UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549







FORM
10-K




(Mark
One)




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




For
the fiscal year ended December 31, 2008




o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE OF
      1934




For
the transition period from ___________ to ___________




Commission
file number 333-118155







MDWERKS,
INC.


(Name of
Registrant as Specified in Its Charter)




Delaware
            33-1095411(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (I.R.S.
      Employer
              Identification
      No.)




Windolph
Center, Suite I


1020
N.W. 6th Street


Deerfield
Beach, FL 33442


(Address
of Principal Executive Offices)





(954)
389-8300


(Registrant's
telephone number)









Securities
registered under Section 12(b) of the Exchange Act:  None
[MDWK:OTCBB]




Securities
registered under Section 12(g) of the Exchange Act:  None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act  Yes  o    No 
x


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15 (d) of the Act  Yes  o    No 
x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes  x    No 
o




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§299.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x


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





Large
accelerated filer o                                                                              Accelerated
filer o


Non-accelerated
filer
                                                                                
Smaller reporting company x





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




As of
June 30, 2008, there were 14,370,208 shares of the issuer’s common equity
outstanding with an aggregate market value of $8,622,125.




Documents
incorporated by reference:   None













TABLE
OF CONTENTS




PAGEPART
      IITEM
      1.
              
              BUSINESS
              
              1ITEM
      1A.
              
              RISK
      FACTORS
              
              8ITEM
      1B.
              
              UNRESOLVED
      STAFF COMMENTS
              
              23ITEM
      2.
              
              PROPERTIES
              
              23ITEM
      3.
              
              LEGAL
      PROCEEDINGS
              
              23ITEM
      4.
              
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              23PART
      IIITEM
      5.
              
              MARKET
      FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
              
              24ITEM
      6.
              
              SELECTED
      FINANCIAL DATA
              
              25ITEM
      7.
              
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
              
              25ITEM
      7A.
              
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              
              30ITEM
      8.
              
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
              
              30ITEM
      9.
              
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
              
              30ITEM
      9A.
              
              CONTROLS
      AND PROCEDURES
              
              31ITEM
      9B.
              
              OTHER
      INFORMATION
              
              31PART
      IIIITEM
      10.
              
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
              
              32ITEM
      11.
              
              EXECUTIVE
      COMPENSATION
              
              37ITEM
      12.
              
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
              
              44ITEM
      13.
              
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS
              
              44ITEM
      14.
              
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              
              45




PART
      IVITEM
      15.
            
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES
            
            46


i





PART
I




ITEM
      1.
            BUSINESS




Unless otherwise indicated, all
references to ‘‘we’’, ‘‘us’’, ‘‘our’’, the ‘‘Company’’ and similar terms, as
well as references to the ‘‘Registrant’’ in this Annual Report on Form 10-K,
refer to MDwerks, Inc. (including its subsidiaries).




Description
of Business




We
operate various entities engaged in the sale of products and services to the
health care industry.  We have recently shifted our focus away from
the funding solution business and are currently focused on the sale and leasing
of digital pen technology and in connection therewith the provision of funding
to the healthcare provider industry. Our products, software and services can
help doctors, clinics, surgical or hospital based practices, home health care,
nursing homes and other healthcare providers and their vendors significantly
improve their electronic medical records as follows:





·
            Improve
      cash flow management;




·
            Increase
      revenue control;




·
            Leverage
      receivables through competitive short term financing
      arrangements;




·
            Improve
      information management, financial security and provider regulatory
      compliance;




MDwerks,
Inc., an OTC Bulletin Board company (OTCBB:MDWK) conducts its business through
four wholly owned subsidiaries of our wholly-owned subsidiary, MDwerks Global
Holdings, Inc., namely: Xeni Medical Systems, Inc. (‘‘Xeni Systems’’); Xeni
Medical Billing, Corp. (‘‘Xeni Billing’’); Xeni Financial Services, Corp. (Xeni
Financial); and, Xeni Patient Access Solutions, Inc. (“XPAS”). Xeni Systems,
Xeni Billing, Xeni Financial  and XPAS are the ‘‘Xeni
Companies’’





Digital
Pen Technology




We expect
to generate all of our future revenues from two different sources, each of which
is related to the sale of  products associated with the D-PAS digital
pen technology.  More specifically, we expect to derive revenue from
the sale of digital pens to  healthcare providers.  In
addition, we will receive fees from Patient Access Solutions, Inc. (“PASO”) for
the provision of financing to the health care providers to enable them to enter
into digital pen leases.  We also expect to receive referral fees from
strategic associates.





In
September 2008 we began focusing our sales efforts on the D-PAS Digital Pen
Technology to providers of health care.  D-PAS utilizes a digital pen
and paper technology, which is easy to use, has a low cost of ownership, and is
unobtrusive to business processes. This means people utilizing this technology
can continue to write with pen and paper. All the information written is
captured electronically, transmitted to a central processing server via the
Internet and made available to back office and document management systems
immediately. Data can be transmitted in two ways. The pens are Bluetooth enabled
and can be paired with approved cellular devices where data is routed through a
secure connection back to the server. Additionally, based on business
requirements, the pens can be docked in a USB cradle attached to a PC or
workstation which will also send the data back for processing if real time data
is not required. D-PAS captures handwritten information, transfers it into a
digital form and utilizes the data to initiate workflows in a secure
environment. Patients’ medical history and patient records are securely used to
initiate necessary workflows digitally, securely and much more efficiently,
empowering the healthcare business process. Although the initial focus is on the
healthcare industry, the digital pen can be utilized by many different
industries and these applications will be explored as potential areas for sales
of the product.  We anticipate having many different customers and do not
currently have any dependence on one customer.




We have a
non-exclusive nationwide sub-license from PASO and currently we are
concentrating our marketing efforts in South Florida. Our primary customers are
qualified healthcare providers such as nursing homes, clinics, hospitals and
multiple doctor practices. We intend to expand in the near future into states
such as Texas, Ohio, California, Pennsylvania and New Jersey, each of which has
a high concentration of prospective healthcare clients.




The
digital pen was developed by the Anoto Group AB, headquartered in
Sweden.  The Anoto Group AB has licensed the rights to sell the pen to
Digital Pen Systems in Salt Lake City, Utah who subsequently sells the pens to
us as well as the paper required to be used with the pens.  The
technology used to integrate the D-PAS pen with computer systems was created and
is owned by PASO who has further sublicensed the technology to us on a
non-exclusive basis.  PASO is a company with headquarters in
Hauppauge, New York whose shares of common stock are traded on the OTC. 
The Company has not spent any research and development costs on the digital pen
technology business.  There are no anticipated risks relating to obtaining
materials for digital pens or risks relating to environmental
costs.





The
healthcare industry is being required to provide and maintain Electronic Medical
Records (EMR) to replace their current paper-based systems.  The
digital pen provides a streamlined and intuitive system that allows doctors,
nursing homes and other health care facilities to affordably digitize their
practices.


1




Digital
Pen Sales and Services




Through
our partnership with PASO, XPAS has begun to sell D-PAS digital pen technology
directly to healthcare providers such as nursing homes and home health care
companies.  Digital pens capture the handwriting for later transfer to
a personal computer.  These pens work in conjunction with specialized,
customized forms and paper.  In the healthcare industry, various
opportunities exist to standardize and improve the capturing of medical
information which can improve their ability to process claims easier and improve
insurance reimbursement on a faster and more accurate basis.  We also
intend to finance the digital pen leases and derive revenue from the interest
charged for the loans we provide.  To date, we have not sold any
digital pens systems but have made four proposals to Florida based nursing
homes.  However, during the 6 months ended March 31, 2009, we financed
six leases of D-PAS digital pen technology to customers of PASO and will
recognize approximately $410,000 in revenue over 36 to 48 month periods from
such financings once the implementations are completed.  Software
customization and integration and final installation as well as designing and
printing the necessary digital forms needed by each client can take 60 to 120
days.  Thus, one client has had a successful installation and three
others are in the final stages of installation and the remaining two are
scheduled for finalization in May 2009.  The digital pen technology
package will also be productive in other industries as well and the Company
believes that opportunities are available in transportation, airlines, trucking
and the military, among others. We intend to expand into some of these
industries in future periods.




Digital Pen
Contract Purchasing Services




Through
Xeni Financial, we can offer to purchase contracts from PASO for clients
purchasing and utilizing a digital pen.  The lease purchases are
secured by the underlying digital pen leases of the healthcare
provider.  These contracts are typically purchased at a discount from
the contracted revenue stream from these digital pen leases. Our ability to
engage in these financing transactions will be dependent upon our ability to use
existing financing for the pen purchase or to find alternative financing. We intend
to consummate a financing commitment by April 17, 2009 whereby we will receive
$3,200,000 (net proceeds of $3,108,550) in financing to be utilized for
business operations, including the financing of lease
purchases.




Medical
Claims Businesses





At the
end of 2008, the Company decided to disband the medical claims submission,
billing and collection and financing businesses of Xeni Systems, Xeni Billing
and Xeni Finance.  Although we do not plan to be engaged in this line
of business, we may engage in occasional financing transactions related to such
line of business. This decision was based on our realization that these previous
businesses that had generated most of the Company’s revenue since inception were
no longer generating enough revenue to sustain the Company. During the year
ended December 31, 2008 we derived all of our revenue from our business
services, billing services and lending services businesses. Xeni Finance will
continue its lending services, however, the loans will be provided to finance
digital pen system purchases and leases and will be secured by the pens as
opposed to claims receivables.







2




Lending
Services




Our
FUNDwerksTM solutions electronically managed loans, loan repayments and the
movement of funds through linked bank accounts.




Through
Xeni Financial, we offered to lend or arrange lending from third parties to
healthcare providers on a short term, revolving line of credit and sometimes on
a term loan basis. The loans were secured by claims receivable of the healthcare
provider. Like Xeni Billing, Xeni Financial leveraged the solutions and services
offered by Xeni Systems to value the claims, score risk, document and track
claims payment status, verify remittance of payments from insurance companies
and sweep funds to the appropriate accounts with the assistance of electronic
and automated processes. Xeni Financial arranged loans at attractive rates and
terms, since it did not have to invest significant capital to develop or make a
major hardware and software purchase of a system to make loans secured by
receivables. Xeni Financial lent to healthcare providers on the merit of the
receivables and could even lend on Medicare claims.







Industry
Analysis




Industry
Size:




Healthcare
has been called the single largest U.S. industry. According to the Centers for
Medicare and Medicaid Services (CMS). The National healthcare expenditure
projections are produced annually by the Office of the Actuary at the CMS. They
are based on historical national health expenditures and a model framework that
incorporates actuarial, econometric and judgmental factors.  The
general term "Healthcare" encompasses a multitude of products and
services.  In 2008,
CMS forecasted$2.4 trillion in
health expendituresand
such expenditures are forecasted to grow significantly to$4.3 trillion by
2018, categorized as follows:





Projections(in $Billions)2008
                    
                    
                    2018Hospital
      Care
                    
                    $
                    746.5
                    
                    
                    $
                    1,374.1Physician
      and Clinical Services
                    
                    
                    508.5
                    
                    
                    
                    865.2Other
      Professional Services
                    
                    
                    65.8
                    
                    
                    
                    116.8Dental
      Services
                    
                    
                    99.9
                    
                    
                    
                    161.4Other
      Personal Health Care
                    
                    
                    70.5
                    
                    
                    
                    194.7Home
      Health Care
                    
                    
                    64.4
                    
                    
                    
                    134.9Nursing
      Home Care
                    
                    
                    137.4
                    
                    
                    
                    240.9Prescription
      Drugs
                    
                    
                    235.4
                    
                    
                    
                    453.7Other
      Medical Products
                    
                    
                    64.2
                    
                    
                    
                    97.6Program
      Administration & Private Health
                    
                    
                    165.6
                    
                    
                    
                    315.0Government
      Public Health Activities
                    
                    
                    68.3
                    
                    
                    
                    132.0Research,
      Structures & Equipment
                    
                    
                    152.0
                    
                    
                    
                    267.0$
                    2,378.5
                    
                    
                    $
                    4,353.3





Market
Needs




The
demand for healthcare technology continues to grow as healthcare providers
desire the increased efficiency derived from new technology.





Market
Strategy




We plan
to sell to physician and clinical service group practices, hospitals,
rehabilitation centers, nursing homes and certain related practice vendors by
using internal and external resources. Internal resources will consist mainly of
specialized sales executives with industry knowledge and/or a portfolio of
contacts. External resources will consist primarily of independent sales
representatives as well as channel associates such as vendors of practice
management systems and medical industry specific sales groups such as office
management consultants. These sales resources can leverage an existing customer
base and contacts.


3




Our
marketing is based on prioritizing potential purchasers by size, location and
density, need for our products and services and distribution opportunities.
Accordingly, we expect to focus our marketing efforts in geographic areas that
contain high concentrations of prospective clients, such as
California, Florida, Massachusetts, Texas, New York and New Jersey. We believe
that a concentration of marketing efforts in areas with high concentrations of
prospective clients will also reduce costs (for example, by reducing processing
of repetitive contract pricing and increasing set-up efficiencies for field
reps) as well as increasing revenues.




Media
Marketing




Our
advertising strategy prioritizes spending to facilitate sales goals. We expect
to utilize internal and external resources to develop advertising mediums
to open the appropriate sales opportunities, which may include the
following:




·
            Business-to-business
      advertising;





·
            Search
      engine and Web-site advertising;




·
            Direct
      marketing;




·
            Magazine/trade
      journal advertising;




·
            Trade-show
      advertising, slogans and headlines;




Non-Media
Marketing




We expect
to attract new clients by marketing through independent sales and affinity
business representatives. Typical independent sales representatives are already
selling other products and services of other companies to the same target market
and may be looking for new, non-competitive lines to promote. Affinity business
representatives sell their own complimentary products or services, and may see
our solutions and services as a new product line, enhancement or up-sell to
their existing line. Affinity business representatives are expected to include
vendors and suppliers of healthcare providers, such as clearinghouses,
diagnostic services and medical supply companies, as well as billing and
practice management product sellers. Banks and insurance companies can make
excellent affinity business representatives, as we offer ‘‘off-the-shelf’’
access to the lucrative healthcare provider community for a new lending product,
with tremendous up-selling opportunities, including by co-branding and return
referrals to the other services that they represent.




We
believe independent representatives will offer us access to healthcare providers
based on existing relationships, as well as pre-determined variable costs of
subscriber acquisition tied to sales or referral success. We believe we will
rapidly gain field presence, experienced personnel and credibility without
investing in, and building, resources from the ground up. Multiple resources can
be engaged in less time to acquire subscriber prospects.




Sales
Methods




Sales
will be generated by conventional methods, which may include direct sales calls,
trade shows, seminars, webcasts and direct mail. Lead generation will include
Internet presence and third party referral sources. We also expect to obtain
sales from strategic business alliances.




Revenue
Generation




D-PAS
Digital Pen Technology




We expect
to generate our future revenues from two different sources, each of which is
related to the sale of products associated with the D-PAS digital pen
technology.  More specifically we expect to derive revenue from the
sale of digital pens to healthcare providers.  In addition, we will
receive fees from PASO. for the provision of financing to the health care
providers to enable them to enter into digital pen leases.  To date,
we have financed six leases of D-PAS digital pen technology to customers of PASO
and will derive revenue from such financings once they are
implemented.  Such revenue will be recognized over the life of each
lease.  Examples include the following:


4




Financing Fees:   Financing revenue
from health care providers purchasing pen contracts from PASO.




D-PAS Sales Fees:  
Healthcare providers leases of digital pens and software and the revenue stream
from these pen leases.




New
lines of Business




We expect
to generate new revenue derived from healthcare providers, their payers and
lenders, as well as strategic associates who pay referral fees.




We also
plan to generate additional revenues through strategic
acquisitions.




Competition




There are
many companies that perform data collection services both in the health care
industry as well as in other industries. Many of these companies have data
collection solutions that involve the use of computers and are
digital.  Although we do not know of any other company using the D-PAS
digital pen technology for data collection in the health care industry, there
are several companies using many other methods of data collection that can be
applicable to the health care industry. We will compete with all of these
companies.  The market for data collection is highly
competitive.   Many of the competitors are substantially larger
and more experienced than us and have longer operating histories, and have
materially greater financial and other resources than us.  We may not
be able to successfully compete with them in the marketplace nor may our
licensees.




The
primary purpose of a digital pen is to allow for the transfer of written text to
a computer in digital form. Most digital pens are designed to be used with
specially formatted digital paper. The digital pen can be used productively in
almost any industry for numerous tasks and can significantly increase efficiency
and reduce the amount of paper used or stored. There are a number of companies
that market digital pens, including Anoto, Logitech, LiveScribe, Adapx, XMS
Penvision, Inplay Technologies, EPOS Technologies and Dane Elec Memory and most
have similar functions and capabilities.




The
Digital pen and paper and related software customization and service is a young
business and we expect it to mature quickly. Currently, we are selling the D-PAS
digital pen package to nursing homes and other healthcare facilities. We believe
that the healthcare industry has certain special needs and requirements that can
be fulfilled with our package. While we expect to primarily cater to the
healthcare industry for the next three to six months, we do anticipate offering
the D-PAS digital pen package in various forms to other industries including
transportation, shipping and the Military, where we believe there are prime
opportunities.




Corporate
Information Regarding the Company and its Subsidiaries




MDwerks,
Inc. is a corporation, organized under the laws of the State of Delaware,
originally formed on July 22, 2003.




MDwerks
Global Holdings, Inc. is a corporation, organized under the laws of the State of
Florida, originally formed on October 23, 2003.




Xeni
Systems, Inc. is a corporation, organized under the laws of the State of
Delaware, originally formed on July 21, 2004.




Xeni
Financial Services Corporation is a corporation, organized under the laws of the
State of Florida, originally formed on February 3, 2005.




Xeni
Medical Billing Corp. is a corporation, organized under the laws of the State of
Delaware, originally formed on March 2, 2005.




Xeni
Patient Access Solutions, Inc. is a corporation, organized under the laws of the
State of Florida, originally formed on May 30, 2007 as Patient Payment
Solutions, Inc. and was renamed March 2, 2009.




Our
principal executive office is located at Windolph Center, Suite I, 1020 NW
6th Street, Deerfield Beach, Florida 33442 and our telephone number is (954)
389-8300. Our website address is www.mdwerks.com.


5




History of the
Company




We were
organized and incorporated in the State of Delaware on July 22, 2003 under the
name Western Exploration, Inc. as a resource exploration stage
company.  In November 2005, we ceased operations as a resource
exploration company due to inadequate financing.  On November 16,
2005, Western Exploration, Inc.  engaged in a merger with MDwerks
Global Holdings, Inc. and MDwerks Acquisition Corp., a Florida corporation
(‘‘Acquisition Corp.’’), a wholly-owned subsidiary of Western Exploration, Inc.,
with MDwerks Global Holdings, Inc. surviving as a wholly-owned subsidiary of
Western Exploration, Inc. Upon the closing of the Merger, we changed our
corporate name from ‘‘Western Exploration, Inc.’’ to ‘‘MDwerks, Inc.’’ and
succeeded to the business of MDwerks Global Holdings, Inc. as our sole line of
business under the direction of MDwerks Global Holdings, Inc.’s
management.





MDwerks
Global Holdings, Inc. was originally formed under the name Global IP
Communications, Inc., in October 2003, as a provider of telecommunications
products and services. In April 2004, MDwerks Global Holdings, Inc. decided to
discontinue its telecommunications business and in December 2004, it decided to
focus on a new line of business in the area of providing insurance claims
transaction solutions and related services through investment in Xeni Systems.
In late May 2005, the Xeni Companies and MDwerks Global Holdings, Inc.
determined that a holding company structure with MDwerks Global Holdings, Inc.
serving as a holding company and overseeing the business of the Xeni Companies
provided certain strategic advantages to the Xeni Companies. In addition, it
also provided the Xeni Companies with access to cash held by MDwerks Global
Holdings, Inc. to continue to fund the business of the Xeni Companies. As a
result, the Xeni Companies became wholly-owned subsidiaries of MDwerks Global
Holdings, Inc., pursuant to share exchange agreements between MDwerks and each
of the shareholders of the Xeni Companies.





After 5
years of research, development and testing with strategic and ‘‘name brand’’
resources, the designer of Xeni Systems’ products, MEDwerks, LLC, substantially
completed the initial product development cycle for the products offered by Xeni
Systems. In October of 2003, MEDwerks, LLC ceased operations, due to a lack of
continuing operating capital. In October of 2004, substantially all of the
assets of MEDwerks, LLC were acquired by Xeni Systems pursuant to a Contribution
and Stockholders Agreement (the ‘‘Contribution Agreement’’) in exchange for
MEDwerks, LLC receiving approximately a 67% equity interest in Xeni Systems. The
purpose of the Contribution Agreement transaction was to launch and market the
MDwerks System commercially, utilizing a growth oriented management team of
seasoned professionals. Xeni Systems successfully obtained investment and
financing of $450,000 and positioned the technology for demonstration and
pre-commercial sale.





Xeni
Financial was organized in February 2005, to finance providers seeking loans on
receivables processed through Xeni Systems. Xeni Billing was organized in March
2005, to provide billing services to providers processing their claims through
Xeni Systems.  Today, these entities are no longer providing billing
services but are being used in our digital pen technology business as opposed to
the purpose for which they were organized.





We have
provided for our funding needs through the issuance of securities and notes
payable.  The Company received its financing from the sale of
securities in private offerings in 2005 and 2006 and notes payable created in
2006 and paid off in 2007, as well as two notes issued in 2006.  From
October 2006 to March 2008, we raised an aggregate gross amount of $15,000,000
from the sale of notes payable of $5,000,000 to Gottbetter Capital Master,
Ltd.(these notes are now owned by Vicis) and from the sale of Series B Preferred
Stock of $10,000,000 to Vicis Capital Master Fund .  In November 2008,
we entered into a Loan and Securities Purchase Agreement with Debt Opportunity
Fund LLLP (“DOF”) pursuant to which DOF will lend the Company up to $10,300,000
(subsequently increased to $11,800,000 on December 31, 2008) subject to a claims
assignment agreement.





Subsequent
to year end, the possible transaction with a new client, for which funds from
DOF had been escrowed, was aborted and the Company discussed the DOF escrowed
funds with Vicis Capital, the manager of DOF.   It was suggested
that a portion of such funds be loaned to the Company for use in further
developing and promoting its new digital pen and paper business. Terms of a loan
in the amount of $3,200,000 (net proceeds of $3,108,550) were agreed upon
in March 2009 and a closing is anticipated no later than April 17, 2009. The
loan will be reflected as a Senior Secured Promissory Note in the amount of
$3,851,375 which, in addition to the loan proceeds, includes a $300,000 advance
made to the Company in December 2008, $236,000 for fees related to the cancelled
transaction, $27,925 of accrued interest and $87,450 for professional and other
fees. An original issue discount of 2% is payable upon takedown and annual
interest of 13% will accrue through September 2009 and is payable on October 1,
2009 at which time monthly interest payments will commence and are payable in
arrears on the first business day of each following month. Monthly principal
payments of $40,000 will also commence on October 1, 2009 and the Note balance
is due on October 30, 2011. In addition, Vicis will receive 10 year warrants to
purchase 3,043,142 shares of Company common stock at $0.35 per share. The
warrants include piggy back registration rights and the right to cashless
exercise. There are no prepayment penalties on this loan.





