**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549







**FORM
      10-KSB**








(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, 2006ORo
              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
              (I.R.S.
                  EmployerIncorporation
                  or Organization)
              Identification
                  No.)








**31
      Mespil Road, Ballsbridge, Dublin 2 Ireland**


(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**





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








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





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





State
      issuer’s revenues for its most recent fiscal year: $2,097,749 for
      the
      fiscal year ended June 30, 2006.





As
      of
      September 25, 2006, the aggregate market value of the voting and non-voting
      equity held by non-affiliates of the registrant was $66,694,958.





As
      of
      September 25, 2006,  208,147,427 shares of our common stock were
      issued and outstanding.





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








1
 **Table
          of Contents**







TABLE
      OFCONTENTS




PAGEPART
                  I.ITEM
                  1.
              DESCRIPTION
                  OF BUSINESS
              3ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY
              12ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              13ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
              13PART
                  II.ITEM
                  5.
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS
              13ITEM
                  6.
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
              14ITEM
                  7.
              CONSOLIDATED
                  FINANCIAL STATEMENTS
              20ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE
              20ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
              20ITEM
                  8B
              OTHER
                  INFORMATION
              20PART
                  III.ITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                  PERSONS;  COMPLIANCE
                  WITH SECTION 16(A) OF THE EXCHANGE ACT
              20ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              22ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              24ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS
              27ITEM
                  13.
              EXHIBITS
              27ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              27SIGNATURES





2
 **Table
          of Contents**


PART
      I.





ITEM
      1.
      DESCRIPTION OF BUSINESS





Overview




We
      are a
      provider of electronic payment processing services, including credit and debit
      card transaction processing, related software applications and other value-added
      services. We currently process on average approximately
      1,500,000 transactions per month and serve approximately
      1,000 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, which we refer to as POS), and capturing and transmitting
      transaction data. Through
      an agreement with Hypercom Corporation, the world's second largest manufacturer
      of payment terminals, we also offer our customers POS 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" the
      card
      through its POS terminal and enters the amount of the purchase. After capturing
      the data, the POS 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. As described below, we also provide an Internet Payment Gateway
      for online or internet transactions in which there is no POS terminal and the
      card is not physically present at the merchant location.





We
      were
      originally organized on August 2, 1997, under the laws of the State of Delaware
      as Interstate Capital Corporation. On November 17, 1999, we merged into a newly
      formed Nevada corporation, Freedom Surf, Inc., for the purpose of changing
      the
      corporate domicile to Nevada. On February 24, 2003, we filed a Certificate
      of
      Amendment to our Articles of Incorporation with the Nevada Secretary of State
      changing our name to "FreeStar Technology Corporation". On September 10, 2002,
      we entered into an agreement with Heroya Investments Limited for the acquisition
      of Rahaxi Processing Oy through a combination of cash and stock. The agreement
      with Heroya was subsequently amended three times to increase the stock
      consideration and decrease the cash component. Rahaxi, our wholly owned
      subsidiary, is based in Helsinki, Finland.





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 1,000 merchants each day and processing on
      average approximately 1,500,000 transactions per month.




Our primary source of revenue is from transaction fees we receive from
      processing credit and debit card transactions through POS terminals at a
      merchant’s retail location. Recently, we have also begun generating revenue from
      consulting fees, which include customization of software applications for
      merchants and other customers, as well as fees from sales of POS terminals.
      Other anticipated revenue streams include processing fees from our Internet
      Payment Gateway and fees from a range of different value added services. In
      fiscal year 2006, the period from July 1, 2005 through June 30, 2006,
      transaction fees from POS terminal transactions were primarily from merchants
      and customers based in Finland. We also derived revenue from transaction fees
      generated by our client in Estonia .In addition, we derived revenue from
      consulting and development fees from our customers in Sweden and the United
      Kingdom.





Currently,
      we support transaction processing services for merchant categories such
      as:





Catalog


Department
      stores


E-commerce


Government
      (e.g., municipalities)


Lodging,
      travel, sports, and entertainment (e.g., theaters, stadiums and
      hotels)


Office
      products


Quick
      service restaurants/fast food


Medical/dentistry


Multi-national
      establishments


Remote
      (e.g., mobile, outdoor, temporary, transport, and seasonal)


Small
      multi-line Specialty goods (electronics, carpet/tile,


furniture,
      etc.)


Specialty
      retail/soft goods (apparel, shoes, consignment, etc.)


Supermarket/grocery
      (supermarkets, delis, butcher shops)


Table
      service restaurants (chains and local restaurants)


Vending
      automates


Public
      transport vehicles





Products
      and Services





Our
      main
      product and service offering includes:





(1)  Authorization.





Transaction
      fees from processing POS terminal transactions make up the bulk 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.


3
 **Table
          of Contents**





We
      provide transaction processing support for
      Visa, MasterCard, American Express, Diners Club, JCB and all bank-issued Finnish
      debit cards. Our network currently supports over 5,000 POS appliances and is
      growing, including integrated cash registers and stand-alone/desk terminals.
      Our
      authorization and transaction fees are primarily priced based on a specified
      amount per transaction.





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 new
      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 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 asymmetric encryption algorithms such
      as
      DES, Triple-DES, RSA and SHA 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/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 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 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 intend
      to
      offer end-to-end merchant processing solutions. Through our strategic
      relationship with Hypercom, we offer high performance, integrated/hybrid POS
      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 POS terminals from a globally recognized
      manufacturer, 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 Group pursuant to
      which
      we developed a software system that allows multiple applications at the POS
      terminal, such as 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 supplier, Hypercom Corporation, one of the world's largest
      payment device manufacturers.





We
      have a
      licensing and distribution agreement with Hypercom to deploy the ICE(TM) family
      of terminals, bringing fully EMV compliant terminals to the Finnish market.
      Our
      collective product offering with Hypercom, 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 did not
      derive any revenue from the sale of Hypercom terminals in fiscal 2006, but
      expects to in fiscal 2007.





(4)  Internet
      Payment Gateway





In
      addition to providing card processing and payment solutions for physical/retail
      storefronts utilizing POS terminals, we also offer a "state-of-the art" Internet
      Payment Gateway, or IPG. Our proprietary IPG provides a mechanism for Internet,
      mail order and telephone order payment transactions. This advanced payment
      service includes real-time reporting and fraud management. The IPG delivers
      a
      global solution for online merchants.





Our
      payment processing services are facilitated by our IPG. This gateway provides
      a
      live link to the credit card networks, a real-time transaction database for
      dynamic reporting, and a risk management system. Depending upon specific
      business goals and requirements, the IPG may be hosted by us or installed in
      a
      merchant’s data center or processing facility. In either case, the processing,
      risk management, and reporting tools are available 24 hours a day through a
      secure, password-protected website. All that is required to access and manage
      a
      merchant portfolio from the site is a desktop computer and Microsoft Internet
      Explorer browser software. This web-based design facilitates dynamic interaction
      with all transaction data for effective and customized merchant portfolio
      management. Both merchants and financial institutions are protected by an
      extensive matrix of fraud detection analysis and software. Through the system,
      an individual merchant or an entire merchant portfolio can be monitored for
      potentially fraudulent card activity and data entry errors.





Our
      IPG
      allows us to expand our focus from our traditional, retail location transaction
      processing activities, based primarily in Finland, to internet transaction
      processing on a worldwide basis, which is one of the fastest growing segments
      of
      the processing market. The obvious advantages with internet transactions are
      that the geographical location of the merchant's customers is not important
      and
      that the time to market, i.e. executing the roll out of our IPG services, is
      short and, not the least, relatively inexpensive. We did not derive any revenue
      from our IPG in fiscal 2006 but expect to derive revenue in fiscal
      2007.


4
 **Table
          of Contents**





(5)  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
      POS 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 POS 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
      POS 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 Refunds 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, with plans to expand to France,
      Germany and the Netherlands in 2007 and then into Italy, the UK, and
      Switzerland. We did not derive any revenue from our relationship with FCC and
      Global Refund in fiscal 2006 as the application was still under development,
      but
      we expect to derive revenue in 2007 from this strategic
      relationship.





(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.





(7)  Software
      Development / 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.
      We
      began generating revenue from these fees in the first quarter of fiscal
      2006.





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 POS,
      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 POS 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
      POS terminals and software, switching and processing of POS terminal
      transactions, and a range of value added services.





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 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 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. For example, online retailing
      generated US $90 billion in revenues for US retailers in 2004, compared with
      just US $8 billion in 1998, i.e. a cumulative average annual growth rate of
      about 50%.




1 Source: The McKinsey Quarterly, 2005 Number 3, “Retailing: What's working
      online."


5
 **Table
          of Contents**







**Europe**





Credit card
      usage in Europe has grown significantly. For example, GDV in 2004, as reported
      by MasterCard’s customers, increased by 14.2% over 2003. This
      can
      be compared to 9.3% 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. Similarly, India -- where only 14% of citizens currently have a credit
      card, according to a MasterCard International survey -- experienced 31% growth
      in Visa and MasterCard purchase volume during the same period, from
      approximately $1.8 billion in 2002 to about $2.4 billion in 2003.





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**





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.





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.





**EMV**





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.





**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 POS 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 POS
      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 on or after January
      1, 2005, 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.





**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.




**Regulatory
        Changes**
 
 Regulatory
        changes on national, regional and global levels affect participants in the
        payment industry. 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. One
        significant European level change will be the Single European Payment Area,
        or
        SEPA, which means that bank issued debit or ATM cards in the future must
        work in
        a cross-border environment the same way as credit cards do
        today.






2 Source: MasterCard Corporation’s annual report 2004. GDV represents gross usage
        (purchased and cash transactions) on MasterCard branded cards for goods and
        services, including balance transfers and convenience checks. The figures
        exclude Maestro and Cirrus transactions.


6
 **Table
          of Contents**






**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 POS systems is intensely competitive
      and we expect competition to continue to increase. Our competitors for POS
      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.





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 the Nordics and Baltics and Expand into Rest of
      Europe





We
      believe we are well placed to capitalize on the transformation sweeping the
      payment industry. We are targeting the Baltic countries in the Finnish region
      and other European markets to broaden our customer base.





We
      also intend to expand our operations into the rest of Europe, exploiting
      our competitive edge with EMV compatibility and cross-boarder capabilities.
      Further, in line with our "Partners in Business Philosophy", we seek to grow
      our
      merchant base through strategic partnerships with global blue chip players
      such
      as Global Refund and Hypercom.





(2)  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.





(3)  Grow
      Within Internet Transactions





We
      have
      entered the marketing phase of our newly implemented Internet Payment Gateway,
      or IPG, which allows us to expand our focus from our traditional retail location
      processing activities in Finland to internet based merchant processing
      transactions on a worldwide basis, which is one of the fastest growing segments
      of the processing market. The obvious advantages with internet transactions
      are
      that the geographical location of the merchant’s customers is unimportant and
      that the time-to-market, i.e. executing the roll out if our IPG services,
      is short and, not the least, relatively inexpensive.





(4)  Capitalize
      on High Growth Opportunities in Emerging Markets





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.





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.
      We have
      also entered into contractual arrangements with several major European financial
      institutions in order to provide the transaction processing services for China
      Unionpay customers in Europe.




(5)  Secure
        Relationships with Additional European Merchant Banks
 
 In
        order
        for us to increase our transaction processing volume outside of Finland,
        we
        intend 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.




7
 **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





·  POS
      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.





**POS
      Providers**





While
      big
      merchants carefully select their providers of payment services, small merchants
      tend to choose the payment provider that is recommended by the POS provider(s)
      they use. As a consequence, we are focusing to develop business relations with
      key POS providers who 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.





**Payment
      Terminal Vendors**





We
      are
      working with several vendors, both in marketing and technology sharing fields.
      We are aiming to take our vendor relationships to a strategic level, which
      means
      similar re-seller programs that we have in place with POS vendors, but also
      a
      deeper cooperation around terminal technical roadmaps.





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 are increasingly
      contacting 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
      many
      opportunities for growth in the market and that we can achieve long-term
      profitability. We are active in a growth market and we enjoy certain competitive
      advantages. Even though we are still in a pre-profitable stage of our
      development, our transaction volume, as well as transaction revenues, are
      growing. During fiscal 2006, we generated on average
      approximately 1,500,000 transactions per month, a growth rate of
      approximately 15% compared to the average monthly transaction volume in fiscal
      2005.  Management estimates that, due to new business wins and new service
      offerings, the average monthly transaction volume will amount to 2 million
      transactions by the end of calendar year 2006 and as much as 5 million by the
      end of fiscal 2007.





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.[ I n
        April
        2006 we received EMV-certification for Visa®, MasterCard® and all domestic
        Finnish cards used with its Rahaxi-OTI(TM) Point Of Sale (POS) middleware
        solution from Luottokunta in Finland. In addition in late June 2006 we
 received the Finnish EMV certification required to sell Hypercom's Optimum
        T2100 card payment terminal in Finland.
 
 We will also be 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 transaction
        per
        month and can increase this capacity with the addition of further
        licenses.




Research
        and Development
 
 Our
        long-term growth strategy requires continued development of new processing
        products. 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 $1,600,000
        for
        fiscal 2006 and approximately $1,000,000 for fiscal 2005, which includes
        software costs which were expensed as incurred and costs which have been
        capitalized. Key development activities during fiscal 2006
        included:






8
 **Table
          of Contents**


- 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 POS middleware software solution
          Rahaxi-OTIÔand
          the HypercomâT2100
          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 1,000 customers. Our clients and global partners include Ikea,
        Hypercom , 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.  The
        Company's two largest customers accounted for approximately 15% and 10% of
        its
        sales for theyear
        ended June 30, 2005. The Company had one customer that accounted for
        approximately 10% of sales for the year ended June 30,
        2006.





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


Bitwise
      -
      XML Conversion


DioneSystek
      - Terminal Manufacturer


Fujitsu
      -
      Multi-Banking Link Software


HP
      Invent
      - Hardware Systems


Hypercom
      - POS Manufacturer


InterMart
      Corporation - Hybrid Card Based Solutions


Sonera
      -
      X.25 and Telecom Lines


TietoEnator
      - Hardware Housing





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. We intend
        to
        link our customers to more banks in Europe during the course of fiscal 2007.
        We
        currently have links (electronic communications)in place with the following
        acquiring banks:


Luottokunta


Handelsbanken


SEB/Euroline


CEKAB


Nordea


Oko


Sampo


Alandsbanken


Samlink


PKK





Employees




As
        of
        June 30, 2006, we had 34 full-time employees , as well as several consultants
        in
        various specialties. Of the total, four are senior management, four in finance
        and accounting, 8 in software development, two in project management, eight
        in
        office administration, and seven in sales and marketing.





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.





RISK
      FACTORS





**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. 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.




9
 **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.




**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 $58,113,714 as of June 30, 2006. 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, 2006 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.





**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
        intend to recruit in fiscal year 2006 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.


10
 **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 equal to approximately 27.6%
      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.


11
 **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-KSB's/Form 10-QSB'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.





**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. In general,
      under Rule 144 a person (or persons whose shares are aggregated) who has
      beneficially owned shares acquired in a non-public transaction for at least
      one
      year, including persons who may be deemed affiliates of the Company (as that
      term is defined under that rule) would be entitled to sell within any
      three-month period a number of shares that does not exceed 1% of the then
      outstanding shares of common stock, 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.





