No. 128, “Earnings Per Share,” the basic loss per common
share is computed by dividing net loss available to common stockholders less
preferred dividends by the weighted average number of common shares outstanding.
Diluted loss per common share is computed similarly to basic loss per common
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were not
anti-dilutive. The Company has excluded all outstanding warrants, options, and
shares issuable upon conversion of preferred stock to common stock from the
calculation of diluted net loss per share because these securities are
anti-dilutive. The Company has excluded 31,461,414 and 55,574,586 of potential
shares from the computation for the years ended June 30, 2008 and 2007,
respectively.





Liquidity





As
reflected in the accompanying consolidated financial statements, the Company
incurred net losses of $23,150,901 and  $16,305,197 for the years
ended June 30, 2008 and 2007, respectively, and has an accumulated deficit of
$97,569,812 as of June 30, 2008. The Company’s current liabilities exceeded its
current assets by $2,525,238 and $298,665 as of June 30, 2008 and 2007,
respectively .





Concentrations of Credit
Risk





Financial
instruments and related items, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash in investments
with credit quality institutions. At times, such investments may be in excess of
applicable government mandated insurance limit. Concentrations of credit risk
with respect to trade receivables are limited to the large number of customers
comprising the Company’s customer base. The Company’s customers are concentrated
primarily in Europe and it periodically reviews its trade receivables in
determining its allowance for doubtful accounts. The allowance for doubtful
accounts was $91,483 and $54,903 at June 30, 2008 and 2007, respectively. The
Company’s two largest customers accounted for approximately 55% of its sales for
the year ended June 30, 2008, and 50% of its sales for the year ended June 30,
2007.





Reclassification





Certain  reclassification
have been made in prior years’ financial statements to conform to
classifications used in the current year.





Segment
Information





SFAS No.
131, “Disclosures about Segments of an Enterprise and Related
Information,”  establishes  standards for
reporting  information regarding operating segments in annual
financial  statements and requires selected information for those
segments to be presented in interim financial reports issued to stockholders.
SFAS No. 131 also establishes standards for related disclosures about products
and services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or
decision-making group, in making decisions how to allocate resources and assess
performance. The information disclosed herein materially represents all of the
financial information related to the Company’s principal operating segments: the
sale of its secure transaction processing PaySafe System, and
transaction  processing fees and transaction processing hardware sales
generated by Rahaxi Processing Oy,  its  wholly-owned
subsidiary.





Foreign Currency
Translation





The
Company translates the foreign currency financial statements in accordance with
the requirements of SFAS No. 52, “Foreign Currency Translation.” Assets and
liabilities of non-U.S. subsidiaries whose functional currency is not the U.S.
dollar are translated into U.S. dollars at fiscal year-end exchange rates.
Revenue and expense items are translated at average exchange rates prevailing
during the fiscal year. Translation adjustments are included in Accumulated
Other Comprehensive Income (Loss). Foreign currency transaction (losses)/gains
are included in other comprehensive  income and totaled $108,352 and
$200,758  in fiscal years 2008 and 2007,
respectively.




F-12
 Table of Contents





Stock-based
compensation





Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised), “Share-Based
Payment” (SFAS 123R) utilizing the modified prospective approach. Prior to the
adoption of SFAS 123R we accounted for stock option grant in accordance with APB
Opinion No. 25, “Accounting for Stock Issued to Employees” (the intrinsic value
method), and accordingly, recognized compensation expense for stock option
grants.





Under the
modified prospective approach, SFAS 123(R) applies to new awards and to awards
that were outstanding on January 1, 2006 that are subsequently modified,
repurchased or cancelled. Under the modified prospective approach, compensation
cost recognized in the first quarter of fiscal 2006 includes compensation cost
for all share-based payments granted prior to, but not yet vested as of January
1, 2006, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS 123, and compensation cost for all share-based
payments granted subsequent to January 1, 2006 based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(r). Prior periods
were not restated to reflect the impact of adopting the new
standard.





A summary
of option activity under the Company’s stock and option plans as of June 30,
2008, and changes during the period then ended are presented
below:





Options
            
            
            Weighted
              Average
              Exercise
              PriceOutstanding
      at June 30, 2006
            
            
            625,000
            
            
            $
            0.34Issued
            
            
            500,000
            
            
            
            0.14Exercised
            
            
            (50,000
            )
            
            
            (0.15
            )Forfeited
      or expired
            
            
            --
            
            
            
            --Outstanding
      at June 30, 2007
            
            
            1,075,000
            
            
            $
            0.26Issued
            
            
            12,000,000
            
            
            
            0.05Forfeited
      or expired
            
            
            --
            
            
            
            --Outstanding
      at June 30, 2008
            
            
            13,075,000
            
            
            $
            0.07Non-vested
      at June 30, 2008
            
            
            --
            
            
            
            --Exercisable
      at June 30, 2008
            
            
            13,075,000
            
            
            $
            0.07





During
the year ended June 30, 2008, the Company issued options to purchase 6,000,000
shares of common stock at a price of $0.05 to each of its Chief Executive
Officer and Chief Financials Officer (an aggregate of options to purchase
12,000,000 shares).  50% of these options are eligible to be converted
on a cashless conversion basis.  The total fair value
of  these options of  $268,538 was charged to operations
during the twelve months ended June 30, 2008.





Aggregate
intrinsic value of options outstanding and options exercisable at June 30, 2008
was $0. Aggregate intrinsic value represents the difference between the
company’s closing stock price on the last trading day of the fiscal period,
which was $0.05 as of June 30, 2008, and the exercise price multiplied by the
number of options outstanding. As of June 30, 2008, total unrecognized
stock-based compensation expense related to non-vested stock options was $0.
During the year ended June 30, 2008 the Company charged $268,538 to operations
related to recognized stock-based compensation expense for employee stock
options.




Capitalized software
development costs





In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86,
“Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed,” the Company capitalizes certain costs related to the development of
new software products or the enhancement of existing software products for use
in our transaction processing software. These costs include (I) the purchase of
off-the-shelf software modules from a third party vendor to be added to the
Company’s Base24 transaction processing software, and (ii) the customization and
installation of these modules. These costs are capitalized from the point in
time that technological feasibility has been established, as evidenced by a
working model or detailed working program design to the point in time that the
product is available for general release to customers.  Capitalized
development costs are amortized on a straight-line basis over the estimated
economic lives of the products, beginning when the product is placed into
service. The following software costs are expensed as incurred: (i) Research and
development  costs incurred prior to establishing technological
feasibility; (ii) maintenance costs paid to the provider of the off-the-shelf
modules;(iii) in-house costs of software development unrelated to the Company’s
Base24 transaction processing software. The Company periodically evaluates
whether events or circumstances have occurred that indicate that the remaining
useful lives of the capitalized software development costs should be revised or
that the remaining balance of such assets may not be recoverable.





The
Company often has under development several discreet design features or
enhancements, each of which may be completed and released to customers at
different times. During the year ended June 30, 2008, the Company recognized an
impairment of its software and software licenses in the amount of
$4,086,502.  The total net book value of software in service at
June  30, 2008 is  $0. The total net book value of software
under development at June 30, 2008 is $0. At June 30, 2008, total software
capitalized under SFAS No. 86 is $0 (note 7).




Software
costs also include the Enhanced Transactions Secured Software (“ETSS”), which
was  originally  contributed  by the founder and
president of  ePayLatina,
S.A.,  Paul  Egan,  who is
also  president  of
the  Company.  This  software  is
essential for the use of the Company’s ePayPad.  Software costs also
include the development  costs related to
adding  enhancements  to this software  consisting
primarily of labor cost.  Software costs are amortized on a
straight-line  basis over a  period  of three to
six  years.    These costs have been amortized as
of June 30, 2008.





