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EDGAR FILINGS

Year 2004 / March 17

FREESTAR TECHNOLOGY CORPORATION (FSRC.OB)

Quarterly Report

ITEM 2. MANAGEMENT'S DISCUSSION AND CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of financial condition and results of operations of the FreeStar Technology Corporation, a Nevada corporation ("Registrant"), is based upon, and should be read in conjunction with, its unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-QSB, which have been prepared in accordance with accounting principles generally accepted in the United States.

Overview.

The e-payments and e-commerce market is composed of debit and credit card issuers, switch interchanges, transaction acquirers and transaction generators, including Automated Teller Machine ("ATM") networks, retail merchant locations and the Internet. The routing, control and settlement of e-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 are typically performed online and must be conducted 24 hours a day, seven days a week.

The Registrant's products and services are primarily focused on facilitating electronic payments ("e-payments") and electronic commerce ("e-commerce"). These products and services are used principally by financial institutions, retailers, and e-payment processors, both in domestic and international markets.

The payments industry is rapidly transforming. The Registrant, after its acquisition of Rahaxi Processing Oy. and the assets of ePayLatina S.A., believes it is a part of this transformation. While payment media such as credit cards have reached maturity, it is still the most frequently used method of online payment. The growth in electronic commerce is forcing financial institutions and merchants to offer new secure payment forms to their customers. Internet payment gateways and the increased prospect of fraud from electronic payments are some of the issues that are creating challenges for financial institutions around the world.

The Registrant's solutions and services focus on these areas and enable financial institutions and merchants to formulate coherent strategies based on knowledge, insight and understanding of the transformations taking place in the industry. The Registrant's acquisition of the assets of ePayLatina S.A., and the formation of its strategic alliances were instigated to help institutions and merchants position themselves to provide superior value added services, and differentiate themselves from competitors in a way that preserves the business line's profitability.

The Registrant intends to have four main revenue sources: (1) sales of its PaySafe devices "ePayPad"; (2) processing fees related to the transactions through the use of ePayPad and merchant services (the Registrant intends to charge a fee for these transactions ranging from 0.3% to 1.3% of the value of the transaction); (3) revenue from the Registrant's transaction fees stemming from its Internet Payment Gateway (estimated to be about 0.5% to 3.5% of the value of the transaction); and (4) revenue stemming from Rahaxi Processing Oy., which derives income from the transaction fees it receives from processing online point of sale terminal transactions in Finland. For the six months ended December 31, 2003, the Registrant's revenue was primarily generated from the transaction fees through its Finland operations.

For the Registrant to derive revenue outside of its Finnish operations, the Registrant first had to perform a major hardware and software upgrade at Rahaxi, as Rahaxi is the core operating system of the Registrants products . This upgrade was completed in December 2003, and evolved the Registrant's business critical systems to the latest Hewlett-Packard ("HP") NonStop servers and BASE24? e-payment processing software. HP NonStop servers 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 the Registrant a secure, continuously available processing platform. A vastly scalable platform, HP NonStop provides the Registrant with the ability to achieve an adaptive enterprise by enabling it to respond quickly and easily to changing business needs, such as managing the expected growing number of transactions and the need for increased capacity.

BASE24r software from ACI Worldwide provides the Registrant 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 e-payment implementations worldwide.

The new system will enable the Registrant to meet the latest Visa and MasterCard standards and to pave the way for EMV Europay/MasterCard/Visa ("EMV") compliance. The Registrant will also be capable of supporting the latest Visa 3D Secure payment technology. EMV is an agreed-upon protocol for the introduction of smart cards. Chip-based bank and payment cards provide a substantial increase in the security of consumer payment transactions, and the Registrant expects it will be the standard throughout Europe by 2005. EMV is also gaining momentum in Asia and America, and promises complete global interoperability of bankcards for consumers. All payment processors will have to be able to accept payments mediated by smart cards in order to remain competitive, and meeting EMV compliance has major implications for all aspects of the payment handling processes.

