1.     Nature of Operations

iPay Technologies Holding Company, LLC (the "Company") is a limited liability company that provides a high quality internet and telephone bill payment service at a cost effective price to financial institutions nationwide.

On December 6, 2006 a consortium of private equity investment funds associated with SEI V iPay AIV, L.P., Spectrum V Investment Managers' Fund, L.P., and BV Investors I, Inc. acquired iPay Technologies, LLC (the "Predecessor") (the "Transaction"). The Transaction was accomplished through the creation of iPay Technologies Holding Company, LLC.

Pursuant to the terms of the Company's operating agreement, no member shall be liable for any debt, obligation or liability of the Company. Additionally, no member shall be required to loan any funds to the Company or to pay any contributions, assessments, or payments to the Company.

2.     Principles of Consolidation

The consolidated financial statements include the accounts of iPay Technologies Holding Company, LLC and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated.

3.     Cash and Cash Equivalents

The Company considers investments purchased with a maturity of three months or less to be cash equivalents. The Company maintains cash and cash equivalents, which, at times, exceed federally insured limits.

4.     Accounts Receivable

Accounts receivable consists of implementation fees for new customers, monthly maintenance fees and monthly transaction and user fees. Accounts receivable for these fees are collected by electronic withdrawal from the accounts of the financial institution customers. The Company has not experienced any bad debts to date and has not recorded an allowance for doubtful accounts.

5.     Revenue Recognition

The Company recognizes revenues from service fees when all of the following criteria are met: a) persuasive evidence of an arrangement exists; b) delivery has occurred or services have been rendered; c) the seller's price to the buyer is fixed or determinable; and d) collectability is reasonably assured.

The Company recognizes monthly maintenance fees and monthly transaction and user fees as revenue when services are performed. For contracts with escalating monthly payments, the Company generally recognizes revenue ratably over the term of the contract, which results in the recording of unbilled revenue. The Company defers annual maintenance fees and compliance fees and recognizes these fees as revenue ratably throughout the year. Implementation fees for new customers are not considered separate deliverables. Accordingly, the new user implementation fees are deferred and recognized as revenues on a straight-line basis over the period from the date that the new user implementation work concludes through the end of the contract.

In addition, the direct costs associated with providing implementation services have been capitalized and are amortized over the same period as the deferred implementation fees. These costs are recorded in deferred implementation costs on the consolidated balance sheets.

The Company collects funds from end-users and aggregates them in clearing accounts, which are not included in the consolidated balance sheets, as the Company does not have ownership of these funds. For certain transactions, funds may remain in the clearing accounts until a payment check is deposited or other payment transmission is accepted by the receiving merchant. In 2008, the Company earned interest on these funds for the period they remained in the clearing accounts. The interest totaled $1,093,870 for the year ended December 31, 2008, and is recorded as revenue on the consolidated statements of operations.

6.     Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated on the straight-line method over the estimated useful lives of the assets.

The Company capitalizes the cost of computer software developed or obtained for internal use. Capitalized computer software costs consist primarily of payroll and consulting costs incurred during the development stage. The Company expenses costs related to preliminary project assessments, research and development, training and application maintenance as they are incurred. Upgrades and enhancements to the software once developed are capitalized when the modifications result in additional functionality of the software. Capitalized software costs are being amortized on the straight-line method over a period of three years upon being placed in service.

7.     Impairment of Long-Lived Assets

The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its disposition are less than its carrying amount.

8.     Loan Fees

Loan fees are being amortized over the term of the loan. Loan fees net accumulated amortization were $198,399 and $292,347 as of December 31, 2009 and 2008, respectively, and are recorded as other assets on the consolidated balance sheets.

9.     Intangible Assets

Customer relationships represent customer contracts and relationships obtained as part of the Transaction and are being amortized on a straight-line basis over their estimated useful life, which is a period of ten years.

Developed technology represents the value of information technology internally developed by the Predecessor and acquired as part of the Transaction, and is being amortized on a straight-line basis over an estimated useful life of ten years.

The trade name intangible asset represents the fair value of the iPay Technologies trade name obtained as part of the Transaction and is being amortized on a straight-line basis over its estimated useful life of five years.

10.    Goodwill

Goodwill represents the excess of cost over the fair value of net assets acquired. When circumstances change, or at least annually, management compares the carrying value of the Company (a single reporting unit) to its estimated fair value. If the carrying value is greater than the respective estimated fair value, management then determines if the goodwill is impaired and whether some or all of the goodwill should be written off as a current period expense. The estimate of fair value requires various assumptions including the use of projections of future cash flows and discount rates that reflect the risks associated with achieving the future cash flows.