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 Table of Contents




Impairment of Long-Lived
Assets





The
Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS
144).  The Statement   requires that long-lived assets
and certain identifiable intangibles held and used by the Company be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Events relating
to recoverability may include significant unfavorable changes in business
conditions, recurring losses, or a forecasted inability to achieve break-even
operating results over an extended period. The Company evaluates the
recoverability of long-lived assets based upon forecasted undercounted cash
flows. Should impairment in value be indicated, the carrying value of intangible
assets will be adjusted, based on estimates of future discounted cash flows
resulting from the use and ultimate disposition of the asset.  SFAS
No. 144 also requires assets to be disposed of be reported at the lower of the
carrying amount or the fair value less costs to sell.





During
the year ended June 30, 2008, the Company management preformed an evaluation of
its intangible assets (capitalized software) for purposes of determining the
implied fair value of the assets at June 30, 2008. The test indicated that the
recorded remaining book value of its intellectual property exceeded its fair
value, as determined by discounted cash flows.  As a result, upon
completion of the assessment, management recorded a non-cash impairment charge
of $4,086,502, net of tax, or $0.014 per share during the year ended June 30,
2008 to reduce the carrying value of the capitalized software to $0.
Considerable management judgment is necessary to estimate the fair
value.  Accordingly, actual results could vary significantly from
management’s estimates (See Note 7).




Significant recent
accounting pronouncements




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. This statement
amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest (minority interest) in a subsidiary and for the
deconsolidation of a subsidiary. Upon its adoption, effective for us in the
fiscal year beginning July 1, 2009, noncontrolling interests will be classified
as equity in the Company’s balance sheet and income and comprehensive income
attributed to the noncontrolling interest will be included in the Company’s
income and comprehensive income, respectively. The provisions of this standard
must be applied prospectively upon adoption except for the presentation and
disclosure requirements. We do not expect the adoption of SFAS No. 160 to have
an impact on our consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS No. 133”. SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133 for derivative instruments
and hedging activities. SFAS No. 161 requires qualitative disclosure about
objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. We do not expect the adoption of SFAS No. 161
to have a significant impact on our consolidated financial
statements.


In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under FASB Statement No. 142,
“Goodwill and Other Intangible Assets”. This new guidance applies prospectively
to intangible assets that are acquired individually or with a group of other
assets in business combinations and asset acquisitions. FSP 142-3 is effective
for financial statements issued for fiscal years and interim periods beginning
after December 15, 2008. Early adoption is prohibited. The Company is currently
evaluating the impact, if any, that FSP 142-3 will have on its consolidated
financial statements.
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” The Company does not currently expect the adoption of SFAS 162 to
have a material effect on its consolidated results of operations and financial
condition.
  In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1 “Accounting
for Convertible Debt instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not believe the adoption of FSP APB 14-1 will have
significant effect on its consolidated results of operations and financial
condition.
 
 F-14
 Table of Contents


2.  ACQUISITION
OF PROJECT LIFE CYCLE PARTNERS, LTD.





Effective
November 21, 2006, the Company has acquired 50% of the outstanding capital stock
of Project Life Cycle Partners, Ltd. (“PLC Partners”), technology consulting
firm located in Dublin, Ireland.  PLC Partners is a niche project
consulting firm specializing in the management and implementation of information
systems projects.  PLC Partners has international experience within the
financial services sector.




The
acquisition of PLC Partners was accounted for using the purchase method in
accordance with SFAS 141, “Business Combinations”. Total consideration for the
transaction was $1,000,000, consisting of $200,000 cash and 2,222,222 shares of
the Company's common stock, valued at $0.36 per share based upon a 30-day
average closing price per share. The Company also assumed 50%, or approximately
$132,000, of PLC's liabilities at the date of acquisition. The Company may be
required to issue additional shares, capped at a maximum of an additional 50%,
if, on the one-year anniversary of the acquisition, the 30-day average closing
price per share of the Company's stock is less than $0.36.




The PLC
Partners acquisition is not a significant acquisition pursuant to Rule 3-01 of
regulation S-X of the Securities and Exchange Commission, and the Company is not
required to submit pro forma financial statements under Item
9.01(b).





The
results of operations for PLC Partners have been included in the Consolidated
Statements of Operations since the date of acquisition. The components of
the purchase price were as follows:





Common
      Stock
            
            $
            800,000Cash
            
            
            200,000Total
            
            $
            1,000,000










In
accordance with Financial Accounting Standard (SFAS) No. 141, Business
Combinations, the total purchase price was allocated to the estimated fair
value of assets acquired and liabilities assumed. The fair value of the
assets acquired was based on management's best estimates. The purchase price was
allocated to the fair value of assets acquired and liabilities assumed as
follows:








Cash
      and cash equivalents
            
            $
            22,213Accounts
      receivable
            
            
            273,740Equipment
      and other assets
            
            
            2,381Customer
      relationships and contracts
            
            
            982,045Subtotal
            
            
            1,280,379Current
      liabilities
            
            
            (262,423
            )Minority
      interest
            
            
            (17,956
            )Total
            
            $
            1,000,000




Pursuant
to the terms of the 50% acquisition of  PLC, the Company was obligated to
issue to the PLC shareholders  additional shares of Freestar common stock
representing the difference between $800,000 and the value of the Freestar
Shares, calculated based on the one-year closing price. The number of shares
issuable pursuant to this calculation is capped at
1,111,111.   The one year closing price was calculated as of
November 21, 2007.  As of November 12, 2007, the Company owed to the
PLC shareholders an additional 1,111,111 shares of common stock with a fair
value of  $192,555.  The Company issued these shares and
charged this amount to operations during the twelve months ended June 30,
2008.




F-15
 Table of Contents





The
following unaudited condensed combined pro forma results of operations reflect
the pro forma combination of the Company and PLC Partners businesses as if the
combination had occurred at the beginning of the periods presented. The
unaudited pro forma condensed combined results of operations do not purport to
represent what the companies' combined results of operations would have been if
such transaction had occurred at the beginning of the periods presented, and are
not necessarily indicative of the Company's future results.





Twelve
      months ended June 30, 2007Actual
            
            
            ProformaTotal
      revenues
            
            $
            3,780,335
            
            
            $
            4,538,097Net
      income (loss):
            
            $
            (16,305,197
            )
            
            $
            (16,293,810
            )Earnings
      per share- basic and diluted
            
            $
            (0.08
            )
            
            $
            (0.08
            )




3.  ACCOUNTS
RECEIVABLE





Accounts
Receivable consists of the following at June 30, 2008 and 2007:





2008
            
            
            2007Amounts
      receivable from customers
            
            $
            816,427
            
            
            $
            1,032,405Less:
      Reserve for doubtful accounts
            
            
            (91,483
            )
            
            
            (54,903
            )Accounts
      receivable, net
            
            $
            724,944
            
            
            $
            977,502





4.  OTHER
CURRENT ASSETS





Other
current assets consists of the following at June 30, 2008 and 2007:





2008
            
            
            2007Prepaid
      expenses
            
            $
            70,840
            
            
            $
            79,433Employee
      salary advances
            
            
            11,049
            
            
            
            12,830Deposits
            
            
            61,593
            
            
            
            11,725Total
            
            $
            143,482
            
            
            $
            103,988









F-16
 Table of Contents





5.  INVENTORIES





Inventory
consists of the Company’s Point of Sale Terminals which have been purchased from
third party manufactures, along with related equipment such as mounting brackets
and cabling. Components of inventories as of June 30, 2008 and 2007 are as
follows:




2008
            
            
            2007Finished
      Goods
            
            $
            579,030
            
            
            $
            918,947Total
            
            $
            579,030
            
            
            $
            918,947





6.  PROPERTY
AND EQUIPMENT





A summary
of property and equipment at June 30, 2008 and 2007 is as
follows:





2008
            
            
            2007Computer
      equipment
            
            $
            210,791
            
            
            $
            171,372Furniture
      and office equipment
            
            
            241,439
            
            
            
            186,755Less
      accumulated depreciation and amortization
            
            
            (286,240
            )
            
            
            (170,804
            )Property
      and equipment, net
            
            $
            165,990
            
            
            $
            187,323





Depreciation  and  amortization  expense
for property and equipment  amounted to $99,157 and $80,926  for
the years ended June 30, 2008 and 2007, respectively.