ITEM
      2.  DESCRIPTION OF PROPERTY





Offices




We lease a 1,664 square foot office for our corporate headquarters in Dublin,
      Ireland for $7,842 per month. The lease expires in January 2011.


We
        lease
        1,300 square feet of office space in Helsinki, Finland for $3,257 per month;
        the
        rental rate is tied to the annual cost of living index in Finland. This lease
        expires in July 2008, but can also be terminated with three months
        notice.
 
 We
        lease
        a 6,082 square foot office at Ave.
        Sarasota No. 02 8th
        Floor, Suite 08, Torre Empresarial AIRD, La Julia, Santo Domingo, Dominican
        Republic. This lease is for five years and expires in September 2011; the
        current rent is $7,000 per month.
 
 We
        have a
        three year lease, which expires on March 31, 2009, on 1,700 square feet of
        office space in Stockholm, Sweden at a rent of approximately $4,000 per month
 
 We
        also
        have office space in Geneva, Switzerland, which is being provided at no cost
        to
        us by Carl Hessel, one of our directors.
 
 The Company also leases certain of its computer hardware and software under
        non-cancelable operating leases in the amount of $53,731 per quarter, which
        expire in June, 2007.
 
 All
        these
        offices are currently adequate for our needs.


12
 **Table
          of Contents**





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 $122,539 and $93,403, respectively, as of June
      30, 2006 and 2005.





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





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.





**Diamond
      Club of America, Inc. v. FreeStar Technology Corporation**





On
      April 6, 2004, Diamond Club of America, Inc. filed a complaint against us in
      the
      Suffolk County New York Supreme Court. The complaint alleges, among other
      things, that we owe Diamond Club $35,410.45 pursuant to an agreement between
      Diamond Club and TransAxis, Inc. or a predecessor company of TransAxis,
      Inc.





We
      have
      filed an answer to the complaint in which we affirmatively defend this action
      on
      the grounds that as a minority stockholder in TransAxis, we are not responsible
      for the debts of TransAxis. This action is still pending, but the plaintiff
      has
      made no efforts to move this case forward, and we have had no contact with
      plaintiff during the past 24 months.





**Cybernet
      Ventures v. Digital Courier Technologies, Inc. et al.**





On
      April
      18, 2002, Cybernet Ventures, Inc. filed a complaint in Los Angeles County
      Superior Court alleging that between April 1999 and December 2001, Digital
      Courier Technologies, Inc., or DCTI, engaged in wrongful conduct with respect
      to
      its performance of certain credit card processing agreements with DCTI.
      Cybernet's complaint asserts legal causes of action against DCTI for fraud,
      intentional misrepresentation, negligent misrepresentation, conversion, unjust
      enrichment, and interference with economic relations.





Unbeknownst
      to FreeStar, on June 11, 2003, Cybernet filed its first amended complaint adding
      FreeStar as a "Doe" defendant without adding any specific claims for relief.
      In
      March 2005, again unbeknownst to FreeStar, Cybernet secured a $2,200,000 default
      judgment against FreeStar.





On
      July
      25, 2005, after consideration of the papers filed by the parties, and the
      arguments of counsel, the Court reversed its early judgment and vacated the
      $2,200,000 default judgment that had been entered against FreeStar. On July
      26,
      2005, FreeStar moved the Court to dismiss the entire amended complaint against
      FreeStar. On September 12, 2005, Cybernet filed a new amended complaint against
      FreeStar seeking $2,200,000 in damages, alleging that FreeStar had engaged
      in a
      "defacto" merger with DCTI and therefore should be subject to DCTI's financial
      obligations.





On
      May
      23, 2006, Cybernet and FreeStar entered into a definitive settlement agreement.
      Under the settlement agreement, FreeStar agreed to pay Cybernet 108,695
      unregistered common shares of its stock in exchange for Cybernet dismissing
      its
      $2.2 million lawsuit against FreeStar with prejudice. Cybernet also released
      FreeStar and its officers, agents and directors from all liability, known and
      unknown.





**Securities
      and Exchange Commission Investigation**





In
      January 2003, we were advised by the staff of the Denver office of the SEC
      that
      it had initiated an informal, non-public inquiry. Since that time, the staff
      has
      sought and received production of documents and testimony relating to certain
      financing transactions entered into by FreeStar, issuance of our stock in
      compliance with the registration provisions, facts stated in press releases
      and
      reports filed with the SEC concerning, among other things, our assets,
      operations, financial condition, anticipated revenue and strategic
      initiatives.





In
      July
      2003, we learned that the SEC had issued a formal order of investigation. There
      is a risk that an enforcement proceeding will be recommended by the staff of
      the
      SEC as a result of this formal investigation. Enforcement proceedings could
      include allegations by the SEC that FreeStar violated the anti-fraud,
      registration and books and records provisions of federal securities laws, and
      the rules thereunder. However, it cannot be predicted with certainty what the
      nature of such enforcement proceeding would be, the type of sanctions that
      might
      be sought, or what the likelihood would be of reaching a settlement. FreeStar
      has been and expects to continue to cooperate with the ongoing SEC
      investigation.





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





None.





PART
      II.




ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS





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 "FreeStar 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.


13
 **Table
          of Contents**





Per
                Share Common Stock Bid Prices by QuarterFor
                the Fiscal Year Ended June 30, 2006
            High
            LowQuarter
                Ended June 30, 2006
            $
                0.67
            $
                0.33Quarter
                Ended March 31, 2006
            1.22
            0.31Quarter
                Ended December 31, 2005
            0.34
            0.20Quarter
                Ended September 30, 2005
            0.32
            0.20Per
                Share Common Stock Bid Prices by QuarterFor
                the Fiscal Year Ended June 30, 2005
            High
            LowQuarter
                Ended June 30, 2005
            $
                0.40
            $
                0.21Quarter
                Ended March 31, 2005
            0.42
            0.195Quarter
                Ended December 31, 2004
            0.469
            0.205Quarter
                Ended September 30, 2004
            0.085
            0.036





Holders
      of Common Equity





As
      of
      September 15, 2006, we had approximately 264 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, 2006:
 
 On
        April
        10, 2006, we
        issued
        142,857 shares of common stock valued at $60,000 to our European Business
        consultant , as compensation for her consulting services. This grant was
        made
        pursuant to Regulation S of the Securities Act of 1933, as amended. [only
        if not
        US resident]
 
 On
        April
        15, 2006, we
        issued
        100,000 shares of common stock valued at $45,000 to our Marketing and Sales
        consultant, as compensation for his consulting services. This grant was made
        pursuant to Regulation S of the Securities Act of 1933, as amended. [only
        if not
        US resident]
 
 On
        April
        28, 2006, we
        issued
        132,143 shares of common stock valued at $66,072 to our [Advisory consultant
        ,
        as compensation for his consulting services. This grant was made pursuant
        to
        Regulation S of the Securities Act of 1933, as amended. [only if not US
        resident]
  On
        May 4,
        2006 and May 8, 2006, we issued a total of 250,000 shares of common stock
        valued
        at $121,000 to an advisory board member. These issuances were made to compensate
        the advisory board member for his services.





On
      June
      6, 2006, we issued 108,695 shares of common stock valued at $53,260 to Cybernet
      Ventures, Inc. pursuant to a legal settlement agreement. See Item 3 “Legal
      Proceedings”.




On
      June
      19, 2006, we issued 600,000 shares of common stock valued at $282,000 to our
      Sales Director, as part of his compensation for his services. This grant was
      made pursuant to Regulation S of the Securities Act of 1933, as
      amended.





On
      May
      12, 2006, we issued 1,183,283 shares of common stock valued at $650,000 to
      Internet Opportunity Entertainment Limited pursuant to conversion of a note
      payable. The conversion
      price was computed based on the average of the daily closing prices for our
      common stock for the 90 consecutive full trading days prior to the maturity
      date, which was May 12, 2006, of the note.


In
        January and May, 2006, we issued 4,600,000 and 3,000,000 shares of common
        stock,
        respectively, valued at an aggregate of $2,912,000 as a commission for an
        equity
        fundraising.





No
      commissions were paid in connection with any of these sales. 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 or Regulation D promulgated by the Securities and Exchange Commission as
      transactions by an issuer not involving any public offering.







ITEM
      6.
      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-KSB, 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.


14
 **Table
          of Contents**


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; (4) Sale of Point of Sale solutions:
      sales
      of point of sale terminals; (5) Internet Payment Gateway: transaction fees
      stemming from our Internet Payment Gateway; and (6) Private Label Cards:
      transaction management services provided for a private label card issuer. Our
      revenue for the year ended June 30, 2006 was primarily generated from
      transaction fees and consulting fees through our Finland
      operations.





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,
      w e
      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-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**





We
      reported revenue of $2,097,749 for the year ended June 30, 2006 compared to
      $1,602,819 for the year ended June 30, 2005, an increase of $494,930 or
      approximately 30%. The increase was due primarily to an increase in consulting
      and development fees by our subsidiary, Rahaxi Processing Oy. The other reason
      for the increase in revenue was an increase in transaction processing fees
      by
      Rahaxi due to an increase in the number of transactions processed. We expect
      this trend to continue throughout fiscal 2007 with the addition of new clients
      and a continued increase in consumers' preference to use credit and debit cards
      instead of cash.


For
        the
        year ended June 30, 2006, we processed approximately 18,000,000 transactions,
        an
        increase of 2,520,000, or approximately 16.2, over the approximate 15,480,000
        transactions that were processed in the year ended June 30,
        2005.





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 and our Internet Payment Gateway. We believe that we
      will
      derive a higher price per transaction for processing EMV transactions as
      compared to non-EMV transactions; 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, 2006 has been derived from a limited
      number of its customers, primarily Finnish customers for its transaction
      processing products. Approximately 52% 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 2007. We believe that this customer concentration will be diluted
      in
      the second half of fiscal 2007 as we pursues operations outside of Finland.
      All
      of our revenues for the twelve months ended June 30, 2006 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 2007.





**Cost
      of Revenue**





Cost
      of
      revenue was $2,078,698 for the year ended June 30, 2006, compared to $1,695,069
      for the year ended June 30, 2005, an increase of $383,627 or approximately
      23%,
      due to an increase in expenditures to enhance our transaction processing
      software and further develop our product line.





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.





**Selling,
      General and Administrative Expenses**


Selling,
        general and administrative expenses were $13,913,969 for the year ended June
        30,
        2006 compared to $21,299,941 for the year ended June 30, 2005, a decrease
        of
        $7,385,972 or approximately 34%. During the year ended June 30, 2005, we
        completed the long-term incentive compensation package for our senior executives
        consisting of 20,000,000 shares of restricted common stock valued at $4,600,000;
        1,500,000 shares of Series B Preferred stock valued at $4,140,000; and options
        to purchase 5,000,000 shares of common stock at price of $0.01 per share,
        valued
        at $1,100,000, and options to purchase 500,000 shares of common stock at
        a price
        of $0.15 per share, valued at $125,000. We also forgave the conversion cost
        (exercise price) of $50,000 related to 5,000,000 of these options. The total
        value of this long-term incentive package was $10,015,000, which was charged
        to
        the twelve months ended June 30, 2005; there was no comparable charge during
        fiscal year 2006. The primary components of selling, general, and administrative
        expenses for the year ended June 30, 2006 were: consulting fees of $10,187,299
        to service providers for financial consulting and other professional services;
        $10,109,934 of this amount consisted of non-cash compensation in the form
        of
        stock, stock options, and warrants. Other components of selling, general,
        and
        administrative expenses for fiscal year 2006 included payroll and related
        costs
        of $1,791,390; travel and entertainment costs of $480,478; facilities expense
        (rent, telephone, utilities, and maintenance) of $475,248; legal and accounting
        fees of $283,314; depreciation and amortization of $259,599; other professional
        services of $139,472; and $80,062 for investor relations.
  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.


15
 **Table
          of Contents**


**Gain
      on Settlement**





During
      the year ended June 30, 2005, we recorded a non-recurring gain of $350,000,
      representing the recovery and cancellation of 714,286 shares of common stock
      which had been issued as compensation to our prior investment banker. The gain
      was recorded at the fair value of the shares when they were originally issued.
      There was no such gain during the year ended June 30, 2006.





**Cost
      of Legal Settlement**





Cost
      of
      legal settlements was $53,261 for the year ended June 30, 2006, a decrease
      of
      $979,028 or approximately 95% compared to $1,032,289 during the year ended
      June
      30, 2005. During the year ended June 30, 2006, we charged to operations the
      amount of $53,261 representing the cost of settling a legal dispute. This amount
      consists of 108,695 shares of common stock. During the year ended June 30,
      2005,
      we charged to operations the amount of $1,032,289 representing the cost of
      settling a legal dispute. This amount consists of warrants with a fair value
      of
      $431,717 and a convertible note payable with a fair value, net of the discount
      associated with the beneficial conversion feature, of $600,572.




**Interest Expense**


Interest
        expense (net) was $53,807 for the year ended June 30, 2006, compared to $26,774
         for the year ended June 30, 2005, an increase of $27,033 or approximately
        101%. The increase is due to a note payable in the amount of $650,000 which
        the
        Company had during the year ended June 30, 2006; interest of $ 42,798 related
        to
        this note was charged to the year ended June 30, 2006 and $6,450 related
        to the
        year ended June 30, 2005.




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.





**Net
      Loss**


We
        recorded a net loss of $13,999,773 for the year ended June 30, 2006 compared
        to
        $22,102,463 for the year ended June 30, 2005, a decrease of $8,102,690 or
        approximately 36%. As stated above, the primary reason for the decrease in
        net
        loss was due to the reduction in selling, general, and administrative expenses,
        which was primarily due to the absence in fiscal year 2006 of expenses related
        to the long-term incentive compensation package for our senior executives
        that
        was adopted in fiscal year 2005.





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.





Commitments





Our
      total
      commitments under non-cancelable operating leases at June 30, 2006 are as
      follows:





Years
                  ending June 30,2007
              
              $
              433,3002008
              
              $
              226,1032009
              
              $
              214,1032010
              
              $
              178,1032011
              
              $
              138,893Total
              
              $
              1,190,502










Operating
      Activities


The
        net
        cash used in operating activities was $4,112,305 for the year ended June
        30,
        2006 compared to $1,422,247 for the year ended June 30, 2005, an increase
        of
        $2,690,058 or approximately 189%. The primary reason for the increase in
        cash
        used in operating activities is the increase in product development costs
        as we
        continue to upgrade our software platform and expand our line of product
        offerings. The primary components of cash used in operating activities during
        the current period are the net loss of $13,999,773, partially offset by the
        non-cash charges of non-cash compensation of $10,109,934; depreciation and
        amortization of $655,000; common stock issued for legal settlement of $53,260;
        amortization of discount on note payable of $42,978; bad debt expense of
        $20,291; and gain on disposal of assets of ($2,211). The non-cash components
        of
        working capital changed in the aggregate amount of $991,784 which was offset
        by
        a decrease in cash.





Investing
      Activities





Net
      cash
      used in investing activities was $996,511 during the year ended June 30, 2006
      compared to $625,064 for the year ended June 30, 2005, an increase of $371,447
      or approximately 59%. This change was primarily due to our increased investing
      in software enhancement to our transaction processing system.





Liquidity
      and Capital Resources





The
      independent auditors report on our June 30, 2006 financial statements included
      in this Form 10-KSB 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.