Visa 3D Secure payment introduces greatly increased security for Internet-based card payments. Consumer payments over the Internet are already a substantial and growing market, but suffer from unacceptably high fraud levels. The 3D-Secure protocol will re- establish public confidence in card payments over the Internet, and enable the continued expansion of electronic commerce.

The Registrant believes that its investment in the upgraded NonStop systems running the newest ACI software, that it can meet its projected increasing capacity needs and ensure future volume growth.

The acquisition of TransAxis, Inc. has enabled the Registrant to enhance its existing processing system and offer a complete end-to-end solution to its clients. As an Internet Payment Gateway is an integral part of the Registrant's business module, and TransAxis, Inc. possessed what the Registrant believes to be a quality Internet Payment Gateway with a proven record, the Registrant decided it would be in its best interests to acquire TransAxis, Inc. This Internet Payment Gateway is a comprehensive merchant and client payment gateway that offers, amongst others, the following:

Transaction processing for VISA/MC/AMEX and Diners Club

Real-time transaction reporting

Fraudulent protection and transaction monitoring through iGuard Administration

Batch services

Credit issuing services

After extensive research, the Registrant concluded that the cost involved to develop its own Internet Payment Gateway with the same advanced functionalities would be substantially in excess of the purchase price of TransAxis, Inc. The Registrant intends to derive revenue by charging its clients a fee per transaction for processing transactions through the Internet Payment Gateway. The Registrant believes that its Internet Payment Gateway, in addition to its existing processing system, will enable it to offer a more comprehensive processing solution to its clients.

The Registrant is a small company in a very competitive market. It has a limited number of staff and is currently headquartered in the Dominican Republic; its main operating subsidiary is in Finland, which is a primary target market. In addition, many of the company's support services are in the United States. The Registrant believes that its operating plan is aggressive, and its success will depend largely upon its ability to continue to implement high quality technical solutions for complex and sensitive transaction processing issues, and to rollout these solutions in a timely, well-coordinated fashion. In order to enhance the company's ability to coordinate its operations, it intends to relocate its corporate offices in the near future to Miami, Florida; it recently opened a European headquarters in Geneva, Switzerland.

The Registrant, under the current management, began generating more revenue since its acquisition of Rahaxi Processing Oy. in January 2003. Its business is rapidly changing, and it expects the coming twelve months to be quite different from the previous twelve months as the company makes ready and further rolls-out its products and services. This process will require the company to react quickly to problems and opportunities as they arise, and may involve costs that it does not currently anticipate. The Registrant also expects that further acquisitions may help it to quickly move forward in achieving its goals. It is important to remember that within this context, it is often difficult to extrapolate future trends from the company's past operating history.

In order to conserve cash, the company compensates many of its outside consultants via stock and stock options in lieu of cash payments. These consultants include attorneys, financial and marketing consultants, and accountants. Fees for these types of services are charged to sales, general, and administrative expenses when they are satisfied via cash, and to non-cash compensation when they are satisfied via stock or stock options.

Results of Operations - Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002.

(a) Revenue.

The Registrant had revenue of $361,431 for the three months ended December 31, 2003. The Registrant did not yet have revenue in the comparable period during fiscal 2003. The increased revenue is mainly due to the revenue derived as a result of the acquisition of Rahaxi Processing Oy. The Registrant did not own Rahaxi during the three months ended December 31, 2002.

(b) Cost of Revenue.

Cost of revenue was $282,776 for the three months ended December 31, 2003 compared to $0 for the three months ended December 31, 2002 as the Registrant did not yet have revenue or cost of revenue in the prior period. The Registrant began to produce revenue and record the related costs of this revenue with the acquisition of Rahaxi Processing Oy. that occurred beginning in January 2003.

(c) Non-cash Compensation.