During
the year ended June 30, 2007, the Company sold fixed assets with a net book
value of $0 for cash proceeds of $2,211 which resulted in a gain of $2,211 on
the disposal of fixed assets.





7.  INTANGIBLE
ASSETS





The costs
to acquire intangible  assets have been  allocated to the
assets  acquired  according to
the  estimated  fair values.  The Company has
adopted SFAS No. 142, Goodwill and Other Intangible Assets,  whereby
the Company periodically tests its intangible assets for impairment. On an
annual basis, and when  there is reason to
suspect  that  their  values  have
been  diminished  or
impaired,  these  assets are  tested
for  impairment,  and  write-downs  will
be included in results from operations.





During
the year ended June 30, 2008, the Company management preformed an evaluation of
its intangible assets, consisting of previously capitalized software and related
software licenses,  for purposes of determining the implied fair value
of the assets at June 30, 2008. The test indicated that the recorded remaining
book value of its capitalized software and related software licenses exceeded
its fair value, as determined by discounted cash flows.  As a result,
upon completion of the assessment, management recorded a non-cash impairment
charge of $ 4,086,502, net of tax, or $0.014 per share during the year ended
June 30, 2008 to reduce the carrying value of the capitalized software and
related software licenses to $ 0. Considerable management judgment is necessary
to estimate the fair value.  Accordingly, actual results could vary
significantly from management’s estimates.







F-17
 Table of Contents


The  identifiable  intangible  assets
carrying values at June 30, 2008 are:




Carrying
              Amount
            
            
            Accumulated
              Amortization
            
            
            Net
            
            
            Residual
      Value
            
            Weighted
              Average
              Amortization
              YearsAmortizable
      Intangible Assets:Software
      and related development costs
            
            $
            1,542,315
            
            
            $
            1,542,315
            
            
            $
            -
            
            
            $
            -
            
            4.6Customer
      Relationships and Contracts
            
            $
            2,949,249
            
            
            $
            1,158,413
            
            
            $
            1,790,836
            
            
            $
            -
            
            10.0Software
      Licenses
            
            $
            1,194,422
            
            
            $
            1,194,422
            
            
            $
            -
            
            
            $
            -
            
            10.0





The  identifiable  intangible  assets
carrying values at June 30, 2007 are:




Carrying
              Amount
            
            
            Accumulated
              Amortization
            
            
            Net
            
            
            Residual
      Value
            
            Weighted
              Average
              Amortization
              YearsAmortizable
      Intangible Assets:Software
      and related development costs
            
            $
            3,784,354
            
            
            $
            1,175,908
            
            
            $
            2,608,446
            
            
            $
            -
            
            4.6Customer
      Relationships and Contracts
            
            $
            2,949,249
            
            
            $
            848,493
            
            
            $
            2,100,756
            
            
            $
            -
            
            10.0Software
      Licenses
            
            $
            2,261,156
            
            
            $
            1,027,457
            
            
            $
            1,233,699
            
            
            $
            -
            
            10.0




Total  amortization  expense  charged
to operations  for the years ended June 30, 2008 and 2007 was
$707,890  and $782,486, respectively.  Total impairment
expense charged to operations for the years ended June 30, 2008 and 2007 was
$4,086,502 and $0, respectively.





Estimated
amortization expense as of June 30, 2008 is as follows:





2009
            
            $
            309,9212010
            
            
            309,9212011
            
            
            309,9212012
      and thereafter
            
            
            861,073Total
            
            $
            1,790,836




8.OTHER LONGTERMASSETS





Other
long term assets at June 30, 2008 is $0.  Other long term assets of
$19,966 at June 30, 2007 consists of prepaid rent.





9.     
      ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES





Accounts
payable and accrued liabilities at June 30, 2008 and 2007 are as
follows:





2008
            
            
            2007Accounts
      payable and accrued expenses
            
            $
            3,330,480
            
            
            $
            2,312,643Payroll
      and related expenses
            
            
            317,744
            
            
            
            172,985Total
            
            $
            3,648,224
            
            
            $
            2,485,628







F-18
 Table of Contents





10.           RELATED
PARTY TRANSACTIONS





The
Company’s President and Chief Executive Officer (“CEO) and  the
Company’s Chief Financial Officer (“CFO) occasionally forego taking their salary
payments in order to conserve the Company’s cash. The Company’s
CEO  has also advanced funds to the Company.  These advances
accrue interest at the rate of 7% per annum. At June 30, 2008, the Company
owed the following to these executives  for accrued salaries,
advances, and accrued interest:




CEO
            
            
            CFO
            
            
            TotalAccrued
      Salary
            
            $
            317,385
            
            
            $
            147,123
            
            
            $
            464,508Advances
            
            
            217,613
            
            
            
            19,268
            
            
            
            236,881Accrued
      Interest
            
            
            9,179
            
            
            
            2,069
            
            
            
            11,248Accrued
      car allowance
            
            
            30,786
            
            
            
            30,786
            
            
            
            61,572Total
            
            $
            574,963
            
            
            $
            199,246
            
            
            $
            774,209





At June
30, 2007, the Company owed the following to these executives  for
accrued salaries, advances, and accrued interest:





CEO
            
            
            CFO
            
            
            TotalAccrued
      Salary
            
            $
            49,901
            
            
            $
            81,649
            
            
            $
            131,550Advances
            
            
            56,126
            
            
            
            -
            
            
            
            56,126Accrued
      Interest
            
            
            264
            
            
            
            -
            
            
            
            264Accrued
      car allowance
            
            
            2,022
            
            
            
            2,022
            
            
            
            4,044Total
            
            $
            108,313
            
            
            $
            83,671
            
            
            $
            191,984




PLC
Expenses





Prior to
the acquisition of PLC Partners, (note 2), the Company had utilized the services
of PLC Partners as outside consultants to the Company.   The
Company issued 650,000 shares of its common stock with a fair value of $240,000
to a principal of PLC Partners in October and November, 2006 as payment for
these services.  The Company charged $240,000 to operations for these
services  during the twelve months ended June 30,
2007.  During the twelve months ended June 30, 2007 and after the PLC
acquisition, the Company issued an additional 500,000 shares of its common stock
with a fair value of $145,000 to a principal of PLC Partners for services, and
during the twelve months ended June 30, 2008, the Company issued an additional
2,250,000 shares of its common stock with a fair value of $241,250  to
a principal of PLC Partners for services.





11.
SEGMENT INFORMATION





The
Company currently operates three business segments: (1) transaction processing
fees and the sale of transaction processing hardware by its wholly owned
subsidiary, Freestar Dominicana; (2) transaction processing fees and the sale of
transaction processing hardware by its wholly owned subsidiary, Rahaxi
Processing Oy; and (3) consulting services offered through its 50% owned
subsidiary Project Life Cycle Partners, Limited.  Intercompany
receivable and payable are subtracted from the total assets and liabilities for
the segments, that are eliminated in consolidation and therefore, do not
themselves impact consolidated results.