16
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          of Contents**




As
        of
        June 30, 2006, we had total current assets of $3,518,739 and total current
        liabilities of $1,071,245, resulting in working capital of $2,447,494. We
        had
        cash and cash equivalents of $2,972,135 at June 30, 2006, and an accumulated
        deficit of $58,113,714.





The
      accompanying financial statements have been prepared assuming that the we
      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.





On
      January 27, 2006, we 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, which we refer to as 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, we 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, which we refer to as the March Investors),
      lead by Olympia Holding AS, informed us that they were willing to invest on
      the
      same terms and conditions that were negotiated for the terminated January
      Financing, and we agreed to this financing transaction with the March Investors,
      which we refer to as the March Financing.


Pursuant
          to the March Financing, we 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, one of our directors and major stockholders based
          in
          Geneva, Switzerland, along with the warrants. Pursuant to the terms of
          the March
          Financing, the first payment of $4.6 million was due immediately, with
          a second
          payment of $4.6 million due within three months thereafter. As of June
          30, 2006,
          we had received cash in the net amount $4,063,924 pursuant to the March
          Financing, and had issued 22,850,000 shares of common stock and warrants
          to
          purchase an additional 24,836,957 shares. We also issued to consultants
          as a
          commission for the March Financing the following: 7,600,000 shares of
          unregistered common stock with a fair value of $2,912,000; warrants to
          purchase
          12,000,000 shares of common stock at a price of $1.00 per share with a
          fair
          value of $2,212,681; and warrants to purchase an additional 1,000,000 shares
          of common stock at a price of $1.50 per share with a fair value of
          $148,086. We charged the amount of $5,272,770 to operations during the
          year
          ended June 30, 2006 for these shares and warrants issued as commission.


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





Number
                of shares of Company
                Common
                  Stock underlying WarrantsExercise
                PricePer
                Share
            
            When
                fully subscribed
            
            At
                June 30, 2006$1.50
            
            
            14,000,000
            
            
            6,954,348$2.50
            
            
            11,000,000
            
            
            5,464,130$4.50
            
            
            7,000,000
            
            
            3,477,174$5.50
            
            
            7,000,000
            
            
            3,477,174$6.50
            
            
            7,000,000
            
            
            3,477,174$8.50
            
            
            4,000,000
            
            
            1,986,95750,000,000
            
            
            24,836,957




All
      warrants have a two-year exercise period from the date of issuance of the
      warrants. No registration rights were granted to the March 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.





In
      April
      2006, we signed subscriptions agreements with a group of offshore investors
      led
      by Swedish Credit and Finance .AB for the sale of an aggregate of 25,000,000
      shares of the Company’s common stock plus warrants to purchase an additional
      25,000,000 shares of common stock for the aggregate price of $10,000,000, which
      we refer to as the April Financing. Pursuant to the April Financing, shares
      of
      common stock were issued as follows:





Number
                of
            
            Price
                per
            
            TotalShares
            
            Share
            
            Price
            
            Terms5,000,000
            
            $
            0.30
            
            $
            1,500,000
            
            
            90
                day note at 12% due August 9, 200610,000,000
            
            $
            0.55
            
            $
            5,500,000
            
            
            One
                year note at 12% due May 11, 200710,000,000
            
            $
            0.30
            
            $
            3,000,000
            
            
            Cash
                due 30 days, or June 10, 200625,000,000
            
            
            
            
            $
            10,000,000








These
        shares and warrants are being held in escrow by Margaux Investment Management
        Group, S.A., a Company controlled by a board member, Carl Hessel and are
        deemed
        not to be issued and outstanding. As of September 28, 2006, we have not received
        any of the funds pursuant to the April Financing.







17
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          of Contents**


Management
      plans to continue raising additional capital through a variety of fund raising
      methods during fiscal 2007 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:





o  curtail
      operations significantly;





o  sell
      significant assets;





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





o  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.


We
        have
        been successful in obtaining cash resources through private placements and
        the
        exercise of options. Financing activities provided cash of $7,461,852 during
        the
        year ended June 30, 2006 compared to $2,505,900 for the year ended June 30,
        2005, an increase of $4,955,952 or approximately 198%.





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, 2006, $19,730 and $20,444 of accrued salaries
      were owed to Paul Egan and Ciaran Egan, respectively. At June 30, 2005, $150,753
      and $112,800 of accrued salaries were owed to Paul Egan and Ciaran Egan,
      respectively.





Paul
      Egan
      has advanced funds to us for our operations. These amounts include advances
      of
      $169,177 and accrued interest of $17,894 at June 30, 2005. These amounts
      were repaid to Mr. Egan at June 30, 2006.





Ciaran
      Egan has advanced funds to us for our operations. These amounts included
      advances of $8,208 and accrued interest of $904 at June 30, 2005. These amounts
      were repaid to Mr. Egan at June 30, 2006.





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 ($25,354)
      for the year ended June 30, 2006.





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.





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.





18
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            of Contents**


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**




We intend
      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**





We
      recognize revenue when products are shipped or services provided to our
      customers. Provisions for discounts and other adjustments are provided for
      in
      the same period the related sales are recorded.





Processing
      fee revenue is earned based upon the actual number of transactions processed
      through its processing system. Transaction processing fees are recognized in
      the
      period that the service is performed. These fees are 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-KSB 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-KSB, 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:





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





o  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;





o  gain
      or loss
      of clients or strategic relationships;





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





o  price
      competition;





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





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





o  changes
      in
      governmental regulation; and





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


19
 **Table
          of Contents**





ITEM
      7.
      CONSOLIDATED FINANCIAL STATEMENTS





Consolidated
      financial statements as of and for the fiscal year ended June 30, 2006 and
      for
      the fiscal year ended June 30, 2005 are presented in a separate section of
      this
      report following Item 14.





ITEM
      8.
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





Not
      applicable.





ITEM
      8A. CONTROLS AND PROCEDURES





Evaluation
      of Disclosure Controls and Procedures





We
      maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and
      Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) that
      are
      designed to ensure that information required to be disclosed in our periodic
      reports filed under the Exchange Act is recorded, processed, summarized and
      reported within the time periods specified in the SEC's rules and forms, and
      that such information is accumulated and communicated to our management,
      including our principal executive/financial officer, to allow timely decisions
      regarding required disclosure.





As
      of the
      end of the period covered by this report, our management carried out an
      evaluation, under the supervision and with the participation of our principal
      executive and principal financial officer, of our disclosure controls and
      procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange
      Act). Based upon the evaluation, our principal executive and principal financial
      officer concluded that our disclosure controls and procedures were effective
      at
      a reasonable assurance level to ensure that information required to be disclosed
      by us in the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported, within the time periods specified in the
      SEC's rules and forms. In addition, our


principal
      executive officer and principal financial officer concluded that our disclosure
      controls and procedures were effective at a reasonable assurance level to ensure
      that information required to be disclosed in the reports that we file or submit
      under the Exchange Act is accumulated and communicated to our management,
      including our principal executive


officer
      and principal financial officer, to allow timely decisions regarding required
      disclosure.





Changes
      in Disclosure Controls and Procedures





There
      were no changes in our disclosure controls and procedures, or in factors that
      could significantly affect those controls and procedures, since their most
      recent evaluation.





ITEM
      8B.
      OTHER INFORMATION





None.





PART
      III.





ITEM
      9.
      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH
      SECTION 16(A) OF THE EXCHANGE ACT





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 43, 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 42, 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 36, 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.


20
 **Table
          of Contents**





Carl
      M.
      Hessel, CEO, European Operations/Director


Mr.
        Hessel, age 43, 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.




Key
      Employees





Angel
      Pacheco - Vice President of New Business Development





Mr.
      Pacheco, age 48, brings more than 20 years of core technology experience in
      the
      telecommunications, payment processing and financial service industries. Mr.
      Pacheco served as our Chief Technology Officer from May 2005 through September
      2006. Since September, he has served as our Vice President of New Business
      Development. Prior to joining us full time in May 2005 (he served as a
      consultant starting in March 2004), Mr. Pacheco worked for Spinnetworks, a
      software development company, starting in late 2003. Prior to that, he was
      the
      chief technology officer of Blackstone starting in 1999), a manufacturer and
      distributor of prepaid products and telecommunication services. In this
      position, Mr. Pacheco was responsible for the development of Blackstone's
      automated prepaid delivery and payment transaction system. Using industry POS
      units as a front end, the Blackstone prepaid system was the first platform
      to be
      integrated into the Hypercom 5000 series of POS terminals. With the capacity
      to
      deliver payment processing, prepaid products, postpaid services and information
      transactions, it was considered the standard by which all prepaid delivery
      systems were measured. Before working at Blackstone, Mr. Pacheco was the Vice
      President of Technology Development of First American Acceptance Corporation.
      He
      was responsible in that role for developing a state of the art portfolio and
      underwriting management system.





Jose
      Enrique Perez - Chief Technical Officer





Mr.
      Perez, age 46,  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.





Family
      Relationships





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





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, 2006, we are not aware of
        any
        reports which were not timely filed. 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,
        2006.





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-KSB 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 but are actively
      seeking such a person.


21
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          of Contents**





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-KSB.





ITEM
      10.
      EXECUTIVE COMPENSATION





Summary
      Compensation Table





The
      following table sets forth compensation information for services rendered by
      our
      Chief Executive Officer and our named executive officers during the last three
      completed fiscal years.








Annual
                compensation
            
            Long-term
                compensationName
            
            
            
            
            
            
            
            
            
            Awardsand
            
            
            
            
            
            
            
            Other
            
            
            
            SecuritiesPrincipal
            
            
            
            
            
            
            
            Annual
            
            Restricted
            
            Underlying
            
            AllPosition
            
            Fiscal
            
            
            
            
            
            Compen-
            
            Stock
            
            Options
                /
            
            Other(1)
            
            Year
            
            Salary
            
            Bonus
            
            sation
            
            Awards
            
            SARS
            
            CompensationCarl
                M. Hessel
            
            2006
            
            -
            
            -
            
            -
            
            -
            
            -
            
            $
                506,000Director
                (2)
            
            2005
            
            -
            
            -
            
            -
            
            $    1,350,000
            
            -
            
            -2004
            
            -
            
            -
            
            -
            
            $       500,000
            
            -
            
            -Fionn
                Stakelum
            
            2006
            
            $    88,000
            
            
            
            $    385,805
            
            $          -
            
            -
            
            -Director
                (3)
            
            2005
            
            $    63,263
            
            -
            
            $         -
            
            $      540,000
            
            -
            
            -2004
            
            $    39,000
            
            -
            
            $         -
            
            $          
                -
            
            -
            
            -Paul
                Egan
            
            2006
            
            $  214,629
            
            
            
            $         -
            
            $           -
            
            -
            
            -CEO
                / President /
            
            2005
            
            $  150,000
            
            -
            
            $    575,000
            
            $   5,060,000
            
            2,500,000
            
            -Director
                (4)
            
            2004
            
            $  150,000
            
            -
            
            $    100,000
            
            $          -
            
            -Ciaran
                Egan
            
            2006
            
            $  187,629
            
            
            
            
            
            
            
            
            
            -Secretary
                / Treasurer/
            
            2005
            
            $  120,000
            
            -
            
            $    575,000
            
            $   3,860,000
            
            2,500,000
            
            -CFO
                / Director (5)
            
            2004
            
            $  120,000
            
            -
            
            $      60,500
            
            $         -
            
            -
            
            -








(1)
      None
      of our other executive officers have received compensation in excess of $100,000
      in any year during the last three fiscal years.





(2)
      Carl
      M. Hessel was appointed to the board of directors on April 5, 2004. 2006 amounts
      include the following: In April and May 2006, we paid the amount of $506,000
      in
      cash to Margaux Consulting Group, an entity beneficially controlled by Mr.
      Hessel, as a fee for assisting us in equity fundraising activities. 2005 amounts
      include the following: Restricted Stock Awards: In June 2005, Mr. Hessel
      received an award of 5,000,000 shares of our common stock valued at $1,350,000.
      As of June 30, 2006, the value of these shares was $2,650,000 and the shares
      were fully vested. 2004 amounts include the following: On June 6, 2004, Mr.
      Hessel was granted an option to purchase 10,000,000 shares of our common stock
      at an exercise price of $0.05 per share. The fair value of this award was
      $500,000.  In June 2004, Mr. Hessel exercised this option.





(3)
      Fionn
      Stakelum was appointed to the board of directors effective on October 16, 2002.
      2005 amounts include the following: Restricted Stock Awards: In June 2005,
      Mr.
      Stakelum received an award of 2,000,000 shares of our common stock valued at
      $540,000. As of June 30, 2006, the value of these shares was $1,060,000 and
      the
      shares were fully vested. 2004 amounts include the following: Other Annual
      Compensation includes 500,000 shares preferred stock issued with a fair value
      of
      $360,000, and the fair value of an option to purchase 500,000 shares of common
      stock totaling $25,805.





(4)
      Paul
      Egan assumed the position of president on September 15, 2001. 2006 amounts
      include the following: Salary consists of $207,000 accrued salary from Mr.
      Egan’s role as Chief Executive Officer of FreeStar Technology.   2005
      amounts include the following: Other Annual Compensation includes an option
      to
      purchase 2,500,000 shares of our common stock at a price of $0.01 per share,
      valued at $550,000. This option was exercised during the year ended June 30,
      2005, and the exercise price of $25,000 was forgiven; this $25,000 forgiveness
      is also included in Other Annual Compensation. Restricted stock awards for
      2005
      include: 10,000,000 shares of restricted common stock with a fair value of
      $2,300,000, and 1,000,000 shares of Series B preferred stock convertible into
      12,000,000 shares of our common stock with a value of $2,760,000. As of June
      30,
      2006, the value of the common stock was $5,300,000 and the shares were fully
      vested. As of June 30, 2006, the value of these Series B Preferred was
      $6,360,000 and the shares were fully vested and convertible into common stock
      at
      any time. 2004 amounts include the following: Other Annual Compensation:
      Forgiveness of the exercise price of $100,000 for stock options exercised.


22
 **Table
          of Contents**





(5)
      Ciaran Egan assumed the position of chief financial office on June 28, 2001;
      he
      later took on the additional position of secretary/treasurer on September 15,
      2001. 2006 amounts include the following: Salary consists of $180,000 accrued
      salary from Mr. Egan’s role as Chief Financial Officer of FreeStar Technology,
      and $7,629 from Mr. Egan’s position as Chief Financial Officer of the our
      newly-formed subsidiary FreeStar Dominicana. 2005 amounts include the following:
      Other Annual Compensation includes an option to purchase 2,500,000 shares of
      our
      common stock at a price of $0.01 per share, valued at $550,000. This option
      was
      exercised during the year ended June 30, 2005, and the exercise price of $25,000
      was forgiven; this $25,000 forgiveness is also included in Other Annual
      Compensation. Restricted stock awards for 2005 includes 10,000,000 shares of
      restricted common stock with a fair value of $2,300,000, and 500,000 shares
      of
      Series B preferred stock convertible into 6,000,000 shares of our common stock
      with a value of $1,380,000. As of June 30, 2006, the value of the common stock
      was $5,300,000 and the shares were fully vested. As of June 30, 2006, the value
      of these Series B Preferred was $3,180,000 and the shares were fully vested
      and
      convertible into common stock at any time. 2004 amounts include the following:
      Other Annual Compensation includes forgiveness of the exercise price of $50,000
      for an option exercised, and $10,500 in fringe benefits.