During the three months ended December 31, 2003, the Registrant recorded $611,552 in non-cash compensation, which was a decrease of $3,804,920, or approximately 86%, compared to $4,416,472 in non-cash compensation recorded during the three months ended December 31, 2002. The decrease was attributable primarily to fewer shares issued to consultants. In addition, the Registrant issued shares to directors and officers in the prior year and no such grants were made to directors and officers during the quarter ended December 31, 2003.

(d) Selling, General and Administrative Expenses.

Selling, general, and administrative ("SG&A") expenses were $720,151 for the three months ended December 31, 2003, an increase of $427,850, or approximately 146%, compared to such expenses of $292,301 for the three months ended December 31, 2002. Legal and accounting fees increased due to ongoing litigation (see "Part II - Item 1: Legal Proceedings") and as a result of increased legal and accounting work involved with regard to our acquisitions of Rahaxi Processing Oy. and TransAxis, Inc. Legal and accounting expenses made up approximately $168,000 of total SG&A expenses for the quarter ended December 31, 2003. In addition, the Registrant continued to add to its product capabilities, with higher values for capitalized software and software licenses generating higher amortization expense. Depreciation expense also increased for similar reasons. Depreciation and amortization accounted for approximately $105,000 of the total SG&A expenses for the quarter ended December 31, 2003. The company has continued to build out its infrastructure, and payroll costs have risen to approximately $95,000 during that quarter. Travel costs rose to approximately $44,000 for the quarter ended December 31, 2003 as the company increased its focus on the Finnish market and coordination of its product rollout with Rahaxi Processing Oy.

(e) Interest Expense.

The Registrant recognized net interest expense of $15,910 during the three months ended December 31, 2003, a decrease of $238,344, or approximately 94%, compared to interest expense of $254,254 for the three months ended December 31, 2002. The reason for this change is lower borrowings during the quarter ended December 31, 2003. The Registrant had outstanding convertible debentures of approximately $600,000 during the quarter ended December 31, 2002 that were settled in December 2002 with common stock personally owned by the President of the Registrant. The Registrant has recorded a liability to its president in the amount of $679,869 and accrues interest on this amount at the rate of 7% per annum. During the comparable three-month period of 2002, interest expense included substantially higher interest charges for the convertible debentures, including amortization of an amount attributable to the beneficial conversion feature of these notes.

(f) Miscellaneous.

The Registrant recorded no miscellaneous income or expense during the three months ended December 31, 2003 compared to miscellaneous expense of $7,966 during the three months ended December 31, 2002.

(g) Net Loss.

For the reasons stated above, the Registrant recorded a net loss of $1,268,958 for the three months ended December 31, 2003, an improvement of $3,702,035, or approximately 75%, compared to the net loss of $4,970,993 realized during the three months ended December 31, 2002.

Results of Operations - Six Months Ended December 31, 2003 Compared to Six Months Ended December 31, 2002.

(a) Revenue.

The Registrant had revenue of $661,374 for the six months ended December 31, 2003 compared to revenue of $8,700 during the six months ended December 31, 2002, an increase of $652,674, or approximately 7,500%. The increased revenue is mainly due to the revenue derived as a result of the acquisition of Rahaxi Processing Oy. The Registrant did not own Rahaxi Processing Oy. during the six months ended December 31, 2002.

The Registrant expects revenue levels to increase throughout the next twelve months as the company continues to roll out its service offering; however, there can be no guarantee that our product will be accepted in the marketplace or that our sales effort will be successful. Please see "Factors That May Affect Operating Results", below.

(b) Cost of Revenue.

Cost of revenue was $435,435 for the six months ended December 31, 2003 compared to $802 for the six months ended December 31, 2002. The Registrant's revenue was minimal during the six months ended December 31, 2002 and related cost of revenue was insignificant. The Registrant began to produce revenue and record the related cost of revenue with the acquisition of Rahaxi Processing Oy. that occurred during the quarter ended March 31, 2003.