F-19
 Table of Contents




The
following table summarizes segment asset and operating balances by reportable
segment:





Twelve
      months ended June 30,2008
            
            
            2007Sales
      to external customers:Corporate
            
            $
            -
            
            
            $
            33,987Freestar
      Dominicana
            
            
            314,581
            
            
            
            -Rahaxi
            
            
            3,161,433
            
            
            
            2,430,373PLC
            
            
            2,783,693
            
            
            
            1,315,976Total
      sales to external customers:
            
            $
            6,259,707
            
            
            $
            3,780,336Depreciation
      and amortization:Corporate
            
            $
            491,259
            
            
            $
            9,825Freestar
      Dominicana
            
            
            14,747
            
            
            
            22,520Rahaxi
            
            
            300,388
            
            
            
            833,850PLC
            
            
            653
            
            
            
            217Total
      depreciation and amortization:
            
            $
            807,047
            
            
            $
            866,412General
      and administrative expense:(not
      including depreciation and amortization)Corporate
            
            $
            15,043,852
            
            
            $
            8,373,966Freestar
      Dominicana
            
            
            505,607
            
            
            
            656,674Rahaxi
            
            
            3,233,564
            
            
            
            2,125,738PLC
            
            
            545,117
            
            
            
            342,000Total
      general and administrative expense
            
            $
            19,328,140
            
            
            $
            11,498,378Capital
      expenditures:Corporate
            
            $
            2,865
            
            
            $
            47,640Freestar
      Dominicana
            
            
            12,593
            
            
            
            26,713Rahaxi
            
            
            453,439
            
            
            
            841,465PLC
            
            
            1,692
            
            
            
            373,639Total
      capital expenditures
            
            $
            470,589
            
            
            $
            1,289,457Operating
      income (loss):Corporate
            
            $
            (15,535,111
            )
            
            $
            (12,755,940
            )Freestar
      Dominicana
            
            
            (423,602
            )
            
            
            (679,194
            )Rahaxi
            
            
            (2,905,599
            )
            
            
            (2,930,036
            )PLC
            
            
            91,157
            
            
            
            157,637Total
      operating income (loss)
            
            $
            (18,773,155
            )
            
            $
            (16,207,533
            )Impairment
      expense:Corporate
            
            $
            1,066,733
            
            
            $
            -Freestar
      Dominicana
            
            
            -
            
            
            
            -Rahaxi
            
            
            3,019,769
            
            
            
            -PLC
            
            
            -
            
            
            
            -Total
      impairment expense
            
            $
            4,086,502
            
            
            $
            -Interest
      Expense, Net:Corporate
            
            $
            4,020
            
            
            $
            730Freestar
      Dominicana
            
            
            7,113
            
            
            
            118Rahaxi
            
            
            36,241
            
            
            
            2,170PLC
            
            
            -
            
            
            
            -Total
      Interest Expense
            
            $
            47,374
            
            
            $
            3,018Segment
      assets:Corporate
            
            $
            913,411
            
            
            $
            2,644,695Freestar
      Dominicana
            
            
            192,810
            
            
            
            108,454Rahaxi
            
            
            1,321,379
            
            
            
            4,226,610PLC
            
            
            1,669,484
            
            
            
            1,637,276Total
      segment assets
            
            $
            4,097,084
            
            
            $
            8,617,035






F-20
 Table of Contents




12.
INCOME TAXES





Financial
Accounting Standard No. 109 requires the recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have been
included in the financial statement or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between
financial statements and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Temporary differences between taxable income reported for financial reporting
purposes and income tax purposes are insignificant.





The
Company operates in several countries. As a result, we are subject to numerous
domestic and foreign tax jurisdictions and tax agreements and treaties among the
various taxing authorities. Our operations in these jurisdictions are taxed on
various bases: income before taxes, deemed profits and withholding taxes based
on revenue. The calculation of our tax liabilities involves consideration of
uncertainties in the application and interpretation of complex tax regulations
in a multitude of jurisdictions across our global operations.





Changes
in tax laws, regulations, agreements and treaties, foreign currency exchange
restrictions or our level of operations or profitability in each taxing
jurisdiction could have an impact upon the amount of income taxes that we
provide during any given year.





At June
30, 2008, the Company has available for income tax reporting purposes a net
operating loss carryforwards of approximately $33,800,000, which may be used to
offset future taxable income and the majority expire in 2027, though the
Ireland portion, of approximately $1,115,000, has no expiration period. The
deferred tax asset related to the carryforward is approximately $9,900,000. The
Company has provided a valuation reserve against the full amount of the net
operating loss benefit because, in the opinion of management based upon the
earning history of the Company, it is more likely than not that the benefits
will not be realized. Due to significant changes in the Company’s ownership, the
Company’s future use of its existing net operating losses may be limited in
accordance with Section 382 of the Internal Revenue Code, as
amended.





Income
tax expense for 2008 represents income taxes on our  Irish
subsidiary.





Components
of deferred tax assets as of June 30, 2008 are as follows:





Non
      Current:Net
      operating loss carryforward
            
            $
            9,900,000Valuation
      allowance
            
            
            (9,900,000
            )Net
      deferred tax asset
            
            $
            -




13.           EQUITY
COMPENSATION PLANS





Non-Employee Directors and
Consultants Retainer Stock Plan





On
October 25, 2001, the Company adopted a Non-Employee Directors and Consultants
Retainer Stock Plan (the Company adopted Amendment No. 4 to this plan on
December 20, 2004). The purposes of the plan are to enable the Company to
promote the interests of the company by attracting and retaining non-employee
directors and consultants capable of furthering the business of the Company and
by aligning their economic interests more closely with those of the Company’s
shareholders, by paying their retainer or fees in the form of shares of common
stock. A total of 75,000,000 shares of common stock have been registered under
this plan as a result of Form S-8’s filed with the SEC. Through June 30, 2008,
the Company had issued 75,000,000 shares of common stock under this
plan.





On
February 1, 2007, the Company adopted the 2007 Directors and Consultants Stock
Plan, authorizing an additional 35,000,000 shares of common stock for the same
purposes as the Non-Employee Directors and Consultants Retainer Stock Plan. On
April 17, 2008, the Company registered an additional 35,000,000 shares of common
stock under the 2007 Directors and Consultants Stock Plan for a total of
70,000,000 shares registered under this plan.  During the year ended
June 30, 2008, the Company issued 47,473,996 shares of common stock under this
plan and reserved an additional 1,075,000 shares for the exercise of
options.  At June 30, 2008, there is an aggregate of 21,451,004 shares
available for issuance under both the Non-Employee Directors and Consultants
Retainer Stock Plan and the 2007 Directors and Consultants Stock
Plan





Stock Incentive
Plan





On
October 25, 2001, the Company adopted a Stock Incentive Plan (the company
adopted Amendment No. 3 to this plan on December 20, 2004). This plan is
intended to allow directors, officers, employees, and certain non-employees of
the Company to receive options to purchase company common stock. The purpose of
this plan is to provide these persons with equity-based compensation incentives
to make significant and extraordinary contributions to the long-term performance
and growth of the company, and to attract and retain employees. A total of
70,000,000 shares of common stock have been registered under this plan under
Form S-8’s filed with the SEC. Options granted under this plan are to be
exercisable for a period of ten years from the grant date at whatever price is
established by the board of directors, in its sole discretion, on the date of
the grant. Through June 30, 2008, the Company had issued 70,000,000 shares of
common stock under this plan.





On
February 1, 2007, the Company adopted the 2007 Stock Incentive Plan, authorizing
an additional 35,000,000 shares of common stock for the same purposes as the
Stock Incentive Plan. On April 17, 2008, the Company registered an additional
35,000,000 shares of common stock under the 2007 Stock Incentive Plan for a
total of 70,000,000 shares registered under this plan.   During
the year ended June 30, 2008, the Company issued 8,060,0184 shares of common
stock under this plan and reserved an additional 3,029,271 shares for the
exercise of options. At June 30, 2008, there is an aggregate of 58,910,545
shares of common stock available for issuance under both the Stock Incentive
Plan and the 2007 Stock Incentive Plan.