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. However, currently, we do not have set compensation package for
        directors and equity grants for service as directors are only made when and
        if
        determined by the Board of Directors. No equity or cash compensation was
        granted
        to any of our directors, for their service as directors, in fiscal year 2006.
        In
        fiscal year 2005, Mr. Hessel received an award of 5,000,000 shares of our
        common
        stock valued at $1,350,000 as compensation for financial advisory and consulting
        services. Mr. Stakelum received an award of 2,000,000 shares of our common
        stock
        valued at $540,000 for business development and consulting services.




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.





Employment
      Agreements







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, we are liable to
      Mr.
      Egan for a minimum annual salary of $150,000 per year. In addition, we are
      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 our newly established subsidiary,
      Freestar Dominicana.





At
      June
      30, 2005, we owed Paul Egan the amount of $150,753 in accrued salary. During
      the
      year ended June 30, 2006, Paul Egan earned an additional $207,000 in salary,
      and
      the Company paid Mr. Egan the amount of $338,023. At June 30, 2006, we owe
      Paul
      Egan the amount of $19,730 in accrued salary. Also at June 30, 2005, we owed
      Mr.
      Egan 1,000,000 shares of Series B Preferred Stock with a value of $2,760,000
      which had been charged to operations during the year ended June 30, 2005. These
      shares were issued to Mr. Egan during the year ended June 30, 2006.





We
      accrued and paid $0 of fringe benefits to Paul Egan for the years ended June
      30,
      2006 and 2005.








Chief
      Financial Officer





In
      August
      2001, we entered into an employment agreement with Ciaran Egan, our Chief
      Financial Officer. Under the terms of the agreement, we are liable to Mr. Egan
      for a minimum annual salary of $120,000 per year. In addition, we are 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 our newly established subsidiary,
      Freestar Dominicana.





At
      June
      30, 2005, we owed Ciaran Egan the amount of $112,800 in accrued salary. During
      the year ended June 30, 2006, Ciaran Egan earned an additional $180,000 in
      salary, and we paid Mr. Egan the amount of $272,356. At June 30, 2006, we owes
      Ciaran Egan the amount of $20,444 in accrued salary. Also at June 30, 2005,
      we
      owed Ciaran Egan 500,000 shares of Series B Preferred Stock with a value of
      $1,380,000 which had been charged to operations during the year ended June
      30,
      2005. These shares were issued to Mr. Egan during the year ended June 30, 2006.





We
      accrued and paid $0 of fringe benefits to Ciaran Egan for the years ended June
      30, 2006 and 2005.





ITEM
      11.
      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, Series A Preferred Stock and Series B Preferred
        Stock.  As of September 25, 2006 there were 208,147,427 shares of
        Common Stock issued and outstanding; also outstanding: 1,000,000 shares of
        Series A preferred stock, 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); and 2,500,000 shares of Series B preferred stock,
        each share of which is currently convertible into 1.71 shares of common 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:





23
 **Table
          of Contents**





Class
                ofName
            
            Security
            
            Shares
            
            %
                of classPaul
                Egan (3)
            
            
            Common
            
            
            29,791,793
            
            
            13.4
            %Ave.
                  Sarasota No.02
                8thFloor, Suite 08
                Torre
                  Empresarial AIRD
                La
                  Julia, Santo Domingo
                Dominican
                  RepublicSvensk
              Kreditt och
              Finance
            
            
            Common
            
            
            20,000,000
            
            
            9.6
            %Uppfartsvagen 13
              169 38 Solna
              SwedenCiaran
                Egan (4)
            
            
            Common
            
            
            20,549,794
            
            
            9.5
            %Ave.
                  Sarasota No.02
                8thFloor, Suite 08
                Torre
                  Empresarial AIRD
                La
                  Julia, Santo Domingo
                Dominican
                  RepublicCarl
                M. Hessel (4)
            
            
            Common
            
            
            10,488,445
            
            
            5.0
            %31
                Mespil Road
              Ballsbridge
                Dublin
                  2 IrelandFionn
                Stakelum (5)
            
            
            Common
            
            
            2,855,000
            
            
            1.4
            %31
                Mespil Road
              Ballsbridge
                Dublin
                  2 IrelandAll
                Directors and officers
            
            
            Common
            
            
            230,422,427
            
            
            27.6
            %as
                a group (4 persons)






(1)
        Other
        than as set forth below, none of these security holders has the right to
        acquire
        any amount of common stock within sixty days from options, warrants, rights,
        conversion privilege, or similar obligations.





(2)
      The
      percentage amount for all the common shareholders, except for Carl Hessel,
      is
      calculated by adding the conversion amount of the Series B preferred shares
      owned by them to the issued and outstanding shares as of September 25,
      2006.





(3)
      Out
      of the total shares owned, 13,710,000 consist of shares which would result
      from
      the conversion of 2,000,000 shares of Series B preferred stock, which Mr. Egan
      has the right to acquire within 60 days. 1,000,000 Series A preferred stock
      are
      not included since they are not convertible until the Company attains certain
      financial goals, which have not been achieved.





(4)
      Out
      of the total shares owned, 7,710,000 consist of shares which would result from
      the conversion of 1,500,000 shares of Series B preferred stock, which Mr. Egan
      has the right to acquire within 60 days.





(5)
      Out
      of the total shares owned, 855,000 consist of shares which would result from
      the
      conversion of 500,000 shares of Series B preferred stock, which Mr. Stakelum
      has
      the right to acquire within 60 days.




(6)
        3,597,544 of the shares are held in the name of Margaux Investment Management
        Group, S.A., which is controlled by Mr. Hessel, its president. 428,475 of
        the
        shares are held in the name of Isabella Hessel, Mr. Hessel’s daughter. 300,000
        of the shares are held in the name of Donna Hessel, Mr. Hessel’s
        wife.







24
 **Table
          of Contents**







Class
                ofName
            
            Security
            
            Shares
            
            %
                of classPaul
                Egan
            
            
            Preferred
            
            
            1,000,000
            
            
            100.0
            %Ave.
                  Sarasota No.02
                8thFloor, Suite 08
                Torre
                  Empresarial AIRD
                La
                  Julia, Santo Domingo
                Dominican
                  Republic
            
            
            Series
                ACiaran
                Egan
            
            
            Preferred
            
            
            -
            
            
            0.0
            %Ave.
                  Sarasota No.02
                8thFloor, Suite 08
                Torre
                  Empresarial AIRD
                La
                  Julia, Santo Domingo
                Dominican
                  Republic
            
            
            Series
                AFionn
                Stakelum
            
            
            Preferred
            
            
            -
            
            
            0.0
            %31
                Mespil Road, Ballsbridge
            
            
            Series
                ADublin
                2 IrelandCarl
                M. Hessel
            
            
            Preferred
            
            
            -
            
            
            0.0
            %31
                Mespil Road, Ballsbridge
            
            
            Series
                ADublin
                2 IrelandAll
                Directors and officers
            
            
            Preferred
            
            
            1,000,000
            
            
            100.0
            %as
                a group (4 persons)
            
            
            Series
                A








Class
                ofName
            
            Security
            
            Shares
            
            %
                of classPaul
                Egan
            
            
            Preferred
            
            
            2,000,000
            
            
            50.0
            %Ave.
                  Sarasota No.02
                8thFloor, Suite 08
                Torre
                  Empresarial AIRD
                La
                  Julia, Santo Domingo
                Dominican
                  Republic
            
            
            Series
                BCiaran
                Egan
            
            
            Preferred
            
            
            1,500,000
            
            
            37.5
            %Ave.
                  Sarasota No.02
                8thFloor, Suite 08
                Torre
                  Empresarial AIRD
                La
                  Julia, Santo Domingo
                Dominican
                  Republic
            
            
            Series
                BFionn
                Stakelum
            
            
            Preferred
            
            
            500,000
            
            
            12.5
            %31
                Mespil Road, Ballsbridge
            
            
            Series
                BDublin
                2 IrelandCarl
                M. Hessel
            
            
            Preferred
            
            
            -
            
            
            0.0
            %31
                Mespil Road, Ballsbridge
            
            
            Series
                BDublin
                2 IrelandAll
                Directors and officers
            
            
            Preferred
            
            
            4,000,000
            
            
            100.0
            %as
                a group (4 persons)
            
            
            Series
                B








25
 **Table
          of Contents**




Securities
      Authorized for Issuance under Equity Compensation Plans





We
      have
      adopted two equity compensation plans (neither of which have been approved
      by
      our shareholders):





(a)
      Non-Employee Directors and Consultants Retainer Stock Plan.




On
        October 25, 2001, we adopted a Non-Employee Directors and Consultants Retainer
        Stock Plan (we adopted Amendment No. 4 to this plan on December 20, 2004).
        The
        purposes of the plan are to enable us to promote our interests by attracting
        and
        retaining non-employee directors and consultants capable of furthering our
        business and by aligning their economic interests more closely with those
        of our
        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,
        2006,
        we had issued 71,842,010 shares of common stock under this plan and options
        to
        purchase 1,512,605 shares of stock were unexercised, leaving 1,645,385 shares
        of
        common stock remaining to be issued as of that date.


(b)
      Stock
      Incentive Plan


On
        October 25, 2001, we adopted a Stock Incentive Plan (we adopted Amendment
        No. 3
        to this plan on December 20, 2004). This plan is intended to allow directors,
        officers, employees, and certain non-employees to receive options to purchase
        our common stock. The purpose of this plan is to provide these persons with
        equity-based compensation incentives to make significant and extraordinary
        contributions to our long-term performance and growth, 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, 2006, we had issued 62,296,518
        shares
        of common stock under this plan, and options to purchase 625,000 shares of
        common stock were unexercised, leaving 7,081,482 shares of common stock
        available to be issued as of that date.







Equity
      Compensation Plan Information


as
      of
      June 30, 2006





Individual
        Option/SAR Grants in Fiscal Year Ended June 30, 2005.


Percent
                  of totalNumber
                  of securities
              
              options
                  / SARs granted
              
              Exerciseunderlying
              
              to
                  employees in
              
              or
                  base
              
              ExpirationName
              
              Options
                  / SARs granted
              
              fiscal
                  year
              
              price
                  ($/sh)
              
              dateNone
              
              0
              
              0
              
              0
              
              0


Aggregated
        Option/SAR Exercises In Fiscal Year Ended June 30, 2006 and Fiscal Year-End
        Option/SAR Values


Number
                  ofsecurities
              
              Value
                  ofunderlying
              
              unexercisedunexercised
              
              in-the-moneyoptions/SARs
              
              options/SARsat
                  FYE (#)
              
              at
                  FYE ($)Shares
                  acquired
              
              
              
              exercisable/
              
              exercisable/Name
              
              on
                  exercise (#)
              
              Value
                  realized ($)
              
              unexercisable
              
              unexercisableNone
              
              0
              
              0
              
              0
              
              0







26
 **Table
          of Contents**








ITEM
      12.
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.





Other
      than as set forth below, during the past two years 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 (see
      Exhibit 10.3). 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.




(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,
      2006, $19,730 of accrued salaries were owed to Paul Egan, compared to $150,753
      at June 30,2005.





(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, 2006, $20,444 of accrued salaries were owed to Ciaran Egan,
      compared to $112,800 at June 30, 2005.




(d)
      Paul Egan
      has advanced us funds for our operations. These amounts include advances of
      $0
      and accrued interest of $0 at June 30, 2006 and advances of $169,177 and accrued
      interest of $17,894 at June 30, 2005.




(e)  Ciaran
      Egan has advanced funds to us for our operations. These amounts include advances
      of $0 and accrued interest of $0 at June 30, 2006 and advances of $8,208 and
      accrued interest of $904 at June 30, 2005.





(f)
      On June
      30, 2005, we issued a total of 7,000,000 shares of common stock to Carl Hessel
      and Fionn Stakelum, two of our directors, as compensation for services
      performed. Mr. Hessel provided financial consulting and advisory services,
      and
      Mr. Fionn’s services were in his capacity as our Director of European
      Operations.




(g)
      During
      the year ended June 30, 2006, we granted 300,000 shares of the Company’s common
      stock valued at $81,000 to Donna Hessel, the wife of our Chairman. Ms. Hessel
      has considerable experience in the areas of finance and operations and provides
      the Company with strategic and operational consulting services.




(h)
      During
      the year ended June 30, 2005, we agreed to issue 1,000,000 shares of our Series
      B preferred stock to Paul Egan, and 500,000 shares of our Series B preferred
      stock to Ciaran Egan in exchange for services rendered during the year. The
      value the shares based upon the quoted market price of our underlying common
      shares at the time the obligation was incurred was $4,140,000, and was charged
      to operations during the year ended June 30, 2005.  We issued the Series B
      Preferred shares to our officers during the year ended June 30, 2006.




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





ITEM
      13.
      EXHIBITS





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





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 Russell Bedford Stefanou Mirchandani LLP 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: 2006: $210,817; and 2005: $173,631.


27
 **Table
          of Contents**







Audit-Related
      Fees





The
      aggregate fees billed in each of the last two fiscal years for assurance and
      related services by the Accountant that are reasonably related to the
      performance of the audit or review of our financial statements and are not
      reported under Audit Fees above:  2006: $25,600; and 2005: $0.





Tax
      Fees





The
      aggregate fees billed in each of the last two fiscal years for professional
      services rendered by the Accountant 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 the Accountant, 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 2006 and fiscal 2005
      were approved in accordance with the audit committee’s pre-approval
      policies.








28
 **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 Corporation**Date: September
              29, 2006
            By:
            /s/ Paul
              EganPaul
              EganPresident/Chief
                Executive








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-KSB
      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 .