6





Employees




We employ
6 people who devote their full business time to our activities and 1 part time
administrative and accounting person. In addition, we have 4 sales persons who
are independent contractors and one sales executive who is also an independent
contractor and consultant




Intellectual
Property




A United
States patent application regarding certain aspects of our systems was
filed by our predecessor, MEDwerks, LLC, on April 15, 2002. The US Patent Office
has recently issued an office action indicating that it will not
allow a patent based upon our current claims. We have decided to not continue
pursuing the patent due to the high unlikelihood of the patent being approved,
the significant costs that would be incurred to continue with the application
and the shift in our focus to the digital pen technology.




Properties




The
Company leases its facility under a master lease that expires in June
2013.  Rent expense for the year ended December 31, 2008 was $99,264
and for the year ended December 31, 2007 was $83,772. Future monthly rent
payments through June 2013 total $239,705.




Government
Regulation




See Risk
Factors - ‘‘We are subject to substantial government regulations.’’


7




ITEM
      1A.
            RISK
      FACTORS





We
have a very limited operating history, making it difficult to accurately
forecast our revenues and appropriately plan our expenses.




We have a
very limited operating history with respect to our current line of business, the
digital pen technology business but have been operating in the health care
industry since 2005.    In December 2008, we discontinued
our processing, billing and collecting operations which provided substantially
all of our revenue to date and shifted our focus to the sale of digital pen
technology and related leases, products and services. We have not yet sold any
digital pen systems and have derived no revenue from the financing of two pen
leases of D-PAS digital pen technology to customers of PASO through December 31,
2008.  Prior to this shift, we operated the businesses of MDwerks
Global Holdings, Inc. and the Xeni Companies as our sole lines of business.
Since 2000 our focus has been on developing software programs for the medical
transaction system employed by us.  Accordingly, we should be viewed
as an entity with a very limited operating history.





Because
we have had a limited operating history, it is difficult to accurately forecast
our revenues and expenses. Additionally, our operations will continue to be
subject to risks inherent in the establishment of a developing new business,
including, among other things, efficiently deploying our capital, developing our
product and services offerings, developing and implementing our marketing
campaigns and strategies and developing awareness and acceptance of our
products. Our ability to generate future revenues will be dependent on a number
of factors, many of which are beyond our control, including the pricing of other
services, overall demand for our products, market competition and government
regulation. As with any investment in a company with a limited operating
history, ownership of our securities may involve a high degree of risk and is
not recommended if an investor cannot reasonably bear the risk of a total loss
of his or her investment.




We
have historically incurred net losses and may not be profitable in the future.
In addition, we intend to continue to spend resources on maintaining and
strengthening our business and this may cause our operating expenses to increase
and operating results to decrease.




Our net
loss attributable to common shareholders for the year ended December 31, 2008
was $8,179,102 and since our inception, our accumulated deficit as of December
31, 2008 was $49,669,646. We expect to continue to incur additional substantial
operating and net losses for the foreseeable future. The profit potential of our
business model is unproven, and, to be successful, we must, among other things,
develop and market products and services that would be widely accepted by
potential users of such products and services at prices that will yield a
profit. If our products and services cannot be commercially developed and
launched, and do not achieve or sustain broad market acceptance we will not
achieve sufficient revenues to continue to operate our business.




If we
continue to incur losses in future periods, we may be unable to retain employees
or fund investments in our systems development, sales and marketing programs,
research and development and business plan. There can be no assurance that we
will ever obtain sufficient revenues to exceed our cost structure and achieve
profitability. If we do achieve profitability, there can be no assurance that we
may sustain or increase profitability in the future.


8




The
report of our independent registered public accountants contains the following
statement with which we concur: ‘‘the accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements, the Company has
suffered recurring losses from operations that raises substantial doubt about
its ability to continue as a going concern.’’




We
will need to raise additional capital in the future and may need to initiate
other operational strategies to continue our operations.




As of
December 31, 2008, we had a cash balance of $1,223,807. The amount of cash
available to us will be insufficient for us to service our current indebtedness
and implement our business plan as anticipated and will require us to seek
additional debt or equity financing in the near future, as we will be unable to
generate sufficient cash flow from our operations. As our business develops, we
will need to raise capital through the incurrence of additional long-term or
short-term indebtedness or the issuance of additional equity securities in
private or public transactions in order to complete further investments. In the
past we have raised money needed for operations from the sale of securities and
notes payable and in fact in 2005 and 2006 we engaged in private placements of
our securities in which we raised approximately $1.6 million, $5.0 million in
notes payable and in 2007 and 2008 we issued convertible securities in private
placement transactions in which we raised $10.0 million for manditorily
redeemable preferred stock due on March 31, 2010. This could result in dilution
of existing equity positions, increased interest expense, decreased net income
and diminished shareholder’s value. In addition, significant capital
requirements associated with such investments may impair our ability to pay
dividends (although we do not anticipate paying any dividends on common stock in
the foreseeable future) or interest on indebtedness or to meet our operating
needs. As described, the Company is anticipating the closing of a loan from
Vicis for $3,200,000 (net proceeds of $3,108,550) by April 17, 2009.
However, there can be no assurance that acceptable financing for future
investments can be obtained on suitable terms, if at all. If we do not raise
additional capital, we may cease to operate as a going concern.




Competition
from providers of similar products and services could adversely affect our
revenues and financial condition.




There are
many companies that perform data collection services both in the health care
industry as well as in other industries. Many of these companies have data
collection solutions that involve the use of computers and are
digital.  Although we do not know of any other company using the D-PAS
digital pen technology for data collection in the health care industry, there
are several companies using many other methods of data collection that can be
applicable to the health care industry. We will compete with all of these
companies.  The market for data collection is highly
competitive.   Many of the competitors are substantially larger
and more experienced than us and have longer operating histories, and have
materially greater financial and other resources than us.  We may not
be able to successfully compete with them in the marketplace nor may our
licensees.






To be
competitive, we will have to invest significant resources in business
development, advertising and marketing. We may also have to rely on strategic
partnerships for critical branding and relationship leverage, such as PAS, the
entity that provides technical support and service to our customers, which
partnerships may or may not be available or sufficient. We cannot assure that we
will have sufficient resources to make these investments or that we will be able
to make the advances necessary to be competitive. Increased competition may
result in fee reductions, reduced gross margin and loss of market share. Failure
to compete successfully against current or future competitors will result in
less revenue and have a material adverse effect on our business, operating
results and financial condition.




If
our technology is not operational and usable it could adversely affect our
business as we are currently selling one product dependent upon a specific
technology.




The
success of our business proposition is materially and substantially dependent on
the technology of the digital pen solution (and the availability, operability
and use of such technology in whole or in part).  If the technology of
the digital pen system is not usable, we will be unable to operate, as our
systems are dependent upon such technology.




We operate in industries characterized by rapid
technological change.




The data
storage industry is  subject to rapid technological change. Our
ability to remain competitive depends on our ability to enhance existing
products and develop and manufacture new products in a timely and cost effective
manner and to accurately predict technology transitions. Because new product
development commitments must be made well in advance of sales, we must
anticipate the future demand for products in selecting which development
programs to fund and pursue.  Since our technology must be integrated
with computer systems, changes in computer systems may require us  to
enhance our products.  We cannot be certain that we will be successful
in selecting, developing, manufacturing, and marketing new
technologies.


9




Our
success will be dependent upon our relationship with our limited number of
suppliers, the success of such suppliers and the suppliers’ relationship with
the owner of the digital pen technology and the manufacturer of the digital
pens.




Since
our technology is licensed from one entity and the product we sell will be
manufactured by one entity, our success will be dependent upon our relationship
with the manufacturer of the digital pens and the licensor of the digital pen
technology.  Our products and services were designed and built using
certain key technologies and licenses from a limited number of suppliers. The
technology which is critical to our success is licensed from a company that is
sublicensed from one company on a nonexclusive basis that indirectly licenses
the technology from the owner of the technology. In addition, the digital pen
that we will use is manufactured by one entity.  If our licensor were
to terminate our sublicense, go out of business, if its sublicense were to be
terminated or if the digital pen manufacturer were to stop supplying us with
pens for any reason it would be very difficult to find an alternative supplier.
..We will depend on this company for software updates, technical support and
possibly for system management or for new product development. In fact, we
currently do not have the staff capable of performing the installation services
necessary and are relying on our licensor to provide such
services.  Although we believe there might be alternative suppliers
for some or all of these technologies, it would take a significant period of
time and money to establish relationships with alternative suppliers and
substitute their technologies for technologies currently being used. The loss of
any of our relationships with these suppliers could result in system shut downs
and/or the inability to offer services we offer, or intend to offer, which could
result in a material adverse effect on our business, operating results and
financial condition.




We
currently do not have the personnel required to implement our business
plan.




If we are
unable to attract and retain personnel to perform the installation and service
needs of our customers, our business prospects, financial condition, and results
of operations will suffer. We currently do not have any employees capable of
performing our installation and customer service needs.  We are
therefore dependent upon outside companies to provide such services, which can
be very costly. Our future performance will be substantially dependant on our
ability to hire and retain employees with the experience and skills to implement
our business plan.  The creation of an infrastructure to commercialize
our technology may be difficult, expensive and time
consuming.





We
will not be able to exert full control over the individuals that perform our
installation and customer service needs and this could lead to harmful claims
against us.





We will be subject to the risk that the
third parties hired to perform our installation and customer service needs will
not be employees. We will be subject to the risk that they will not comply with
our policies and procedures, which could result in harmful claims against
us. Since the third
parties that perform our installation and customer service needs will not be our
employees, we will not be able to exert the same level of control over them as
we do with employees. In order to keep our costs at a minimum, we have not
hired any personnel capable of performing our installation and customer service
needs.  We are therefore dependent upon third parties to perform such
services.




If
our systems fail, it could interrupt operations and could adversely impact
us.




Our
operations are dependent upon our ability to support our highly complex network
infrastructure and avoid damage from fires, earthquakes, floods, hurricanes,
power losses, war, terrorist attacks, telecommunications failures and similar
natural or manmade events. The occurrence of a natural disaster, intentional or
unintentional human error or action, or other unanticipated problem could cause
interruptions in the services that we provide. Additionally, the failure of our
third-party backbone providers to provide the data communications capacity that
we require, as a result of natural disaster, operational disruption or any other
reason could cause interruptions in the services that we provide. Any damage or
failure that causes interruptions in our operations could result in loss of
revenues from clients, loss of clients, monetary damage, or increased costs of
operations, any or all of which could have a material adverse effect on our
business, operating results and financial condition.




If we are unable to retain key personnel it will have an adverse
effect on our business. We do not maintain ‘‘key man’’ life insurance policies
on our key personnel.




Our
operations have been and will continue be dependent on the efforts of Mr. David
M. Barnes, our Chief Executive Officer, and Mr. Vincent Colangelo, our Chief
Financial Officer and Corporate Secretary. The loss of key management or an
inability to attract and retain sufficient numbers of other qualified management
personnel would adversely delay and affect our business, products and services
and could have a material adverse effect on our business, operating results and
financial condition.




We do not
have ‘‘key man’’ life insurance policies for Mr. Barnes or Mr. Colangelo. Even
if we were to obtain ‘‘key man’’ insurance for Mr. Barnes or Mr. Colangelo of
which there can be no assurance, the amount of such policies may not be
sufficient to cover losses experienced by us as a result of the loss of Mr.
Barnes or Mr. Colangelo.


10




If
we fail to attract skilled personnel it could adversely affect our
business.




Our
future success depends, in large part, on our ability to attract and retain
highly skilled personnel. If we are unable to attract or retain qualified
personnel in the future or there are any delays in hiring required personnel,
particularly technical, sales, marketing and financial personnel, it could
materially adversely affect our business, operating results and financial
condition.




We will
need to expand our sales operations and marketing operations in order to
increase market awareness of our products and generate revenues. New sales
personnel and marketing personnel will require training and it will take time to
achieve full productivity. Competition for such personnel is intense. We cannot
be certain that we will successfully attract and retain additional qualified
personnel.




The
use of independent sales representatives or distributors will subject us to
certain risks.




We
presently generate revenue from the efforts of independent sales representatives
and we expect to generate a substantial portion of our revenue from independent
sales representatives or distributors. Such representatives and distributors may
not be required to meet sales quotas and our ability to manage independent sales
representatives or distributors to performance standards is unknown. Failure to
generate revenue from these sales representatives or distributors would have a
negative impact on our business.





Our
business may subject us to risks related to nationwide or international
operations.




If we
offer our products and services on a national, or even international, basis,
distribution would be subject to a variety of associated risks, any of which
could seriously harm our business, financial condition and results of
operations.




These
risks include:




·
            greater
      difficulty in collecting accounts
receivable;




·
            satisfying
      import or export licensing and product certification
      requirements;




·
            taxes,
      tariffs, duties, price controls or other restrictions on out-of-state
      companies, foreign currencies or trade barriers imposed by states or
      foreign countries;




·
            potential
      adverse tax consequences, including restrictions on repatriation of
      earnings;




·
            fluctuations
      in currency exchange rates;




·
            seasonal
      reductions in business activity in some parts of the country or the
      world;




·
            unexpected
      changes in local, state, federal or international regulatory
      requirements;




·
            burdens
      of complying with a wide variety of state and foreign
  laws;




·
            difficulties
      and costs of staffing and managing national and foreign
      operations;




·
            different
      regulatory and political climates and/or political
      instability;




·
            the
      impact of economic recessions in and outside of the United States;
      and




·
            limited
      ability to enforce agreements, intellectual property and other rights in
      foreign territories.


11




We
are subject to substantial government regulation which may adversely affect the
way we conduct our business and the costs of conducting our
business.




The
healthcare industry is highly regulated and is subject to changing political,
economic and regulatory influences. Federal and state legislatures have
periodically considered programs to reform or amend the U.S. healthcare system
at both the federal and state level and to change healthcare financing and
reimbursement systems, such as the Balanced Budget Act of 1997 and the Medicare
Modernization Act of 2003. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates or otherwise
change the environment in which healthcare industry participants operate.
Current or future government regulations or healthcare reform measures may
affect our business. Healthcare industry participants may respond by reducing
their investments or postponing investment decisions, including investments in
our products and services.  In addition, we may need to adapt our
technology to meet governmental demands.




Under the
Health Insurance Portability and Accountability Act of 1996, or HIPAA, final
rules were published regarding standards for electronic transactions as well as
standards for privacy and security of individually identifiable health
information. The HIPAA rules set new or higher standards for the healthcare
industry in handling healthcare transactions and information, with penalties for
noncompliance. We have incurred and we will continue to incur costs to comply
with these rules. Compliance with these rules may prove to be more costly than
we currently anticipate. Failure to comply with such rules may have a material
adverse effect on our business and may subject us to civil and criminal
penalties as well as loss of customers.




HIPAA, in
part, governs the collection, use, storage and disclosure of health information
for the purpose of safeguarding the privacy and security of such information.
Persons who believe health information has been misused or disclosed improperly
may file complaints against offending parties, which may lead to investigation
and potential civil and criminal penalties from Federal or state
governments.




The
passage of HIPAA is part of a wider healthcare reform initiative. We expect that
the debate on healthcare reform will continue. We also expect that the federal
government as well as state governments will pass laws and issue regulations
addressing healthcare issues and reimbursement of healthcare providers. We
cannot predict whether the governmental-bodies regulators will enact new
legislation and regulations, and, if enacted, whether such new developments will
have an adverse affect our business, operating results or financial
condition.




The Gramm
Leach Bliley Act may govern our lending practices as related to safeguarding
personal customer information.




Solutions
and services that we offer may subject us to product liability
claims.




Solutions
that we sell may fail to perform in a variety of ways, and services that we
provide may not meet customer expectations, including shipping a product which
is either late, does not meet customer requirements or expectations, or is lost,
damaged, stolen or corrupted, or which faces frequent Internet service
interruptions, which take it off-line. Such problems would seriously harm our
credibility, market acceptance of our products and the value of our brands. In
addition, such problems may result in liability for damages arising out of
product liability of our products and services. The occurrence of some of these
types of problems may seriously harm our business, operating results and
financial condition.   12




Our
systems are subject to certain security risks which can adversely affect our
operations.




Despite
the implementation of security measures, our systems may be vulnerable to
unauthorized access, computer viruses and other disruptive problems. Companies
have experienced, and may experience, interruptions in service as a result of
the accidental or intentional actions of Internet users, current and former
employees or others. Unauthorized access could also potentially jeopardize the
security of customers’ and our confidential information stored in our computer
systems, which may result in liability to customers and also may deter potential
customers from using our products and services. Although we intend to continue
to implement industry-standard security measures, such measures have been
circumvented in the past, and there can be no assurance that measures that we
implement will not be circumvented in the future. Eliminating computer viruses
and alleviating other security problems may require interruptions, delays or
cessation of service to our customers, such interruptions, delays or cessation
of services may result in a loss of customers or subject us to potential
liability for actions out of such interruptions, delays or cessation of
services.




If
we fail to enter into a banking relationship to offer our lending and contract
purchasing services it will limit our ability to provide funding services and it
will adversely affect our business.




If our
customers are unable to receive financing, many will be unable to purchase our
products.   In addition, we will lose revenue that we expect to
derive from arranging such financing if our customers are unable to receive
financing from sources supplied by us. We will need to enter into agreements
with financial institutions to enable us to offer sufficient funds for the
lending services that we offer customers. To date, our only revenue from the
digital pen technology has been from the financing of six digital pen leases
agreements. The lending services that we offer allow us to purchase digital pen
leases. To date, we do not have any such agreement with any financial
institution. There can be no assurance that we will be able to enter into such
an agreement with a financial institution. If we fail to enter into such an
agreement with a financial institution we may not generate sufficient funds to
offer our lending services in a meaningful fashion which could result in a
material adverse effect on our business, operating results and financial
condition.




If
we fail to recover the value of amounts that we lend to healthcare providers it
will adversely affect our business.




With
respect to digital pen leases made by us to providers, we expect to experience
charge-offs in the future. A charge-off occurs when all or part of the principal
of a particular lease is no longer recoverable and will not be repaid. If we
were to experience material losses on our lease portfolio, it would have a
material adverse effect on our ability to fund our business and to the extent
the losses exceed our provision for lease losses, it could have a material
adverse effect on our revenues, net income and assets.




Other
commercial finance companies have experienced charge offs. In addition, like
other commercial finance companies, we may experience missed and late payments,
failures by clients to comply with operational and financial covenants in their
lease agreements and client performance below that which was expected when we
originated the lease. Any of the events described in the preceding sentence may
be an indication that our risk of loss with respect to a particular lease has
materially increased.




Some
of our sales will be to privately owned small and medium-sized companies which
present a greater risk of loss than larger companies.




Our lease
portfolio will consist of some commercial sales to small and medium-sized,
privately owned medical practices. Compared to larger, publicly owned firms,
these companies generally have more limited access to capital and higher funding
costs, may be in a weaker financial position and may need more capital to expand
or compete. These financial challenges may make it difficult for clients to make
scheduled payments on digital pen leases. Accordingly, sales made to these types
of clients entail higher risks than advances made to companies who are able to
access traditional credit sources.


13




Numerous
factors may affect a client’s ability to make scheduled payments on its lease,
including the failure to meet its business plan or a downturn in its industry.
In part because of their smaller size, our clients may:




·
            experience
      significant variations in operating
results;




·
            depend
      on the management talents and efforts of a single individual or a small
      group of persons for their success, the death, disability or resignation
      of whom could materially harm the client’s financial condition or
      prospects;




·
            have
      less skilled or experienced management personnel than larger companies;
      or




·
            could
      be adversely affected by policy or regulatory changes and changes in
      reimbursement policies of insurance
companies.




Accordingly,
any of these factors could impair a client’s cash flow or result in other
events, such as bankruptcy, which could limit that client’s ability to repay its
obligations to us, and may lead to losses in our lease portfolio and a decrease
in our revenues, net income and assets and result in a material adverse effect
on our business, operating results and financial condition.




Our
lack of operating history makes it difficult to accurately judge the credit
performance of our lease portfolio and, as a result, increases the risk that the
allowance for lease losses may prove inadequate.




Our
lending services depend on the creditworthiness of our clients. While we will
conduct general due diligence and a general review of the creditworthiness of
each of our clients, this review requires the application of significant
judgment by our management, which judgment may not be correct.




We will
maintain an allowance for lease losses on our consolidated financial statements
in an amount that reflects our judgment concerning the potential for losses
inherent in our lease portfolio. Because we have not yet recorded any lease
charge-offs, our reserve rate was developed independent of the historical
performance of our lease portfolio. Because our lack of operating history and
the relative lack of seasoning of our leases make it difficult to judge the
credit performance of our lease portfolio, there can be no assurance that the
estimates and judgment with respect to the appropriateness of our allowance for
lease losses are accurate. Our allowance may not be adequate to cover credit
losses in our lease portfolio as a result of unanticipated adverse changes in
the economy or events adversely affecting specific clients, industries or
markets. If our allowance for lease losses is not adequate, our net income will
suffer, and our financial performance and condition could be significantly
impaired.




We
may not have all of the material information relating to a potential client at
the time that we make a credit decision with respect to that potential client,
or at the time we advance funds which may subject us to a greater risk of loss
on leases that we make.




We may
suffer losses on lease purchases or create lease agreements that we would not
have made if we had all of the material information about clients.




There is
generally no publicly available information about the privately owned companies
to which we will typically lend. Therefore, we must rely on our clients and the
due diligence efforts of our employees to obtain the information that we will
consider when making credit decisions. To some extent, our employees depend and
rely upon the management of these companies to provide full and accurate
disclosure of material information concerning their business, financial
condition and prospects. If our employees do not have access to all of the
material information about a particular client’s business, financial condition
and prospects, or if a client’s accounting records are poorly maintained or
organized, we may not make a fully informed credit decision which may lead,
ultimately, to a failure or inability to recover the lease payments in its
entirety.


14




We
may make errors in evaluating accurate information reported by our clients and,
as a result, we may suffer losses on leases or advances that we would not have
made if we had properly evaluated the information.




We intend
to create leases primarily secured by claims receivable and not based on
detailed financial information provided to us by our clients or personal
creditworthiness or personal credit guarantees. Even if clients provide us with
full and accurate disclosure of all material information concerning their
businesses, and even if we require personal credit guarantees from our clients,
we may misinterpret or incorrectly analyze credit performance related
information. Mistakes by our staff may cause us to make leases that we otherwise
would not have made, to fund advances that we otherwise would not have funded or
result in losses on one or more existing leases.




Our
concentration of leases to a limited number of borrowers within a particular
industry, such as the healthcare industry, could impair our revenues, if the
industry were to experience economic difficulties.




Defaults
by our clients may be correlated with economic conditions affecting particular
industries. As a result, if the healthcare industry were to experience economic
difficulties, the overall timing and amount of collections on our leases to
clients may differ from what we expected and result in material harm to our
revenues, net income and assets.




The
dependence by our clients on reimbursement revenues could cause us to suffer
losses in several instances:




·
            If
      clients fail to comply with operational covenants and other regulations
      imposed by these programs, they may lose their eligibility to continue to
      receive reimbursements under the program or incur monetary penalties,
      either of which could result in the client’s inability to make scheduled
      payments.




·
            If
      reimbursement rates do not keep pace with increasing costs of services to
      eligible recipients, or funding levels decrease as a result of increasing
      pressures from carriers to control healthcare costs, clients may not be
      able to generate adequate revenues to satisfy their
      obligations.


15




We
may be unable to recognize or act upon an operational or financial problem with
a client in a timely fashion so as to prevent a loss of our lease to that
client.




Our
clients may experience operational or financial problems that, if not timely
addressed by us, could result in a substantial impairment or loss of the value
of the lease to the client. We may fail to identify problems, because our client
did not report them in a timely manner or, even if the client did report the
problem, we may fail to address it quickly enough, adequately enough or at all.
As a result, we could suffer lease losses, which could have a material adverse
effect on our revenues, net income and results of operations.