11.    Unit-based Compensation

The Company measures and recognizes compensation cost at fair value for all share-based payments, including incentive units.

The Company applies the Black-Scholes valuation model in determining the fair value of incentive units, which are amortized on the straight-line basis over the requisite service period as a component of personnel operating expenses in the consolidated statements of operations.

12.    Income Taxes

The Company is taxed as a partnership for U.S. income tax purposes. Accordingly, the members will report their share of the Company's taxable income on their U.S. Federal tax returns. A provision for state and local income taxes has been recorded on the consolidated statements of operations for the amounts of such taxes the Company is obligated to pay. At December 31, 2009 and 2008, amounts accrued for income taxes totaled $121,797 and $33,900, respectively.

The Company has evaluated the application of accounting for uncertainty in income taxes, which it adopted on January 1, 2009, and has determined the adoption does not have an impact on the Company's financial statements. If a future liability does arise related to uncertainty in income taxes, the Company has elected an accounting policy to classify interest and penalties, if any, as interest expense. Accordingly, a loss contingency is recognized when it is probable that a liability has been incurred as of the date of the financial statements and the amount of the loss can be reasonably estimated. The amount recognized is subject to estimate and management judgment with respect to the likely outcome of each uncertain tax position. The amount that is ultimately sustained for an individual uncertain tax position or for all uncertain tax positions in the aggregate could differ from the amount recognized.

13.    Advertising

Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 2009 and 2008 was $417,289 and $89,907, respectively.

14.    Fair Value of Financial Instruments

The carrying amounts for current assets and liabilities approximate their fair value due to their short maturity. The carrying amounts of long-term debt approximate their fair values based upon current rates available for similar types of instruments.

15.    Use of Estimates

The preparation of 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.

16.    Reclassifications

Certain 2008 amounts have been reclassified to conform to 2009 presentation.

17.    Subsequent Events

For the year ended December 31, 2009, the Company has evaluated subsequent events for potential recognition and disclosure through February 19, 2010.

Property and equipment consists of the following:

Depreciation and amortization expense for the years ended December 31, 2009 and 2008 was $1,733,596 and $1,437,044, respectively.

Intangible assets consist of the following:

Amortization expense for each of the years ended December 31, 2009 and 2008 was $2,450,000. Estimated amortization for the years 2010 to 2014 is as follows:

At December 31, 2009, the remaining amortization period of customer relationships, developed technology and trade name is approximately 7 years, 7 years, and 2 years, respectively.

Long-term debt consists of the following:

The loan agreement, covering the note payable and the line of credit, as discussed in Note D, with CIT Lending Services Corporation contain various covenants pertaining to maintenance of certain levels of interest coverage, total leverage and fixed charge coverage ratios. As of December 31, 2009, the Company was in compliance with these covenants.

CIT Lending Services Corporation owns member units of the Company and thus qualifies as a related party.

Future principal maturities of long-term debt are as follows:

The Company has several agreements to lease office equipment. These leases are classified as operating leases with terms expiring at various dates through 2010.

The Company has various operating lease agreements to lease office space with terms expiring in 2013.

Approximate future minimum annual lease payments are as follows at year end:

Rent expense for the years ended December 31, 2009 and 2008 was $63,095 and $68,168, respectively.

The expected forfeiture rate is 17% based on Management's past experience and expectations of future turnover. A summary of the status of the Company's nonvested units as of December 31, 2009 and 2008 and changes during the years then ended, is presented below.

The fair value of the options was estimated on the date of grant based on the Black-Scholes option pricing model assuming, among other things, the following:

The expected life represents the period of time the option for the Incentive Units are expected to be outstanding. The risk-free rate is based on the spot rates for U.S. Treasury strips with maturities similar to the Incentive Units. The expected volatility was determined using historical and implied volatility for a group of comparable public companies. The dividend yield was determined to be 0%, as the Company has not paid a dividend since the Transaction and currently does not intend to pay dividends to unit holders.

As of December 31, 2009, there were 2,607,461 vested Incentive Units with a total fair value of $645,084. For the years ended December 31, 2009 and 2008, the Company recognized $327,789 and $286,916, respectively, in compensation expense related to the units granted. The Company expects to recognize an additional $832,349 in compensation expense over 2.6 years, the remaining weighted average vesting period of the units.