/s/ Paul
              Egan
            
            
            /s/ Ciaran
              EganPaul
              Egan
            
            
            Ciaran
              EganPresident
                and Chief Executive Officer (Principal Executive Officer) and
                Director
            
            
            Chief
                Financial Officer, Secretary and Treasurer (Principal Financial and
                Accounting Officer) and DirectorDate: September 29, 2006
            
            
            Date: September 29,
              2006




/s/ Fionn
              Stakelum
            
            
            /s/ Carl
              M. HesselFionn
                Stakelum
            
            
            Carl
                M. HesselDirector
            
            
            DirectorDate: September 29, 2006
            
            
            Date: September 29,
              2006










29
 **Table
          of Contents**


EXHIBIT
      INDEX




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)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
              Non-Employee
                  Directors and Consultants Retainer Stock Plan, dated October 25,
                  2001
                  (incorporated by reference to Exhibit 4.1 of the Form S-8 filed
                  on
                  November 9, 2001).4.3
              Employee
                  Stock Incentive Plan, dated October 25, 2001 (incorporated by reference
                  to
                  Exhibit 4.2 of the Form S-8 filed on November 9, 2001).4.4
              Amended
                  and Restated Non-Employee Directors and Consultants Retainer Stock
                  Plan,
                  dated November 15, 2002 (incorporated by reference to Exhibit 4.1
                  of the
                  Form S-8 POS filed on December 11, 2002).4.5
              Amended
                  and Restated Stock Incentive Plan, dated November 15, 2002 (incorporated
                  by reference to Exhibit 4.2 of the Form S-8 POS filed on December
                  11,
                  2002).4.6
              Amended
                  and Restated Non-Employee Directors and Consultants Retainer Stock
                  Plan
                  (Amendment No, 2), dated May 25, 2003 (incorporated by reference
                  to
                  Exhibit 4.1 of the Form S-8 POS filed on June 2, 2003).4.7
              Amended
                  and Restated Stock Incentive Plan (Amendment No, 2), dated May
                  25, 2003
                  (incorporated by reference to Exhibit 4.2 of the Form S-8 POS filed
                  on
                  June 2, 2003).4.8
              Amended
                  and Restated Non-Employee Directors and Consultants Retainer Stock
                  Plan
                  (Amendment No. 3), dated April 7, 2004 (incorporated by reference
                  to
                  Exhibit 4 of the Form S-8 PSO filed on April 19, 2004).4.9
              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 POS filed on January 26,
                  2005).4.10
              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
                  POS filed
                  on January 26, 2005).
   30
 **Table
            of Contents**
  4.11
              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).4.12
              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).4.13
              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).10.1
              Employment
                  Agreement between the Company and Ciaran Egan, dated August 9,
                  2001
                  (incorporated by reference to Exhibit 10.2 of the Form 8-K filed
                  on August
                  14, 2001).10.2
              Employment
                  Agreement between the Company and Paul Egan, dated August 9, 2001
                  (incorporated by reference to Exhibit 10.3 of the Form 8-K filed
                  on August
                  14, 2001).10.3
              Consulting
                  Agreement between the Company and Margaux Investment Management
                  Group
                  S.A., dated August 23, 2003 (incorporated by reference to Exhibit
                  10.3 of
                  the Form 10-KSB/A filed on October 28, 2004).10.4
              Addendum
                  to Employment Contract between the Company and Paul Egan, dated
                  August 9,
                  2004 (incorporated by reference to Exhibit 10.4 of the Form 10-KSB/A
                  filed
                  on October 28, 2004).10.5
              Addendum
                  to Employment Contract between the Company and Ciaran Egan, dated
                  August
                  9, 2004 (incorporated by reference to Exhibit 10.5 of the Form
                  10-KSB/A
                  filed on October 28, 2004).10.6
              Rescission
                  Agreement between the Company and TransAxis, Inc., dated August
                  24, 2004
                  (effective on June 17, 2004) (incorporated by reference to Exhibit
                  10 of
                  the Form 8-K/A filed on August 26, 2004).10.7
              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).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).







31
 **Table
          of Contents**










WASHINGTON,
      D.C. 20549








FINANCIAL
      STATEMENTS AND SCHEDULES





JUNE
      30,
      2006 AND 2005








FORMING
      A
      PART OF ANNUAL REPORT


PURSUANT
      TO THE SECURITIES EXCHANGE ACT OF 1934








FREESTAR
      TECHNOLOGY CORPORATION





F-1
 **Table
          of Contents**











FREESTAR
      TECHNOLOGY CORPORATION


INDEX
      TO
      FINANCIAL STATEMENTS




PageReport
                of Independent Registered Public Accounting Firm
            F-3Consolidated
                Balance Sheet at June 30, 2006
            F-4Consolidated
                Statements of Losses for The Years Ended June
                30, 2006 and 2005
            F-5Consolidated
                    Statements of  Stockholders' Equity for The
                    Years Ended June 30, 2006 and 2005
            F-6Consolidated
                    Statements of Cash Flows for The Years
                    Ended June 30, 2006 and 2005
            F-7Notes
                to Consolidated Financial
                Statements
            F-8
                to F-32





F-2
 **Table
          of Contents**


REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM
 
 Board
        of
        Directors
 FreeStar
        Technology Corporation
 
 
 We
        have
        audited the accompanying consolidated balance sheet of FreeStar Technology
        Corporation and subsidiaries (the "Company") as of June 30, 2006 and the
        related
        consolidated statements of losses, stockholders'equity, and cash flows for
        each
        of the two years in the period ended June 30, 2006. 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. 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, 2006, and the results of its operations and its
        cash
        flows for each of the two years in the period ended June 30, 2006 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/
        RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
 Russell
        Bedford Stefanou Mirchandani LLP
 Certified
        Public Accountants
 
 New
        York,
        New York
 September
        1, 2006








F-3
 **Table
          of Contents**


FREESTAR
                  TECHNOLOGY CORPORATION
                  CONSOLIDATED
                    BALANCE SHEET AS OF JUNE 30,  2006ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              2,972,135Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $53,394 (note 2)
              
              
              307,181Other
                  current assets (note 3)
              
              
              133,643Inventory
                  ( note 4)
              
              
              105,780Total
                  current assets
              
              
              3,518,739Property,
                  plant and equipment, net of accumulated depreciation andamortization
                  of $78,879 at June 30, 2006 (note 5)
              
              
              125,921Software
                  license, net of accumulated amortization of $804,836 at June 30,
                  2006
              
              
              1,456,319Customer
                  relationships and contracts, net of accumulated
                  amortizationof
                  $582,219 at June 30, 2006 (note 6)
              
              
              1,384,985Software,
                  net of accumulated amortization of $750,599 at June 30, 2006 (note
                  6)
              
              
              1,901,927Total
                  assets
              
              $
              8,387,891LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable and accrued expenses (note 7)
              
              
              1,071,245Stockholders'
                  Equity: (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
              
              
              1,000Convertible
                  preferred stock, series B, $0.001 par value,4,000,000
                  shares authorized, 4,000,000 issued and outstanding
              
              
              4,000Additional
                  paid-in capital - preferred stock
              
              
              6,368,058Common
                  stock, $0.001 par value, 500,000,000 shares authorized;183,367,427
                  shares issued and outstanding
              
              
              183,367Additional
                  paid-in capital - common stock
              
              
              60,998,915Common
                  stock subscrptions receivable
              
              
              (175,792
              )Common
                  stock subscribed
              
              
              952,500Deferred
                  compensation
              
              
              (2,792,325
              )Accumulated
                  deficit
              
              
              (58,113,714
              )Accumulated
                  other comprehensive gain (loss)
              
              
              (109,363
              )Total
                  stockholders' equity
              
              
              7,316,646Total
                  liabilities and stockholders' equity
              
              $
              8,387,891The
                  accompanying notes form an integral part of these consolidated
                  financial
                  statements.


F-4
 **Table
          of Contents**





FREESTAR
      TECHNOLOGY CORPORATION


CONSOLIDATED
      STATEMENT OF LOSSES


FOR
      THE
      YEARS ENDED JUNE 30,





2006
              
              2005Revenue
              
              $
              2,097,749
              
              $
              1,602,819Cost
                  of revenue
              
              
              2,078,696
              
              
              1,695,069Gross
                  profit
              
              
              19,053
              
              
              (92,250
              )Selling,
                  general and administrative expenses
              
              
              13,913,969
              
              
              21,299,941Loss
                  from operations
              
              
              (13,894,916
              )
              
              (21,392,191
              )Other
                  income (expenses):Legal
                  settlement cost
              
              
              (53,261
              )
              
              (1,032,289
              )Gain
                  on legal settlement
              
              
              -
              
              
              350,000Gain
                  (loss) on disposal of assets
              
              
              2,211
              
              
              (1,209
              )Interest
                  income/(expense)
              
              
              53,807
              
              
              (26,774
              )Loss
                  before income taxes
              
              
              (13,999,773
              )
              
              (22,102,463
              )Income
                  taxes (benefit)
              
              
              -
              
              
              -Net
                  Loss
              
              
              (13,999,773
              )
              
              (22,102,463
              )Other
                  - Comprehensive income (loss): Gain (Loss) on foreign
                  exchange
              
              
              (25,354
              )
              
              (74,594
              )Comprehensive
                  loss
              
              $
              (14,025,127
              )
              $
              (22,177,057
              )Loss
                  per share - basic
              
              $
              (0.09
              )
              $
              (0.28
              )Weighted
                  average shares outstanding - basic
              
              
              163,229,950
              
              
              79,929,410Weighted
                  average shares outstanding - diluted
              
              
              188,056,642
              
              
              86,214,956The
                  accompanying notes form an integral part of these consolidated
                  financial
                  statements.


F-5
 **Table
          of Contents**











FREESTAR
      TECHNOLOGY CORPORATION


CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY


FOR
      THE
      TWO YEARS ENDED JUNE 30, 2006











StockPreferred
                stock
            
            Common
                stock
            
            Share
            
            
            
            issued
                in
            
            Common
            
            
            
            
            
            Accumulated
            
            TotalSeries
                A
            
            Series
                B
            
            Additional
            
            
            
            
            
            Additional
            
            Cancellation
            
            Deferred
            
            advance
                of
            
            Stock
            
            Subscription
            
            Accumulated
            
            Other
                Comp
            
            ShareholdersShares
            
            Amount
            
            Shares
            
            Amount
            
            paid-in
                capital
            
            Shares
            
            Amount
            
            paid-in
                capital
            
            Receivable
            
            compensation
            
            transaction
            
            Subscribed
            
            receivable
            
            deficit
            
            Inc
                ( Loss)
            
            DeficitBalance
                at June 30, 2004
            
            1,000,000
            
            $1,000
            
            2,500,000
            
            $2,500
            
            $2,229,558
            
            67,932,035
            
            $67,932
            
            $28,362,238
            
            -
            
            $(1,396,290)
            
            -
            
            -
            
            $(1,077,693)
            
            $(22,011,474)
            
            $(9,415)
            
            $3,583,728Issuance
                of common stock to consultants
                and legal advisors
                for
                  professional fees
            
            -
            
            -
            
            -
            
            -
            
            -
            
            14,480,534
            
            14,481
            
            4,258,664
            
            -
            
            (1,531,037)
            
            -
            
            -
            
            -
            
            -
            
            -
            
            2,742,107Fair
                value of options issued to consultants
            
            -
            
            -
            
            -
            
            -
            
            -
            
            **-**
            
            -
            
            912,774
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            912,774Intrinsic
                value of options
                issued
                  to officers
            
            -
            
            -
            
            -
            
            -
            
            -
            
            **-**
            
            -
            
            1,225,000
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,225,000Issuance
                of common stock for exercise
                of
                  options by consultants
            
            -
            
            -
            
            -
            
            -
            
            -
            
            7,121,379
            
            7,121
            
            1,197,679
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,204,800Cancellation
                of shares previously
                issued
                  to consultant in error
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (142,857)
            
            (143)
            
            (149,857)
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Debt
                converted into common stocks
            
            -
            
            -
            
            -
            
            -
            
            -
            
            5,000,000
            
            5,000
            
            745,000
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            750,000Grant
                of shares of common stock
                to
                  officers
            
            -
            
            -
            
            -
            
            -
            
            -
            
            20,000,000
            
            20,000
            
            4,580,000
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            4,600,000Exercise
                of options by officers
            
            -
            
            -
            
            -
            
            -
            
            -
            
            5,000,000
            
            5,000
            
            45,000
            
            -
            
            -
            
            -
            
            -
            
            (50,000)
            
            -
            
            -
            
            -Shares
                cancelled due to legal settlement
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (714,285)
            
            (714)
            
            (349,286)
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (350,000)Adjust
                deferred compensation
            
            -
            
            -
            
            -
            
            -
            
            -
            
            **-**
            
            -
            
            -
            
            -
            
            1,680,084
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,680,084Cash
                collected on subscriptions receivable
            
            -
            
            -
            
            -
            
            -
            
            -
            
            **-**
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            429,000
            
            -
            
            -
            
            429,000Warrants
                issued in legal settlement
            
            -
            
            -
            
            -
            
            -
            
            -
            
            **-**
            
            -
            
            431,717
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            431,717Write-off
                subscriptions receivable
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            698,693
            
            -
            
            -
            
            698,693Warrants
                issued for consulting services
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            647,150
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            647,150Series
                A Preferred Stock issued to officers
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Write-off
                unrecovered shares of common stock
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            2,434,628Rounding
            
            -
            
            -
            
            -
            
            -
            
            -
            
            206
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Loss
                for the year ended June 30, 2005
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (22,102,468)
            
            (74,594)
            
            (22,177,062)Balance
                at June 30, 2005
            
            1,000,000
            
            $1,000
            
            2,500,000
            
            $2,500
            
            $2,229,558
            
            118,677,012
            
            $118,677
            
            $41,906,079
            
            -
            
            $(1,247,243)
            
            -
            
            -
            
            $-
            
            $(44,113,942)
            
            $(84,009)
            
            $(1,187,381)Preferred
                stock issued to officers as compensation
            
            -
            
            -
            
            1,500,000
            
            1,500
            
            4,138,500
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            4,140,000Common
                stock issued for options / warrants exercised
            
            -
            
            -
            
            -
            
            -
            
            -
            
            10,885,685
            
            10,886
            
            1,501,071
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,511,957Common
                stock issued to consultants and employees for services
            
            -
            
            -
            
            -
            
            -
            
            -
            
            11,228,857
            
            11,229
            
            4,855,700
            
            -
            
            -
            
            -
            
            352,500
            
            -
            
            -
            
            -
            
            5,219,429Shares
                previously issued for services, returned for cancellation
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (378,574)
            
            (378)
            
            (262,972)
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (263,350)Shares
                issued in March 23, 2006 financing
            
            -
            
            -
            
            -
            
            -
            
            -
            
            22,850,000
            
            22,850
            
            4,041,150
            
            -
            
            -
            
            -
            
            -
            
            (175,792)
            
            -
            
            -
            
            4,064,000Shares
                sold for cash - other financings
            
            -
            
            -
            
            -
            
            -
            
            -
            
            11,212,291
            
            11,212
            
            1,564,580
            
            -
            
            -
            
            -
            
            600,000
            
            -
            
            -
            
            -
            
            2,000,000Options
                and warrants issued to employees and consultants for
                services
            
            -
            
            -
            
            -
            
            -
            
            -
            
            **-**
            
            -
            
            1,166,863
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,166,863Adjust
                deferred compensation
            
            -
            
            -
            
            -
            
            -
            
            -
            
            **-**
            
            -
            
            -
            
            -
            
            (1,545,082)
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (1,545,082)Extension
                of life of options and warrants issued to consultant
            
            -
            
            -
            
            -
            
            -
            
            -
            
            **-**
            
            -
            
            259,305
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            259,305Common
                stock issued as commission for equity financing
            
            -
            
            -
            
            -
            
            -
            
            -
            
            7,600,000
            
            7,600
            
            (2,904,400)
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            2,912,000Fair
              value
              of warrants issued as commission for equity financing
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            2,360,770
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            2,360,770Shares
                issued in legal settlement
            
            -
            
            -
            
            -
            
            -
            
            -
            
            108,695
            
            108
            
            53,152
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            53,260Shares
                issued for conversion of note payable
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,183,461
            
            1,183
            
            648,817
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            650,000Loss
                for the year ended June 30, 2006
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            **-**
            
            -
            
            -
            
            -
            
            -
            
            -
            
            (13,999,773)
            
            (25,354)
            
            (14,025,127)Balance
                at June 30, 2006
            
            1,000,000
            
            $1,000
            
            4,000,000
            
            $4,000
            
            $6,368,058
            
            183,367,427
            
            $183,367
            
            $60,998,915
            
            -
            
            $(2,792,325)
            
            -
            
            952,500
            
            $(175,792)
            
            $(58,113,714)
            
            $(109,363)
            
            $7,316,646The
                accompanying notes form an integral part of these consolidated financial
                statements.