Cost of revenue can be expected to increase in the coming twelve months if the company continues it current trend of increasing sales. The Registrant also intends to expand its service offering and its business mix will necessarily change, so that gross margin as a percent of sales may not remain constant.

(c) Non-cash Compensation.

During the six months ended December 31, 2003, the Registrant recorded $2,552,408 in non-cash compensation, which was an decrease of $2,066,097, or approximately 45%, compared to $4,618,505 in non-cash compensation recorded during the six months ended December 31, 2002. The primary components of the decrease were fewer shares issued as compensation to consultants, as well as a decrease in the number of shares issued as compensation to officers and directors.

The Registrant expects non-cash compensation to increase during the coming twelve months. The Registrant's expected continued expansion in its various geographic markets will create a growing need for local consultants and advisors that will be satisfied in large part via non-cash compensation. Management intends to continue to utilize non-cash compensation in order to conserve cash.

(d) Selling, General and Administrative Expenses.

SG&A expenses were $1,315,956 for the six months ended December 31, 2003, an increase of $596,190, or approximately 83%, compared to $719,766 for the six months ended December 31, 2002. The same dynamics which drove up SG&A expenses during the three months ended December 31, 2003 were in play for the six months ended December 31, 2003: Legal and accounting fees were approximately $223,000 due to acquisitions, and the complexity of the company's business; depreciation and amortization rose to approximately $214,000, and payroll rose to approximately $187,000 as the company grew. Travel costs were approximately $82,000 for the six months ended December 31, 2003 due to the focus on its Finland subsidiary and the Finnish market.

The rate of future SG&A expenses will largely depend on the pace of the Registrant's growth in the market for payment processing products and upon the cost of outside services and professional fees, including legal fees relating to litigation. The company fully expects these costs to increase as it continues its expected rollout of product offerings. Selling expenses will continue to increase due to increased focus on obtaining new customers. The company intends to focus additional resources in the areas of sales personnel salaries, trade show participation, and other promotional expenses. In addition, the Registrant may pursue further acquisitions in order to facilitate its rapid growth and exploit market opportunities, which would further drive up legal and accounting fees, payroll, and travel costs.

(e) Interest Expense.

The Registrant recognized net interest expense of $32,461 during the six months ended December 31,2003, a decrease of $345,401, or approximately 91%, compared to interest expense of $377,862 for the six months ended December 31, 2002. The reason is due to lower borrowings during the quarter ended December 31, 2003. The Registrant had outstanding convertible debentures of approximately $600,000 during the quarter ended December 31, 2002 that were settled in December 2002 with common stock personally owned by the president of the company. The Registrant has recorded a liability to its president in the amount of $679,869 and accrues interest on this amount at the rate of 7% per annum. During the comparable six-month period of 2002, interest expense included substantially higher interest charges for the convertible debentures, including amortization of an amount attributable to the beneficial conversion feature of these notes.

Currently, the Registrant is utilizing equity financing partly in order to avoid the interest charges associated with debt financing. Accordingly, the Registrant does not expect interest expense to materially increase in the coming twelve months. There can be no guarantee that this will be the case; however, as the market for the Registrant's stock could change, forcing the company to pursue alternative methods of financing the company's cash needs; in addition, the Registrant 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.

(f) Miscellaneous.

The Registrant recorded no miscellaneous income and expense during the six months ended December 31, 2003 compared to miscellaneous income of $42,656 during the comparable period of 2002. The Registrant received a non-refundable deposit of $50,000 during the six months ended December 31, 2002, and had no such transaction during the comparable period of 2003.

The Registrant does not anticipate material increases in miscellaneous income or expense in the coming twelve months.

(g) Net Loss.

For the reasons stated above, the Registrant recorded a net loss of $3,674,886 for the six months ended December 31, 2003, an improvement of $1,990,693, or approximately 35%, compared to the net loss of $5,665,579 realized during the six months ended December 31, 2002.