F-21
 Table of Contents




14. STOCK
OPTIONS AND WARRANTS





Non-Employee Stock
Options





The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company’s common stock issued to the Company
consultants. These options were granted in lieu of cash compensation for
services performed (amounts have been adjusted to reflect the reverse stock
split and other adjustments):





Weighted
            
            
            
            
            
            WeightedWeighted
            
            
            Average
            
            
            
            
            
            AverageAverage
            
            
            Exercise
      Price
            
            
            
            
            
            Exercise
      PriceRange
      of
            
            
            
            
            
            Remaining
            
            
            of
            
            
            
            
            
            ofExercise
            
            
            Number
            
            
            Contractual
            
            
            Outstanding
            
            
            Number
            
            
            ExercisablePrices
            
            
            Outstanding
            
            
            Life
      (Years)
            
            
            Options
            
            
            Exercisable
            
            
            Options$
            0.15
            
            
            
            166,666
            
            
            
            7.2
            
            
            $
            0.15
            
            
            
            166,666
            
            
            $
            0.15$
            0.20
            
            
            
            1,350,000
            
            
            
            8.3
            
            
            $
            0.20
            
            
            
            1,350,000
            
            
            $
            0.20$
            0.49
            
            
            
            756,303
            
            
            
            4.7
            
            
            $
            0.49
            
            
            
            756,303
            
            
            $
            0.49$
            0.70
            
            
            
            756,302
            
            
            
            4.7
            
            
            $
            0.70
            
            
            
            756,302
            
            
            $
            0.703,029,271
            
            
            
            6.5
            
            
            $
            0.39
            
            
            
            3,029,271
            
            
            $
            0.39




Transactions
involving stock options issued to consultants are summarized as
follows:





Weighted
              AverageNumber
      of
              Shares
            
            
            Exercise
              PriceOptions
      exercisable at June 30, 2006
            
            
            1,679,271
            
            
            $
            0.39Granted
            
            
            15,016,666
            
            
            $
            0.14Exercised
            
            
            (13,666,666
            )
            
            $
            0.14Cancelled
      / Expired
            
            
            --
            
            
            
            --Options  at
      June 30, 2007
            
            
            3,029,271
            
            
            $
            0.39Granted
            
            
            55,035,127
            
            
            $
            0.14Exercised
            
            
            (55,035,127
            )
            
            $
            0.14Cancelled
      / Expired
            
            
            --
            
            
            
            --Options  at
      June 30, 2008
            
            
            3,029,271
            
            
            $
            0.39Non-vested
      at June 30, 2008
            
            
            --
            
            
            
            --Vested
      at June 30, 2008
            
            
            3,029,271
            
            
            $
            0.39


--





F-22
 Table of Contents




The
estimated value of the non-employee stock options vested during the years ended
June 30, 2008 and 2007 were determined using the Black-Scholes option pricing
model and the following assumptions: expected option life of .01 to 1 year, a
risk free interest rate of 3.75 to 4.75%, a dividend yield of 0% and expected
volatility of 97% to 116%. The amount of the expense charged to operations in
connection with granting the options was $3,502,407 and $876,636 during the year
ended June 30, 2008 and 2007, respectively.





During
the twelve months ended June 30, 2007, the company extended the life of an
option to purchase 1,428,571 shares of common stock granted to a consultant from
2 years to 10 years. The Company valued the increase in the term of this option
at $64,616 and charged this amount to operations during the year ended June 30,
2007.





Employee Stock
Options


During
the twelve months ended June 30, 2008, the Company issued one-year options to
purchase 6,000,000 shares of common stock at a price of $0.05 per share to each
of its President and Chief Executive office and it’s Vice President and Chief
Financial Officer (an aggregate of options to purchase 12,000,000 shares of
common stock).During the year ended June 30, 2008 and 2007 the Company charged
$268,538 and $119,226, respectively, to operations related to recognized
stock-based compensation expense for employee stock options.  These
options were not issued under either of the Company’s stock option
plans.
 The
following table summarizes the changes to employee stock options outstanding and
the related prices of the Company’s common stock options issued to employees
under its non-qualified employee stock option plans (amounts have been adjusted
to reflect the reverse stock split and other adjustments):




Range
      of
                Exercise
                Prices
              
              
              Number
      of
                Shares
                Outstanding
              
              
              Weighted
                Average
                Remaining
                Contractual
                Life
      (Years)
              
              
              Weighted
                Average
                Exercise
                Price
      of
                Outstanding
                Options
              
              
              Number
      of
                shares
                exercisable
              
              
              Weighted
                Average
                Exercise
                Price
      of
                Exercisable
                Options$
              0.14
              
              
              
              500,000
              
              
              
              9.2
              
              
              $
              0.14
              
              
              
              500,000
              
              
              $
              0.14$
              0.15
              
              
              
              200,000
              
              
              
              7.9
              
              
              $
              0.15
              
              
              
              200,000
              
              
              $
              0.15$
              0.47
              
              
              
              375,000
              
              
              
              7.8
              
              
              $
              0.47
              
              
              
              375,000
              
              
              $
              0.471,075,000
              
              
              
              2.1
              
              
              $
              0.26
              
              
              
              1,075,000
              
              
              $
              0.26


Transactions
involving stock options issued to employees are summarized as
follows:
  Weighted
                  AverageNumber
      of
                  Shares
                
                
                Exercise
      PriceOptions
      outstanding at June 30, 2006
                
                
                625,000
                
                
                $
                0.34Granted
                
                
                500,000
                
                
                $
                0.14Exercised
                
                
                (50,000
                )
                
                $
                0.15Cancelled
      / Expired
                
                
                --
                
                
                
                --Options
      outstanding at June 30, 2007
                
                
                1,075,000
                
                
                $
                0.26Granted
                
                
                --
                
                
                
                --Exercised
                
                
                --
                
                
                
                --Cancelled
      / Expired
                
                
                --
                
                
                
                --Options
      outstanding at June 30, 2008
                
                
                1,075,000
                
                
                
                0.26Non-vested
      at June 30, 2008
                
                
                --
                
                
                
                --Vested
      at June 30, 2008
                
                
                1,075,000
                
                
                $
                0.26




F-23
 Table of Contents




The
weighted-average fair value of stock options granted to employees during the
years ended June 30, 2008 and 2007 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:




Significant
      assumptions (weighted-average):
            
            2008
            
            
            2007Risk-free
      interest rate at grant date
            
            
            3.5
            %
            
            
            4.5
            %Expected
      stock price volatility
            
            
            114
      - 116
            %
            
            
            105-115
            %Expected
      dividend payout
            
            
            --
            
            
            
            --Expected
      option life (in years)
            
            
            1.0
            
            
            
            10.0




Warrants





The
following table summarizes the changes in warrants outstanding and the related
prices of the Company’s common stock issued to non-employees of the Company.
These warrants were granted instead of cash compensation for services performed
and settlement of legal dispute (amounts have been adjusted to reflect the
reverse stock split and other adjustments):





Range
      of
              Exercise
              Prices
            
            
            Number
      of
              Shares
              Outstanding
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life
      (Years)
            
            
            Weighted
              Average
              Exercise
              Price
      of
              Outstanding
              Warrants
            
            
            Number
      of
              Shares
              Exercisable
            
            
            Weighted
              Average
              Exercise
              Price
      of
              Exercisable
              Warrants$
            0.98
            
            
            
            642,857
            
            
            
            4.45
            
            
            $
            0.98
            
            
            
            642,857
            
            
            $
            0.98$
            1.50
            
            
            
            7,000,000
            
            
            
            1.25
            
            
            $
            1.50
            
            
            
            7,000,000
            
            
            $
            1.50$
            2.50
            
            
            
            5,500,000
            
            
            
            1.25
            
            
            $
            2.50
            
            
            
            5,500,000
            
            
            $
            2.50$
            4.50
            
            
            
            3,500,000
            
            
            
            1.25
            
            
            $
            4.50
            
            
            
            3,500,000
            
            
            $
            4.50$
            5.50
            
            
            
            3,500,000
            
            
            
            1.25
            
            
            $
            5.50
            
            
            
            3,500,000
            
            
            $
            5.50$
            6.50
            
            
            
            3,500,000
            
            
            