F-6
 **Table
          of Contents**










FREESTAR
                TECHNOLOGY CORPORATION
                CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
                  FOR
                    THE YEARS ENDED JUNE 30,2006
            
            2005Cash
                flows used for operating activities:Net
                loss
            
            $
            (13,999,773
            )
            $
            (22,102,463
            )Adjustments
                to reconcile net loss to net cashprovided
                by (used for) operating activities:Cost
                of unrecovered shares issued
            
            
            -
            
            
            2,434,628Gain
                on disposal of fixed assets
            
            
            (2,211
            )
            
            -Bad
                debt expense
            
            
            20,291
            
            
            -Gain
                on extinguishment of debt
            
            
            -
            
            
            (350,000
            )Amortization
                of discount on note
            
            
            42,978
            
            
            6,450Loss
                on legal settlement
            
            
            -
            
            
            1,032,289Loss
                on disposal of fixed assets
            
            
            -
            
            
            1,209Depreciation
                and amortization
            
            
            655,000
            
            
            645,508Non-cash
                compensation
            
            
            10,109,934
            
            
            16,645,799Common
                stock issued in legal settlement
            
            
            53,260
            
            
            -Changes
                in assets and liabilities:(Increase)
                decrease in assetsAccounts
                receivable
            
            
            (150,144
            )
            
            (18,058
            )Inventory
            
            
            (103,692
            )
            
            -Other
                assets
            
            
            (95,415
            )
            
            (30,687
            )Increase
                (decrease) in liabilitiesAccounts
                payable and accrued expenses
            
            
            (378,975
            )
            
            49,521Due
                to shareholders
            
            
            -
            
            
            263,557Payment
                of accrued salary to officers
            
            
            (263,557
            )
            
            -Total
                adjustments
            
            
            9,887,468
            
            
            20,680,216Net
                cash used by operating activities
            
            
            (4,112,304
            )
            
            (1,422,247
            )Cash
                flows provided by (used for) investing activities:Purchase
                of fixed assets
            
            
            (71,850
            )
            
            (89,956
            )Cash
                from sale of fixed assets
            
            
            2,223
            
            
            4,054Purchase
                of software and capitalized software cost
            
            
            (926,884
            )
            
            (539,162
            )Net
                cash used by investing activities
            
            
            (996,511
            )
            
            (625,064
            )Cash
                flows provided by (used for) financing activities:Proceeds
                from issuance of demand loans
            
            
            -
            
            
            900,000Proceeds
                from sale of common stock
            
            
            6,064,000
            
            
            -Advanced
                from related parties
            
            
            -
            
            
            122,100Payments
                to related parties for advances
            
            
            (185,105
            )
            
            -Proceeds
                from exercise of stock options/warrants
            
            
            1,582,957
            
            
            1,054,800Cash
                collected from subscriptions receivable
            
            
            -
            
            
            429,000Net
                cash provided by financing activities
            
            
            7,461,852
            
            
            2,505,900Net
                increase (decrease) in cash and cash equivalents
            
            
            2,353,037
            
            
            458,589Foreign
                currently translation adjustments
            
            
            (13,580
            )
            
            (32,116
            )Cash
                and cash equivalents, beginning of period
            
            
            632,678
            
            
            206,205Cash
                and cash equivalents, end of period
            
            $
            2,972,135
            
            $
            632,678The
                accompanying notes form an integral part of these consolidated financial
                statements.










F-7








FREESTAR
                TECHNOLOGY CORPORATION
                CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
                  FOR
                    THE YEARS ENDED JUNE 30,
                  (CONTINUED)2006
            
            
            2005Supplemental
                disclosure of cash flow information:Interest
                paid
            
            $
            -
            
            $
            -Income
                tax paid
            
            $
            -
            
            $
            -Effect
                of reverse split of common stock
            
            $
            -
            
            $
            410,112Shares,
                warrants, and options issued for services
            
            $
            11,918,367
            
            $
            2,586,108Cancellation
                of shares of common stock
            
            $
            (263,350
            )
            $
            150,000Adjustment
                of deferred compensation
            
            $
            (1,545,081
            )
            $
            1,680,073Issuance
                of common stock to officers
            
            $
            -
            
            $
            4,600,000Issuance
                of options to officers
            
            $
            -
            
            $
            1,225,000Fair
                value of options issued to consultants and employees
            
            $
            -
            
            $
            913,012Gain
                on extinguishment of debt
            
            $
            -
            
            $
            727,459Gain
                on legal settlement
            
            $
            -
            
            $
            350,000Conversion
                of debt to common stock
            
            $
            -
            
            $
            900,000Shares
                issuable to an employee for services
            
            $
            352,500
            
            **$**
            **-**Write-off
                of stock options receivable
            
            $
            -
            
            $
            698,693Issuance
                of warrants for legal settlement
            
            $
            -
            
            $
            431,717Issuance
                of warrants for consulting expense
            
            $
            -
            
            $
            647,150Issuance
                of convertible note for legal settlement
            
            $
            -
            
            $
            650,000Issuance
                of common stock for subscriptions receivable
            
            $
            175,792
            
            $
            -Conversion
                of note payable to common stock
            
            $
            650,000
            
            $
            -Imputed
                interest on note issued for legal settlement
            
            $
            -
            
            $
            49,428Accrual
                of value of Series B preferred stock to be issued
                to officers
            
            $
            -
            
            $
            4,140,000Common
                stock issued in legal settlement
            
            $
            53,260
            
            **$**
            **-**Imputed
                interest on note issued for legal settlement
            
            $
            42,978
            
            **$**
            **-**Issuance
              of Series Preferred B stock related to
              officer compensation accrued prior period
            
            $
            4,140,000
            
            $
            -The
                accompanying notes form an integral part of these consolidated financial
                statements.









F-8
 **Table
          of Contents**




FREESTAR
      TECHNOLOGY CORPORATON




NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




June
      30,
      2006 AND 2005







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; Stockholm, Sweden; Geneva, Switzerland; and Santo
      Domingo, the Dominican Republic.





The
      Company intends to derive revenues from its core payment processing products,
      which include: (1) Authorization: transaction fees it receives from processing
      online point of sale terminal transactions; (2) Point of Sale: sales of “Point
      of Sale” terminals; (3) Transaction Fees: stemming from its Internet Payment
      Gateway; (4) Dynamic Currency Conversion: credit card services to merchants
      and
      acquiring banks (the Company will provide transaction gateway services and
      settlement with participating banking institutions); (5) Private Label Cards:
      transaction management services provided for a private label card issuer; and
      (6) 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 $ 13,999,773
        for the year ended June 30, 2006 and $22,102,463 for the year ended June
        30,
        2005, and had an accumulated deficit of $ 58,113,714 as of June 30,
        2006.





The
      Company cannot be certain that anticipated revenues from operations will be
      sufficient to satisfy its ongoing capital requirements. Management’s belief is
      based on the Company’s operating plan, which in turn is based on assumptions
      that may prove to be incorrect. If the Company’s financial resources are
      insufficient the Company may 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 raise funds in the public markets, though
      there currently are no plans to do so. 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 also intends to 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”) and
      Freestar Technologies Ireland, Ltd. (“Freestar Ireland”) (and its wholly owned
      subsidiary Freestar Processing Oy. (“Freestar Finland”)). The consolidation of
      Rahaxi is effective January 16, 2003. The consolidation of Freestar Ireland
      was
      effective April 2002, and the consolidation of Freestar Finland was effective
      October 2002. All material intercompany transactions have been eliminated upon
      consolidation of these entities.





F-9




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.




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)collectibility
      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 collectibility 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.





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.





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 $307,181 at June 30, 2006 .







F-10
 **Table
          of Contents**




Accounting
      for Bad Debts and Allowances




Bad
        debts
        and allowances are provided based on historical experience and management’s
        evaluation of outstanding accounts receivable. The management periodically
        evaluates past due or delinquency of accounts receivable in evaluating its
        allowance for doubtful accounts. Allowance for doubtful accounts was
        $53,394 at June 30, 2006.





Inventories


Inventories
        are stated at the lower of cost or market determined by the first-in, first-out
        method. Inventories consist primarily of equipment
        held for resale (see Note 4).





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.


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 method. 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 $692,888 for the year ended June 30, 2006 and $498,584 for the year
      ended June 30, 2005, respectively.






F-11
 **Table
          of Contents**





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, 2006 and 2005, 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.





Advertising


The
        Company expenses advertising costs when incurred. The
        Company did not incur any material advertising costs during the years ended
        June
        30, 2006 and 2005.





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.





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, 2006 and
      2005,
      and for the years then ended, the Company reported the foreign currency
      translation adjustment as other comprehensive income (loss) in the consolidated
      financial statements.







F-12
 **Table
          of Contents**


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 24,826,692 and 8,063,587 of potential shares from the computation
      for
      the years ended June 30, 2006 and 2005, respectively.





Liquidity




As
        reflected in the accompanying consolidated financial statements, the
        Company incurred
        net losses of $13,999,773 and of $22,102,463 for the years ended June 30,
        2006
        and 2005, respectively, and has an accumulated deficit of $58,113,714 as
        of June
        30, 2006. The Company had current assets of $3,518,739 and current liabilities
        of $1,071,245 for net working capital of $2,447,494 as of June 30, 2006.
        The
        Company’s operations are subject to all risks inherent in the establishment of a
        new business enterprise.





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 $53,394 at June 30, 2006.  The Company's two
        largest customers accounted for approximately 15% and 10% of its sales for
        the
        year ended June 30, 2005. The Company had one customer that accounted for
        approximately 10% of sales for the year ended June 30, 2006





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:  transaction processing fees generated by Rahaxi, 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 (expense) income and totaled $25,354 and $(74,594) in
      fiscal years 2006 and 2005, respectively.






F-13
 **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® 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®. Prior periods
      were not restated to reflect the impact of adopting the new
      standard.





A
      summary
      of option activity under the Plan as of June 30, 2006, and changes during the
      period then ended are presented below:





Options
            
            Weighted-Average
              ExercisePriceOutstanding
                at June 30, 2005
            
            
            500,000
            
            $
            0.15Issued
            
            
            775,000
            
            
            0.28Exercised
            
            
            (650,000
            )
            
            (0.12
            )Forfeited
                or expired
            
            
            --
            
            
            --Outstanding
                at June 30, 2006
            
            
            625,000
            
            $
            0.34Non-vested
                at June 30, 2006
            
            
            --
            
            
            --Exercisable
                at June 30, 2006
            
            
            625,000
            
            $
            0.34





Aggregate
      intrinsic value of options outstanding and options exercisable at June 30,
      2006
      was $331,250. Aggregate intrinsic value represents the difference between the
      company’s closing stock price on the last trading day of the fiscal period,
      which was $0.53 as of June 30, 2006, and the exercise price multiplied by the
      number of options outstanding. As of June 30, 2006, total unrecognized
      stock-based compensation expense related to non-vested stock options was $0.
      The total
      fair value of options vested was $329,343 and $0 for the twelve-month periods
      ended June 30, 2006 and 2005, respectively.





The
      modified transition method of SFAS 123R requires the presentation of pro forma
      information for periods presented prior to the adoption of SFAS 123R regarding
      net loss an net loss per share as if we had accounted for our stock plans under
      the fair value method of SFAS 123R. For pro forma purposes, the fair value
      of
      stock options was estimated using the Black-Scholes option valuation model
      and
      amortizing on a straight-line basis. The pro forma amounts are as
      follows:





June
                  30,
                2006
              
              June
                  30,
                2005Net
                  loss, as reported
              
              $
              (13,999,773
              )
              $
              (22,102,463
              )Compensation
                  recognized under under APB No. 25
              
              
              34,500
              
              
              1,225,000Compensation
                  expense under SFAS No. 123
              
              
              (34,500
              )
              
              (1,329,451
              )Pro
                  forma net loss
              
              $
              (13,999,773
              )
              $
              (22,206,914
              )Pro
                  forma loss per share
              
              $
              (0.08
              )
              $
              (0.28
              )







F-14
 **Table
          of Contents**




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; 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 twelve months ended June 30, 2006, the Company
      placed into service and began amortizing approximately $1,214,000 of software.
      The total net book value of software in service at June 30, 2006 is
      approximately $1,054,000. During the twelve months ended June 30, 2006, the
      Company has capitalized totaling $926,884. The total net book value of software
      under development at June 30, 2006 is approximately $893,894. At June 30, 2006,
      total software capitalized under SFAS No. 86 is $2,698,724, net of accumulated
      amortization of $750,599.





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 substantially amortized as of
      June
      30, 2006.










F-15
 **Table
          of Contents**


Significant
      recent accounting pronouncements






In
      March
      2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
      Financial Assets - an amendment to FASB Statement No. 140. Statement 156
      requires that an entity recognize a servicing asset or servicing liability
      each
      time it undertakes an obligation to service a financial asset by entering into
      a
      service contract under certain situations. The new standard is effective for
      fiscal years beginning after September 15, 2006. The company does not expect
      its
      adoption of this new standard to have a material impact on its financial
      position, results of operations or cash flows.





In
      February 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid
      Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and
      Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial
      allows financial instruments that have embedded derivatives to be accounted
      for
      as a whole (eliminating the need to bifurcate the derivative from its host)
      if
      the holder elects to account for the whole instrument on a fair value basis.
      SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and
      SFAS
      140. This statement is effective for all financial instruments acquired or
      issued in fiscal years beginning after September 15, 2006. The company does
      not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.





In
      November 2005, the FASB issued FASB Staff Position No. FAS 123R-3, “Transition
      Election Related to Accounting for Tax Effects of Share-Based Payment Awards.”
The alternative transition method includes simplified methods to establish
      the
      beginning balance of the additional paid-in capital pool (“APIC pool”) related
      to the tax effects of employee share-based compensation, and to determine the
      subsequent impact on the APIC pool and consolidated statements of cash flows
      of
      the tax effects of employee share-based compensation awards that are outstanding
      upon adoption of SFAS 123R. An entity may make a one-time election to adopt
      the
      transition method described in this guidance and may take up to one year from
      the later of its initial adoption of SFAS 123R or the effective date of this
      guidance, which was November 11, 2005. The company has elected not to adopt
      the
      alternative transition method provided in FAS 123R-3 for calculating the tax
      effects of share-based compensation pursuant to SFAS 123R.





Effective
      January 1, 2006, the company adopted FAS 123R using the modified prospective
      transition method, which provides for certain changes to the method for valuing
      share-based compensation. The valuation provisions of FAS 123R apply to new
      awards and to awards that are outstanding at the effective date and subsequently
      modified or cancelled. Estimated compensation expense for awards outstanding
      at
      January 1, 2006 will be recognized over the remaining service period using
      the
      compensation cost calculated for pro forma disclosure purposes under FAS 123.
      In
      accordance with the modified prospective transition method, our statements
      of
      operations for periods prior to January 1, 2006 will not be restated to reflect
      the impact of FAS 123R.





Our
      calculation of share-based compensation expense in future periods will be
      calculated using the Black-Scholes option valuation model and will include
      the
      portion of share-based payment awards that is ultimately expected to vest during
      the period and therefore will be adjusted to reflect estimated forfeitures.
      SFAS
      123® requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. In our pro forma information required under SFAS 123 for the periods
      prior to 2006, we accounted for forfeitures as they occurred. For share awards
      granted after January 1, 2006, expenses will be amortized under the
      straight-line attribution method. For share awards granted prior to 2006,
      expenses are amortized under the straight-line single option method prescribed
      by SFAS 123. We expect that our adoption of FAS 123R in 2006 will have a
      material impact on our results of operations and net loss per
      share.