The
collateral securing a lease may not be sufficient to protect us from a partial
or complete loss if the lease becomes non-performing, and we are required to
foreclose.




While
most of our leases will be secured by a lien on specified collateral of the
client, there is no assurance that the collateral securing any particular lease
will protect us from suffering a partial or complete loss if the lease becomes
non-performing and we move to foreclose on the collateral. The collateral
securing our leases is subject to inherent risks that may limit our ability to
recover the principal of a non-performing lease. Risks that may affect the value
of accounts receivable in which we may take a security interest include, among
other things, the following:




·
            problems
      with the client’s underlying agreements with insurance carriers, which
      result in greater than anticipated, disputed
  accounts;




·
            unrecorded
      liabilities;




·
            the
      disruption or bankruptcy of key obligor who is responsible for material
      amounts of the accounts receivable;




·
            the
      client misrepresents, or does not keep adequate records of, claims or
      important information concerning the amounts and aging of its accounts
      receivable; or




·
            the
      client’s government claims that are being sent to a client controlled
      account and then ‘‘swept’’ (directed) to a lockbox are stopped by client
      from being swept or are re-directed by client, which may require judicial
      action or relief.




Any one
or more of the preceding factors could materially impair our ability to recover
principal in a foreclosure on the related lease.


16
  Errors
by or dishonesty of our employees could result in lease losses.




We will
rely heavily on the performance and integrity of our employees in making initial
credit decisions with respect to leases and in servicing the leases after they
have closed. Because there is generally little or no publicly available
information about the clients to whom we will contract with, we cannot
independently confirm or verify the information employees provide for use in
making credit and lease purchasing decisions. Errors by employees in assembling,
analyzing or recording information concerning clients could cause us to
originate leases or fund subsequent advances that we would not otherwise
originate or fund. This could result in losses. Losses could also arise if any
employee were dishonest. A dishonest employee could collude with clients to
misrepresent the creditworthiness of a prospective client or to provide
inaccurate reports regarding the client’s compliance with the covenants in its
lease agreement. If, based on an employee’s dishonesty, we made a lease to a
client that was not creditworthy or failed to exercise our rights under a lease
agreement against a client that was not in compliance with covenants in the
agreement, we could lose some or the entire principal of the lease. Further, if
we determine to pursue remedies against a dishonest employee, the costs of
pursuing such remedies could be substantial and there can be no assurance that
we will be able to obtain an adequate remedy against a dishonest employee to
offset losses caused by such employee.





Leases
could be subject to equitable subordination by a court and thereby increase the
risk of loss with respect to such leases.




Courts
have, in some cases, applied the doctrine of equitable subordination to
subordinate the claim of a lending institution against a borrower to claims of
other creditors of the borrower, when the lending institution is found to have
engaged in unfair, inequitable or fraudulent conduct. The courts have also
applied the doctrine of equitable subordination when a lending institution or
its affiliates are found to have exerted inappropriate control over a client,
including control resulting from the ownership of equity interests in a client.
Payments on one or more of our leases, particularly a lease to a client in which
we also hold equity interests, may be subject to claims of equitable
subordination. If, when challenged, these factors were deemed to give us the
ability to control or otherwise exercise influence over the business and affairs
of one or more of its clients, this control or influence could constitute
grounds for equitable subordination. This means that a court may treat one or
more of our leases as if it were common equity in the client. In that case, if
the client were to liquidate, we would be entitled to repayment of its lease on
an equal basis with other holders of the client’s common equity only after all
of the client’s obligations relating to its debt and preferred securities had
been satisfied. One or more successful claims of equitable subordination against
us could have a material adverse effect on our business, operating results and
financial condition.




We
may incur lender liability as a result of our lending activities.




In recent
years, a number of judicial decisions have upheld the right of borrowers to sue
lending institutions on the basis of various evolving legal theories,
collectively termed ‘‘lender liability.’’ Generally, lender liability is founded
on the premise that a lender has either violated a duty, whether implied or
contractual, of good faith and fair dealing owed to the borrower or has assumed
a degree of control over the borrower resulting in the creation of a fiduciary
duty owed to the borrower or its other creditors or shareholders. We may be
subject to allegations of lender liability. There can be no assurance that these
claims will not arise or that we will not be subject to significant liability if
a claim of this type did arise. Such liability could result in a material
adverse effect on our business, operating results and financial
condition.




We
have not paid dividends and do not expect to do so in the future.




We have
not paid any cash dividends on our common stock. For the foreseeable future, it
is anticipated that earnings, if any, which may be generated from operations
will be used to finance our growth and that dividends will not be paid to
holders of common stock.




Our
certificate of incorporation, bylaws and state law contains provisions that
preserve current management.




Provisions
of state law, our articles of incorporation and by-laws may discourage, delay or
prevent a change in our management team that stockholders may consider
favorable. These provisions include:




·
            authorizing
      the issuance of ‘‘blank check’’ preferred stock without any need for
      action by stockholders;


17




·
            eliminating
      the ability of stockholders to call special meetings of
      stockholders;




·
            permitting
      stockholder action by written consent;
and




·
            establishing
      advance notice requirements for nominations for election to the board of
      directors or for proposing matters that can be acted on by stockholders at
      stockholder meetings.




These
provisions could allow our Board of Directors to affect the investor’s rights as
a stockholder since the Board of Directors can make it more difficult for
preferred stockholders or common stockholders to replace members of the Board.
Because the Board of Directors is responsible for appointing the members of the
management team, these provisions could in turn affect any attempt to replace
the current or future management team.




Our
Common Stock is considered ‘‘penny stock’’ and may be difficult to
trade.




The SEC
has adopted regulations that generally define ‘‘penny stock’’ to be an equity
security that has a market or exercise price of less than $5.00 per share,
subject to specific exemptions. The market price of our common stock is less
than $5.00 per share and, therefore, subject to ‘‘penny stock’’ rules pursuant
to Section 15(g) of the Exchange Act. This designation requires any broker or
dealer selling these securities to disclose certain information concerning the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the securities. These rules may
restrict the ability of brokers or dealers to sell our common stock and may
affect the ability of investors to sell their shares. In addition, since our
common stock is currently only quoted on the OTCBB, investors may find it
difficult to obtain accurate quotations of our common stock and may experience a
lack of buyers to purchase such stock or a lack of market makers to support the
stock price.




A
significant number of our shares are eligible for sale, and their sale could
depress the market price of our stock.




Sales of
5,547,072 of our common stock in the public market pursuant to our registration
statement which became effective on December 7, 2006, could harm the market
price of our common stock. As additional shares of common stock may be sold in
the public market, the supply of common stock will increase, which could
decrease its price. Additionally, some or all of our shares of common stock may
be offered from time to time in the open market pursuant to Rule 144, and these
sales may have a depressive effect on the market for shares of common stock. In
general, a person who has held restricted shares for a period of one year may,
upon filing with the SEC a notification on Form 144, sell into the market common
stock in an amount equal to the greater of 1% of the outstanding shares or the
average weekly number of shares sold in the last four weeks prior to such sale.
Such sales may be repeated once each three months, and any amount of the
restricted shares may be sold by a non-affiliate after they have been held two
years.




There
is no public market for our Common Stock other than OTCBB.




There is
no public market for our common stock other than the market that exists in the
common stock of the Company on the over-the-counter bulletin board market
(‘‘OTCBB’’). There can be no assurance that an active trading market will
develop in the common stock of the Company, or that the OTCBB market trading
will be sustained.


18




Until
November, 2005 we were a public shell company. There are certain risks
associated with transactions with public shell companies generally, including
increased SEC scrutiny and regulation and lack of analyst coverage of the
Company.




In
November 2005, we succeeded to the business of MDwerks Global Holdings, Inc. and
the Xeni Companies pursuant to a merger of a wholly owned subsidiary of ours
into MDwerks Global Holdings, Inc. (the ‘‘Merger’’). As a result of the Merger,
MDwerks Global Holdings, Inc. became our wholly owned subsidiary and we began to
operate its business and the businesses of the Xeni Companies as our sole line
of business. Until such time, the Company was and had been effectively a public
shell company with no material assets or operations whose only value was that it
maintained current filings with the SEC and a class of securities that was
offered for sale pursuant to the OTCBB. The Merger provided an immediate benefit
for the then existing stockholders of the Company that might not have been
readily available, or available at all, to other stockholders who either
acquired their shares of stock in connection with the purchase of Units in this
Offering or otherwise.




Substantial
additional risks are associated with a public shell merger transaction such as
absence of accurate or adequate public information concerning the public shell;
undisclosed liabilities; improper accounting; claims or litigation from former
officers, directors, employees or stockholders; contractual obligations;
regulatory requirements and others. In addition, the status as a shell company
could, in certain cases, prevent the securityholders from being able to rely on
Rule 144 under the Securities Act of 1933 for the resale of securities that are
not registered.  Although management performed due diligence on the
Company, there can be no assurance that such risks do not occur. The occurrence
of any such risk could materially adversely affect the Company’s results of
operations, financial condition and stock price. In addition, the cost of
operations of the Company has increased as a result of the Merger due to legal,
regulatory, and accounting requirements imposed upon a company with a class of
registered securities and based upon the acquisition by the Company of an
operating company.




There
has been a limited active public market for the Common Stock, and prospective
investors may not be able to resell their shares at or above the price at which
they purchase shares, if at all.




Shares of
our common are traded on the Over the Counter Bulletin Board (‘‘OTCBB’’). We
plan on seeking to retain the OTCBB status of the Company so that the registered
securities of the Company will have the benefit of a trading market, but will
likely be traded only in the OTCBB market for the foreseeable future, although
listing on a national exchange such as the AMEX, or NASDAQ Small Cap market may
be sought, but is not assured. There is no guarantee that if such listing is
pursued the Company will meet the listing requirements or that such efforts to
list the Company’s common stock on any national or regional exchange or the
NASDAQ Small Cap market will be successful, or if successful, will be
maintained, including but not limited to requirements associated with
maintenance of a minimum net worth, minimum stock price and ability to establish
a sufficient number of market makers. As a result, the reported prices for the
Company’s securities may be: (i) arbitrarily determined, as a result of the
valuation ascribed to the shares in transactions by the Company and adopted for
purposes of securities offerings; and (ii) the result of market forces, and as
such reported prices may not necessarily indicate the value of the traded shares
or of the Company. Furthermore, there has been a limited to no public market for
our common stock. An active public market for our common stock may not develop
or be sustained.




The
market price of our securities may fluctuate significantly in response to
factors, some of which will be beyond our control, such as the announcement of
new products or product enhancements by the Company or its competitors;
developments concerning intellectual property rights and regulatory approvals;
quarterly variations in our competitors’ results of operations; changes in
earnings estimates or recommendations by securities analysts; developments in
our industry; and general market conditions and other factors, including factors
unrelated to our operations.


19




The stock
market in general may experience extreme price and volume fluctuations. In
particular, market prices of securities of technology companies have experienced
fluctuations that often have been unrelated or disproportionate to the operating
results of these companies. Market fluctuations could result in extreme
volatility in the price of the common stock, which could cause a decline in the
value of the common stock. Prospective investors should also be aware that price
volatility might be exacerbated if the trading volume of the common stock is
low.




There
are additional costs of being a public company and those costs may be
significant.




We are a
publicly traded company, and, accordingly, subject to the information and
reporting requirements of the U.S. securities laws. The U.S. securities laws
require, among other things, review, audit and public reporting of the Company’s
financial results, business activities and other matters. The public company
costs of preparing and filing annual and quarterly reports, proxy statements and
other information with the SEC and furnishing audited reports to stockholders,
which we estimate will be approximately $250,000 per year, will cause our
expenses to be higher than they would be if we were privately-held. In addition,
the Company incurred estimated expenses of approximately $100,000 in connection
with the preparation of the registration statement and related documents with
respect to the registration of the common stock required to be registered
pursuant to the Company’s undertaking to file a registration statement as
described herein. We are required to update such filings, which will also cause
us to incur additional expenses.  These increased costs may be
material and may include the hiring of additional employees and/or the retention
of additional consultants and professionals. Failure by the Company to comply
with the federal or state securities laws could result in private or
governmental legal action against the Company and/or its officers and directors,
which could have a detrimental effect on the business and finances of the
Company, the value of the Company’s stock and the ability of stockholders to
resell their stock.





Failure
to achieve and maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act could have material adverse effect on our business
and operating results.




It may be
time consuming, difficult and costly for us to implement the additional internal
controls, processes and reporting procedures required by the Sarbanes-Oxley Act.
We may need to hire additional financial reporting, internal auditing and other
finance staff in order to develop and implement appropriate additional internal
controls, processes and reporting procedures. If we are unable to comply with
these requirements of the Sarbanes-Oxley Act, we may not be able to obtain the
independent accountant certifications that the Sarbanes-Oxley Act requires of
publicly traded companies.




If we
fail to comply in a timely manner with the requirements of Section 404 of
the Sarbanes-Oxley Act regarding internal control over financial reporting or to
remedy any material weaknesses in our internal controls that we may identify,
such failure could result in material misstatements in our financial statements,
cause investors to lose confidence in our reported financial information and
have a negative effect on the trading price of our common stock.




Pursuant
to Section 404 of the Sarbanes-Oxley Act and current SEC regulations, we
will be required to prepare assessments regarding internal controls over
financial reporting. We have begun the process of documenting and testing our
internal control procedures in order to satisfy these requirements, which is
likely to result in increased general and administrative expenses and may shift
management time and attention from revenue-generating activities to compliance
activities. While our management is expending significant resources in an effort
to complete this important project, there can be no assurance that we will be
able to achieve our objective on a timely basis. There also can be no assurance
that our auditors will be able to issue an unqualified opinion on management’s
assessment of the effectiveness of our internal control over financial
reporting. Failure to achieve and maintain an effective internal control
environment or complete our Section 404 certifications could have a
material adverse effect on our stock price.




In
addition, in connection with our on-going assessment of the effectiveness of our
internal control over financial reporting, we may discover “material weaknesses”
in our internal controls as defined in standards established by the Public
Company Accounting Oversight Board, or the PCAOB. A material weakness is a
significant deficiency, or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. The PCAOB
defines “significant deficiency” as a deficiency that results in more
than a remote likelihood that a misstatement of the financial statements
that is more than inconsequential will not be prevented or
detected.




In the
event that a material weakness is identified, we will employ qualified personnel
and adopt and implement policies and procedures to address any material
weaknesses that we identify. However, the process of designing and implementing
effective internal controls is a continuous effort that requires us to
anticipate and react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as a
public company. We cannot assure you that the measures we will take will
remediate any material weaknesses that we may identify or that we will implement
and maintain adequate controls over our financial process and reporting in the
future.


20




Any
failure to complete our assessment of our internal control over financial
reporting, to remediate any material weaknesses that we may identify or to
implement new or improved controls, or difficulties encountered in their
implementation, could harm our operating results, cause us to fail to meet our
reporting obligations or result in material misstatements in our financial
statements. Any such failure could also adversely affect the results of the
periodic management evaluations of our internal controls and, in the case of a
failure to remediate any material weaknesses that we may identify, would
adversely affect the annual auditor attestation reports regarding the
effectiveness of our internal control over financial reporting that are required
under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls
could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
common stock.




SHOULD
ONE OR MORE OF THE FOREGOING RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR
PLANNED.


21




CAUTIONARY
LANGUAGE REGARDING FORWARD-LOOKING


STATEMENTS
AND INDUSTRY DATA




This
Annual Report on Form 10-K contains ‘‘forward-looking statements’’ that involve
risks and uncertainties, many of which are beyond our control. Our actual
results could differ materially and adversely from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this Annual Report on Form 10-K. Important
factors that may cause actual results to differ from projections include, but
are not limited to, for example:




·
            adverse
      economic conditions;




·
            inability
      to raise sufficient additional capital to implement our business
      plan;




·
            intense
      competition, from providers of services similar to those offered by
      us;




·
            unexpected
      costs and operating deficits, and lower than expected sales and
      revenues;




·
            adverse
      results of any legal proceedings;




·
            inability
      to satisfy government and commercial customers using our
      technology;




·
            the
      volatility of our operating results and financial
    condition;




·
            inability
      to attract or retain qualified senior management personnel, including
      sales and marketing, and technology personnel;
  and




·
            other
      specific risks that may be alluded to in this Annual Report on Form
      10-K.




All
statements, other than statements of historical facts, included in this Annual
Report on Form 10-K regarding our strategy, future operations, financial
position, estimated revenue or losses, projected costs, prospects and plans and
objectives of management are forward-looking statements. When used in this
Annual Report on Form 10-K, the words ‘‘will,’’ ‘‘may,’’ ‘‘believe,’’
‘‘anticipate,’’ ‘‘intend,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘project,’’ ‘‘plan’’ and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this Annual Report on
Form 10-K. We do not undertake any obligation to update any forward-looking
statements or other information contained herein. Potential investors should not
place undue reliance on these forward-looking statements. Although we believe
that our plans, intentions and expectations reflected in or suggested by the
forward-looking statements in this Annual Report on Form 10-K are reasonable, no
one can assure investors that these plans, intentions or expectations will be
achieved. Important factors that could cause actual results to differ materially
from expectations expressed herein are described under ‘‘Risk Factors’’ and
elsewhere in this Annual Report on Form 10-K. These cautionary statements and
risk factors qualify all forward-looking statements attributable to information
provided in this Annual Report on Form 10-K and on behalf of us or persons
acting on our behalf.




Information
regarding market and industry statistics contained in this Annual Report on Form
10-K is included based on information available to us that we believe is
accurate. It is generally based on academic and other publications that are not
produced for purposes of securities offerings or economic analysis. Forecasts
and other forward-looking information obtained from these sources are subject to
the same qualifications and the additional uncertainties accompanying any
estimates of future market size, revenue and market acceptance of products and
services. We have no obligation to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could affect
those statements. See ‘‘Risk Factors’’ for a more detailed discussion of
uncertainties and risks that may have an impact on future results.




22




ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS


Not
required .




ITEM
2.           PROPERTIES





The
Company leases its facility under a master lease that expires in June
2013.  Rent expense for the year ended December 31, 2008 was $99,264
and for the year ended December 31, 2007 was $83,772. Future monthly rent
payments through June 2013 total $239,705.




ITEM
      3.
            LEGAL
      PROCEEDINGS




We are
not a party to any material pending legal proceedings.




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




On
October 29, 2008, MDwerks, Inc. (the “Company”) held a special meeting of the
stockholders of the Company (the “Special Meeting”).  At the Special
Meeting, stockholders representing 14,534,584 shares or 55.3% of 12,940,065
shares of Common Stock and 1,000 shares of Series B Convertible Preferred Stock
entitled to vote as 13,333,334 shares of Common Stock constituted a quorum and a
majority of all outstanding shares unanimously voted all their shares
approving the following:




The
stockholders approved an amendment to Article 4 of the Certificate of
Incorporation of the Company to increase the authorized number of shares of
common stock, par value $0.001 per share, of the Company from 100 million shares
to 200 million shares.  The stockholders also approved an amendment to
Section 1 of Article I of the Company’s Bylaws to appropriately reflect the name
of the Company as “MDwerks, Inc.” and an amendment to Section 2 of Article II of
the Company’s Bylaws to change the date of the annual meeting of the Company to
May 31 of each year or such other date as the Board of Directors
determines.




At the
Special Meeting, the stockholders of the Company elected the following people to
serve on the Board of Directors of the Company until the next Annual Meeting and
on the committees designated next to their name:




Howard B.
Katz, Chairman of the Board of Directors


David M.
Barnes, Director, Audit Committee Chairman and Compensation Committee
Chairman


Peter
Dunne, Director and Compensation Committee Member


Paul
Kushner, Director and Audit Committee Member


Shad
Stastney, Director


Chris
Phillips, Director


Sheldon
Steiner, Director





Sheldon
Steiner was a newly elected Director.  All others continued their
service as Directors.





The
stockholders of the Company also ratified the appointment of Sherb & Co.,
LLP as the independent registered public accounting firm for the Company for the
fiscal year ended December 31, 2008 and for the 2009 quarterly SEC
reports.




Subsequent
to this Special Meeting, Howard B. Katz resigned as Chairman of the Board of
Directors and David M. Barnes was appointed Chairman of the Board of
Directors.  David M. Barnes also resigned as Audit Committee Chairman
and Compensation Committee Chairman and Sheldon Steiner was appointed Audit
Committee Chairman and Compensation Committee Chairman.


23




PART
II




ITEM
      5.
            MARKET
      FOR OUR COMMON STOCK AND RELATED STOCKHOLDER
  MATTERS




Our
Common Stock has been quoted on the OTC Bulletin Board since November 16,
2005 under the symbol MDWK.OB. Prior to that date, there was no active market
for our Common Stock. As of April 10, 2009, there were approximately 370 holders
of record of our Common Stock.




The
following table sets forth the high and low sales prices for our Common Stock
for the periods indicated as reported by the OTC Bulletin Board.




High
                  
                  
                  LowFiscal
      Year 2007First
      Quarter
                  
                  $
                  1.50
                  
                  
                  $
                  0.47Second
      Quarter
                  
                  
                  1.30
                  
                  
                  
                  0.35Third
      Quarter
                  
                  
                  1.55
                  
                  
                  
                  0.60Fourth
      Quarter
                  
                  
                  0.74
                  
                  
                  
                  0.35Fiscal
      Year 2008First
      Quarter
                  
                  $
                  1.20
                  
                  
                  $
                  0.38Second
      Quarter
                  
                  
                  0.85
                  
                  
                  
                  0.47Third
      Quarter
                  
                  
                  0.99
                  
                  
                  
                  0.30Fourth
      Quarter
                  
                  
                  0.75
                  
                  
                  
                  0.18Fiscal
      Year 2009First
      Quarter
                  
                  $
                  0.30
                  
                  
                  $
                  0.03Second
      Quarter (through April10, 2009)
                  
                  
                  0.06
                  
                  
                  
                  0.055




The
prices reported on the OTC Bulletin Board as high and low sales prices vary from
inter-dealer bids which state inter-dealer quotations. Such inter-dealer bids
(and reported high and low sales prices) do not include retail mark-ups,
mark-downs or commissions. Such prices do not necessarily represent actual
transactions.




We have
not declared or paid any dividends on our Common Stock and do not anticipate
declaring or paying any cash dividends in the foreseeable future. We currently
expect to retain future earnings, if any, to finance the growth and development
of our business. The holders of our Common Stock are entitled to dividends when
and if declared by our Board from legally available funds.


24




Sales
of Unregistered Securities




Equity
Compensation Plan Information





Plan
      category
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              (a)
            Weighted-average
      exercise price of outstanding options, warrants and rights
              (b)
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
              (c)Equity
      compensation plans approved by security holders
            -
            -
            -Equity
      compensation plans not approved by security holders
            63,331,026
            0.88
            9,594,920Total
            63,331,026
            0.88
            9,594,920





(c)
represents the remainder of 15,000,000 shares reserved for employee options not
issued





ITEM
      6.
            SELECTED
      FINANCIAL DATA
              
              Not
      required




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




Overview





During
2008, we shifted our focus from the electronic medical claims processing,
funding and collection solutions and began focusing our efforts of purchasing
leases for digital medical equipment that provide a low cost solution to
physicians for converting medical records to a digital format.  The
Company will also begin selling the digital medical equipment leases directly to
the healthcare industry as part of our licensing arrangement with the outside
vendor that we are currently purchasing the leases from.  To date we
have not sold any digital medical equipment; however we have financed six leases
of such equipment and will derive approximately $410,000 in revenue from such
financing activities.