A significant percentage of the Registrant's revenue for the second quarter of fiscal 2004 and for the first six months of fiscal 2004 has been derived from a limited number of the Registrant's customers, primarily Finnish customers for the Registrant's transaction processing products. Approximately 40% of the Registrant's total revenue was attributable to the Registrant's ten largest customers. The future loss of any major customer could have a material adverse effect on the Registrant's business, financial condition and results of operations. The Registrant believes that this customer concentration will continue for the remainder of fiscal 2004. The Registrant believes that this customer concentration will be diluted in the first half of Fiscal 2005 as it pursues operations outside of Finland.

The majority of Registrant's revenues for the second quarter of fiscal 2004 and for the first six months of fiscal 2004 has been generated by its operations outside of the United States, and the Registrant's future growth rates and success are in part dependent on continued growth and success in international markets. The Registrant expects this trend to continue through the fiscal year 2004.

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

The Registrant will attempt to continue to fund its operations through debt and equity financing until it achieves profitability, of which there is no guarantee. The Registrant expects these concerns regarding its perceived viability to continue throughout the fiscal year 2004.

Factors That May Affect Operating Results.

The operating results of the Registrant can vary significantly depending upon a number of factors, many of which are outside the company's control. General factors that may affect the Registrant's operating results include:

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

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

- gain or loss of clients or strategic relationships;

- announcement or introduction of new services and products by the Registrant or by its competitors;

- price competition;

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

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

- changes in governmental regulation; and

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

The Registrant believes that its planned growth and profitability will depend in large part on the ability to promote its services, gain clients and expand its relationship with current clients. Accordingly, the Registrant intends to invest in marketing, strategic partnerships, and development of its client base. If the Registrant is not successful in promoting its services and expanding its client base, this may have a material adverse effect on its financial condition and the ability to continue to operate the business.

The Registrant is also subject to the following specific factors that may affect the company's operating results:

(a) Competition.

The market for electronic payment systems and electronic POS systems is intensely competitive and we expect competition to continue to increase. The Registrant's competitors for POS systems include VeriFone, Ingenico and Hypercom amongst others, and companies such as NetGiro, TradeSafe & ProPay, and SafeDebit for the Registrant's electronic payment software. In addition, the companies with whom we have strategic relationships could develop products or services, which compete with the Registrant's products or services. In addition some competitors in the Registrant's market have longer operating histories, significantly greater financial, technical, marketing and other resources, and greater brand recognition than the company does. The Registrant also expects to face additional competition as other established and emerging companies enter the market for electronic payment solutions. To be competitive, the Registrant believes that it must, among other things, invest significant resources in developing new products, improve its current products and maintain customer satisfaction. Such investment will increase the Registrant's expenses and affect its profitability. In addition, if it fails to make this investment, the Registrant may not be able to compete successfully with its competitors, which could have a material adverse effect on its revenue and future profitability

(b) Technological and Market Changes.

The markets in which the Registrant competes are characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing needs of customers. There can be no assurance that the Registrant's existing products will continue to be properly positioned in the market or that the company will be able to introduce new or enhanced products into the market on a timely basis, or at all. Currently, the Registrant is 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 the Registrant to modify existing products. There is also the risk to the Registrant 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.

(c) New Versions of Registrant's Products May Contain Errors or Defects.

The Registrant's 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 the Registrant's products. The Registrant has in the past discovered software errors in its new releases and new products after their introduction. The Registrant has experienced delays in release, lost revenues and customer frustration during the period required to correct these errors. The Registrant 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 the Registrant's business, cash flow, financial condition and results of operations could be materially adversely affected.

(d) Protection of Proprietary Rights.