            1.25
            
            
            $
            6.50
            
            
            
            3,500,000
            
            
            $
            6.50$
            8.50
            
            
            
            2,000,000
            
            
            
            1.25
            
            
            $
            8.50
            
            
            
            2.000.000
            
            
            $
            8.5025,642,857
            
            
            
            1.33
            
            
            $
            3.89
            
            
            
            25,642,857
            
            
            $
            3.89






F-24
 Table of Contents




Transactions
involving warrants are summarized as follows:




Weighted
              AverageNumber
      of
              Shares
            
            
            Exercise
              PriceWarrants
      outstanding June 30, 2005
            
            
            3,571,428
            
            
            $
            0.63Granted
            
            
            37,836,957
            
            
            
            2.96Exercised
            
            
            (223,785
            )
            
            
            0.21Cancelled
      / Expired
            
            
            --
            
            
            
            --Warrants  outstanding
      at  June 30, 2006
            
            
            41,184,600
            
            
            $
            2.77Granted
            
            
            --
            
            
            
            --Exercised
            
            
            --
            
            
            
            --Cancelled
      / Expired
            
            
            --
            
            
            
            --Warrants
      outstanding at  June 30, 2007
            
            
            41,184,600
            
            
            $
            2.77Granted
            
            
            25,000,000
            
            
            $
            3.96Exercised
            
            
            --
            
            
            
            --Cancelled
      / Expired
            
            
            (40,541,743
            )
            
            $
            2.80Warrants
      outstanding at June 30, 2008
            
            
            25,642,857
            
            
            $
            3.89




During
the twelve months ended June 30, 2008, the Company issued warrants to purchase
25,000,000 shares of common stock to investors in a private placement of equity
securities (see note 15).





During
the twelve months ended June 30, 2007, the Company extended the life of a
warrant to purchase 1,428,571 shares of common stock granted to a consultant
from 2 years to 10 years. The Company valued the increase in the term of this
option at $194,688 and charged this amount to operations during the year ended
June 30, 2007.





15.
CAPITAL STOCK




The
Company has authorized 5,000,000 shares of preferred stock, with a par value of
$0.001 per share. The Company has designated 1,000,000 shares of its preferred
stock as Series A convertible preferred stock (“Series A Preferred”) and
4,000,000 shares as Series B convertible preferred stock (“Series B Preferred”).
As of June 30, 2008, the Company had 1,000,000 shares of Series A Preferred and
0 shares of Series B Preferred issued and outstanding.  As of June 30,
2007, the Company had 1,000,000 shares of Series A Preferred and 2,000,000
shares of Series B Preferred issued and outstanding.





The
Company has authorized 500,000,000 shares of common stock, with a par value of
$0.001 per share. On November 8, 2004, the Company effected a one (1) for seven
(7) reverse stock split of its authorized and outstanding shares of common
stock; total authorized shares and par value remained unchanged. All references
in the financial statements and notes to financial statements, numbers of shares
and share amounts have been retroactively restated to reflect the reverse split.
The Company had 380,412,332 and  233,783,452 shares of common stock
issued and outstanding as of June 30, 2008 and 2007, respectively.





F-25
 Table of Contents




Series A Preferred
Stock





The terms
of the Series A Preferred Stock are as follows:





The
Series A Preferred shares rank senior to the common stock and each share of the
Series A preferred is convertible, under certain conditions, at the option of
the holders, into 1.71 shares (post reverse-split) of the Company’s common
stock. The 1,000,000 shares of the Series A preferred stock outstanding at June
30, 2008 are thus convertible into 1,710,000 shares (post reverse-split) of the
Company’s common stock. The holders of Series A Preferred shares may elect to
convert there shares to the Company’s common stock upon the certification after
12 months that the Company has a before tax profit of at least $1,000,000 at
which time, one-third of the preferred shares become convertible into common.
Then, on each 12-month anniversary date, again on certification of before tax
profits of at least $1,000,000, another one third of the preferred shares will
convert to common until all of the Series A Preferred shares have been
converted. For the years ended June 30, 2008 and 2007, the Company has not met
the requisite before tax profits of $1,000,000 and accordingly, no Series A
Preferred shares have been eligible for conversion to the Company’s common
shares.





The
Series A Preferred stockholders are not entitled to receive any dividends
declared and paid by the Company but are entitled to all of the voting rights
including the right to vote in person or by proxy. Each share of Series A
Preferred stock receives 1.71 votes on any issue brought before the
shareholders. The Company did not issue any Series A Preferred shares during the
years ended June 30, 2008 and 2007.




Series B Preferred
Stock





The terms
of the Series B Preferred stock are as follows:





The
Series B Preferred shares rank senior to the common stock and each share of the
Series B Preferred stock was originally convertible, at the option of the
holders, into 12 shares of the Company’s common stock. There were 2,500,000
shares of Series B Preferred stock outstanding at the time of the a 1-for-7
reverse split of the Company’s common stock in November, 2004; the conversion
ratio of these 2,500,000 shares of Series B Preferred stock was adjusted for the
reverse split, and these shares of Series B Preferred stock became convertible
into 1.71 shares of the Company’s common stock.





There
were an additional 1,500,000 shares of Series B preferred stock issuance
subsequent to the Company’s 1-for-7 reverse split of common stock in November,
2004; these shares of Series B preferred stock are convertible into common stock
at the rate of 12 to 1.





Year
ended June 30, 2007:





The
Company’s President and Chief Executive Officer converted 1,000,000 of the
Series B preferred shares into 12,000,000 shares of common stock.





The
Company’s President and Chief Executive converted an
additional  1,000,000 shares of Series B Preferred stock into a total
of 1,710,000 shares of common stock.





At June
30, 2007, there remained outstanding 2,000,000 shares of the Company’s Series B
preferred shares, convertible into a total of 8,565,000 shares of common
stock.





Year
ended June 30, 2008:





A board
member converted a total of 500,000 shares of Series B Preferred stock was
converted into 855,000 shares of common stock.





The
Company’s Vice President and Chief Financial Officer converted a total of
1,500,000 shares of Series B Preferred stock into a total of 7,710,000 shares of
common stock.





At June
30, 2008, there remain outstanding 1,500,000 shares of Series B preferred stock
convertible at a rate 1-to-1.71 of common stock, or 2,571,429 shares of common
stock issuable; and 500,000 shares of Series B preferred stock convertible at a
rate of 12-to-1 of commons tock, or 6,000,000 shares of common stock issuable.
At June 30, 2008, there are a total of 2,000,000 shares of Series B preferred
stock outstanding, convertible into a total of  2,571,429 shares of
common stock.





At June
30, 2008, there were no shares of Series B Preferred stock
outstanding.




F-26
 Table of Contents




Private Placement of Common
Stock





On
January 27, 2006, the Company signed subscription agreements with a group of
offshore investors for the sale of an aggregate of $9.2 million in Company
common stock, plus warrants (the “January Financing”). Due to the failure of the
investment group to timely fund in full the first payment required for the
purchase of shares and warrants, the Company terminated the January Financing;
all shares and warrants issued thereunder were returned by the escrow holder to
the Company for cancellation, and any funds received pursuant to the January
Financing were returned by the escrow holder to the investors.





In March
2006, a group of European investors (collectively, the “March Investors”), lead
by Olympia Holding AS, informed the Company that they were willing to invest on
the same terms and conditions that were negotiated for the now-terminated
January Financing, and the Company agreed to this financing transaction with the
March Investors (the “March Financing”).





Pursuant
to the March Financing, the Company agreed to issue 46 million shares of
restricted common stock under Regulation S at $0.20 per share, plus warrants to
purchase 50 million shares of common stock with two-year exercise periods and
strike prices ranging from $1.50 to $8.50, as set forth below. The shares were
held in escrow by Carl Hessel ("Escrow Holder"), a director and major
stockholder of the Company based in Geneva, Switzerland, along with the
warrants.  Pursuant to the terms of the March Financing, the first
payment of $4.6 million is due immediately, with a second payment of $4.6
million due within three months thereafter.