We also
can provide term loans and purchase medical claims to improve our client’s cash
flows and to finance certain leases.





To date,
all of our revenue has been derived from our prior line of business, the
electronic medical claims processing, funding and collection solution
business.  From the Company’s inception, we offered a comprehensive
technology-based selection of electronic medical claims processing, funding and
collection solutions to the healthcare provider industry through an internet web
browser. Our services helped doctors, hospital based practices, and other
healthcare providers and their vendors to significantly improve daily insurance
claims transaction administration and management.  This part of our
business was not deemed viable any longer and was discontinued on February 27,
2009.




25






There was
no major hardware or software investment required to use the Company’s Web-based
systems. All transactions were designed to comply with the Health Insurance
Portability and Accountability Act of 1996 (‘‘HIPAA’’). We
offered our services to physician and clinical service group practices,
hospitals, rehabilitation centers, nursing homes and certain related practice
vendors, by using internal and external resources. Internal resources consisted
mainly of specialized sales executives with industry knowledge and/or a
portfolio of contacts. External resources consisted primarily of independent
sales representatives as well as channel associates, such as vendors of practice
management systems and medical industry specific sales groups such as office
management consultants. These sales resources can leverage an existing customer
base and contacts. Our marketing was based on prioritizing potential subscribers
by size, location and density, need for our products and services and
distribution opportunities. Accordingly, we focused our marketing efforts in
geographic areas such as California, Florida, Texas, New York, Philadelphia,
Illinois and New Jersey, each of which has a high concentration of prospective
healthcare clients.




Our
future operations will continue to be subject to risks inherent in the
establishing and acquiring of new businesses, including, among other things,
efficiently deploying our capital, developing our product and services
offerings, developing and implementing our marketing campaigns and strategies
and developing awareness and acceptance of our products. Our ability to generate
future revenue will be dependent on a number of factors, many of which are
beyond our control, including the pricing of other services, overall demand for
our products, market competition and government regulation.


26




Critical
Accounting Policies




The
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are 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.




We apply
the Securities and Exchange Commission's Staff Accounting Bulletin 104 for
revenue recognition. In general, we record revenue when persuasive evidence of
an arrangement exists, services have been rendered or product delivery has
occurred, the sales price to the customer is fixed or determinable, and
collectibility is reasonably assured. We have identified the policy below as
critical to our business operations and understanding of our financial
results:




Revenue
derived from fees related to claims and contract management services are
generally recognized when services are provided to the customer. We provide
advance funding for medical claims and term loan services to unaffiliated
healthcare providers. These arrangements typically require us to advance funds
to these unaffiliated healthcare providers (our customers) in exchange for liens
on the receivables related to invoices remitted to their clients for services
performed. The advances are generally repaid through the remittance of payments
of receivables by their payors directly to us. We may withhold from these
advances interest, a fee charged in consideration of administration of advance
funding and loans and other charges as well as the amount of receivables
relating to prior advances that remain unpaid after a specified number of days.
These interest charges, administrative fees and other charges are recognized as
revenue when earned and are calculated on a daily basis.





Revenue
derived from term loans to unaffiliated companies are generally recognized as
revenue is earned.  Revenue from term loans can include interest,
administrative fees and other charges.




Revenue
derived from fees related to billing and collection services are generally
recognized when the customer's accounts receivable are collected. Revenue from
implementation fees are generally recognized over the term of the customer
agreement. Revenue derived from maintenance, administrative and support fees are
generally recognized at the time the services are provided to the
customer.





Revenue
derived from claims purchased from unaffiliated healthcare providers are
generally recognized when the claims are paid and the funds are
collected.






Results
of Operations




For
the Year Ended December 31, 2008 Versus the Year Ended December 31,
2007




Revenue




For the
year ended December 31, 2008, we recorded total revenue of $881,656. Of this
total, we recorded service fee revenue of $493,805, accounting for 56.0% of
total revenue, financing income of $288,935, accounting for 32.8% of total
revenue and claims purchase revenue of $98,916, accounting for 11.2% of total
revenue. For the year ended December 31, 2007, we recorded total revenue of
$577,251. Of this total, we recorded service fee revenue of $470,149, accounting
for 81.4% of total revenue and financing income of $107,102, accounting for
18.6% of total revenue.  The increases in revenue from 2007 resulted
primarily from additional funding to and claims purchased from new and existing
clients.




Operating
Expenses




For the
year ended December 31, 2008, total operating expenses were $8,216,344 as
compared to $8,022,031 for the year ended December 31, 2007, an increase of
$194,313 or 2.4%, primarily due to a decrease in compensation and consulting
expense partially offset by an increase in professional fees and selling,
general and administrative expenses.  Included in this net increase
for the year ended December 31, 2008 is the following:




1.
            We
      recorded compensation expense of $4,885,000 as compared to $5,286,985 for
      the year ended December 31, 2007. This $401,985 or 7.6% decrease was
      mainly attributable to stock options granted of $2,374,905 and executive
      bonuses of $479,034 paid during the year ended December 2008 versus
      amortization of prior year stock option grants of $3,196,046 and executive
      bonuses of $163,128 during the year ended December 2007;
    and  27




2.
            Consulting
      expense amounted to $239,124 as compared to $760,284 for the year ended
      December 31, 2007, a decrease of $521,160, or 68.6%. This decrease
      resulted primarily from a decrease of $152,670 related to consultants used
      to assist with obtaining financing for the company,  and a
      decrease of $139,869 for the hiring of information technology consultants
      in the current year; and




3.
            Professional
      fees amounted to $725,107 as compared to $411,917 for the year ended
      December 31, 2007, an increase of $313,190, or 76.0%. This expense was
      attributable to an increase in legal fees related to additional SEC
      filings, and Series B Convertible Preferred Stock offerings, new client
      agreements and other corporate matters;
and




4.
            Selling,
      general and administrative expenses were $2,367,113 as compared to
      $1,562,845 for the year ended December 31, 2007, an increase of $804,268,
      or 51.5%. This increase resulted from bad debt expense partially offset by
      a reduction of outside sales consultants, advertising, sales travel, trade
      shows and investor relation
expenses.




For the
year ended December 31, 2008 and 2007, selling, general and administrative
expenses consisted of the following:




December
      31,
              2008
            
            December
      31,
              2007Employee
      benefits and payroll taxes
            
            $
            424,401
            
            $
            385,678Information
      technology
            
            
            505,786
            
            
            179,281Occupancy
      and office expenses
            
            
            219,308
            
            
            203,084Other
      selling, general and administrative
            
            
            1,217,618
            
            
            794,802$
            2,367,113
            
            $
            1,562,845




Other
Income (Expenses)




For the
year ended December 31, 2008, interest income was $1,088,270 as compared to
$46,978 for the year ended December 31, 2007, an increase of $1,041,292. This
increase was principally due to restructuring the notes receivable described
below.




On June
16, 2008, the Company restructured one healthcare vendor’s notes receivable
which was due and payable to the Company on June 15, 2008.  Notes
receivables of $175,000 were paid off and the remaining balance was consolidated
into a new promissory note totaling $395,835 with a new maturity date of June
15, 2009.  As consideration for the changes to the terms of these
notes, among other fees, the Company was given 920,000 shares of the healthcare
vendor’s common stock when the stock was valued at $0.69 per share, 1,000,000
shares when the stock was valued at $0.31 per share and 550,000 shares when the
stock was valued at $0.20 per share as quoted on the OTC Bulletin
Board.  These stock receipts were recorded as interest income of
$1,054,800.  At December 31, 2008, the stock price decreased to $0.025
per share resulting in a $993,050 decrease in the value of the
Available-for-sale securities.  The Company will revalue these
securities on a quarterly basis.  These revaluations will
correspondingly adjust the Accumulated other comprehensive income/loss reported
in the Equity section of the Balance Sheet.





For the
year ended December 31, 2008, interest expense was $1,561,908 as compared to
$2,484,835 for the year ended December 31, 2007, a decrease of $922,927. This
decrease was primarily due to non-cash interest amortization of debt discount,
accrued dividends, and deferred fees related to our notes payable as well as an
increase in borrowings.





On
November 6, 2008, the Company temporarily reduced the conversion price set forth
in the Senior Note issued to Gottbetter on October 19, 2006 (the “October Note”)
from $0.75 per share to $0.303 per share with respect to a one-time conversion
of  $433,333 of Conversion Amount (as defined in the October Note). 
After the conversion price was reduced, Gottbetter converted $433,333 of
Conversion Amount into 1,430,143 shares of Common Stock of the Company. 
This resulted in a debt conversion expense of $371,265.




Net
Loss




We
reported a net loss of $8,179,102 for the year ended December 31, 2008 as
compared to net loss of $9,882,330 for the year ended December 31, 2007. The
loss per share was $0.62 for the year ended December 31, 2008 as compared to a
per share loss of $0.77 for the year ended December 31,
2007.


28




Liquidity and Capital
Resources




We used
the proceeds from the sales of preferred stock and notes and loans payable
through December 31, 2008 for working capital purposes and for funding our notes
and accounts receivables of which we have $1,277,722 and $388,048 owed to us at
December 31, 2008. We will continue to advance funds under certain digital pen
lease agreements.




As of
December 31, 2008, we had a cash balance of $1,223,807 which is insufficient for
us to service our current indebtedness and implement our business plan as
anticipated.  Thus we require additional debt or equity financing in
the absence of which we would be unable to generate sufficient cash flow from
our operations.  Our ability to continue to implement our revenue and
profit growth strategy will be adversely affected and the Company will have to
curtail operations if we are unable to consummate a sufficient amount of
additional private placement transactions or debt financing, which we are
currently pursuing.




Subsequent
to year end, the possible transaction with a new client, for which funds from
DOF had been escrowed, was aborted and the Company discussed the DOF escrowed
funds with Vicis Capital, the manager of DOF. It was suggested that a portion of
such funds be loaned to the Company for use in further developing and promoting
its new digital pen and paper business. Terms of a loan in the amount of
$3,200,000 were agreed upon in March 2009 and a closing is anticipated no later
than April 17, 2009. The loan will be reflected as a Senior Secured Promissory
Note in the amount of $3,856,925 which, in addition to the loan proceeds,
includes a $300,000 advance made to the Company in December 2008, $236,000 for
fees related to the cancelled transaction, $27,925 of accrued interest and
$93,000 for professional and other fees. An original issue discount of 2% is
payable upon takedown and annual interest of 13% will accrue through September
2009 and is payable on October 1, 2009 at which time monthly interest payments
will commence and are payable in arrears on the first business day of each
following month. Monthly principal payments of $40,000 will also commence on
October 1, 2009 and the Note balance is due on October 30, 2011. In addition,
Vicis will receive 10 year warrants to purchase 3,043,142 shares of Company
common stock at $0.35 per share. The warrants include piggy back registration
rights and the right to cashless exercise. There are no prepayment penalties on
this loan.





A Form
8-K fully describing this loan transaction will be filed with the SEC upon
closing.




We
currently have no material commitments for capital expenditures.





Cash
flows




At
December 31, 2008, we had cash of $1,223,807.




Net cash
used in operating activities was $4,953,666 for the year ended December 31, 2008
as compared to $4,967,641 for the year ended December 31, 2007, a decrease of
$13,975. This decrease is primarily attributable to a net decrease in the
following:




1.
            Gottbetter
      and Vicis debt offering costs of $259,638 and debt discount costs of
      $1,202,003, compared to debt related costs during the year ended December
      31, 2007 of $2,239,552 mainly related to the less debt discount amortized
      in 2008;




2.
            Stock-based
      compensation of $2,374,905 versus stock-based compensation expense of
      $3,196,046 for the year ended December 31, 2007 due to less amortization
      and fewer stock-based compensation issued in
  2008;





3.
            A
      net increase in notes receivable, accounts receivable, lease receivable,
      and prepaid expenses aggregating $1,492,888 principally related to the
      increases in customer receivables;




4.
            A
      net decrease in accounts payable, accrued expenses, and deferred revenue
      related to a decrease in operating activities aggregating
      $287,167.




Net cash
used in investing activities was $18,434 for the year ended December 31, 2008 as
compared to $5,209 for the year ended December 31, 2007 mainly due to purchase
of computer equipment.




Net cash
provided by financing activities was $5,875,004 due to the proceeds from the
sale of Series B Preferred Stock for the year ended December 31, 2008 as
compared to net cash provided by financing activities of $2,146,912 for the year
ended December 31, 2007.




Off
Balance Sheet Arrangements




We had no
off balance sheet arrangements as of December 31, 2008.


29





ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                
                Not
      required.ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATASee
      our Financial Statements beginning on page
F-1.




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




None


30




ITEM
      9A.
            CONTROLS
      AND PROCEDURES





(a)
              Disclosure Controls and
      Procedures




Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
report (the “Evaluation Date”). Based on this evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective such that the
information relating to MDwerks, Inc., including our consolidated subsidiaries,
required to be disclosed in our Securities and Exchange Commission (“SEC”)
reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and (ii) is accumulated and
communicated to MDwerks, Inc. management, including our principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.




Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Due to
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within MDwerks, Inc. have been detected.  Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that
internal controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.




(b)
              Management’s Report on Internal Control over
      Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act, as amended). Our management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2008. In
making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated
Framework. Our management has concluded that, as of December 31, 2008,
our internal control over financial reporting is effective based on these
criteria.




(c)
              Changes in Internal Control over Financial
      Reporting




Our
management has also evaluated our internal controls over financial reporting,
and there have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.





This
annual report does not include an attestation report of our public accounting
firm regarding internal control over financial reporting. Our management’s
report was not subject to attestation by our registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit us to provide only management’s report in this annual
report.





There have been no changes in our internal control over financial
reporting during our fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





On July
25, 2007, the Securities and Exchange Commission unanimously approved the Public
Company Accounting Oversight Board's (PCAOB) proposed Auditing Standard No. 5,
An Audit of Internal Control
Over Financial Reporting That is Integrated With An Audit of Financial
Statement. Auditing Standard No. 5 provides the new professional
standards and related performance guidance for independent auditors to attest
to, and report on, management's assessment of the effectiveness of internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act
of 2002 (SOX). In 2007 and 2008, we engaged a qualified third-party to assist us
with the preparations for management’s assessment of the effectiveness of
internal controls over financial reporting required by the end of this fiscal
year and with the documentation and procedures required for our external auditor
attestation requirement, which becomes effective fiscal year ending
2009.




ITEM
      9B.
            OTHER
      INFORMATION




We have
been informed that there is an ongoing jury investigation involving certain
workers compensation claims which may involve Medical Solutions Management Inc.
(“MSMT”), a former client of MDwerks, Inc.  MDwerks provided support
services to MSMT in connection with the collection of certain accounts of MSMT,
including claims which could be the subject of the grand jury
investigation.  We have not been contacted by any governmental
authorities, and we are not aware that we are the subject of any investigation
of any governmental authorities.  We have been told that the grand
jury is sitting in the United States District Court of New Hampshire and that
the investigation is ongoing.


31


PART
III




ITEM
      10.
            DIRECTORS
      AND EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




The
following table sets forth information regarding the members of our Board of
Directors and our executive officers. The directors listed below will serve
until the next annual meeting of our stockholders.




Name
                      
                      Age
                      
                      PositionDavid
      M. Barnes
                      
                      
                      66
                      
                      
                      Chief
      Executive Officer, President and ChairmanVincent
      Colangelo
                      
                      
                      65
                      
                      
                      Chief
      Financial Officer and SecretaryStephen
      M. Weiss
                      
                      
                      55
                      
                      
                      Chief
      Operating OfficerHoward
      B. Katz
                      
                      
                      67
                      
                      
                      Former
      Chief Executive Officer and President (Resigned February 16,
      2009)Peter
      Dunne
                      
                      
                      51
                      
                      
                      DirectorPaul
      Kushner
                      
                      
                      62
                      
                      
                      DirectorSheldon
      Steiner
                      
                      
                      75
                      
                      
                      DirectorChris
      Phillips
                      
                      
                      37
                      
                      
                      DirectorShad
      Stastney
                      
                      
                      39
                      
                      
                      Director




The
principal occupation for the past five years (and, in some instances, for prior
years) of each of our directors and officers are as follows:




David M. Barnes became,
effective February 19, 2009, Chairman of the Board of Directors and Chief
Executive Officer of the Company.  Prior to this, Mr. Barnes served
from December 1, 2008, as President, which title he still
retains.  Mr. Barnes has served as a member of our Board of Directors
since November 16, 2005.  Mr. Barnes also served as a member of the
Audit and Compensation Committees since November 16, 2005, positions from which
he resigned as of December 1, 2008.  Mr. Barnes served as Chief
Financial Officer of Neah Power Systems, Inc., (NPWS:OTCBB), from April, 2006
through August 2008, and was Chief Financial Officer of Cyber Defense Systems,
Inc., (CYDF:OTCBB), from August, 2005, through November, 2007. In addition, Mr.
Barnes was a Director, Executive Vice President and Chief Financial Officer of
American United Global, Inc., now Solar Thin Films, Inc. (SLTN:OTCBB), from
April, 1996, through July, 2006 and was a Director and Chairman of the Audit
Committee and Compensation Committee of Searchhelp, Inc.
(SHLP:OTCBB).  Mr. Barnes is also a member of the Board of Directors,
Audit Committee and Compensation Committee of China Direct Industries, Inc.
(CDII:NASDAQ).





Vincent Colangelo became,
effective as of November 16, 2005, our Chief Financial Officer. Since July,
2005, until becoming our Chief Financial Officer, Mr. Colangelo provided
consulting services to us. From March 2004 to November 2005, Mr. Colangelo was
the President and Principal Consultant of Weston Business Advisors, Inc., a
business consulting company based in Weston, Florida. From January 2003 to March
2004, Mr. Colangelo was the President of Cartridge World Florida in Weston,
Florida, a master franchisee for the State of Florida for a world wide print
cartridge refilling organization. From September 1995 to December 2002, Mr.
Colangelo was the President and Principal Consultant of Birchwood Associates,
Inc., a business consulting company based in Weston, Florida which provided
interim CFO, COO and general financial consulting services to clients ranging
from small businesses to Fortune 100 companies. He also worked at Xerox’ world
headquarters as a consolidations and regulatory reporting and as financial
planning manager. Mr. Colangelo received an MBA and a BBA from Iona College and
is a New York State CPA.




Stephen M. Weiss became,
effective as of May 29, 2007, our Chief Operating Officer. Prior to this Mr.
Weiss served from November 16, 2005, as our Chief Technology Officer. Mr. Weiss
has provided consulting services to us and served as acting Chief Technology
Officer of MDwerks Global Holdings, Inc. since March 2005. From March 2002 to
March 2005, Mr. Weiss was the Chief Technology Officer and Chief Operating
Officer of Enterprise Technology Corporation, a financial software services
consulting company that served many Fortune 500 clients. From September 1999 to
November 2001, Mr. Weiss was the Chief Technology Officer at Imagine Networks,
Inc.  Prior to joining Imagine Networks, Inc., he co-founded AstraTek,
a software products and consulting firm that developed products and consulting
services for financial and technology companies.  Mr. Weiss also
served as Vice President at Bankers Trust Company for over 13
years.  Mr. Weiss received a BA from Buffalo State
College.


32





Howard B. Katz resigned as
Chief Executive Officer and President on February 16, 2009.  Prior to
this Mr. Katz effective as of October 10, 2008, was our Chief Executive Officer
and President. Prior to this, Mr. Katz served from November 16, 2005, as our
Chief Executive Officer and a Member of our Board of Directors. Mr. Katz was
also the Chief Executive Officer and a Director of our wholly-owned subsidiary
MDwerks Global Holdings, Inc., which positions he had held since June, 2005.
Since July, 2004, Mr. Katz had been a Director and Chief Executive Officer of
Xeni Medical Systems, Inc., and Mr. Katz had been the sole Director and Chief
Executive Officer of Xeni Medical Billing Corp. since March 2005, and had been
the sole Director and Chief Executive Officer of Xeni Financial Services,
Corporation since February 2005. From December, 2002 until October, 2004, Mr.
Katz was Chief Executive Officer of ViewPoint Exams International, Inc., a
company that facilitated independent medical examinations in connection with
insurance and litigation matters. From August 1998 to December, 2002, Mr. Katz
was the Chief Executive Officer of Imagine Networks, Inc., a company based in
New York City that engaged in prepaid telecommunications and financial services.
Mr. Katz served on the Board of Directors of American United Global, Inc., (now
Solar Thin Films – SLTN:OTCBB) from April 1996 until August 2005.  Mr.
Katz was President of National Fiber Network, Inc. which later became MetroMedia
Fiber Network, Inc.  Mr. Katz received an MBA from New York
University.





Peter Dunne became, effective
as of November 16, 2005, a member of our Board of Directors and serves on our
Compensation Committee. Mr. Dunne has been President and a partner of Franklin
Communications, LLC, a full service graphic services company since July 2002.
From March 2002 to July 2002 he was Regional General Manager for Kelmscott
Communications, LLC. From September 2000 to July 2002 he held the position of
Regional Controller for the same companies. From September 1982 to September
2000 he was Vice President and Controller of Franklin Communications. Mr.
Dunne’s other experiences include positions in Dataco, a national data entry
service business, and Robertson Leasing Corp, an equipment leasing company. Mr.
Dunne is Vice Chairman of the Board of Directors of the Printing Association of
Florida and on the CEO Advisory Board to the Printing Industries of
America.




Paul Kushner became, effective
June 22, 2006, a member of our Board of Directors and serves on our Audit
Committee. Mr. Kushner has been President and Owner of Asset Indemnity Brokerage
Corp., an insurance brokerage firm since July 1994. Mr. Kushner started his
career in the surety industry in 1967 and has been world regional bond manager
for American International Group (AIG) and special representative to Norway for
the introduction of surety bonds in the United States.





Sheldon
Steinerbecame,
effective October 29, 2008, a member of our Board of Directors and serves as the
Chair of our Compensation Committee and Audit Committee.  Mr. Steiner
has 52 years of both public and private accounting experience. Mr. Steiner
served as managing director of RSM McGladrey and was a co-founder and principal
of Millward & Co. CPAs. He currently serves as a Senior Vice President at
Valley Bank in South Florida. Heis also a member of the Board of
Directors, Audit Committee and Compensation Committee of China Direct
Industries, Inc. (CDII:NASDAQ).He is a graduate of
the City College of New York.




Chris
Phillipsbecame, effective
April 24, 2008, a member of our Board of Directors.   Mr.
Phillips joined Vicis Capital LLC in January 2008 as Managing Director and
previously had been President and CEO of Apogee Financial Investments, Inc., a
merchant bank, since August 2004.  Mr. Phillips will not be
compensated for his services but will be reimbursed for reasonable expenses
incurred by him in attending board meetings.




Shad Stastneybecame,
effective April 24, 2008, a member of our Board of
Directors.   Mr. Shad Stastney is the Chief Operating Officer and
Head of Research for Vicis Capital LLC, a company he jointly founded in
2004.   Mr. Stastney is also a Director of Ambient
Corp.(ABTG:OTCBB) and Amacore Group (ACGI:OTCBB).  Mr. Stastney will
not be compensated for his services but will be reimbursed for reasonable
expenses incurred by him in attending board meetings.


33




Board
of Director Composition and Committees




Our Board
of Directors is comprised of six directors, Messrs. Barnes, Dunne, Kushner,
Steiner, Phillips and Stastney. Sheldon Steiner and Peter Dunne serve as members
of our Compensation Committee and Sheldon Steiner and Paul Kushner serve as
members of our Audit Committee. We have independent parties serving on each of
the Audit Committee and the Compensation Committee.  Mr. Steiner is
Chairman of both the Audit Committee and the Compensation
Committee.