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

The Registrant 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 its business plan. The Registrant currently has no licenses for the use of any specific products. There can be no assurance that these third party licenses will be available or will continue to be available to the Registrant on acceptable terms or at all. The inability to enter into and maintain any of these licenses could have a material adverse effect on the Registrant's business, financial condition or operating results.

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

(e) Economic Slowdown.

The world economy in general, and the United States economy in particular have experienced a prolonged downturn for electronic payment products which the Registrant believes has adversely affected demand for its products and has made it increasingly difficult to accurately forecast future revenues. While it is seeing indications that the economic outlook is no longer deteriorating, the Registrant cannot predict the extent, timing or duration of any improvement in the economies where it sells its products. Further, the Registrant expects that its revenue during fiscal 2004 will be significantly affected by the timing and success of the introduction of new products and services during the fiscal year.

(f) Key Personnel.

The Registrant's success is largely dependent on the personal efforts and abilities of its senior management. The loss of certain members of the Registrant's senior management, including the company's chief executive officer, chief financial officer and chief technical officer, could have a material adverse effect on the company's business and prospects.

The Registrant intends to recruit in fiscal year 2004 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 the Registrant's business. As a result, the Registrant 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.

(g) Litigation.

As stated under Legal Proceedings, the Registrant is subject to a variety of claims and lawsuits. It is possible that one or more of these matters could be resolved in a manner that ultimately would have a material adverse impact on the Registrant's business, and could negatively impact its revenues, operating margins, and net income.

Liquidity and Capital Resources.

The Registrant had a working capital deficit of $1,109,432 as of December 31, 2003, which is an increase of $206,228, or approximately 23%, from a working capital deficit of $903,204 as of December 31, 2002, and a decrease of $130,960, or approximately 11%, compared to a working capital deficit of $1,240,392 at June 30, 2003. The Registrant has needed to continually raise capital through private offerings to fund its operations.

The Registrant recognizes the need for the infusion of cash during fiscal 2004. The Registrant is pursuing various financing options. However, there can be no assurance that we will be able to raise additional funds on favorable terms or at all. The Company relies heavily upon the market liquidity of its stock as traded on the Over the Counter Bulletin Board for its ability to raise funds, for its ability to consummate acquisitions, and for the use of non-cash compensation for many of the company's consultants. Should the Company experience a weakening in the market for its common stock, both its short-term liquidity and its ability to achieve its long-term strategy could be adversely affected.

The Registrant's continued operations, as well as the implementation of its business plan, will depend upon its ability to raise additional funds through bank borrowings, equity or debt financing. The Registrant estimates that it will need to raise approximately $5,000,000 over the next twelve months for such purposes. However, adequate funds may not be available when needed or may not be available on favorable terms to the Registrant. The ability of the Registrant to continue as a going concern is dependent on additional sources of capital and the success of the company's business plan. Regardless of whether the Registrant's cash assets prove to be inadequate to meet its operational needs, the company might seek to compensate providers of services by issuance of stock in lieu of cash. The notes to the condensed consolidated financial statements contained in this Form 10-QSB, as well as the audited consolidated financial statements contained in the Registrant's Form 10-KSB for the year ended June 30, 2003, include substantial doubt paragraphs regarding the company's ability to continue as a going concern. The Registrant believes it currently has adequate cash to fund anticipated cash needs for at least the next three months.

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

- curtail operations significantly;

- sell significant assets;

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

- explore other strategic alternatives including a merger or sale of the Registrant.

In addition, if additional shares were issued to obtain financing, or compensate service providers, existing stockholders may suffer a dilutive effect on their percentage of stock ownership.

Financing Activities.

During the three months ended December 31, 2003, the Registrant sold a total of 163,700,000 shares of common stock in a Regulation S offering to individuals for a total consideration of $1,637,000 ($0.01 per share). The Registrant received cash proceeds of $946,167 (net of financing costs of $163,700 paid and to be paid) and expects to receive the remaining $527,133 in the quarter ending March 31, 2004.