As of
June 30, 2008, the Company had received cash in the net amount $8,134,924
pursuant to the March Financing, and had issued 45,850,000 shares of common
stock and warrants to purchase an additional 49,836,957
shares.  Warrants to purchase 24,836,957 shares expired on March 31,
2008, and warrants to purchase 25,000,000 shares remain outstanding at June 30,
2008, as detailed in the table below.





The
Company also issued to consultants 4,600,000 shares of unregistered common stock
and warrants to purchase an additional 13,000,000 shares of common stock at a
price of $0.20 per share as a commission for work performed on the March
Financing.  These warrants to purchase 13,000,000 shares expired on
March 31, 2008.




The
warrants to be issued pursuant to the investors in the March Financing are as
follows:





OutstandingTotal
            
            
            
            
            
            atExercise
      Price
            
            
            Number
            
            
            
            
            
            June
      30,Per
      Share
            
            
            Issued
            
            
            Expired
            
            
            2008$
            1.50
            
            
            
            13,954,348
            
            
            
            (6,954,348
            )
            
            
            7,000,000$
            2.50
            
            
            
            10,964,130
            
            
            
            (5,464,130
            )
            
            
            5,500,000$
            4.50
            
            
            
            6,977,174
            
            
            
            (3,477,174
            )
            
            
            3,500,000$
            5.50
            
            
            
            6,977,174
            
            
            
            (3,477,174
            )
            
            
            3,500,000$
            6.50
            
            
            
            6,977,174
            
            
            
            (3,477,174
            )
            
            
            3,500,000$
            8.50
            
            
            
            3,986,957
            
            
            
            (1,986,957
            )
            
            
            2,000,00049,836,957
            
            
            
            (24,836,957
            )
            
            
            25,000,000





All
warrants have a two-year exercise period from the date of issuance of the
warrants. No registration rights were granted to the Investors in connection
with the March Financing and the shares and warrants issued in the March
Financing will be restricted securities, subject to the applicable restrictions
set forth in Regulation S promulgated under the Securities Act of 1933, as
amended.








F-27
 Table of Contents




Saleof
Securities




Year
Ended June 30, 2007:





The
Company issued 750,000 shares of common stock with a fair value of $352,500 to
an employee for services. The amount of $352,500 was charged to operations
during the prior year ended June 30, 2007.





The
Company issued 10,199,997 shares of common stock with a fair value of $2,999,899
to consultants for services to be performed through June, 2008. The amount of
$786,230 was charged to operations during the twelve months ended June 30, 2008,
and $2,213,579 were charged to deferred compensation and will be amortized to
expense during the year ending June 30, 2008.





The
Company issued 610,000 shares of restricted common stock with a fair value of
$158,600 to employees for services rendered. These shares vest in one year from
the date of issuance. During the year ended June 30, 2008, the Company charged
the amount of $36,899 to operations, and carried the balance of $121,701 as
Unearned Common Restricted Stock on its balance sheet.





The
Company issued 180,000 shares of common stock with a fair value of $75,600 as
prepaid rent.





The
Company issued 13,716,666 shares of common stock pursuant to the exercise of
stock options for cash proceeds of $4,766,547.





The
Company issued 2,180,000 shares of common stock with a fair value of $444,600 to
employees as compensation.





The
Company cancelled 142,858 shares of common stock previously issued to a
consultant for services. The amount of the originally issued value of $158,000
was credited to operations during the year ended June 30, 2008.





The
Company issued 2,222,220 shares of common stock for the acquisition of 50% of
PLC Partners, Ltd. The fair value of $800,000 was allocated to the assets
acquired.





The
Company issued 4,000,000 shares of common stock for subscriptions receivable of
$600,000. At June 30, 2008, payment for these shares has not yet been
received.





The
Company issued 3,000,000 shares of common stock for cash proceeds of $600,000
which had been received during the year ended June 30, 2007. These proceeds had
been carried as common stock subscribed on the Company’s statement of equity as
of June 30, 2007.





The
Company issued 13,700,000 shares of common stock pursuant to the conversion of
2,000,000 shares of Series B preferred stock by the Company’s President and
Chief Executive Officer.





Year
ended June 30, 2008:





The
Company issued 29,969,500 shares of common stock with a fair value of $4,559,271
to consultants for services provided.





The
Company issued 45,715,127 shares of common stock pursuant to the exercise of
options for cash proceeds of $3,439,011.





The
Company issued 9,320,000 shares of common stock pursuant to the exercise options
for which payment has not yet been received. The Company charged the amount due
under these options exercises of $279,600 to subscriptions
receivable.





The
Company issued 2,850,000 shares of common stock with a fair value of $310,550 to
employees as bonuses.





The
Company issued 8,567,143 shares of common stock for the conversion of Series B
Preferred stock.





The
Company issued 1,111,110 shares of common stock as additional consideration
pursuant to the terms of the acquisition of PLC Partners.





The
Company issued 800,000 shares of common stock for cash proceeds of
$40,000.





The
Company issued 2,300,000 shares of common stock valued at $303,000 to a director
as compensation for services performed.





The
Company issued 20,000,000 shares of common stock with a fair value of $1,000,000
to its President and Chief Executive Officer for services
performed.





F-28
 Table of Contents




The
Company accrued the issuance of 15,000,000 shares of common stock with a fair
value of $750,000 to its Vice President and Chief Financial officer for services
performed.  The amount of $750,000 is on the Company’s balance sheet
at June 30, 2008 as  subscriptions payable.





The
Company received for cancellation 4,000,000 shares of common stock issued during
the twelve months ended June 30, 2007 for subscriptions receivable of
$600,000.  The Company reduced additional paid-in capital and
subscriptions receivable by the amount of $600,000 during the twelve months
ended June 30, 2008.





The
Company issued 13,000,000 shares of common stock previously subscribed for cash
in the amount of $2,600,000.





The
Company issued 2,500,000 shares of common stock for cash of
$500,000;





The
Company issued 7,500,000 shares of common stock for which payment has not yet
been received. The amount of $1,500,000 is carried as subscriptions receivable
on the Company’s balance sheet at June 30, 2008;





The
Company received cash of $465,000 for 2,325,000 shares of common stock
previously issued.





The
Company received cash of $630,300 pursuant to the exercise of options to
purchase shares of common stock; this common stock has not been issued at June
30, 2008.





16.
RESTRICTED STOCK





On April
17, 2007, the Company into Restricted Stock Agreements with fourteen employees
for a total of 610,000 shares of S-8 registered common stock with a fair value
of $0.26 per share for a total aggregate value of $158,600. These shares become
fully vested one year from the date of issuance, or April 17, 2008.  As of
June 30, 2008 and 2007, unearned compensation related to restricted stock
agreements totaled $0 and $121,701, respectively.





17.
EMPLOYMENT AGREEMENTS





Chief Executive
Officer





In August
2001, the Company entered into an employment agreement with Paul Egan, its
President and Chief Executive Officer. Under the terms of the agreement, the
Company is liable to Mr. Egan for a minimum annual salary of $150,000 per year.
In addition, the Company is liable for an automobile allowance not to exceed
$1,500 per month. This employment agreement expired in August 2004, at which
time an addendum to this employment contract was executed which (i) extended all
terms and conditions of this employment contract to April 9, 2007, and (ii)
provided that a review of Paul Egan’s remuneration take place on or before
December 31, 2004. Effective January 1, 2006, Paul Egan’s salary was increased
to $264,000 per year. Effective March 1, 2006, Paul Egan began to draw a salary
of $25,000 per year for his position as Chief Executive Officer of the Company’s
newly established subsidiary, Freestar Dominicana.