Director
Compensation




The
following non-management directors received compensation from MDwerks, Inc. in
the amounts set forth in the chart below for the twelve months ended December
31, 2008. We intend to continue to compensate non-management directors through
the issuance of stock awards including, without limitation, incentive stock
options, restricted stock awards, stock grants and/or stock appreciation rights.
The value attributable to any Option Awards in the following chart is computed
in accordance with FAS 123R. No other item of compensation was paid to any
director of the Company other than reimbursement of expenses:




DIRECTOR
COMPENSATION




Name
                                
                                Year
                                
                                Fees
                                  Earned
                                  or
      Paid in
                                  Cash
                                
                                Stock
                                  Awards
                                
                                Option
                                  Awards
                                
                                Non-
                                  Equity
                                  Incentive
                                  Plan
                                  Compen-
                                  sation
                                
                                Change
      in
                                  Pension
                                  Value
      and
                                  Non-
                                  qualified
                                  Deferred
                                  Compen-
                                  sation
                                  Earnings
                                
                                All
      Other
                                  Compen-
                                  sation
                                
                                TotalDavid
      M. Barnes
                                
                                
                                2008
                                
                                $
                                21,000
                                
                                
                                —
                                
                                $
                                42,750
                                1
                                
                                —
                                
                                
                                —
                                
                                
                                20,000
                                2
                                $
                                83,750Peter
      Dunne
                                
                                
                                2008
                                
                                $
                                17,000
                                
                                
                                —
                                
                                $
                                42,750
                                1
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                $
                                59,750Paul
      Kushner
                                
                                
                                2008
                                
                                $
                                17,000
                                
                                
                                —
                                
                                $
                                42,750
                                1
                                
                                —
                                
                                
                                —
                                
                                
                                —
                                
                                $
                                59,750




Sheldon
      Steiner
            
            
            2008
            
            $
            3,333
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            $
            3,333




Chris
Phillips and Shad Stastney are not compensated for their services as Directors
but are reimbursed for reasonable expenses incurred by them in attending board
meetings.




David M.
Barnes became President of the Company on December 1, 2008.  This
schedule includes the period of January 1, 2008 through November 30, 2008 when
he was a non-management director.









1
            Consists
      of Incentive Stock Options to purchase 75,000 shares of common stock at a
      price of $0.75 per share granted on April 10, 2008 and vesting on April
      10, 2008.2
            Consists
      of $20,000 paid for consulting
fees.


34




Audit Committee Financial
Expert




Sheldon
Steiner serves on our Audit Committee as the audit committee financial expert.
Mr. Steiner is independent (as such term is used in Item 7(d) (3) (iv) of
Schedule 14A under the Exchange Act).




Executive
Officer Employment Agreements




Effective
December 1, 2008, David M. Barnes entered into an employment agreement with
us.  Effective January 1, 2006, each of Vincent Colangelo and Stephen
W. Weiss entered into an employment agreement with us. The employment agreement
with Messrs. Barnes, Colangelo and Weiss expire on December 31,
2010.  Pursuant to these employment agreements, Messrs. Barnes,
Colangelo and Weiss have each agreed to devote all of their time, attention and
ability, to our business as our Chief Executive Officer and President, Chief
Financial Officer, and Chief Operating Officer, respectively. The employment
agreements provide that Messrs. Barnes, Colangelo, and Weiss will receive a base
salary during calendar year 2008 at an annual rate of $210,000, $200,000, and
$185,000 for services rendered in such positions. During calendar years 2009
under the employment agreements for Mr. Barnes, his annual base salary will
continue to be $210,000.  During calendar years 2009 under the
employment agreements for Mr. Colangelo, his annual base salary will be
increased to $220,000.  During calendar years 2009 under the
employment agreements for Mr. Weiss, his annual base salary will be increased to
$200,000, subject to performance acceptable to the Compensation
Committee.  During calendar years 2010, under the employment agreement
for Messrs. Barnes and Colangelo, the annual base salary will be increased to
$231,000 and $242,000.  During calendar years 2010, under the
employment agreement for Mr. Weiss, his annual base salary will be increased to
$215,000, subject to performance acceptable to the Compensation Committee. In
addition, each executive may be entitled to receive, at the sole discretion of
our board of directors, cash bonuses based on the executive meeting and
exceeding performance goals. The cash bonuses range from up to 25% of the
executive’s annual base salary for Mr. Weiss and up to 100% of the executive’s
annual base salary for Messrs. Barnes and Colangelo. The cash bonuses for Mr.
Colangelo include a minimum bonus due of 25%. Mr. Colangelo has agreed to defer
his salary increase for 2009 to which he was entitled. Each of our executive
officers is entitled to participate in our 2005 Incentive Compensation Plan. We
have also agreed to pay or reimburse each executive officer up to a specified
monthly amount for the business use of his personal car and cell phone. The
employment agreements provide for termination by us upon death or disability
(defined as 90 aggregate days of incapacity during any 365-consecutive day
period) of the executive or upon conviction of a felony or any crime involving
moral turpitude, or willful and material malfeasance, dishonesty or habitual
drug or alcohol abuse by the executive, related to or affecting the performance
of his duties. In the event any of the employment agreements are terminated by
us without cause, such executive will be entitled to compensation for the
balance of the term of his employment agreement. Messrs. Barnes and Colangelo
also have the right, if terminated without cause, to accelerate the vesting of
any stock options or other awards granted under our 2005 Incentive Compensation
Plan. We intend
to obtain commitments for key-man life insurance policies for our benefit on the
lives of Messrs. Barnes and Colangelo equal to three times their respective
annual base salary. In addition to the key-man life insurance policies, we have
agreed to maintain throughout the term of each employment agreement 15-year term
life insurance policies on the lives of Messrs. Barnes and Colangelo, with
benefits payable to their designated beneficiaries, and to pay all premiums in
connection with those policies.




In the event of a change of control of our company, Messrs.
Barnes and Colangelo may terminate their employment with us within six months
after such event and will be entitled to continue to be paid pursuant to the
terms of their respective employment agreements.




The
employment agreements also contain covenants (a) restricting the executive from
engaging in any activities competitive with our business during the terms of
such employment agreements and one year thereafter, (b) prohibiting the
executive from disclosure of confidential information regarding us at any time
and (c) confirming that all intellectual property developed by the executive and
relating to our business constitutes our sole and exclusive
property.




The
foregoing summaries of our employment agreements are qualified by reference to
the full texts of the form of each of the Senior Executive Level Employment
Agreement and Executive Level Employment Agreement, filed as Exhibits 10.1 and
10.2 to our Current Report on Form 8-K, filed with the SEC on January 5, 2006,
respectively, as Exhibit 10.1 to our Current Report on Form 8-K, filed with the
SEC on April 29, 2008, and as Exhibit 10.1 to our Current Report on Form 8-K,
filed with the SEC on December 24, 2008 all of which are incorporated herein in
their entirety.


35




Indemnification
of Directors and Officers




As
permitted by the provisions of the Delaware General Corporation Law (the
‘‘DGCL’’), we have the power to indemnify any person made a party to an action,
suit or proceeding by reason of the fact that they are or were a director,
officer, employee or agent of ours, against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by them in
connection with any such action, suit or proceeding if they acted in good faith
and in a manner which they reasonably believed to be in, or not opposed to, our
best interest and, in any criminal action or proceeding, they had no reasonable
cause to believe their conduct was unlawful. Termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, does not, of itself, create a presumption that the person did not
act in good faith and in a manner which they reasonably believed to be in or not
opposed to our best interests, and, in any criminal action or proceeding, they
had no reasonable cause to believe their conduct was unlawful.




We must
indemnify a director, officer, employee or agent who is successful, on the
merits or otherwise, in the defense of any action, suit or proceeding, or in
defense of any claim, issue, or matter in the proceeding, to which they are a
party because they are or were a director, officer, employee or agent, against
expenses actually and reasonably incurred by them in connection with the
defense.





We may
provide to pay the expenses of officers and directors incurred in defending a
civil or criminal action, suit or proceeding as the expenses are incurred and in
advance of the final disposition of the action, suit or proceeding, upon receipt
of an undertaking by or on behalf of the director or officer to repay the amount
if it is ultimately determined by a court of competent jurisdiction that they
are not entitled to be indemnified.




The DGCL
also permits a corporation to purchase and maintain liability insurance or make
other financial arrangements on behalf of any person who is or was




·
            a
      director, officer, employee or agent of
ours,




·
            or
      is or was serving at the request of the corporation as a director,
      officer, employee or agent of another corporation, partnership, joint
      venture, trust or other
enterprises.




Such
coverage may be for any liability asserted against them and liability and
expenses incurred by them in their capacity as a director, officer, employee or
agent, or arising out of their status as such, whether or not the corporation
has the authority to indemnify them against such liability and
expenses.




Insofar
as indemnification for liabilities arising under the Securities Act, as amended,
may be permitted to officers, directors or persons controlling our company
pursuant to the foregoing provisions, we have been informed that in the opinion
of the SEC such indemnification is against public policy as expressed in such
Act and is therefore unenforceable.


36




Code
of Ethics




We
adopted a code of ethics that applies to our officers, directors and employees,
including our chief executive officer and chief financial officer. A copy of our
Code of Ethics will be furnished to any person upon written request from any
such person. Requests should be sent to:  Secretary, MDwerks,
Inc  Windolph Center, Suite I, 1020 NW 6th Street, Deerfield Beach,
Florida 33442. Shareholders wishing to communicate with directors should contact
the Corporate Secretary at such address, who will facilitate, but not screen,
communications with individual directors.




Compliance
with Section 16(a) of the Securities Exchange Act of 1934




Section
16(a) of the Securities Exchange Act of 1934, as amended, which requires
executive officers and directors, and persons who beneficially own more than ten
(10%) percent of the common stock of a company with a class of securities
registered under the Securities Exchange Act of 1934, to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission, is not currently applicable to us.




ITEM
      11.
            EXECUTIVE
      COMPENSATION




Incentive
Compensation Plan




In
November, 2005, we approved the MDwerks, Inc. 2005 Incentive Compensation Plan
(the ‘‘Incentive Plan’’). The Incentive Plan covers grants of stock options,
grants of equity securities, dividend equivalents and other customary items
covered by such plans. Persons eligible to receive awards under the Incentive
Plan are the officers, directors, employees, consultants and other persons who
provide services to us or any Related Entity (as defined in the Incentive
Plan).




The
Incentive Plan is administered by our Compensation Committee; however, the Board
of Directors can exercise any power or authority granted to the Compensation
Committee under the Incentive Plan, unless expressly provided otherwise in the
Incentive Plan.




We have
reserved 15,000,000 shares of our authorized Common Stock for issuance pursuant
to grants under the Incentive Plan.


37


The
following executives received grants of stock options from MDwerks, Inc. through
December 31, 2008:




OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END




Option
      Awards
                                            
                                            Stock
      AwardsName and Principal
      Position
                                            
                                            Number
      of
                                              Securities
                                              Underlying
                                              Unexercised
                                              Options
                                              Exercisable
                                            
                                            Number
      of
                                              Securities
                                              Underlying
                                              Unexercised
                                              Options
                                              Unexercisable
                                            
                                            Equity
                                              Incentive
                                              Plan
                                              Awards:
                                              Number
      of
                                              Securities
                                              Underlying
                                              Unexercised
                                              Unearned
                                              Options
                                            
                                            Option
                                              Exercise
                                              Price
                                            
                                            Option
                                              Expiration
                                              Date
                                            
                                            Number
                                              of
                                              Shares
                                              or
      Units
                                              of
      Stock
                                              That
                                              Have
                                              Not
                                              Vested
                                            
                                            Market
                                              Value
      of
                                              Shares
                                              or
      Units
                                              of
      Stock
                                              That
                                              Have
                                              Not
                                              Vested
                                            
                                            Equity
                                              Incentive
                                              Plan
                                              Awards:
                                              Number
      of
                                              Unearned
                                              Shares,
                                              Units
      or
                                              Other
                                              Rights
                                              That
      Have
                                              Not
      Vested
                                            
                                            Equity
                                              Incentive
                                              Plan
                                              Awards:
                                              Market
      or
                                              Payout
                                              Value
      of
                                              Unearned
                                              Shares,
                                              Units
      or
                                              Other
                                              Rights
                                              That
      Have
                                              Not
      VestedDavid
      M. Barnes
                                            
                                            
                                            75,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            2.25
                                            
                                            10/10/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Chief
      Executive
                                            
                                            
                                            150,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            0.38
                                            
                                            12/31/2017
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Officer,
      President
                                            
                                            
                                            75,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            0.75
                                            
                                            4/10/2018
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —and
      ChairmanVincent
      Colangelo
                                            
                                            
                                            25,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            3.25
                                            
                                            12/28/2015
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Chief
      Financial
                                            
                                            
                                            83,333
                                            
                                            41,667
                                            1
                                            —
                                            
                                            $
                                            3.40
                                            
                                            1/2/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Officer
      and
                                            
                                            
                                            50,000
                                            
                                            25,000
                                            2
                                            —
                                            
                                            $
                                            4.00
                                            
                                            6/18/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —75,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            2.25
                                            
                                            10/10/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —15,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            1.39
                                            
                                            12/26/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —100,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            0.75
                                            
                                            4/10/2018
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Stephen
      M. Weiss
                                            
                                            
                                            25,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            3.25
                                            
                                            12/28/2015
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Chief
      Operating
                                            
                                            
                                            3,333
                                            
                                            1,667
                                            1
                                            —
                                            
                                            $
                                            3.40
                                            
                                            1/2/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Officer
                                            
                                            
                                            16,667
                                            
                                            8,333
                                            2
                                            —
                                            
                                            $
                                            4.00
                                            
                                            6/18/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —25,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            2.25
                                            
                                            10/10/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —15,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            1.39
                                            
                                            12/26/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —100,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            0.75
                                            
                                            4/10/2018
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Howard
      B. Katz
                                            
                                            
                                            25,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            3.25
                                            
                                            12/28/2015
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Former
      Chief
                                            
                                            
                                            283,333
                                            
                                            141,667
                                            1
                                            —
                                            
                                            $
                                            3.40
                                            
                                            1/2/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —Executive
      Officer
                                            
                                            
                                            166,667
                                            
                                            83,333
                                            2
                                            —
                                            
                                            $
                                            4.00
                                            
                                            6/18/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —and
      President
                                            
                                            
                                            500,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            2.25
                                            
                                            10/10/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —50,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            1.39
                                            
                                            12/26/2016
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —263,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            0.38
                                            
                                            12/31/2017
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —1,500,000
                                            
                                            —
                                            
                                            —
                                            
                                            $
                                            0.75
                                            
                                            4/10/2018
                                            
                                            
                                            —
                                            
                                            —
                                            
                                            
                                            —
                                            
                                            —







1
            Consists
      of Options vesting on January 2,
2009.




2
            Consists
      of Options vesting on June 18,
2009.


38




As of
March 31, 2009, the following awards have been granted to the executive officers
named in this Annual Report on Form 10-K under the Incentive Plan:




Name
      of Grantee
                      
                      Incentive
                        Stock
      Options
                      
                      Non-Qualified
                        Stock
      Options
                      
                      Percentage
      of
                        all
      Options
                        Granted
      to
                        EmployeesDavid
      M. Barnes
                      
                      
                      269,000
                      1
                      
                      31,000
                      2
                      
                      6.5
                      %Vincent
      Colangelo
                      
                      
                      153,750
                      3
                      
                      261,250
                      4
                      
                      9.0
                      %Stephen
      Weiss
                      
                      
                      150,750
                      5
                      
                      44,250
                      6
                      
                      4.2
                      %Howard
      B. Katz (Former CEO and President)
                      
                      
                      446,750
                      7
                      
                      2,566,250
                      8
                      
                      65.1
                      %




The following awards have been granted to the executive officers
named in this Annual Report on Form 10-K under the Incentive Plan in the last
fiscal year:




Name
      of Grantee
                        
                        Incentive
                          Stock
      Options
                        
                        Non-Qualified
                          Stock
      Options
                        
                        Percentage
      of
                          all
      Options
                          Granted
      to
                          Employees
                          in
      Last
                          Fiscal
      YearDavid
      M. Barnes
                        
                        
                        75,000
                        9
                        
                        0
                        
                        
                        3.8
                        %Vincent
      Colangelo
                        
                        
                        100,000
                        10
                        
                        0
                        
                        
                        5.1
                        %Stephen
      Weiss
                        
                        
                        100,000
                        10
                        
                        0
                        
                        
                        5.1
                        %Howard
      B. Katz (Former CEO and President)
                        
                        
                        130,000
                        11
                        
                        1,370,000
                        12
                        
                        76.3
                        %









1
            Consists
      of (i) options to purchase 44,000 shares of Common Stock at a price of
      $2.25 per share, granted on October 11, 2006, and vested as of October 11,
      2008, (ii) options to purchase 150,000 shares of Common Stock at a price
      of $0.38 per share, granted on December 31, 2007 and vesting immediately
      and (iii) options to purchase 75,000 shares of Common Stock at a price of
      $0.75 per share, granted on April 10, 2008 and vesting
      immediately.




2
            Consists
      of options to purchase 31,000 shares of Common Stock at a price of $2.25
      per share, granted on October 11, 2006, and vested as of October 11,
      2008.




3
            Consists
      of (i) options to purchase 25,000 shares of Common Stock at a price of
      $3.25 per share, granted on December 29, 2005, and vested as of December
      29, 2008, (ii) options to purchase 25,000 shares of Common Stock at a
      price of $3.40 per share, granted on January 3, 2006 and vested 2/3 as of
      January 3, 2008 and vesting 1/3 on January 3, 2009, (iii) options to
      purchase 3,750 shares of Common Stock at a price of $4.00 per share,
      granted on June 19, 2006 and vested 2/3 as of June 19, 2008 and
      vesting 1/3 on June 19, 2009, and (iv) options to purchase 100,000
      shares of Common Stock at a price of $0.75 per share, granted on April 10,
      2008 and vesting immediately.




4
            Consists
      of (i) options to purchase 100,000 shares of Common Stock at a price of
      $3.40 per share, granted on January 3, 2006, and vested 2/3 as of January
      3, 2008 and vesting 1/3 on January 3, 2009, (ii) options to purchase
      71,250 shares of Common Stock at a price of $4.00 per share, granted on
      June 19, 2006 and vested 2/3 as of June 19, 2008 and vesting 1/3 on
      June 19, 2009, (iii) options to purchase 75,000 shares of Common Stock at
      a price of $2.25 per share, granted on October 11, 2006 and vested as of
      October 11, 2008, and (iv) options to purchase 15,000 shares of Common
      Stock at a price of $1.39 per share, granted on December 27, 2006 and
      vesting immediately. All Non-qualified Stock Options granted to Mr.
      Colangelo are owned with his spouse as Tenants in the
      Entireties.  39




5
            Consists
      of (i) options to purchase 25,000 shares of Common Stock at a price of
      $3.25 per share, granted on December 29, 2005, and vested as of December
      29, 2008, (ii) options to purchase 5,000 shares of Common Stock at a price
      of $3.40 per share, granted on January 3, 2006 and vested 2/3 as of
      January 3, 2008 and vesting 1/3 on January 3, 2009, (iii) options to
      purchase 20,750 shares of common stock at a price of 4.00 per share,
      granted on June 19, 2006 and vested 2/3 as of June 19, 2008 and
      vesting 1/3 on June 19, 2009, and (iv) options to purchase 100,000
      shares of Common Stock at a price of $0.75 per share, granted on April 10,
      2008 and vesting immediately.





6
            Consists
      of (i) options to purchase 4,250 shares of Common Stock at a price of
      $4.00 per share, granted on June 19, 2006, and vested 2/3 as of June 19,
      2008 and vesting 1/3 on June 19, 2009, (ii) options to purchase
      25,000 shares of Common Stock at a price of $2.25 per share, granted on
      October 11, 2006 and vested as of October 11, 2008, and (iii) options to
      purchase 15,000 shares of Common Stock at a price of $1.39 per share,
      granted on December 27, 2006 and vested as of December 27,
      2008.




7
            Consists
      of (i) options to purchase 25,000 shares of Common Stock at a price of
      $3.25 per share, granted on December 29, 2005, and vested as of December
      29, 2008, (ii) options to purchase 25,000 shares of Common Stock at a
      price of $3.40 per share, granted on January 3, 2006 and vested 2/3 as of
      January 3, 2008 and vesting  1/3 on January 3, 2009, (iii)
      options to purchase 3,750 shares of Common Stock at a price of $4.00 per
      share, granted on June 19, 2006 and vested 2/3 as of June 19, 2008 and
      vesting 1/3 on June 19, 2009, (iv) options to purchase 263,000 shares
      of Common Stock at a price of $0.38 per share, granted on December 31,
      2007 and vesting immediately, and (v) options to purchase 130,000 shares
      of Common Stock at a price of $0.75 per share, granted on April 10, 2008
      and vesting immediately.




8
            Consists
      of (i) options to purchase 400,000 shares of Common Stock at a price of
      $3.40 per share, granted on January 3, 2006, and vested 2/3 as of January
      3, 2008 and vesting 1/3 on January 3, 2009, (ii) options to purchase
      246,250 shares of Common Stock at a price of $4.00 per share, granted on
      June 19, 2006 and vested 2/3 as of June 19, 2008 and vesting 1/3 on
      June 19, 2009, (iii) options to purchase 500,000 shares of Common Stock at
      a price of $2.25 per share, granted on October 11, 2006 and vested as of
      October 11, 2008, (iv) options to purchase 50,000 shares of Common Stock
      at a price of $1.39 per share, granted on December 27, 2006 and vesting
      immediately, and (v) options to purchase 1,370,000 shares of Common Stock
      at a price of $0.75 per share, granted on April 10, 2008 and vesting
      immediately. All Non-qualified Stock Options granted to Mr. Katz are owned
      with his spouse as Tenants in the
Entireties.





9
            Consists
      of options to purchase 75,000 shares of Common Stock at a price of $0.75
      per share, granted on April 10, 2008 and vesting
    immediately.




10
            Consists
      of options to purchase 100,000 shares of Common Stock at a price of $0.75
      per share, granted on April 10, 2008 and vesting
    immediately.





11
            Consists
      of options to purchase 130,000 shares of Common Stock at a price of $0.75
      per share, granted on April 10, 2008 and vesting
    immediately.





12
            Consists
      of options to purchase 1,370,000 shares of Common Stock at a price of
      $0.75 per share, granted on April 10, 2008 and vesting
      immediately.


40




Executive
Compensation




The
primary objective of our executive compensation program is to attract and retain
qualified, energetic managers who are enthusiastic about our mission and
culture. A further objective of our compensation program is to provide
incentives and reward each manager for their contribution. In addition, we
strive to promote an ownership mentality among key leadership and the Board of
Directors.




Our
Compensation Committee reviews and approves, or in some cases recommends for the
approval of the full Board of Directors, the annual compensation for our
Executive Officers. Regarding most compensation matters, including executive and
director compensation, our management provides recommendations to the
Compensation Committee; however, the Compensation Committee does not delegate
any of its functions to others in setting compensation. Our Compensation
Committee does not include any Executive Officers. We do not currently engage
any consultant to advise the Company on executive and/or director compensation
matters.




In
measuring our Executive Officers' contributions, the Compensation Committee
considers numerous factors including our growth, strategic business
relationships and financial performance. Stock price performance has not been a
factor in determining annual compensation because the price of our common stock
is subject to a variety of factors outside of our control. We do not have an
exact formula for allocating between cash and non-cash
compensation.