The Registrant requires substantial capital to fund its business, particularly to finance capital expenditures. As a result, the registrant could be required to raise substantial additional capital at any time. To the extent that the registrant raises additional capital through the sale of equity or convertible debt securities, the issuance of such securities could 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 the Registrants operations. If it is unable to obtain such additional capital, the Registrant may be required to reduce the scope of its planned product development and marketing efforts, which would materially adversely affect its business, financial condition and operating results.

Certain Indebtedness.

(a) The Registrant's president and a shareholder, Paul Egan, has advanced funds to the company for its operations. These amounts include advances of $219,144 and accrued interest of $34,816 at December 31,2003. The Registrant expects to repay this amount as soon as sufficient cash flow from operations is generated. Interest on the unpaid balances is accrued at the rate of 7% per annum.

(b) The Registrant has an unsecured note payable with Banc Nacional de Credito, a Dominican Republic bank, of $4,697 at December 31,2003. The note carries an interest rate of 48% and is payable on demand.

(c) On March 25, 2002, the Registrant entered into financing agreements with Boat Basin Investors LLC and Papell Holdings, Ltd. Under the terms of the agreements, the Registrant issued 8% convertible notes payable to these two parties, in the amounts of $70,000 and $200,000. These convertible notes matured on March 1, 2003 and were collateralized by 4,000,000 restricted shares of common stock pledged by the majority stockholder. The notes were convertible after 61 days into common stock at the lower of 80% of the average closing bid price at the conversion date. If the Registrant, at any time while these notes are outstanding, does any of the following, (a) pay stock dividend or any form of distributions on common shares, (b) subdivide outstanding shares of the common stock into a larger number of shares, (c) combine outstanding shares of the common stock into smaller number of shares, or (d) issue by reclassification of shares of common stock any shares of capital stock of the Registrant, the conversion price shall be revised per a pre- defined formula. During the period ended June 30, 2002, none of the principal amount was converted to common stock. The interest is payable on the earlier of the conversion date of the notes or the maturity date with any unpaid interest at an accelerated rate of 18%. Furthermore, the Registrant was required to file a registration statement by May 25, 2002 for 200% of the number of shares the notes plus accrued interest can be converted into.

In addition, since this debt is convertible into equity at the option of the note holder at beneficial conversion rates, an embedded beneficial conversion feature will be recorded as a debt discount and amortized using the effective rate over the life of the debt in accordance with Emerging Issues Task Force ("EITF") No. 00-27. The Registrant recorded a discount of $83,077 and amortized $20,769 as interest expense for the period ended June 30, 2002. Any unamortized debt discount related to the beneficial conversion feature will be charged to interest expense upon conversion.

The Registrant defaulted on the registration requirement and consequently was required to pay the investors a 9% penalty on the amount borrowed. As of June 30, 2002, the Registrant recorded $24,300 related to the penalties. In June 2002, this lender group exercised their rights against the 4,000,000 shares pledged by the president of the Registrant in full satisfaction of the $270,000 note payable. The note originally was set to mature in June 2003. The parties dispute the effect and effective date of such exercise. Such dispute had not been resolved as of September 30, 2003 and the litigation is ongoing.

(d) On June 27, 2002, the Registrant entered into a financing agreement with the following lenders for a total of $400,000 in convertible notes:

Papell Holdings, Ltd., Boat Basin Investors LLC, vFinance, Inc., David Stefansky, Marc Siegal and Richard Rosenblum. These notes were secured by 14,400,000 shares of common stock pledged by the Registrant's president. The Registrant received $60,000 of the proceeds in June 2002 and $150,000 in the quarter ended September 30, 2002. The Registrant expensed $2,262 during the year ended June 30, 2002. The remaining $190,000 represents financing cost. The Registrant prorated the financing cost of $54,280 as of June 30, 2002 based on the cash receipts in June 2002. The remaining $135,720 was recorded as prepaid financing cost in the quarter ended September 30, 2002. The prepaid financing cost is amortized over the term of the loan (approximately one year). The Registrant recorded $47,500 for the amortization of such cost for the quarter ended September 30, 2002, and fully amortized the remaining prepaid financing cost of $140,238 during the quarter ended December 31, 2002.