F-16
 **Table
          of Contents**








2.
      ACCOUNTS RECEIVABLE





At
      June
      30, 2006 Accounts Receivable consists of:





Amounts
                receivable from customers
            
            $
            360,575Less:
                Reserve for doubtful accounts
            
            
            (53,394
            )Accounts
                receivable, net
            
            $
            307,181





3.
      OTHER
      CURRENT ASSETS





Other
      current assets consists of the following at June 30, 2006:





Other
                receivables
            
            $
            66,005Employee
                salary advances
            
            
            37,622Deposits
            
            
            30,016Total
            
            $
            133,643





4.
      INVENTORIES





Inventory
      at June 30, 2006 consists of the Company’s Point of Sale Terminals which have
      been purchased from third party manufacturers. Components of inventories as
      of
      June 30, 2006 are as follows:





Finished
                goods
            
            $
            105,780Total
            
            $
            105,780







F-17
 **Table
          of Contents**







5.
      PROPERTY AND EQUIPMENT





A
      summary
      of property and equipment at June 30, 2006 is as follows:





Computer
                equipment
            
            $
            130,789Furniture
                and office equipment
            
            
            66,237Leasehold
                improvements
            
            
            7,774204,800Less
                accumulated depreciation and amortization
            
            
            (78,879
            )Property
                and equipment, net
            
            $
            125,921







Depreciation
      and amortization expense for property and equipment amounted to $41,448 and
      $29,630 respectively, for the years ended June 30, 2006 and 2005.





During
      the year ended June 30, 2006, the Company sold fixed assets with a net book
      value of $0 for cash proceeds of $2,223 which resulted in a gain of $2,211
      on
      the disposal of fixed assets. During the year ended June 30, 2005, the Company
      sold fixed assets with a net book value of $5,263 for cash proceeds of $4,054
      which resulted in a loss of $1,209 on disposal of fixed assets.







6.
      ACQUISTION OF 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.


F-18
 **Table
          of Contents**







The
      identifiable intangible assets acquired and their carrying values at June 30,
      2006 are:




WeightedGross
              
              
              
              
              
              
              
              AverageCarrying
              
              Accumulated
              
              
              
              Residual
              
              AmortizationAmount
              
              Amortization
              
              Net
              
              Value
              
              YearsAmortizableIntangible
                  Assets:Software
                  and related development costs
              
              $
              2,652,526
              
              $
              750,599
              
              $
              1,901,927
              
              $
              0
              
              
              4.6CustomerRelationships
                  and Contracts
              
              $
              1,967,204
              
              $
              582,219
              
              $
              1,384,985
              
              $
              0
              
              
              10.0Software
                  Licenses
              
              $
              2,261,156
              
              $
              804,836
              
              $
              1,456,319
              
              $
              0
              
              
              10.0





Total
      amortization expense charged to operations for the year ended June 30, 2006
      and
      2005 was $613,552 and $615,878, respectively.





Estimated
      amortization expense as of June 30, 2006 is as follows:





2007
            
            $
            735,0002008
            
            
            735,0002009
            
            
            735,0002010
            
            
            685,0002011
            
            
            915,000Thereafter
            
            
            1,218,231Total
            
            $
            4,743,231





7.
      ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
      payable and accrued liabilities at June 30, 2006 are as follows:





Accounts
                payable and accrued expenses
            
            $
            963,834Payroll
                and related expenses
            
            
            107,411$
            1,071,245








8.
      NOTES
      PAYABLE





On
      May
      12, 2005, the Company entered into a settlement agreement with Sportingbet PLC (“Sportingbet”) whereby the Company and Sportingbet agreed to
      mutually release each other from all liabilities and claims. Pursuant to the
      settlement agreement, the Company issued to Sportingbet its one-year convertible
      note in the amount of $650,000 due May 12, 2006 (the “Sportingbet Note”). The
      Sportingbet Note had no stated interest rate for the first year, and an interest
      rate of 8% per annum thereafter. The Sportingbet Note was convertible into
      the
      Company’s common stock at the option of the Company beginning on the tenth day
      prior to the maturity date and ending on the tenth day after the maturity date
      of the note. The conversion price was to be computed at the average of the
      daily
      closing prices for the Company’s common stock for the 90 consecutive full
      trading days prior to the maturity date. The Company imputed interest on the
      Sportingbet Note at the rate of 8% for a discount of $49,428. During the twelve
      months ended June 30, 2006, the Company amortized to interest expense
      the amount of  $42,978. The Sportingbet note payable was converted to
      1,183,283 shares of common stock on May 12, 2006. (see note 14).






F-19
 **Table
          of Contents**





9.
      SEGMENT INFORMATION





The
      Company currently operates two business segments: (1) the sale of its secure
      transaction processing system ePayPad and related service (Paysafe), and (2)
      transaction processing fees and consulting fees generated through its wholly
      owned subsidiary, Rahaxi Processing Oy. 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.





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





June
                  30, 2006
              
              June
                  30, 2005Net
                  Sales to External Customers:Corporate
              
              $
              --
              
              $
              --PaySafe
              
              
              --
              
              
              --Rahaxi
              
              
              2,097,749
              
              
              1,602,819Total
                  Sales to External Customers
              
              $
              2,097,749
              
              $
              1,602,819Depreciation
                  and Amortization:Corporate
              
              $
              --
              
              $
              --PaySafe
              
              
              25,461
              
              
              55,174Rahaxi
              
              
              629,539
              
              
              590,334Total
                  Depreciation and Amortization
              
              $
              655,000
                  $
              
              
              645,508General
                  and Administrative Expense(not
                  including depreciationand
                  amortization):Corporate
              
              $
              12,106,724
              
              $
              20,327,808PaySafe
              
              
              251,796
              
              
              231,575Rahaxi
              
              
              1,195,126
              
              
              499,213Total
                  General and Administrative Expense
              
              $
              13,553,647
              
              $
              21,058,596Capital
                  Expenditures:Corporate
              
              $
              --
              
              $
              --PaySafe
              
              
              --
              
              
              35,913Rahaxi
              
              
              998,734
              
              
              593,205Total
                  Capital Expenditure
              
              $
              998,734
              
              $
              629,118Operating
                  Income (Loss):Corporate
              
              $
              (12,106,724
              )
              $
              (21,038,141
              )PaySafe
              
              
              (277,257
              )
              
              (286,687
              )Rahaxi
              
              
              (1,510,934
              )
              
              (777,635
              )Total
                  Operating Income (Loss)
              
              $
              (13,894,916
              )
              $
              (22,102,463
              )Interest
                  Expense, Net:Corporate
              
              $
              43,400
              
              $
              6,949PaySafe
              
              
              4,818
              
              
              6,711Rahaxi
              
              
              5,589
              
              
              13,114Total
                  Interest Expense
              
              $
              53,807
              
              $
              26,774Segment
                  Assets:Corporate
              
              $
              3,039,276
              
              $
              506,644PaySafe
              
              
              777
              
              
              71,798Rahaxi
              
              
              5,347,838
              
              
              4,789,302Total
                  Segment Assets
              
              $
              8,387,891
              
              $
              5,367,744









F-20
 **Table
          of Contents**




10.
      RELATED PARTY TRANSACTIONS





Amounts
      due to related parties at June 30, 2006 consist of the following:





Accrued
      Salaries - Officers





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,
      2006, $19,730 of accrued salaries were owed to Paul Egan, compared to $150,753
      at June 30,2005.





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, 2006, $20,444 of accrued salaries were owed to Ciaran Egan,
      compared to $112,800 at June 30, 2005.







11.
      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, 2006, the Company has available for income tax reporting purposes a
          net
          operating loss carryforwards, which may be used to offset future taxable
          income.
          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.







F-21
 **Table
          of Contents**





12.
      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, 2006,
      the Company had issued 71,842,010 shares of common stock under this plan and
      1,512,605 options were unexercised, leaving 1,645,385 shares of common stock
      remaining to be issued as of that date.





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, 2006, the Company had issued 62,293,518 shares
      of
      common stock under this plan, and 625,000 options were unexercised, leaving
      7,081,482 shares of common stock remaining to be issued as of that
      date.







13.
      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
            
            
            
            AverageRange
                of
            
            
            
            Average
                Remaining
            
            Exercise
                Price of
            
            
            
            Exercise
                Price ofExercise
            
            Number
            
            Contractual
            
            Outstanding
            
            Number
            
            ExercisablePrices
            
            Outstanding
            
            Life
                (Years)
            
            Options
            
            Exercisable
            
            Options$
            0.15
            
            
            166,666
            
            
            9.2
            
            $
            0.15
            
            
            166.666
            
            $
            0.15$
            0.49
            
            
            756,303
            
            
            6.9
            
            $
            $0.49
            
            
            756,303
            
            $
            0.49$
            0.70
            
            
            756,303
            
            
            7.0
            
            $
            0.70
            
            
            756,303
            
            $
            0.701,679,272
            
            
            7.2
            
            $
            0.54
            
            
            1,679,272
            
            $
            0.54








F-22
 **Table
          of Contents**





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








Weighted
              AverageNumber
                of
            
            ExerciseShares
            
            PriceOptions
                exercisable at June 30, 2003
            
            
            1,512,605
            
            $
            0.60Granted
            
            
            1,285,714
            
            $
            0.27Exercised
            
            
            (1,285,714
            )
            $
            (0.27
            )Cancelled
                / Expired
            
            
            -
            
            
            -Options
                exercisable at June 30, 2004
            
            
            1,512,605
            
            $
            0.60Granted
            
            
            8,549,949
            
            $
            0.15Exercised
            
            
            (7,121,378
            )
            $
            0.17Cancelled
                / Expired
            
            
            -
            
            $
            -Options
                exercisable at June 30, 2005
            
            
            2,941,176
            
            $
            0.34Granted
            
            
            8,749,996
            
            $
            0.1439Exercised
            
            
            (10,011,901
            )
            $
            0.139Cancelled
                / Expired
            
            
            -
            
            $
            -Options
                exercisable at June 30, 2006
            
            
            1,679,271
            
            $
            0.54








The
        estimated value of the non-employee stock options vested during the yearsended
        June 30, 2006 and 2005 were determined using the Black-Scholes optionpricing
        model and the following assumptions: expected option life of .01 to 6 months,
        a
        risk free interest rate of 3.75 to 4.50%, a dividend yield of 0% and expected
        volatility of 108% to 167%. The amount of the expense charged to operations
        in
        connection with granting the options was $ 867,636
        and $1,146,448 during the year ended June 30, 2006 and 2005, respectively.
        From
        time to time, there is a timing different between receipt of funds from
        investors and exercise of options. The Company maintains these amounts in
        accrued liabilities. During the year ended June 30, 2006, the change in accrued
        liabilities resulting from these timing differences was approximately $70,500
        resulting in remitted to the Company.





During
      the twelve months ended June 30, 2006, 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,
      2006.






F-23
 **Table
          of Contents**





Employee
      Stock Options





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 a non-qualified employee stock option plan (amounts have been adjusted
      to
      reflect the reverse stock split and other adjustments):





Weighted
            
            
            
            WeightedWeighted
            
            Average
            
            
            
            AverageRange
                of
            
            Number
                of
            
            Average
                Remaining
            
            Exercise
                Price of
            
            
            
            Exercise
                Price ofExercise
            
            Shares
            
            Contractual
            
            Outstanding
            
            Number
                of Shares
            
            ExercisablePrices
            
            Outstanding
            
            Life
                (Years)
            
            Options
            
            Exercisable
            
            Options$
            0.15
            
            
            250,000
            
            
            10.0
            
            $
            0.15
            
            
            250,000
            
            $
            0.15$
            0.47
            
            
            375,000
            
            
            10.0
            
            $
            0.47
            
            
            375,000
            
            $
            0.47625,000
            
            
            10.0
            
            $
            0.34
            
            
            625,000
            
            $
            0.34











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





Weighted
                AverageNumber
                of
            
            ExerciseShares
            
            PriceOptions
                exercisable at June 30, 2003
            
            
            -
            
            $
            -Granted
            
            
            1,428,571
            
            $
            0.35Exercised
            
            
            (1,428,571
            )
            $
            0.35Cancelled
                / Expired
            
            
            -
            
            
            -Options
                exercisable at June 30, 2004
            
            
            -
            
            $
            -Granted
            
            
            5,500,000
            
            $
            0.02Exercised
            
            
            (5,000,000
            )
            $
            0.01Cancelled
                / Expired
            
            
            -
            
            $
            -Options
                exercisable at June 30, 2005
            
            
            500,000
            
            $
            0.15Granted
            
            
            775,000
            
            $
            0.28Exercised
            
            
            (650,000
            )
            $
            0.11Cancelled
                / Expired
            
            
            -
            
            
            -Options
                exercisable at June 30, 2006
            
            
            625,000
            
            $
            0.34










F-24
 **Table
          of Contents**


The
        Company received the amount of $75,000 pursuant to these options exercises;
        the
        aggregate exercise price of 150,000 of these options of $1,500 was forgiven
        and
        this cash was not received.




The
      weighted-average fair value of stock options granted to employees during the years
      ended June 30, 2006 and 2005 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):
            
            2006
            
            2005Risk-free
                interest rate at grant date
            
            
            4.5
            %
            
            3.8
            %Expected
                stock price volatility
            
            
            105-115
            %
            
            176
            %Expected
                dividend payout
            
            
            0
            
            
            0Expected
                option life (in years)
            
            
            10.0
            
            
            3.6





Prior
      to
      the adoption if SFAS No. 123R the Company accounted for options in accordance
      with APB No. 25. Under the APB No. 25 method the Company has accounted for
      150,000 options granted, which carried an intrinsic value of $34,500. The
      Company has issued new options after the adoption of SFAS No. 123R, which
      account for 625,000 options with a valuation of $264,728 calculated by utilizing
      the Black-Scholes valuation model.