Annual
executive officer compensation generally consists of a base salary and annual
bonus component, as well as periodic stock option grants. It is the Compensation
Committee's intention to set total executive cash compensation sufficiently high
enough to attract and retain a strong motivated leadership team, but not so high
that it creates a negative perception with our stakeholders. Each of our
executive officers receives stock option grants under our 2005 Incentive
Compensation Plan. Each executive's current and prior compensation is considered
in setting future compensation. In addition, we review the compensation
practices of other companies. To some extent, our compensation plan is based on
the market and the companies we compete against for executive management. The
elements of our plan (e.g., base salary, bonus and stock options) are similar to
the elements used by many companies.




Stock
options are granted to include a long-term component to the Executive's overall
compensation package. The Company has no pension plan, non-equity incentive plan
or deferred compensation arrangement. The number of stock options granted to
each executive officer is made on a discretionary rather than a formula basis by
the Compensation Committee. The Company does not have a specific program, plan
or practice to time stock option grants. The pricing of stock option grants are
based upon the stock's opening price on the date of the grant.




Each of
our executive officers has an employment agreement with the Company that
outlines salary and benefit arrangements. These agreements have similar terms,
which include, but are not limited to: base salaries; annual bonuses;
reimbursements of certain expenses; group health, disability, and life
insurances; and, termination provisions. These agreements have initial terms of
one, two or three years.




41




The
following executives received compensation from MDwerks, Inc. in the amounts set
forth in the chart below for the year ended December 31, 2008 and 2007. The
value attributable to any Option Awards in the following chart is computed in
accordance with FAS 123R. No other item of compensation was paid to any officer
or director of the Company other than reimbursement of expenses:




SUMMARY
COMPENSATION TABLE




Name and Principal
      Position
                                  
                                  Year
                                  
                                  Salary
                                  
                                  Bonus
                                  
                                  Stock
                                    Awards
                                  
                                  Option
                                    Awards
                                  
                                  Non-
                                    Equity
                                    Incentive
                                    Plan
      Compen-
                                    sation
                                  
                                  Change
      in
                                    Pension
                                    Value
      and
                                    Non-
                                    qualified
                                    Deferred
                                    Compen-
                                    sation
                                    Earnings
                                  
                                  All
      Other
                                    Compen-
                                    sation
                                  
                                  TotalDavid
      M. Barnes
                                  
                                  
                                  2008
                                  
                                  $
                                  17,500
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  $
                                  1,900
                                  1
                                  $
                                  19,400Chief
      Executive
                                  
                                  
                                  2007
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —Officer,
      President and DirectorVincent
      Colangelo
                                  
                                  
                                  2008
                                  
                                  $
                                  200,000
                                  
                                  $
                                  51,734
                                  2
                                  
                                  —
                                  
                                  $
                                  56,000
                                  3
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  $
                                  7,000
                                  4
                                  $
                                  314,734Chief
      Financial
                                  
                                  
                                  2007
                                  
                                  $
                                  175,000
                                  
                                  $
                                  53,596
                                  5
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  $
                                  12,000
                                  6
                                  $
                                  240,596Officer
      and SecretaryStephen
      M. Weiss
                                  
                                  
                                  2008
                                  
                                  $
                                  185,000
                                  
                                  $
                                  31,451
                                  7
                                  
                                  —
                                  
                                  $
                                  56,000
                                  3
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  $
                                  6,000
                                  8
                                  $
                                  278,451Chief
      Operating
                                  
                                  
                                  2007
                                  
                                  $
                                  165,000
                                  
                                  $
                                  27,266
                                  9
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  $
                                  4,800
                                  10
                                  $
                                  197,066OfficerHoward
      B. Katz
                                  
                                  
                                  2008
                                  
                                  $
                                  300,000
                                  
                                  $
                                  380,265
                                  11
                                  
                                  —
                                  
                                  $
                                  840,000
                                  12
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  $
                                  16,600
                                  13
                                  $
                                  1,536,685Former
      Chief
                                  
                                  
                                  2007
                                  
                                  $
                                  225,000
                                  
                                  $
                                  103,413
                                  14
                                  
                                  —
                                  
                                  $
                                  94,680
                                  15
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  $
                                  51,000
                                  16
                                  $
                                  474,093Executive
      Officer and President




David M.
Barnes became President of the Company on December 1, 2008.  This
schedule includes any prior periods when he was a non-management
director.  The non-management director compensation for David M.
Barnes is included in the Director Compensation schedule.







1
            Consists
      of an auto allowance of $900 and a contribution of $1,000 towards the
      Company's medical Flexible Spending
account.




2
            Consists
      of $44,423 bonus paid during 2008 and $7,311 bonus paid in
      2009.




3
            Consists
      of Incentive Stock Options to purchase 100,000 shares of Common Stock at a
      price of $0.75 per share, granted on April 10, 2008 and vesting on
      immediately.




4
            Consists
      of an auto allowance of $4,000 and a contribution of $3,000 towards the
      Company's medical Flexible Spending
account.




5
            Consists
      of $738 bonus paid during 2007 and $52,858 bonus paid in
    2008.6
            Consists
      of an auto allowance of $9,000 and a contribution of $3,000 towards the
      Company's medical Flexible Spending
account.


42




7
            Consists
      of a $4,981 bonus paid during 2008 and $26,470 bonus paid in
      2009.




8
            Consists
      of an auto allowance of $3,000 and a contribution of $3,000 towards the
      Company's medical Flexible Spending
account.




9
            Consists
      of a $2,885 bonus paid during 2007 and $24,381 bonus paid in
      2008.10
            Consists
      of an auto allowance of $1,800 and a contribution of $3,000 towards the
      Company's medical Flexible Spending
account.




11
              Consists
      of a $357,315 bonus paid during 2008 and $22,950 bonus paid in
      2009.12
              Consists
      of Incentive Stock Options to purchase 1,500,000 shares of Common Stock at
      a price of $0.75 per share, granted on April 10, 2008 and vesting on
      immediately.13
              Consists
      of an auto allowance of $3,600, a business use of home allowance of
      $10,000, and a contribution of $3,000 towards the Company's medical
      Flexible Spending account.14
              Consists
      of a $5,170 bonus paid during 2007 and $98,243 bonus paid in
      2008.




15
            Consists
      of Incentive Stock Options to purchase 263,000 shares of Common Stock at a
      price of $0.38 per share, granted on December 31, 2007 and vesting on
      immediately.





16
            Consists
      of an auto allowance of $18,000, a business use of home allowance of
      $30,000 and a contribution of $3,000 towards the Company's medical
      Flexible Spending account.


43





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
  MANAGEMENT




The
following table sets forth information regarding the number of shares of Common
Stock beneficially owned on April
10,
2009, by each person who is known by the Company to beneficially own 5%
or more of the Company’s Common Stock, each of the Company’s directors and
executive officers, and all of the Company’s directors and executive officers,
as a group: On April 10, 2009 we had 14,390,208  shares of common
stock outstanding.




Name
      of Beneficial Owner
              
              Common
                Shares
                Owned
              
              Presently
                Exercisable
                Options
      or
                Options
                Exercisable
                Within
      60 Days
              
              Shares
                Beneficially
                Owned
              
              Percentage
                of
      ClassDavid
      M. Barnes
              
              
              75,000
              
              
              300,000
              
              
              375,000
              1
              
              2.6
              %Vincent
      Colangelo
              
              
              25,000
              
              
              390,000
              
              
              415,000
              1
              
              2.8
              %Stephen
      Weiss
              
              
              65,809
              
              
              186,668
              
              
              252,477
              1
              
              1.7
              %Peter
      Dunne
              
              
              53,430
              2
              
              185,000
              
              
              238,430
              1
              
              1.6
              %Paul
      Kushner
              
              
              141,290
              2
              
              185,000
              
              
              326,290
              1
              
              2.2
              %Sheldon
      Steiner
              
              
              0
              
              
              0
              
              
              0
              1
              
              0.0
              %Chris
      Phillips
              
              
              0
              
              
              0
              
              
              0
              1
              
              0.0
              %Shad
      Stastney
              
              
              0
              
              
              0
              
              
              0
              1
              
              0.0
              %Directors
      and officers as a group (8 persons):
              
              
              360,529
              
              
              1,241,668
              
              
              1,602,197
              
              
              10.3
              %Persons
      known to beneficially own more than 5% of the outstanding Common
      Stock:Howard
      B. Katz
              
              
              1,078,001
              
              
              2,929,667
              
              
              4,007,668
              
              
              21.8
              %Solon
      Kandel
              
              
              922,781
              
              
              0
              
              
              922,781
              
              
              9.4
              %MEDwerks.com
      Corp 3
              
              
              2,139,316
              
              
              0
              
              
              2,139,316
              
              
              14.9
              %Jacob
      Nudel
              
              
              1
              
              
              0
              
              
              1
              
              
              0.0
              %AJKN
      Partnership 3
              
              
              831,081
              
              
              0
              
              
              831,081
              
              
              5.8
              %AJLN
      Partnership 3
              
              
              838,381
              
              
              0
              
              
              838,381
              
              
              5.8
              %AJMN
      Partnership 3
              
              
              833,480
              
              
              0
              
              
              833,480
              
              
              5.8
              %









1
                    Includes
      presently exercisable options, as disclosed under Director Compensation
      and Executive Compensation; there are no options exercisable within 60
      days of April 10, 2009.2
                    Includes
      both restricted stock owned and/ or free trading .3
                    Dr.
      Jacob Nudel, MDwerks' former chairman, exercises investment and voting
      control of the shares beneficially owned by MEDwerks.com Corp. Dr. Nudel
      is General Partner of and exercises dispositive voting control of the
      shares beneficially owned by AJKN Limited Partnership, AJLN Limited
      Partnership and AJMN Limited Partnership, but is only a 1% limited partner
      of each of these
entities.




ITEM
13.              CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS





Tonya
Phillips, the wife of Chris Phillips, a member of the Company's Board of
Directors, has a minority ownership interest in Debt Opportunity Fund, LLLP, a
Florida limited liability limited partnership ("DOF"). In November 2008, the
Company entered into a loan agreement with DOF providing for a loan to the
Company of up to $11,800,000, subject to a deduction for an original issue
discount of 2% (the "DOF Loan"). The DOF Loan accrues interest at the rate of
13% per annum. As of April 15, 2009, the outstanding principal and accrued
interest on the DOF Loan equaled approximately $651,374.


44





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




The
following table sets forth the fees billed by our principal independent
accountants for each of our last two fiscal years for the categories of services
indicated.




Year
      Ended December 31,Category
                      
                      2008
                      
                      
                      2007Audit
      Fees 1
                      
                      $
                      42,500
                      
                      
                      $
                      40,000Audit
      Related Fees 2
                      
                      
                      19,500
                      
                      
                      
                      15,000Tax
      Fees 3
                      
                      
                      15,000
                      
                      
                      
                      12,000All
      Other Fees 4
                      
                      
                      1,250
                      
                      
                      
                      6,532





1
            Consists
      of  fees billed for the audit of our annual financial
      statements, review of our Form 10-K and services that are normally
      provided by the accountant in connection with year end statutory and
      regulatory filings or engagements.




2
            Consists
      of fees billed for the review of our quarterly financial statements,
      review of our forms 10-Q and 8-K and services that are normally provided
      by the accountant in connection with non year end statutory and regulatory
      filings on engagements.




3
            Consists
      of professional services rendered by a company aligned with our principal
      accountant for tax compliance, tax advice and tax
  planning.




4
            The
      services provided by our accountants within this category consisted of
      advice and other services relating to SEC matters, registration statement
      review, accounting issues and client
  conferences.




Audit
Committee Pre-Approval Policy




In
addition to retaining Sherb & Co., LLP to audit our consolidated financial
statements for the years ended December 31, 2008 and December 31, 2007, we
retained Sherb & Co., LLP to provide other professional services to us in
our 2007 and 2008 fiscal years. We understand the need for Sherb & Co., LLP
to maintain objectivity and independence in its audit of our financial
statements. To minimize relationships that could appear to impair the
objectivity of Sherb & Co., LLP, our audit committee has restricted the
non-audit services that Sherb & Co., LLP may provide to us primarily to tax
services.




The audit
committee also has adopted policies and procedures for pre-approving all
non-audit work performed by Sherb & Co., LLP.


45


PART
IV


ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





EXHIBITS




Exhibit
      No.
                
                Exhibits3.1
                
                Company
      Certificate of Incorporation 13.2
                
                Amendment
      to Company’ Certificate of Incorporation changing name to MDwerks, Inc.
      and amendingterms
      of Blank Check Preferred Stock 23.3
                
                Amendment
      to Company’ Certificate of Incorporation changing name to MDwerks, Inc.,
      changingauthorized
      shares to 200,000,000 and amending terms of Blank Check Preferred Stock
      33.4
                
                Certificate
      of Designations Designating Series A Convertible Preferred Stock. 43.5
                
                Amended
      and Restated Certificate of Designations Designating Series B Convertible
      Preferred Stock 53.6
                
                Amended
      and Restated Certificate of Designations Designating Series B Convertible
      Preferred Stock 63.7
                
                Bylaws
      of the Company. 73.8
                
                Amendment
      No. 1 to Bylaws of the Company 84.1
                
                MDwerks,
      Inc. 2005 Incentive Compensation Plan. 94.2
                
                Form
      of Warrants to purchase shares of Common Stock at a price of $2.50 per
      share. 104.3
                
                Form
      of Warrants issued to Placement Agent (and sub-agents) to purchase shares
      of Common Stockat
      a price of $1.25 per share. 114.4
                
                Form
      of Series A Warrants to purchase shares of Common Stock at a price of
      $3.00 per share. 124.5
                
                Form
      of Series A Warrants issued to Placement Agent and sub-agents to purchase
      shares ofCommon
      Stock at a price of $1.50 per share. 134.6
                
                Class
      C Warrant to purchase shares of Common Stock at a price of $2.25 per share
      144.7
                
                Securities
      Purchase Agreement by and between Gottbetter and MDwerks, Inc. 154.8
                
                Form
      of Series D Warrant to purchase shares of Common Stock at a price of $2.25
      per share 164.9
                
                Form
      of Series E Warrant to purchase shares of Common Stock at a price of $3.25
      per share 174.10
                
                First
      Amended and Restated Senior Secured Convertible Notes 184.11
                
                Amendment
      No. 1 dated March 1, 2008, to Amended and Restated Senior Secured
      Convertible Note 194.12
                
                Amendment
      No. 2 dated November 12, 2008, to First Amended and Restated Senior
      Secured Convertible Note 204.13
                
                Amendment
      No. 1 dated March 1, 2008, to Amended and Restated Senior Secured
      Convertible Note 214.14
                
                Amendment,
      Consent and Waiver Agreement by and among MDwerks, Inc., Xeni Financial
      and Gottbetter 22


46




4.15
                                  
                                  Amendment,
      Consent and Waiver Agreement by and among MDwerks, Inc., Xeni Financial
      and Gottbetter 234.16
                                  
                                  Consent
      and Waiver Agreement by and among MDwerks, Inc., Xeni Financial and
      Gottbetter 244.17
                                  
                                  Consent
      and Waiver Agreement by and between MDwerks, Inc. and Vicis. 254.18
                                  
                                  Registration
      Rights Agreement between MDwerks, Inc. and Gottbetter 264.19
                                  
                                  Securities
      Purchase Agreement dated September 28, 2007, by and between MDwerks, Inc.
      and Vicis 274.20
                                  
                                  Securities
      Purchase Agreement dated January 18, 2008, by and between MDwerks, Inc.
      and Vicis 284.21
                                  
                                  Securities
      Purchase Agreement dated March 31, 2008, by and between MDwerks, Inc. and
      Vicis 294.22
                                  
                                  Form
      of Series F Warrant to purchase shares of Common Stock at a price of $2.25
      per share 304.23
                                  
                                  Form
      of Series G Warrant to purchase shares of Common Stock at a price of $2.50
      per share 314.24
                                  
                                  Form
      of Series H Warrant to purchase shares of Common Stock at a price of $0.75
      per share 324.25
                                  
                                  Form
      of Series I Warrant to purchase shares of Common Stock at a price of $0.75
      per share 334.26
                                  
                                  Registration Rights Agreement
      between MDwerks, Inc. and Vicis344.27
                                  
                                  First
      Amendment to Registration Rights Agreement between MDwerks, Inc. and Vicis
      354.28
                                  
                                  Amended
      and Restated Registration Rights Agreement between MDwerks, Inc. and Vicis
      364.29
                                  
                                  Loan
      and Securities Purchase Agreement by and among MDwerks, Inc., Xeni
      Financial andDebt
      Opportunity Fund, LLLP 374.30
                                  
                                  Senior
      Secured Promissory Note 384.31
                                  
                                  Form
      of Series J Warrant to purchase shares of Common Stock at a price of $0.75
      per share 394.32
                                  
                                  Registration
      Rights Agreement between MDwerks, Inc. and Debt Opportunity Fund, LLLP
      404.33
                                  
                                  First
      Amendment to Loan and Securities Purchase Agreement by and among MDwerks,
      Inc.,Xeni
      Financial and Debt Opportunity Fund, LLLP414.34
                                  
                                  Amended
      and Restated Senior Secured Promissory Note 424.35
                                  
                                  Form
      of Non-Qualified Stock Option Agreement 434.36
                                  
                                  Form
      of Incentive Stock Option Agreement 44


47




Exhibit
      No.
                    
                    Exhibits10.1
                    
                    Agreement
      of Merger and Plan of Reorganization among Western Exploration, Inc.,
      MDwerks AcquisitionCorp.
      and MDwerks Global Holdings, Inc. 4510.2
                    
                    Placement
      Agent Agreement by and among the Company, MDwerks and Brookshire
      Securities Corporation. 4610.3
                    
                    Form
      of Lock Up Agreement between the Company and executive officers and
      certain stockholders. 4710.4
                    
                    Form
      of Private Placement Subscription Agreement. 4810.5
                    
                    Form
      of Senior Executive Level Employment Agreement between MDwerks, Inc. and
      each of David M. Barnes,Howard
      B. Katz, and Vincent Colangelo. 4910.6
                    
                    Form
      of Executive Level Employment Agreement between MDwerks, Inc. and Stephen
      Weiss. 5010.7
                    
                    Guaranty
      issued to Gottbetter by Xeni Financial Services, Corp., Xeni Medical
      Billing, Corp., MDwerksGlobal
      Holdings, Inc. and Xeni Medical Systems, Inc. 5110.8
                    
                    Security
      Agreement by and among Gottbetter, MDwerks, Inc., Xeni Financial Services,
      Corp., Xeni Medical Corp.,Xeni
      Medical Billing, Corp., MDwerks Global Holdings, Inc. and Xeni Medical
      Systems, Inc. 5210.9
                    
                    Closing
      Agreement by and between Gottbetter and MDwerks, Inc. Modifying and
      WaivingRegistration
      Rights Provisions 5310.10
                    
                    Guaranty
      issued to Vicis by Xeni Financial Services, Corp. 5410.11
                    
                    Guaranty
      issued to Vicis by Xeni Medical Billing, Corp. 5510.12
                    
                    Guaranty
      issued to Vicis by MDwerks Global Holdings, Inc. 5610.13
                    
                    Guaranty
      issued to Vicis by Xeni Medical Systems, Inc. 5710.14
                    
                    Guaranty
      issued to Vicis by Patient Payment Solutions, Inc. 5810.15
                    
                    Security
      Agreement entered into by and between Vicis and MDwerks, Inc. 5910.16
                    
                    Security
      Agreement entered into by and between Vicis and Xeni Medical Billing,
      Corp. 6010.17
                    
                    Security
      Agreement entered into by and between Vicis and MDwerks Global Holdings,
      Inc. 6110.18
                    
                    Security
      Agreement entered into by and between Vicis and Xeni Medical Systems, Inc.
      6210.19
                    
                    Security
      Agreement entered into by and between Vicis and Xeni Financial Services,
      Corp. 6310.20
                    
                    Security
      Agreement entered into by and between Vicis and Patient Payment Solutions,
      Inc. 6410.21
                    
                    Guaranty
      issued to Debt Opportunity Fund, LLLP by Xeni Medical Billing, Corp. 6510.22
                    
                    Guaranty
      issued to Debt Opportunity Fund, LLLP by MDwerks Global Holdings, Inc.
      6610.23
                    
                    Guaranty
      issued to Debt Opportunity Fund, LLLP by Xeni Medical Systems, Inc. 67


48




10.24
                  
                  Guaranty
      issued to Debt Opportunity Fund, LLLP by Patient Payment Solutions, Inc.
      6810.25
                  
                  Security
      Agreement entered into by and between Debt Opportunity Fund, LLLP and
      MDwerks, Inc. 6910.26
                  
                  Security
      Agreement entered into by and between Debt Opportunity Fund, LLLP and Xeni
      Medical Billing, Corp. 7010.27
                  
                  Security
      Agreement entered into by and between Debt Opportunity Fund, LLLP andMDwerks
      Global Holdings, Inc. 7110.28
                  
                  Security
      Agreement entered into by and between Debt Opportunity Fund, LLLP and Xeni
      Medical Systems, Inc. 7210.29
                  
                  Security
      Agreement entered into by and between Debt Opportunity Fund, LLLP andXeni
      Financial Services, Corp. 7310.30
                  
                  Security
      Agreement entered into by and between Debt Opportunity Fund, LLLP andPatient
      Payment Solutions, Inc. 7410.31
                  
                  Form
      of Consulting Agreement 7514.1
                  
                  Code
      of Ethics 7621.1
                  
                  Subsidiaries
      7723.1
                  
                  Consent
      of Sherb & Co., LLP 7831.1
                  
                  Section
      302 Certification of Chief Executive Officer 4731.2
                  
                  Section
      302 Certification of Chief Financial Officer 4732.1
                  
                  Section
      906 Certification of Chief Executive Officer 4732.2
                  
                  Section
      906 Certification of Chief Financial Officer 47









1
            Incorporated
      by reference to our Registration Statement on Form SB-2 filed with the SEC
      on August 12, 2004.




2
            Incorporated
      by reference to Exhibit 3.1 included with our Current Report on Form 8-K
      filed with the SEC on November 18,
2005.




3
            Incorporated
      by reference to Exhibit 1.1 included with our Current Report on Form 8-K
      filed with the SEC on November 3, 2009.4
            Incorporated
      by reference to Exhibit 3.3 to our Registration Statement on Form SB-2
      originally filed with the SEC on March 9, 2006, as amended and
      supplemented.




5
            Incorporated
      by reference to Exhibit 3.1 included with our Current Report on Form 8-K
      filed with the SEC on January 23,
2008.




6
            Incorporated
      by reference to Exhibit 3.1 included with our Current Report on Form 8-K
      filed with the SEC on April 2, 2008.7
            Incorporated
      by reference to our Registration Statement on Form SB-2, filed with the
      SEC on August 12, 2004, as amended and
  supplemented.




8
            Incorporated
      by reference to Exhibit 1.2 included with our Current Report on Form 8-K
      filed with the SEC on November 3, 2008.9
            Incorporated
      by reference to Exhibit 4.1 included with our Current Report on Form 8-K,
      filed with the SEC on November 18,
2005.


49




10
            Incorporated
      by reference to Exhibit 4.2 included with our Current Report on Form 8-K,
      filed with the SEC on November 18,
2005.




11
            Incorporated
      by reference to Exhibit 4.3 included with our Current Report on Form 8-K,
      filed with the SEC on November 18,
2005.




12
            Incorporated
      by reference to Exhibit 4.4 to our Registration Statement on Form SB-2
      originally filed with the Commission on March 9, 2006,as
      amended and supplemented.