These notes payable were convertible into equity at the option of the note holders at beneficial conversion rates, an embedded beneficial conversion feature will be recorded as a debt discount and amortized using the effective rate over the life of the debt in accordance with EITF No. 00-27. The Registrant has an unamortized discount of $62,308 related to convertible notes payable of $270,000 as of June 30, 2002 and recorded a discount of $44,444 related to the $400,000 convertible debts. The Registrant recorded amortization of discounts of $31,880 on these convertible notes during the quarter ended September 30, 2002, and fully amortized the remaining discount of $74,872 during the quarter ended December 31, 2002.

In December 2002, the Registrant received an additional $237,000 less $37,000 financing fees from these same lenders.

In December 2002, this lender group exercised their rights against the 14,400,000 shares pledged by the president of the Registrant in full satisfaction of the outstanding notes payable of $637,000, interest payable of $18,569, and accrued penalties of $24,300. As of December 31, 2002, the Registrant considered the notes payable and related expenses totaling $679,869 with this lender group being paid off and has recorded a payable to the president for this amount plus accrued interest of $47,590 in the accompanying condensed consolidated balance sheet at December 31, 2003. The Registrant intended to issue new stock to replace such pledged shares.

Prepaid financing cost and debt discounts related to this convertible debt were expensed during the quarter ended December 31, 2002.

The Registrant litigated with this lender group regarding excessive financing cost, number of shares to be returned to the Registrant and certain terms of the debt agreements. As of December 31, 2003, the case was still pending and the outcome could not be determined. On March 4, 2004, this lender group entered into settlement agreements with the company. Under the agreements, this lender group agreed to return 14,400,000 shares originally owned by the president of the company and agreed to dismiss all claims, cross- claims and counterclaims with prejudice. Accordingly, the president will relieve the liabilities related to the fair value of the pledged collateral totaling $727,459 as gain on forgiveness of debt during the quarter ending March 31, 2004.

Exchange Rates.

The Registrant's operations are principally in Dominican Republic under the name ePayLatina S.A., which are operated in its local currency, the Dominican Republic Peso; and in Helsinki Finland under the Rahaxi subsidiary, operated in its local currency, the Euro. All assets and liabilities are translated at exchange rates in effect at the end of the period. Income statement accounts are translated at average rates for the period. Gains and losses from translation of foreign currency financial statements into U.S. dollars are included in comprehensive income (loss). The accumulated foreign currency translation adjustment was $107,244 at December 31, 2003.

A significant portion of the Registrant's revenues and expenses is denominated in currencies other than U.S. dollars; Rahaxi Processing Oy. generates its revenue in EUROS. Any significant change in exchange rates may have a favorable or negative effect on both the revenues and operational costs of the Registrant In particular, the value of the U.S. dollar to the Euro impacts the Registrant's operating results. The Registrant's 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 the Registrant's obligations. In addition, a significant portion of the Registrant's financial statements are prepared in Euro and translated to U.S. dollars for consolidation.

Other.

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

Critical Accounting Policies.

The Securities and Exchange Commission ("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, the Registrant's most critical accounting policies include: (a) use of estimates in the preparation of financial statements; and (b) non-cash compensation valuation. The methods, estimates and judgments the Registrant uses in applying these most critical accounting policies have a significant impact on the results the company reports in its financial statements.

(a) Use of Estimates in the Preparation of Financial Statements.

The preparation of these financial statements requires the Registrant 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, the Registrant evaluates these estimates, including those related to revenue recognition and concentration of credit risk. The Registrant bases its 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.

(b) Stock-Based Compensation Arrangements.

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