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):








Weighted
            
            
            
            WeightedWeighted
            
            Average
            
            
            
            AverageAverage
            
            Exercise
            
            
            
            ExerciseRange
                of
            
            Number
                of
            
            Remaining
            
            Price
                of
            
            Number
                of
            
            Price
                ofExercise
            
            Shares
            
            Contractual
            
            Outstanding
            
            Shares
            
            ExercisablePrices
            
            Outstanding
            
            Life
                (Years)
            
            Warrants
            
            Exercisable
            
            Options$
                0.2143
            
            1,204,786
            
            1.39
            
            $0.2143
            
            1,204,786
            
            $0.2143$
                0.75
            
            750,000
            
            1.87
            
            $0.75
            
            750,000
            
            $0.75$0.98-1.00
            
            1,392,857
            
            3.36
            
            $0.99
            
            13,392,857
            
            $0.99$1.50
            
            7,954,348
            
            1.78
            
            $1.50
            
            7,954,348
            
            $1.50$2.50
            
            5,464,130
            
            1.80
            
            2.50
            
            5,464,130
            
            $2.50$4.50
            
            3,477,174
            
            1.75
            
            4.50
            
            3,477,174
            
            $4.50$5.50
            
            3,477,174
            
            1.75
            
            5.50
            
            3,477,174
            
            $5.50$6.50
            
            3,477,174
            
            1.75
            
            6.50
            
            3,477,174
            
            $6.508.50
            
            1,986,957
            
            1.75
            
            8.50
            
            1,986,957
            
            $8.5041,184,600
            
            2.25
            
            2.77
            
            41,184,600
            
            $2.77
















F-25
 **Table
          of Contents**





Transactions
      involving warrants are summarized as
      follows:





Weighted
                AverageNumber
                of
            
            ExerciseShares
            
            PriceWarrants
                exercisable at June 30, 2003
            
            
            192,857
            
            $
            N/A1Granted
            
            
            642,857
            
            $
            0.98Exercised
            
            
            -
            
            $
            -Cancelled
                / Expired
            
            
            (57,143
            )
            $
            (4.97
            )Warrants
                exercisable at June 30, 2004
            
            
            778,571
            
            $
            N/A1Granted
            
            
            2,928,571
            
            $
            0.56Exercised
            
            
            -
            
            $
            -Cancelled
                / Expired
            
            
            (135,714
            )
            $
            N/A1Warrants
                exercisable at June 30, 2005
            
            
            3,571,428
            
            $
            0.63Granted
            
            
            37,836,957
            
            $
            2.96Exercised
            
            
            (223,785
            )
            $
            0.214Cancelled
                / Expired
            
            
            -
            
            $
            -Warrants
                exercisable at June 30, 2006
            
            
            41,184,600
            
            $
            2.77








(1)  Certain
      warrants were granted at an exercise price based on the market price at the
      exercise date; therefore, weighted-average exercise prices cannot be determined
      for those warrants.





During
      the twelve months ended June 30, 2006, the Company extended the life of an
      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, 2006.




24,836,957
        of the warrants
        issued during the twelve months ended June 30, 2006 were all issued in
        connection with equity offerings of the Company’s common stock, and accordingly
        There was no charges to operations for the issuance of these warrants.
        13,000,000 of the warrants issued during the twelve months ended June 30,
        2006
        were commission for the March Financing. The fair value of $2,360,770 of
        these
        warrants was charged to operations during the year ended June 30, 2006.
 13,000,000
          of the warrants issued during the twelve months ended June 30, 2006 were
          commission for the March Financing. The fair value of $2,360,770 of these
          warrants was charged to operations during the year ended June 30,
          2006





14.
      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, 2005, the Company had 1,000,000 shares of Series A Preferred
      and
      2,500,000 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 208,367,427 shares of common stock issued and outstanding as
      of
      June 30, 2006.


F-26
 **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, 2005 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, 2006 and 2005, 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, 2006 and 2005.








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 is 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 at June 30, 2006, each of these 2,500,000 shares of Series
      B
      Preferred stock are convertible into 1.71 shares of the Company’s common stock,
      or a total of 4,275,000 shares of common stock.





During
      the year ended June 30, 2005, the Company agreed to issue 1,000,000 shares
      of
      its Series B preferred stock to it’s President, and 500,000 shares of its Series
      B preferred stock to its Chief Financial Officer in exchange for services
      rendered during the year. The Company valued the shares based upon the quoted
      market price of the Company’s underlying common shares at the time the
      obligation was incurred was $4,140,000 and was charged to operations during
      the
      year ended June 30, 2005. These shares were issued during the year ended June
      30, 2006. Each of these 1,500,000 shares of Series B Preferred stock are
      convertible into 12 shares of the Company’s common stock, or a total of
      18,000,000 shares of common stock.




Common
      Stock




Year
      Ended June 30, 2005:





The
      Company issued 14,480,534 restricted shares of common stock to consultants
      and
      legal advisors for professional fees. The Company recorded the amount of
      $2,742,108 as non-cash compensation and increased deferred compensation in
      the
      amount of $1,531,037.





The
      Company issued 7,121,379 restricted shares of common stock to consultants upon
      the exercise of stock options for $1,204,800 cash.





The
      Company cancelled 142,857 restricted shares of common stock that were previously
      issued to a consultant in error. Upon cancellation, the amount of $150,000
      was
      removed from shares cancellation receivable.





The
      Company converted a note payable in the amount of $750,000 into 5,000,000
      restricted shares of common stock.





The
      Company granted 20,000,000 restricted shares of common stock to officers for
      services to be performed. The amount of $4,600,000 was charged to non-cash
      compensation.





The
      Company issued 5,000,000 restricted shares of common stock to officers for
      the
      exercise of stock options. The total exercise price was $50,000. The Company
      initially charged this exercise to options receivable; this receivable was
      later
      written-off to non-cash compensation.





The
      Company cancelled 714,285 restricted shares of common stock due to a legal
      settlement, and recorded a gain in the amount of $350,000.




F-27
 **Table
            of Contents**
  Year
        Ended June 30, 2006:
  The
          Company issued 10,885,685 shares of common stock upon the exercise of options
          and warrants for cash proceeds of $ 1,582,957. $72,500 of the cash received
          was
          credited to accrued liabilities. The exercise price of $1,500 to an employee
          was
          forgiven. 9,233,330 of these shares were S-8 registered, and 1,652,355
          were
          restricted
  The
          Company issued 11,228,857 shares of common stock valued at $ 4,866,929
          to consultants and legal advisors for professional fees. 7,753,857 of these
          shares were S-8 registered, and 3,475,000 were restricted. The Company
          also
          committed to issue 750,000 S-8 shares to an employee as a sign-on incentive,,
          and charged the amount of $352,500 to Common Stock Subscribed. These 750,000
          shares were issued subsequent to June 30, 2006.





The
      Company cancelled 378,574 restricted shares of common stock that were previously
      issued for services. The amount of $263,350 was credited to operations during
      the year ended June 30, 2006.




The
        Company issued 22,850,000 restricted shares of common stock and warrants
        to
        purchase additional 42,053,215 shares of common stock at prices ranging from
        $1.50 to $8.50 for net cash proceeds of $4,063,924.
 The
          Company issued 7,600,000 restricted shares of common stock with a value
          of
          $2,912,000 for commission related to the March Financing. The amount of
          $2,912,000 was charged to operations during the year ended June 30, 2006.
  The
          Company issued 11,212,291
          restricted shares of common stock for net proceeds of $1,399,980, including
          878,958 shares for which the Company has not yet received cash. Subscriptions
          receivable was debited in the amount of 175,792 on the Company’s balance sheet
          at June 30, 2006 for this amount. During the year ended June 30, 2006,
          the
          Company also received $600,000 in cash representing subscriptions for 3,000,000
          shares of common stock which were not yet issued at June 30, 2006.


The
      Company issued 108,695 restricted shares of common stock valued at $53,260
      pursuant to a legal settlement agreement. The Company charged the amount of
      $53,260 to operations during the year ended June 30, 2006.





The
      Company converted a note payable in the amount of $650,000 into 1,183,461
      restricted shares of common stock.




March
      2006 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”).






F-28
 **Table
          of Contents**





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, 2006, the Company had received
        cash in the net amount $4,569,924 pursuant to the March Financing, and had
        issued 22,850,000 shares of common stock and warrants to purchase an additional
        24,836,957 shares. The Company also issued to consultants 7,600,000 shares
        of
        unregistered common stock with a fair value of $2,912,000; warrants to purchase
        12,000,000 shares of common stock at a price of $1.00 per share with a fair
        value of $2,212,684; and warrants to purchase an additional 1,000,000 shares
        of
        common stock at a price of $1.50 with a fair value of $148,086 as commission
        to
        consultants related to the March Financing. The Company charged the aggregate
        amount of $5,272,770 to operations during the twelve months ended June 30,
        2006
        with regard to the issuance of these shares and warrants.





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








Number
                of shares of CompanyCommon
                Stock underlying WarrantsExercise
                PricePer
                Share
            
            When
                fully subscribed
            
            At
                June 30, 2006$1.50
            
            14,000,000
            
            6,954,348$2.50
            
            11,000,000
            
            5,464,130$4.50
            
            7,000,000
            
            3,447,174$5.50
            
            7,000,000
            
            3,447,174$6.50
            
            7,000,000
            
            3,447,174$8.50
            
            4,000,000
            
            1,986,95750,000,000
            
            24,836,957







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.





April
      2006 Financing





In
        April
        2006, the Company signed subscriptions agreements with a group of offshore
        investors led by Swedish Credit and Finance .AB for the sale of an aggregate
        of
        25,000,000 shares of the Company’s common stock plus warrants to purchase an
        additional 25,000,000 shares of common stock for the aggregate price of
        $10,000,000 (the “April Financing”). Subject to the receipt of funds by the
        Company under the April Financing, shares of common stock will be issued
        as
        follows:


F-29
 **Table
          of Contents**







Number
                of
            
            Price
                per
            
            TotalShares
            
            Share
            
            Price
            
            Terms5,000,000
            
            $
            0.30
            
            $
            1,500,000
            
            
            90
                day note at 12% due August 9, 200610,000,000
            
            $
            0.55
            
            $
            5,500,000
            
            
            One
                year note at 12% due May 11, 200710,000,000
            
            $
            0.30
            
            $
            3,000,000
            
            
            Cash
                due 30 days, or June 10, 200625,000,000
            
            
            
            
            $
            10,000,000





These
          shares and warrants are being held in escrow by Margaux Investment Management
          Group, S.A., a Company controlled by a board member, Carl Hessel and are
          not
          deemed to be issued and outstanding as of the date of the financial statements
          .
  At
        June
        30, 2006, the Company has not recognized interest income on these notes as
        the
        transactions are not yet deemed consummated.
 
 Upon
        receipt of the funds from the April Financing, warrants will be issued as
        follows:






Exercise
                Price
            
            Number
                of shares of CompanyPer
                Share
            
            Common
                Stock underlying Warrants$
                1.50
            
            10,000,000$
                2.00
            
            7,500,000$
                2.50
            
            5,000,000$
                3.00
            
            2,500,000








All
      warrants will 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 April Financing and the shares and warrants issued in the April
      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-30
 **Table
          of Contents**





15.
      DEFERRED COMPENSATION





The
      Company enters into various consulting and service agreements for terms from 60
      days
      to one year. The Company pays a combination of cash and the
      Company’s


common
      stock for these consulting and professional services. Compensation for future
      services is classified as deferred compensation. As of June 30, 2006, deferred
      compensation related to the fair market value of stock issued for future
      services totaled $2,792,325.





16.
      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.





At
      June
      30, 2005, the Company owed Paul Egan the amount of $150,753 in accrued salary.
      During the year ended June 30, 2006, Paul Egan earned an additional $207,000
      in
      salary, and the Company paid Mr. Egan the amount of $338,023. At June 30, 2006,
      the Company owes Paul Egan the amount of $19,730 in accrued salary. Also at
      June
      30, 2005, the Company owed Mr. Egan 1,000,000 shares of Series B Preferred
      Stock
      with a value of $2,760,000 which had been charged to operations during the
      year
      ended June 30, 2005. These shares were issued to Mr. Egan during the year ended
      June 30, 2006.





The
      Company accrued and paid $0 of fringe benefits to Paul Egan for the years ended
      June 30, 2006 and 2005.








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.





At
      June
      30, 2005, the Company owed Ciaran Egan the amount of $112,800 in accrued salary.
      During the year ended June 30, 2006, Ciaran Egan earned an additional $180,000
      in salary, and the Company paid Mr. Egan the amount of $272,356. At June 30,
      2006, the Company owes Ciaran Egan the amount of $20,444 in accrued salary.
      Also
      at June 30, 2005, the Company owed Ciaran Egan 500,000 shares of Series B
      Preferred Stock with a value of $1,380,000 which had been charged to operations
      during the year ended June 30, 2005. These shares were issued to Mr. Egan during
      the year ended June 30, 2006.




The
      Company accrued and paid $0 of fringe benefits to
      Ciaran Egan for the years ended June 30, 2006 and 2005.


F-31
 **Table
          of Contents**





Chief
      Technical Officer




On
      April
      1, 2005, the Company entered into a three-year employment agreement with its
      Chief Technical Officer. Under the terms of this agreement, the Company is
      liable for an annual salary of $180,000. In addition, the Company issued options
      to purchase 500,000 shares of common stock at a price of $0.15 per share; these
      options were valued at their intrinsic value of $125,000, and this amount was
      charged to operations during the year ended June 30, 2005. The Company also
      issued 2,000,000 shares of the Company’s common stock valued at $540,000 and
      charged this amount to deferred compensation. During the year ended June 30,
      2006, $180,000 of this amount was charged to operations, and at June 30, 2006
      the amount of $300,329 is carried in deferred compensation on the Company’s
      balance sheet.





Financial
      Controller





An
      April
      1, 2005, the Company entered into a three-year employment agreement with its
      Financial Controller. Under the terms of this agreement, the Company is liable
      for an annual salary of $150,000. In addition, the Company issued options to
      purchase 375,000 shares of common stock at a price of $0.47 per share. The
      Company valued these options utilizing the Black-Scholes valuation model, and
      charged the amount of $166,074 to operations during the year ended June 30,
      2006. The Company also issued to 750,000 shares of the Company’s common stock
      valued at $352,500 and charged this amount to deferred compensation. During
      the
      year ended June 30, 2006, $86,918 of this amount was charged to operations,
      and
      at June 30, 2006 the amount of $265,582 is carried in deferred compensation
      on
      the Company’s balance sheet.








17.
      COMMITMENTS AND CONTINGENCIES





Operating
      Leases





The
      Company leased the following facilities under non-cancelable lease


agreements
      at June 30, 2006:





Santo
      Domingo, Dominican Republic: 2,000 square feet of office space under a two-year
      operating lease at the rate of $1,000 per months which expires in June 2007.





Helsinki,
      Finland: 1,300 square feet of office space under a lease at the rate of $3,257
      per month which expires in July 2008, but which can be terminated with 3 months
      notice.





The
      Company also leases certain of its computer hardware and software under
      non-cancelable operating leases in the amount of $53,731 per quarter, which
      expire in June, 2007.





The
      Company’s total commitments under non-cancelable operating leases at June 30,
      2006 are as follows:





Years
                    ending June 30,2007
                
                $
                433,3002008
                
                
                226,1032009
                
                
                214,1032010
                
                
                178,1032011
                
                
                138,893Total
                
                $
                1,190,502








Rental
      expenses for office space charged to operations for the year ended June 30,
      2006
      and 2005 are $98,462 and $98,408, 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.





18.
      SUBSEQUENT EVENTS


Common
        stock issued
 
 Subsequent
        to the date of the financial statements, the Company issued 23,000,000 shares
        of
        restricted common stock pursuant to the March Financing (note 14). The Company
        also issued 750,000 S-8 registered shares of common stock to an employee
        as a
        sign-on incentive. These shares are subject to a one-year vesting. The Company
        also issued an aggregate of 350,000 shares of S-8 registered shares of common
        stock to two consultants and 100,000 shares of restricted common stock to
        one
        consultant for services provided; 180,000 shares of restricted common stock
        pursuant to the lease of its facility in Santo Domingo; and 400,000 shares
        of
        S-8 common stock pursuant to the exercise of options.
 
 Lease
          agreement - Santo Domingo
 
 In
        September 2006, the Company signed a lease agreement for 6,082 square feet
        of
        office space in Santo Domingo, the Dominican Republic. The lease has a 5
        year
        term, and calls for monthly payments of $7,000. The Company issued 180,000
        shares of common stock pursuant to the terms of the lease as a security deposit.
    F-32