13
            Incorporated
      by reference to Exhibit 4.5 to our Registration Statement on Form SB-2
      originally filed with the Commission on March 9, 2006,as
      amended and supplemented.




14
            Incorporated
      by reference to Exhibit 4.2 included with our Current Report on Form 8-K
      filed with the SEC on August 23,
2006.




15
            Incorporated
      by reference to Exhibit 4.1 included with our Current Report on Form 8-K
      filed with the SEC on October 23,
2006.




16
            Incorporated
      by reference to Exhibit 4.2 included with our Current Report on Form 8-K
      filed with the SEC on October 23,
2006.




17
            Incorporated
      by reference to Exhibit 4.3 included with our Current Report on Form 8-K
      filed with the SEC on October 23,
2006.




18
            Incorporated
      by reference to Exhibits 10.13 and 10.14 included with our Current Report
      on Form 8-K filed with the SEC on October 2,
  2007.





19
            Incorporated
      by reference to Exhibit 4.11 included with our Current Report on Form 8-K
      filed with the SEC on March 27, 2008.20
            Incorporated
      by reference to Exhibit 99.1 included with our Current Report on Form 8-K
      filed with the SEC on November 12,
2008.




21
            Incorporated
      by reference to Exhibit 4.12 included with our Current Report on Form 8-K
      filed with the SEC on March 27,
2008.




22
            Incorporated
      by reference to Exhibit 10.12 included with our Current Report on Form 8-K
      filed with the SEC on October 2, 2007, as amended and
      supplemented.




23
            Incorporated
      by reference to Exhibit 10.12 included with our Current Report on Form 8-K
      filed with the SEC on April 2, 2008.24
            Incorporated
      by reference to Exhibit 99.2 included with our Current Report on Form 8-K
      filed with the SEC on November 12, 2008.25
            Incorporated
      by reference to Exhibit 99.3 included with our Current Report on Form 8-K
      filed with the SEC on November 12, 2008.26
            Incorporated
      by reference to Exhibit 4.5 included with our Current Report on Form 8-K
      filed with the SEC on October 23,
2006.




27
            Incorporated
      by reference to Exhibit 4.1 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.




28
            Incorporated
      by reference to Exhibit 4.1 included with our Current Report on Form 8-K,
      filed with the SEC on January 23,
2008.




23
            Incorporated
      by reference to Exhibit 4.1 included with our Current Report on Form 8-K
      filed with the SEC on April 2, 2008.30
            Incorporated
      by reference to Exhibit 4.2 included with our Current Report on Form 8-K,
      filed with the SEC on October 2, 2007, as amended and
      supplemented.




31
            Incorporated
      by reference to Exhibit 4.3 included with our Current Report on Form 8-K,
      filed with the SEC on October 2, 2007, as amended and
      supplemented.




32
            Incorporated
      by reference to Exhibit 4.2 included with our Current Report on Form 8-K
      filed with the SEC on April 2, 2008.33
            Incorporated
      by reference to Exhibit 4.3 included with our Current Report on Form 8-K
      filed with the SEC on April 2, 2008.34
            Incorporated
      by reference to Exhibit 4.4 included with our Current Report on Form 8-K,
      filed with the SEC on October 2, 2007, as amended and
      supplemented.


50




35
              Incorporated
      by reference to Exhibit 4.5 included with our Current Report on Form 8-K
      filed with the SEC on January 23, 2008.36
              Incorporated
      by reference to Exhibit 4.4 included with our Current Report on Form 8-K
      filed with the SEC on April 2, 2008.37
              Incorporated
      by reference to Exhibit 4.1 included with our Current Report on Form 8-K
      filed with the SEC on November 12, 2008.38
              Incorporated
      by reference to Exhibit 4.2 included with our Current Report on Form 8-K
      filed with the SEC on November 12, 2008.39
              Incorporated
      by reference to Exhibit 4.3 included with our Current Report on Form 8-K
      filed with the SEC on November 12, 2008.40
              Incorporated
      by reference to Exhibit 4.4 included with our Current Report on Form 8-K
      filed with the SEC on November 12, 2008.41
              Incorporated
      by reference to Exhibit 4.1 included with our Current Report on Form 8-K
      filed with the SEC on January 8, 2009.42
              Incorporated
      by reference to Exhibit 4.2 included with our Current Report on Form 8-K
      filed with the SEC on January 8, 2009.43
              Incorporated
      by reference to Exhibit 4.2 included with our Current Report on Form 8-K
      filed with the SEC on June 25, 2008.44
              Incorporated
      by reference to Exhibit 4.3 included with our Current Report on Form 8-K
      filed with the SEC on June 25, 2008.45
              Incorporated
      by reference to Exhibit 10.1 included with our Current Report on Form 8-K,
      filed with the SEC on October 13,
2005.




46
            Incorporated
      by reference to Exhibit 10.2 included with our Current Report on Form 8-K,
      filed with the SEC on November 18,
2005.




47
            Filed
      herewith.




48
            Incorporated
      by reference to Exhibit 10.4 included with our Current Report on Form 8-K,
      filed with the SEC on November 18,
2005.





49
            Incorporated
      by reference to Exhibit 10.5 to our Registration Statement on Form SB-2,
      originally filed with the SEC on March 9, 2006, as amended and
      supplemented.




50
            Incorporated
      by reference to Exhibit 10.6 to our Registration Statement on Form SB-2,
      originally filed with the SEC on March 9, 2006, as amended and
      supplemented.




51
            Incorporated
      by reference to Exhibit 10.1 included with our Current Report on Form 8-K,
      filed with the SEC on October 23,
2006.




52
            Incorporated
      by reference to Exhibit 10.2 included with our Current Report on Form 8-K
      filed with the SEC on October 23,
2006.




53
            Incorporated
      by reference to Exhibit 10.13 to our Registration Statement on Form SB-2,
      originally filed with the SEC on March 9, 2006 as amended and
      supplemented.




54
            Incorporated
      by reference to Exhibit 10.1 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.




55
            Incorporated
      by reference to Exhibit 10.2 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.




56
            Incorporated
      by reference to Exhibit 10.3 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.




57
            Incorporated
      by reference to Exhibit 10.4 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.




58
            Incorporated
      by reference to Exhibit 10.5 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.




59
            Incorporated
      by reference to Exhibit 10.6 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.




60
            Incorporated
      by reference to Exhibit 10.7 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.




61
            Incorporated
      by reference to Exhibit 10.8 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.




62
            Incorporated
      by reference to Exhibit 10.9 included with our Current Report on Form 8-K,
      filed with the SEC on October 2,
2007.


51




63
            Incorporated
      by reference to Exhibit 10.10 included with our Current Report on Form
      8-K, filed with the SEC on October 2,
2007.




64
            Incorporated
      by reference to Exhibit 10.11 included with our Current Report on Form
      8-K, filed with the SEC on October 2,
2007.




65
            Incorporated
      by reference to Exhibit 10.1 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.66
            Incorporated
      by reference to Exhibit 10.2 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.67
            Incorporated
      by reference to Exhibit 10.3 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.68
            Incorporated
      by reference to Exhibit 10.4 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.69
            Incorporated
      by reference to Exhibit 10.5 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.70
            Incorporated
      by reference to Exhibit 10.6 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.71
            Incorporated
      by reference to Exhibit 10.7 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.72
            Incorporated
      by reference to Exhibit 10.8 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.73
            Incorporated
      by reference to Exhibit 10.9 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.74
            Incorporated
      by reference to Exhibit 10.10 included with our Current Report on Form 8-K
      filed with the SEC on November 20, 2008.75
            Incorporated
      by reference to Exhibit 10.1 included with our Current Report on Form 8-K
      filed with the SEC on February 20, 2009.76
            Incorporated
      by reference to Exhibit 14.1 included with our Current Report on Form 8-K
      filed with the SEC on November 18,
2005.




77
            Incorporated
      by reference to our Registration Statement on Form SB-2, originally filed
      with the SEC on March 9, 2006, as amended and
  supplemented.




78
            Filed
      herewith.




79
            Incorporated
      by reference to Exhibit 99.2 included with our Current Report on Form 8-K,
      filed with the SEC on November 18,
2005.




80
            Incorporated
      by reference to Exhibit 99.3 included with our Current Report on Form 8-K,
      filed with the SEC on November 18,
2005.


52




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.


MDwerks,
      Inc.By:
              /s/
      David M. BarnesName:
      David M. Barnes
                Title:
      Chief Executive Officer
                Date:
      April 15, 2009




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.





Signature
                                              
                                              Title
                                              
                                              Date/s/
      David M. Barnes
                                              
                                              Chief
      Executive Officer, President and
                                              
                                              April
      15, 2009David
      M. Barnes
                                              
                                              Director
      (Principal Executive Officer)/s/
      Vincent Colangelo
                                              
                                              Chief
      Financial Officer and
                                              
                                              April
      15, 2009Vincent
      Colangelo
                                              
                                              Secretary
      (Principal Accountingand
      Financial Officer)/s/
      Adam Friedman
                                              
                                              Controller
                                              
                                              April
      15, 2009Adam
      Friedman/s/
      Peter Dunne
                                              
                                              Director
                                              
                                              April
      15, 2009Peter
      Dunne/s/
      Paul Kushner
                                              
                                              Director
                                              
                                              April
      15, 2009Paul
      Kushner/s/
      Sheldon Steiner
                                              
                                              Director
                                              
                                              April
      15, 2009Sheldon
      Steiner




/s/
      Chris Phillips
                        
                        Director
                        
                        April
      15, 2009Chris
      Phillips/s/
      Shad Stastney
                        
                        Director
                        
                        April
      15, 2009Shad
      Stastney


53




MDWERKS, INC. AND
SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS
 DECEMBER 31, 2008 AND
2007
  INDEX
  PagesReport
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
              F-3Consolidated
      Statements of Operations for the Years Ended December 31, 2008 and
      2007
              F-4Consolidated
      Statements of Changes in Stockholders’ Deficiency for the Years Ended
      December 31, 2008 and 2007
              F-5Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008 and
      2007
              F-6Notes
      to Consolidated Financial Statements
              F-7
      to F-29
  
  REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
  To the Audit
Committee
 MDwerks, Inc.
  We have audited the accompanying
consolidated balance sheets of MDwerks, Inc. and Subsidiaries as of
December 31, 2008 and 2007 and the related consolidated statements of
operations, changes in stockholders’ deficiency and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
  We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.  Our audit included consideration of internal control over
financial reporting as a basis of designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
  In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of MDwerks, Inc. and Subsidiaries as of December 31,
2008 and 2007 and the results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
  The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements, the
Company has suffered recurring losses from operations that raises substantial
doubt about its ability to continue as a going concern. Management’s plan in
regard to these matters is also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
  /s/ SHERB & CO.,
LLP
 Certified Public
Accountants
   Boca Raton, Florida
 April 2, 2009
  F-2
  MDWERKS,
INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 DECEMBER
31, 2008 AND 2007
  2008
                
                
                2007ASSETSCurrent
      assets:Cash
                
                $
                1,223,807
                
                
                $
                320,903Notes
      receivable
                
                
                1,277,722
                
                
                
                1,652,079Accounts
      receivable, net of allowances of $200,000 for 2008 and $0 for
      2007
                
                
                188,048
                
                
                
                66,985Leases
      receivable
                
                
                85,000
                
                
                
                —Prepaid
      expenses and other
                
                
                132,160
                
                
                
                215,073Total
      current assets
                
                
                2,906,737
                
                
                
                2,255,040Long-term
      assets:Available-for-sale
      securities, at fair market value
                
                
                61,750
                
                
                
                —Property
      and equipment, net of accumulated depreciation of $179,211 for 2008 and
      $92,995 for 2007
                
                
                48,120
                
                
                
                115,902Debt
      issuance and offering costs, net of accumulated amortization of $505,478
      for 2008 and $273,997 for 2007
                
                
                631,037
                
                
                
                400,246Total
      assets
                
                $
                3,647,644
                
                
                $
                2,771,188LIABILITIES,
      TEMPORARY EQUITY AND STOCKHOLDERS' DEFICIENCYCurrent
      liabilities:Notes
      payable, net
                
                $
                1,290,870
                
                
                $
                2,942,842Loans
      payable
                
                
                —
                
                
                
                109,559Accounts
      payable
                
                
                161,516
                
                
                
                351,482Accrued
      expenses
                
                
                602,625
                
                
                
                686,917Dividends
      payable
                
                
                948,222
                
                
                
                —Deferred
      revenue
                
                
                —
                
                
                
                11,296Total
      current liabilities
                
                
                3,003,233
                
                
                
                4,102,096Long-term
      liabilities:Notes
      payable, net of discount of $2,325,796 for 2008 and $2,566,395 for
      2007
                
                
                —
                
                
                
                65,763Deferred
      revenue, less current portion
                
                
                —
                
                
                
                1,613Total
      liabilities
                
                
                3,003,233
                
                
                
                4,169,472Temporary
      equity:Mandatorily
      Redeemable Convertible Series B Preferred Stock, $.001 par value, 1,250
      shares authorized;1,000 shares issued and outstanding for 2008 and 250
      shares authorized; 200 shares issued and outstanding for 2007,
      net
                
                
                4,052,083
                
                
                
                1,346,326Total
      temporary equity
                
                
                4,052,083
                
                
                
                1,346,326Stockholders'
      deficiency:Preferred
      stock, Series A preferred stock, $.001 par value, 10,000,000 shares
      authorized;2
      shares issued and outstanding for 2008 and 2007
                
                
                —
                
                
                
                —Common
      stock, $.001 par value, 200,000,000 shares authorized;14,370,208
      shares issued and outstanding for 2008 and12,940,065
      shares issued and outstanding for 2007
                
                
                14,370
                
                
                
                12,940Additional
      paid-in capital
                
                
                47,240,654
                
                
                
                33,732,690Accumulated
      deficit
                
                
                (49,669,646
                )
                
                
                (36,490,240
                )Accumulated
      other comprehensive loss
                
                
                (993,050
                )
                
                
                —Total
      stockholders' deficiency
                
                
                (3,407,672
                )
                
                
                (2,744,610
                )Total
      liabilities, temporary equity and stockholders' deficiency
                
                $
                3,647,644
                
                
                $
                2,771,188
  The
accompanying notes should be read in conjunction with the consolidated financial
statements
  F-3
  MDWERKS,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 
 2008
                                  
                                  
                                  2007Revenue:Service
      fees
                                  
                                  $
                                  493,805
                                  
                                  
                                  $
                                  470,149Financing
      income
                                  
                                  
                                  288,935
                                  
                                  
                                  
                                  107,102Claims
      purchase revenue
                                  
                                  
                                  98,916
                                  
                                  
                                  
                                  —Total
      revenue
                                  
                                  
                                  881,656
                                  
                                  
                                  
                                  577,251Operating
      expenses:Compensation
                                  
                                  
                                  4,885,000
                                  
                                  
                                  
                                  5,286,985Consulting
      expenses
                                  
                                  
                                  239,124
                                  
                                  
                                  
                                  760,284Professional
      fees
                                  
                                  
                                  725,107
                                  
                                  
                                  
                                  411,917Selling,
      general and administrative
                                  
                                  
                                  2,367,113
                                  
                                  
                                  
                                  1,562,845Total
      operating expenses
                                  
                                  
                                  8,216,344
                                  
                                  
                                  
                                  8,022,031Loss
      from operations
                                  
                                  
                                  (7,334,688
                                  )
                                  
                                  
                                  (7,444,780
                                  )Other
      income (expense):Interest
      income
                                  
                                  
                                  1,088,270
                                  
                                  
                                  
                                  46,978Interest
      expense
                                  
                                  
                                  (1,561,908
                                  )
                                  
                                  
                                  (2,484,835
                                  )Debt
      conversion expense
                                  
                                  
                                  (371,265
                                  )
                                  
                                  
                                  —Other
      income
                                  
                                  
                                  489
                                  
                                  
                                  
                                  307Total
      other income (expense)
                                  
                                  
                                  (844,414
                                  )
                                  
                                  
                                  (2,437,550
                                  )Net
      loss
                                  
                                  $
                                  (8,179,102
                                  )
                                  
                                  $
                                  (9,882,330
                                  )NET
      LOSS PER COMMON SHARE - basic and diluted (1)
                                  
                                  $
                                  (0.62
                                  )
                                  
                                  $
                                  (0.77
                                  )WEIGHTED-AVERAGE
      COMMON SHARES OUTSTANDING – basic and diluted
                                  
                                  
                                  13,158,885
                                  
                                  
                                  
                                  12,780,503
 
 (1)
Diluted loss per common share is not presented since the impact of stock options
and warrants would be antidilutive.
  The
accompanying notes should be read in conjunction with the consolidated financial
statements
  F-4
  MDWERKS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
  Series
      A
                                                                                Preferred
      Stock
                                                                                $.001
       Par Value
                                                                              
                                                                              
                                                                              Common
      Stock
                                                                                $.001 Par
      ValueNumber
                                                                                of
                                                                                Shares
                                                                              
                                                                              
                                                                              Amount
                                                                              
                                                                              
                                                                              Number
                                                                                of
                                                                                Shares
                                                                              
                                                                              
                                                                              Amount
                                                                              
                                                                              
                                                                              Additional
                                                                                Paid-in
      Capital
                                                                              
                                                                              
                                                                              Accumulated
      Deficit
                                                                              
                                                                              Accumulated
      Other Comprehensive Income/Loss
                                                                              
                                                                              Total
                                                                                Stockholders’
                                                                                DeficiencyBalance,
      December 31, 2006
                                                                              
                                                                              
                                                                              5
                                                                              
                                                                              
                                                                              $
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              12,580,065
                                                                              
                                                                              
                                                                              $
                                                                              12,580
                                                                              
                                                                              
                                                                              $
                                                                              28,906,508
                                                                              
                                                                              
                                                                              $
                                                                              (26,607,910
                                                                              )
                                                                              —
                                                                              
                                                                              $
                                                                              2,311,178Stock
      Based Compensation
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              3,196,046
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              3,196,046Amortization
      of deferred compensation — consultants
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              266,038
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              266,038Conversion
      of Series A convertible preferred stock
                                                                              
                                                                              
                                                                              (3
                                                                              )
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              60,000
                                                                              
                                                                              
                                                                              
                                                                              60
                                                                              
                                                                              
                                                                              
                                                                              (60
                                                                              )
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              —Issuance
      of warrants in connection with notes payable
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              1,214,458
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              1,214,458Common
      stock issued for services
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              300,000
                                                                              
                                                                              
                                                                              
                                                                              300
                                                                              
                                                                              
                                                                              
                                                                              149,700
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              150,000Net
      loss
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              (9,882,330
                                                                              )
                                                                              —
                                                                              
                                                                              
                                                                              (9,882,330
                                                                              )Balance,
      December 31, 2007
                                                                              
                                                                              
                                                                              2
                                                                              
                                                                              
                                                                              $
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              12,940,065
                                                                              
                                                                              
                                                                              $
                                                                              12,940
                                                                              
                                                                              
                                                                              $
                                                                              33,732,690
                                                                              
                                                                              
                                                                              $
                                                                              (36,490,240
                                                                              )
                                                                              —
                                                                              
                                                                              $
                                                                              (2,744,610
                                                                              )Stock
      Based Compensation
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              2,374,905
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              2,374,905Amortization
      of deferred compensation — consultants
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              22,168
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              22,168Issuance
      of warrants in connection with notes payable and temporary
      equity
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              10,307,723
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              10,307,723Common
      stock issued in connection with debt conversion
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              1,430,143
                                                                              
                                                                              
                                                                              
                                                                              1,430
                                                                              
                                                                              
                                                                              
                                                                              803,168
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              804,598Dividends
      on preferred stock
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              (5,000,304
                                                                              )
                                                                              —
                                                                              
                                                                              
                                                                              (5,000,304
                                                                              )Other
      comprehensive income/loss
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              (993,050
                                                                              )
                                                                              
                                                                              (993,050
                                                                              )Net
      loss
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              (8,179,102
                                                                              )
                                                                              —
                                                                              
                                                                              
                                                                              (8,179,102
                                                                              )Balance,
      December 31, 2008
                                                                              
                                                                              
                                                                              2
                                                                              
                                                                              
                                                                              $
                                                                              —
                                                                              
                                                                              
                                                                              
                                                                              14,370,208
                                                                              
                                                                              
                                                                              $
                                                                              14,370
                                                                              
                                                                              
                                                                              $
                                                                              47,240,654
                                                                              
                                                                              
                                                                              $
                                                                              (49,669,646
                                                                              )
                                                                              (993,050
                                                                              )
                                                                              $
                                                                              (3,407,672
                                                                              )
  The
accompanying notes should be read in conjunction with the consolidated financial
statements
 
 F-5
  MDWERKS,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
  2008
                                
                                
                                2007Cash
      flows from operating activities:Net
      loss
                                
                                $
                                (8,179,102
                                )
                                
                                $
                                (9,882,330
                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                
                                
                                86,216
                                
                                
                                
                                45,439Amortization
      of debt issuance cost
                                
                                
                                —
                                
                                
                                
                                10,954Amortization
      of debt discount
                                
                                
                                1,202,003
                                
                                
                                
                                2,021,396Amortization
      of deferred offering costs
                                
                                
                                259,638
                                
                                
                                
                                207,202Amortization
      of deferred compensation
                                
                                
                                22,168
                                
                                
                                
                                266,040Bad
      debts
                                
                                
                                689,296
                                
                                
                                
                                —Stock-based
      compensation
                                
                                
                                2,374,905
                                
                                
                                
                                3,196,046Debt
      conversion expense
                                
                                
                                371,265
                                
                                
                                
                                —Common
      stock issued for services
                                
                                
                                —
                                
                                
                                
                                150,000Changes
      in assets and liabilities:Notes
      receivable
                                
                                
                                (680,443
                                )
                                
                                
                                (1,178,386
                                )Accounts
      receivable
                                
                                
                                (810,358
                                )
                                
                                
                                (11,394
                                )Leases
      receivable
                                
                                
                                (85,000
                                )
                                
                                
                                —Prepaid
      expenses and other
                                
                                
                                82,913
                                
                                
                                
                                (141,276
                                )Accounts
      payable
                                
                                
                                (189,966
                                )
                                
                                
                                83,560Accrued
      expenses
                                
                                
                                (84,292
                                )
                                
                                
                                308,158Deferred
      revenue
                                
                                
                                (12,909
                                )
                                
                                
                                (43,050
                                )Total
      adjustments
                                
                                
                                3,225,436
                                
                                
                                
                                4,914,689Net
      cash used in operating activities
                                
                                
                                (4,953,666
                                )
                                
                                
                                (4,967,641
                                )Cash
      flows from investing activities:Purchase
      of property and equipment
                                
                                
                                (18,434
                                )
                                
                                
                                (5,209
                                )Net
      cash used in investing activities
                                
                                
                                (18,434
                                )
                                
                                
                                (5,209
                                )Cash
      flows from financing activities:Proceeds from notes payable
                                
                                
                                300,000
                                
                                
                                
                                825,000Proceeds from loans payable
                                
                                
                                —
                                
                                
                                
                                250,000Repayment of notes payable
                                
                                
                                (1,825,000
                                )
                                
                                
                                (598,362
                                )Repayment of loan payable
                                
                                
                                (109,559
                                )
                                
                                
                                (212,916
                                )Proceeds from sale of Mandatorily Redeemable Series B preferred
      stock
                                
                                
                                8,000,000
                                
                                
                                
                                2,000,000Placement fees and other expenses paid
                                
                                
                                (490,437
                                )
                                
                                
                                (116,810
                                )Net
      cash provided by financing activities
                                