On May
29, 2007, the Company entered into new employment agreement with Paul Egan which
replaces his prior employment agreement with the Company. Paul Egan’s employment
agreement has a five year term. Under the agreement, Paul Egan will continue to
serve in his current role of President and Chief Executive Officer of the
Company, reporting to the Board of Directors. The Company will pay Paul Egan
€300,000 (approximately US$403,000, based on current exchange rates) per year in
base salary, plus an automobile allowance of €1,500 (approximately US$2,000
based on current exchange rates) per month and other benefits. The Board of
Directors will review the annual base salary each year, but may not reduce it
below the initial base salary level. Paul Egan will be eligible for bonuses to
be paid in stock or stock options, with such bonuses to be determined by the
Board of Directors. If Mr. Egan’s employment is terminated by the Company
Without Cause (as defined in the employment agreement) or by Mr. Egan for Good
Reason (as defined in the employment agreement), then Mr. Egan shall be entitled
to a lump sum payment equal to one year’s annual salary, plus any applicable
bonuses.





On June
17, 2008, the Board of Directors approved the following equity compensation for
Paul Egan: (i) issuance of twenty million shares of fully vested common stock,
subject to resale restrictions under Rule 144; (ii)  grant of options
to purchase six million shares of restricted common stock at an exercise price
of $0.05 per share, with half of such options having with a net exercise, or
cashless exercise provision.





At June
30, 2008, the Company owed Paul Egan the amount of $317,385 in accrued salary,
and an additional $30,786 in accrued car allowance. Also at June 30, 2008, the
Company owed Mr. Egan $217,613 for cash advances he had made to the Company,
plus an additional $9,179 for interest due on these advances. At June 30, 2007,
the Company owed Paul Egan the amount of $49,901 in accrued salary, and an
additional $2,022 in accrued car allowance. Also at June 30, 2007, the Company
owed Mr. Egan $56,126 for cash advances he had made to the Company, plus an
additional $264 for interest due o on these advances.





F-29
 Table of Contents




Chief Financial
Officer





In August
2001, the Company entered into an employment agreement with Ciaran Egan, its
President and Chief Executive Officer. Under the terms of the agreement, the
Company is liable to Mr. Egan for a minimum annual salary of $120,000 per year.
In addition, the Company is liable for an automobile allowance not to exceed
$1,500 per month. This employment agreement expired in August 2004, at which
time an addendum to this employment contract was executed which (i) extended all
terms and conditions of this employment contract to April 9, 2007, and (ii)
provided that a review of Ciaran Egan’s remuneration take place on or before
December 31, 2004. Effective January 1, 2006, Ciaran Egan’s salary was increased
to $240,000 per year. Effective March 1, 2006, Ciaran Egan began to draw a
salary of $25,000 per year for his position as Chief Financial Officer of the
Company’s newly established subsidiary, Freestar Dominicana.





On May
29, 2007, the Company entered into new employment agreement with Ciaran Egan
which replaces his prior employment agreement with the Company. Ciaran Egan’s
employment agreement has a five year term. Under the agreement, Ciaran Egan will
continue to serve in his current role as Chief Executive Officer of the Company,
reporting to the President. The Company will pay Ciaran Egan €300,000
(approximately US $403,000, based on current exchange rates) per year in base
salary, plus an automobile allowance of €1,500 (approximately US $2,000 based on
current exchange rates) per month and other benefits. The Board of Directors
will review the annual base salary each year, but may not reduce it below the
initial base salary level. Ciaran Egan will be eligible for bonuses to be paid
in stock or stock options, with such bonuses to be determined by the Board of
Directors. If Mr. Egan’s employment is terminated by the Company Without Cause
(as defined in the employment agreement) or by Mr. Egan for Good Reason (as
defined in the employment agreement), then Mr. Egan shall be entitled to a lump
sum payment equal to one year’s annual salary, plus any applicable
bonuses.





On June
17, 2008, the Board of Directors approved the following equity compensation for
Ciaran Egan: (i) issuance of fifteen million shares of fully vested common
stock, subject to resale restrictions under Rule 144; (ii)  grant of
options to purchase six million shares of restricted common stock at an exercise
price of $0.05 per share, with half of such options having with a net exercise,
or cashless exercise provision.





At June
30, 2008, the Company owed Ciaran Egan the amount of $147,123 in accrued salary,
and an additional $30,786 in accrued car allowance. Also at June 30, 2008, the
Company owed Mr. Egan $19,268 for cash advances he had made to the Company, plus
an additional $2,069 for interest due on these advances.  At June 30,
2007, the Company owed Ciaran Egan the amount of $81,649 in accrued salary, and
an additional $2,022 in accrued car allowance.




18.
COMMITMENTS AND CONTINGENCIES





Operating
Leases





The
Company leased the following facilities under non-cancelable lease agreements at
June 30, 2008:





Santo
Domingo, Dominican Republic: 6,081 square feet of office space under a five-year
operating lease at the rate of $10,600 per months which expires in September
2011.





Helsinki,
Finland: 5,527 square feet of office space under a lease at the rate of $11,525
per month which expires in February 2012. The lease contains provisions to
increase the monthly lease amount to $13,420 effective March 1, 2009; $13,735 on
March 1, 2010; and $14,051 on March 1, 20011.





Dublin,
Ireland: 1,664 square feet of office space under a least at the rate of $9,867
per month through January 2011.





Stockholm,
Sweden: 1,700 square feet of office space under a lease at the rate of $4,000
per month through March 2009.





The
Company’s total commitments under non-cancelable operating leases at June 30,
2008 are as follows:




Years
      ending June 30,2009
            
            $
            427,4882010
            
            
            407,9072011
            
            
            362,3592012
            
            
            138,909Thereafter
            
            
            --Total
            
            $
            1,336,663




Rental
expenses for office space charged to operations for the year ended June 30, 2008
and 2007 are $401,132 and $342,592, respectively.





Sales and Marketing
Agreements





The
Company has entered into various sales and marketing agreements. Under these
agreements, the Company agreed to pay these sales/marketing partners a portion
of the revenues brought in by these marketing firms. No material revenue has
been recognized in relation to these sales agreements.





Legal
Proceedings
 
 From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business.  However, litigation is
subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. Other than
as set forth below, we are not a party to any material pending legal proceedings
and, to the best of our knowledge, no such action has been threatened against
us.
 
 ACI
v. Rahaxi Processing Oy
  On March
31, 2008, Rahaxi Processing Oy, a subsidiary of FreeStar based in Helsinki,
Finland, received a summons detailing legal proceedings to be taken against it
by ACI Worldwide (EMEA) Limited (“ACI”), which is domiciled in Watford, United
Kingdom pursuant to a written complaint filed on the 26th February 2008 in
Helsinki District Court. ACI is claiming payment relating to outstanding
invoices for services provided to the Company such as license fees, maintenance
fees, support  and software fees and consultancy service fees pursuant
to various agreements between ACI and the Company.
  The
Company has acknowledged that a certain amount of the fees claimed under summons
are due to ACI and in recognition of this fact the Company has paid a
significant portion of the monies due with respect to the uncontested invoices.
The Company will, however, be contesting a significant portion of the fees
claimed by under the summons when the preliminary hearing of the case takes
place in Helsinki District Court, expected to occur towards the end of
2008.
  This
matter remains in the early stages of litigation and there can be no assurance
as to the outcome of the lawsuit. Litigation is subject to inherent
uncertainties, and unfavorable rulings could occur.  Were unfavorable
rulings to occur, there exists the possibility of a material adverse impact of
money damages on the Company’s financial condition.
 
 19.  SUBSEQUENT
EVENTS
 
 Subsequent
to June 30, 2008, the Company issued the following shares of common
stock:
 
 3,300,000
shares of common stock pursuant to the exercise of stock options;
 
 29,455,362
shares of S-8 common stock were issued to consultants and employees for services
provided;
 
 26,500,000
shares of common stock were issued to employees, officers, and directors
pursuant to compensation or bonus plans.


F-30
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