                                
                                5,875,004
                                
                                
                                
                                2,146,912Net
      increase (decrease) in cash
                                
                                
                                902,904
                                
                                
                                
                                (2,825,938
                                )Cash
      - beginning of year
                                
                                
                                320,903
                                
                                
                                
                                3,146,841Cash
      - end of year
                                
                                $
                                1,223,807
                                
                                
                                $
                                320,903Supplemental
      disclosure of cash flow information:Cash
      paid for:Interest
                                
                                $
                                356,194
                                
                                
                                $
                                351,939Non-cash
      investing and financing activities:Common
      stock issued for debt
                                
                                $
                                433,333
                                
                                
                                $
                                —Issuance
      of warrants in connection with notes payable
                                
                                $
                                10,307,723
                                
                                
                                $
                                1,214,458
 
 The
accompanying notes should be read in conjunction with the consolidated financial
statements
 
 F-6
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
1 — ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Organization
  On
November 16, 2005, a wholly-owned subsidiary of MDwerks, Inc. (f/k/a Western
Exploration, Inc., and hereinafter referred to as the ‘‘Company’’) was merged
with and into MDwerks Global Holdings, Inc., a Florida corporation
(‘‘MDwerks’’), with MDwerks surviving. The Company acquired all of the
outstanding capital stock of MDwerks in exchange for issuing 9,246,339 shares of
the Company’s common stock, par value $0.001 per share to MDwerks’ stockholders,
which at closing of the Merger Agreement represented approximately 87.4% of the
issued and outstanding shares of the Company’s common stock. In connection with
the Merger, the Company changed its corporate name to MDwerks, Inc.
  The
Company has four subsidiaries. Xeni Medical Systems, Inc. ("Xeni Systems") was
incorporated under the laws of the state of Delaware on July 21, 2004.
 Through February 28, 2009, Xeni Systems provided a Web-based package of
electronic claims solutions to the healthcare provider industry through Internet
access to it’s ‘‘MDwerks’’ suite of proprietary products and services so that
healthcare providers can improve daily insurance claims transaction processing,
administration and management. Xeni Financial Services, Corp. ("Xeni Financial")
was incorporated under the laws of the state of Florida on February 3,
2005.  Xeni Systems is now a dormant entity. Xeni Financial offers
financing and advances to health care providers secured by claims processed
through the MDwerks system or secured through other means. Xeni Medical Billing,
Corp. ("Xeni Billing") was incorporated under the laws of the state of Florida
on March 2, 2005. Through February 28, 2009, Xeni Billing offered health care
providers billing services facilitated through the MDwerks
system.  Xeni Billing is now a dormant entity. Xeni Patient Access
Solutions, Inc. (“XPAS”) was incorporated under the laws of the state of Florida
on May 30, 2007, originally formed as Patient Payment Solutions, Inc. and was
renamed March 2, 2009.  XPAS offers health care providers’ digital
medical records solutions.
  Going
concern
  The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered losses
that raise substantial doubt about its ability to continue as a going concern.
While the Company is attempting to attain revenue growth and profitability, the
growth has not been significant enough to support the Company’s daily
operations. Management intends to attempt to raise additional funds by way of a
public or private offering and make strategic acquisitions. While the Company
believes in the viability of its new digital medical records solution strategy,
its ability to improve sales volume and in its ability to raise additional
funds, there can be no assurances to that effect. The ability of the Company to
continue as a going concern is dependent on the Company’s ability to further
implement its business plan and generate revenue. The financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern. Management believes that the actions presently
being taken to further implement its business plan and generate revenue,
including additional institutional financing similar to financing described in
Note 5, 7, 8 & 10, provide the opportunity for the Company to continue as a
going concern.
  As
reflected in the accompanying consolidated financial statements, the Company has
a stockholders’ deficiency of $3,407,672 and working capital deficit of $96,496
at December 31, 2008 and a stockholder’s deficiency of $2,744,610 and working
capital deficiency of $1,847,056 at December 31, 2007.
  Basis of
presentation
  The
consolidated statements include the accounts of the Company and its wholly owned
subsidiaries, Xeni Medical, Xeni Financial, Xeni Billing and XPAS. All
significant intercompany balances and transactions have been
eliminated.
 
 Certain
amounts previously reported in 2007 have been reclassified to conform to the
classifications used in 2008. Such reclassifications have no effect on the
reported net loss.
  F-7
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
1 — ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)
  Use of
estimates
  The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
  Fair value
measurements
 
 Included
in various investment related line items in the financial statements are certain
financial instruments carried at fair value.  Other financial
instruments are periodically measured at fair value, such as when impaired, or,
for certain bonds and preferred stock when carried at the lower of cost or
market.
 
 The fair
value of an asset is the amount at which that asset could be bought or sold in a
current transaction between willing parties, that is, other than in a forced or
liquidation sale.  The fair value of a liability is the amount at
which that liability could be incurred or settled in a current transaction
between willing parties, that is, other than in a forced or liquidation
sale.
 
 Fair
values are based on quoted market prices when available.  When market
prices are not available, fair value is generally estimated using discounted
cash flow analyses, incorporating current market inputs for similar financial
instruments with comparable terms and credit quality.  In instances
where there is little or no market activity for the same or similar instruments,
the Company estimates fair value using methods, models and assumptions that
management believes market participants would use to determine a current
transaction price.  These valuation techniques involve some level of
management estimation and judgment which becomes significant with increasingly
complex instruments or pricing models.  Where appropriate, adjustments
are included to reflect the risk inherent in a particular methodology, model or
input used.
 
 The
Company's financial assets and liabilities carried at fair value have been
classified, for disclosure purposes, based on a hierarchy defined by SFAS No.
157, Fair Value
Measurements.   The hierarchy gives the highest ranking to
fair values determined using unadjusted quoted prices in active markets for
identical assets and liabilities (Level 1) and the lowest ranking to fair values
determined using methodologies and models with unobservable inputs (Level 3). An
asset’s or a liability’s classification is based on the lowest level input that
is significant to its measurement.  For example, a Level 3 fair value
measurement may include inputs that are both observable (Levels 1 and 2) and
unobservable (Level 3).   The levels of the fair value hierarchy
are as follows:
 
 Level 1 - Values are
      unadjusted quoted prices for identical assets and liabilities in active
      markets accessible at the measurement
  date.
  Level 2
      –  Inputs include quoted prices for similar assets or
      liabilities in active markets, quoted prices from those willing to trade
      in markets that are not active, or other inputs that are observable or can
      be corroborated by market data for the term of the
      instrument.  Such inputs include market interest rates and
      volatilities, spreads and yield
curves.
 
 Level 3– Certain
      inputs are unobservable (supported by little or no market activity) and
      significant to the fair value measurement.  Unobservable inputs
      reflect the Company’s best estimate of what hypothetical market
      participants would use to determine a transaction price for the asset or
      liability at the reporting date.
  F-8
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
1 — ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)
  Fair value measurements
(continued)
 
 Financial
assets and liabilities measured at fair value on a recurring basis
 
 The
following table provides information as of December 31, 2008 about the Company’s
financial assets and liabilities measured at fair value on a recurring
basis.
 
 (In
      millions)
                              
                              Level
      1
                              
                              
                              Level
      2
                              
                              
                              Level
      3
                              
                              
                              TotalAssets at fair value:Cash
      and Cash Equivalents – Certificates of Deposit
                              
                              $
                              —
                              
                              
                              $
                              900,000
                              
                              
                              $
                              —
                              
                              
                              $
                              900,000Notes
      receivable
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,277,722
                              
                              
                              
                              1,277,722Leases
      receivable
                              
                              
                              —
                              
                              
                              
                              
                              
                              
                              
                              85,000
                              
                              
                              
                              85,000Available-for-sale
      securities
                              
                              
                              61,750
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              61,750Total
      assets at fair value
                              
                              $
                              61,750
                              
                              
                              $
                              900,000
                              
                              
                              $
                              1,362,722
                              
                              
                              $
                              2,324,472Liabilities at fair value:Notes
      payable
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              1,290,870
                              
                              
                              $
                              1,290,870Total
      liabilities at fair value
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              1,290,870
                              
                              
                              $
                              1,290,870
  Cash and cash
equivalents
  For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less and
money market accounts to be cash equivalents.  At December 31, 2008,
the Company had $900,000 in certificates of deposit that matured on March 31,
2009.
  At
various times, the Company has deposits in excess of the Federal Deposit
Insurance Corporation limit. At December 31, 2008, the Company was $783,578 in
excess of the $250,000 limit in one account. The Company has not experienced any
losses on these accounts.
 
 Accounts and Notes
Receivable
  Accounts
and notes receivable are reported at their outstanding unpaid principal balances
reduced by an allowance for doubtful accounts. The Company estimates doubtful
accounts based on historical bad debts, factors related to specific customers’
ability to pay and current economic trends. The Company writes off receivables
against the allowance when a balance is determined to be
uncollectible.  The Company recorded an  allowance of
$200,000 for one client at December 31, 2008.
 
 Advertising
  The
Company expenses advertising costs as incurred. Advertising costs charged to
operations were approximately $0 and $28,000 for the years ended December 31,
2008 and 2007, respectively.
  Property and
equipment
  Property
and equipment are stated at cost. Depreciation and amortization are provided
using the straight-line method over the estimated useful life.  In
2008, the Company lowered the depreciable life of computers from five years to
three years resulting in an additional $42,731 of expense.
  F-9
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
1 — ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)
 
 Revenue
recognition
  The
Company follows the guidance of the Securities and Exchange Commission’s
(‘‘SEC’’) Staff Accounting Bulletin 104 for revenue recognition. In
general, the Company records revenue when persuasive evidence of an arrangement
exists, services have been rendered or product delivery has occurred, the sales
price to the customer is fixed or determinable, and collectibility is reasonably
assured. The following policies reflect specific criteria for the various
revenues streams of the Company.
  Revenue
derived from fees related to digital pen sales and contract management services
are generally recognized when services are provided to the
customer.
 
 The
Company, through its subsidiaries, provided advance funding for medical claims
and term loan services to unaffiliated healthcare providers that were customers
of the Company. The customer advances were typically collateralized by Security
Agreements granting first position liens on the medical claims submitted by its
customers to third party payers (the ‘‘Payers’’). The advances were repaid
through the remittance of payments of customer medical claims, by Payers,
directly to the Company. The Company can withhold from these advances interest,
an administrative fee and other charges as well as any amount for prior advances
that remain unpaid after a specified number of days. These interest charges,
administrative fees and other charges are recognized as revenue when earned.
There is no right of cancellation or refund provisions in these arrangements and
the Company has no further obligations once the services are
rendered.
 
 The
Company, through its subsidiaries, also provided notes and claims purchasing for
medical claims to unaffiliated healthcare providers that are customers of the
Company. The customer advances were repaid through the remittance of payments of
customer medical claims, by Payers.  The Company could charge
interest, an administrative fee and other charges as well as any amount for
prior advances that remain unpaid after a specified number of days. These
interest charges, administrative fees and other charges were recognized as
revenue when earned. There is no right of cancellation or refund provisions in
these arrangements and the Company had no further obligations once the services
are rendered.
 
 The
Company, through its subsidiaries, now provides medical equipment and software
leases from an unaffiliated healthcare customer. The customer assigns the rights
to these leases and the Company is repaid directly from the monthly lease
payments from the lessees.  The Company can receive interest, an
administrative fee and other charges. These interest charges, administrative
fees and other charges are recognized as revenue when earned. There is no right
of cancellation or refund provisions in these arrangements and the Company has
no further obligations once the services are rendered.
 
 Revenue
derived from fees related to billing and collection services were generally
recognized when the customer’s accounts receivable are collected.
  Revenue
from implementation fees were generally recognized over the term of the
customer’s agreement. Revenue derived from maintenance, administrative and
support fees were generally recognized at the time the services are provided to
the customer.
  Income
taxes
  Income
taxes are accounted for under the asset and liability method of Statement of
Financial Accounting Standards No. 109, ‘‘Accounting for Income Taxes’’ (‘‘SFAS
109’’). Under SFAS 109, 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 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. Under SFAS 109, 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.
  F-10
 
 MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 
 NOTE
1 — ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (continued)
  Loss per common
share
  Basic
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the period. Diluted loss per share
is computed by dividing net loss by the weighted average number of shares of
common stock and potentially dilutive securities outstanding during each period.
For the year ended  December 31, 2008 and 2007, the Company had
outstanding options to purchase an aggregate of  5,405,080 and
3,514,250 shares of common stock, respectively, warrants to purchase an
aggregate of 57,925,946 and 5,733,012 shares of common stock, respectively,
40,000 and 40,000 shares of common stock, respectively, issuable upon conversion
of Series A preferred stock, 13,333,334 and 888,889 shares of common stock,
respectively, issuable upon conversion of Series B preferred stock, and
1,474,074 and 2,222,222 shares of common stock, respectively, issuable upon
conversion of notes payable which could potentially dilute future earnings per
share. Diluted loss per common share has not been presented for the year ended
December 31, 2008 and 2007 since the impact of the stock options and warrants
would be antidilutive.
 
 Concentration of Credit
Risk
  The Company had one customer that
accounted for approximately 83% of total notes receivable for the year ended
December 31, 2008.   The Company did not have any
significant concentrations in revenue.
 
 F-11
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
1 — ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
  Stock-based
compensation
 
 The fair
value of stock options granted to employees and directors, is estimated at the
date of grant using the Black-Scholes option-pricing model, which takes into
consideration the share price at the date of grant, the exercise price of the
option, the expected life of the option, expected interest rates and the
expected volatility. The value of stock options, as noted, is recognized as
compensation expense on a straight-line basis, over the requisite service period
of the entire award.
 
 Through
December 31, 2008, due to the lack of adequate history of its own stock
volatility, the Company estimated its own expected stock volatility based on the
historical stock volatility of three other comparable publicly held companies.
During 2008, as the Company accumulated its own volatility history over longer
periods of time, the Company’s assumptions about its stock price volatility were
based on a rate that was derived by taking into consideration the volatility
rates of the aforesaid comparable publicly held companies as well as its own
historical volatility rates. Beginning in 2008, the Company estimates its
expected stock volatility based on its own historical stock volatility
rates.
 
 Valuation
Assumptions for Stock Options
 
 The fair
value for each stock option granted to employees and directors during the years
ended December 31, 2008 and 2007, was estimated at the date of grant using the
Black-Scholes option-pricing model, assuming no dividends and the following
average assumptions:
 
 Year
      ended
                      December
      312008
                    
                    
                    2007Calculated
      risk-free interest rate
                    
                    
                    2.66
                    %
                    
                    
                    3.45
                    %Calculated
      contractual life (in years)
                    
                    
                    10.0
                    
                    
                    
                    10.0Calculated
      volatility
                    
                    
                    117.43
                    %
                    
                    
                    114.43
                    %
 
 The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant for periods corresponding with the expected life of the
option.
 
 The
contractual life represents the period of time that options granted are
outstanding.  Options and their terms including required service
period, contractual terms or vesting conditions are granted based upon
recommendations of management and Board approval and vest based upon time and
continuous service with the company.  There are 15,000,000 shares
authorized for stock option grants.
 
 In
December 2007, the SEC published Staff Accounting Bulletin (“SAB”)
No. 110, which amends SAB No. 107 by extending the usage of the
Simplified Method, as discussed in SAB No. 107, in developing an estimate
of expected term of “plain vanilla” share options in accordance with SFAS
No. 123 (revised 2004), ”Share-Based Payment”. SAB
No. 110 was declared effective on January 1, 2008, and allows companies, which
do not have sufficient historical experience, to provide a reasonable estimate
to continue use of the Simplified Method for estimating the expected term of
“plain vanilla” share option grants after December 31, 2007. Accordingly, the
Company will continue to use the Simplified Method until there is sufficient
historical experience to provide a reasonable estimate of expected term. SAB No.
110 was effective for the Company on January 1, 2008.
  F-12
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 Recent accounting
pronouncements
  In April 2008, the FASB issued FSP FAS
142-3, “Determination of the Useful Life of Intangible
Assets,”, which amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of intangible assets under FASB 142
“Goodwill and Other
Intangible Assets”.The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of the expected cash flows used to measure the fair value of
the asset under FASB 141 (revised 2007) “Business Combinations”and other U.S. generally accepted
accounting principles.This
FSP is effective for financial statements issued for fiscal years beginning
after December 15, 2008, early adoption is prohibited.The Company is currently evaluating the
potential impact of FSP FAS
142-3 on its consolidated financial statements.
 
 In May2008, the FASB issued FSP Accounting
Principles Board (“APB”) Opinion No.14-1, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including
PartialCash
Settlement).”The FSP
clarifies the accounting for convertible debt instruments that may be settled in
cash (including partial cash settlement) upon conversion. The FSP requires
issuers to account separately for the liability and equity components
ofcertain convertible debt instruments in
a manner that reflects the issuer’s nonconvertible debt (unsecured debt)
borrowing rate when interest cost is recognized. The FSP requires bifurcation of
a component of the debt, classification of that component inequity and the accretion of the
resulting discount on the debt to be recognized as part of interest expense in
our consolidated statement of operations. The FSP requires retrospective
application to the terms of instruments as they existed for all
periodspresented. The FSP is effective for us
as of January 1, 2009 and early adoption is not permitted. The Company is
currently evaluating the potential impact of FSP APB 14-1 upon its consolidated
financial statements.
  F-13
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
 
 Recent accounting
pronouncements (continued)
  In
May 2008, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 162, The Hierarchy of Generally Accepted Accounting
Principles. This standard is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with generally accepted accounting principles in the United States
for non-governmental entities. SFAS No. 162 is effective 60 days following
approval by the U.S. Securities and Exchange Commission ("SEC") of the Public
Company Accounting Oversight Board's amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. We do not expect SFAS No. 162 to have a material impact on the
preparation of our consolidated financial statements.
 
 In June 2008, the FASB ratified EITF
Issue No.07-5,
“Determining Whether an
Instrument (or an Embedded Feature) Is Indexed to an Entity’s Own Stock”(EITF 07-5). EITF 07-5 provides that an entity should use a two
step approach to evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including evaluating the
instrument’s contingent exercise and settlement
provisions. It alsoclarifies on the impact of foreign
currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years
beginning after December 15, 2008.We do not expect EITF 07-5 to
have a material impact on the preparation of our consolidated financial
statements.  The Company
is currently evaluating the potential impact ofEITF 07-5 1 upon its consolidated financial
statements.
 
 In
October 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-3 Determining
the Fair Value  of a Financial Asset When Market for That Asset Is Not
Active, which clarifies the application of FASB Statement No. 157, Fair Value
Measurements, in a market that is not active, it does not require any new fair
value measurements.  We do not expect FAS 157-3 to have a material
impact on the preparation of our consolidated financial statements as the
Company does not currently have any investments affected by this
guidance
 
 The
Company does not believe that any other recently issued, but not yet effective
accounting standards will have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
  F-14
 
 MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
2 — ACCOUNTS AND NOTES RECEIVABLE
  Accounts
receivable are recorded when revenue has been recognized but not yet collected.
The Company had net $188,048 of accounts receivable as of December 31, 2008 and
$66,985 as of December 31, 2007 from claims purchased, implementation,
processing, collection, and other fees, and disbursements not yet
collected.
  At
December 31, 2008, the Company had advanced funding to two healthcare providers
or vendors under lines of credit and note agreements aggregating $1,277,722.
Advances under the lines of credit are due to be repaid out
of providers’ claims collections, as defined in the
agreement.  The notes receivable under note agreements are payable as
the provider collects certain receivables.  The Company charges the
healthcare providers interest and other charges as defined in the
agreements.   At December 31, 2007, the Company had $1,652,079 of
notes receivable.
 
 At
December 31, 2008, the Company evaluated the collectibility of all accounts and
notes receivables and determined that impairment existed on certain
receivables.  Based upon amounts due from the loan
agreements.  The Company wrote off approximately $700,000 in
receivables at December 31, 2008 for four clients that were significantly past
due and that collectibility of principal and interest was
impaired.  This bad debt expense is included in Selling, General and
Administrative costs on the Consolidated Statement of Operations and as
adjustment in  Consolidated Statement of Cash Flows. The Company
recorded an allowance of $200,000 for one client at December 31,
2008.
 
 NOTE
3 — AVAILABLE-FOR-SALE SECURITIES
 
 On June
16, 2008, the Company restructured one healthcare vendor’s notes receivable
which were due and payable to the Company on June 15, 2008.  Notes
receivables of $175,000 were paid off and the remaining balance was consolidated
into a new promissory note totaling $395,835 with a new maturity date of June
15, 2009.  As consideration for the changes to the terms of these
notes, among other fees, the Company was given 920,000 shares of the healthcare
provider’s common stock when the stock was valued at $0.69 per share, 1,000,000
shares when the stock was valued at $0.31 per share and 550,000 shares when the
stock was valued at $0.20 per share as quoted on the OTC Bulletin
Board.  These stock receipts were recorded as interest income of
$1,054,800.  At December 31, 2008, the stock price decreased to $0.025
per share resulting in a $993,050 decrease in the value of the
Available-for-sale securities.  The Company revalues these securities
on a quarterly basis.  These revaluations will correspondingly adjust
the accumulated other comprehensive income/loss reported in the equity section
of the Balance Sheet.  The Company does not plan to sell these
securities within the next twelve months and has recorded this as a long-term
asset.
  F-15
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
4 — PROPERTY AND EQUIPMENT
  Property
and equipment consisted of the following as of December 31, 2008 and
2007:
  Estimated
      Life
                        
                        2008
                        
                        
                        2007Office
      furniture and equipment
                        5-7
      Years
                        
                        $
                        30,174
                        
                        
                        $
                        27,077Computer
      equipment and software
                        3-5
      Years
                        
                        
                        197,157
                        
                        
                        
                        181,820Total
                        
                        
                        
                        227,331
                        
                        
                        
                        208,897Less:
      accumulated depreciation
                        
                        
                        
                        (179,211
                        )
                        
                        
                        (92,995
                        )Property
      and equipment, net
                        
                        
                        $
                        48,120
                        
                        
                        $
                        115,902
  Depreciation
expense for the years ending December 31, 2008 and 2007 was $86,219 and $45,439,
respectively.   The Company lowered the estimated life for
computer equipment to three years in December 2008.
 
 NOTE
5 — NOTES PAYABLE
  On
each of October 19, 2006 and November 9, 2006 we received gross proceeds of
$2,500,000 ($2,375,000 net proceeds) for a total of $5,000,000 in the aggregate
($4,750,000 net proceeds  in the aggregate) in connection with a
financing provided by Gottbetter Capital Master, Ltd. (in liquidation)
“Gottbetter”, an unaffiliated accredited institutional
investor.  Pursuant to the terms of a Securities Purchase Agreement,
we issued two senior secured convertible promissory notes to Gottbetter, each in
the original principal amount of $2,500,000 at an initial conversion price of
$2.25 per share (each a ‘‘Senior Note’’ and collectively, the ‘‘Senior Notes’’),
five-year Series D Warrants to purchase 375,000 shares of our common stock at a
price of $2.25 per share (‘‘Series D Warrants’’) and five-year Series E
Warrants, as amended, to purchase 541,666 shares of our common stock at a price
of $2.25 per share (‘‘Series E Warrants’’).
 
 The
Company valued the Notes Payable at their face value and calculated the
beneficial conversion feature of the warrants using Black Scholes in deriving a
discount that is being amortized over the term of the Notes as interest expense
using a straight line method.
  On
September 27, 2007, in connection with an extension of repayment of principal
until February 1, 2008 on the Senior Notes described above, the Company granted
to Gottbetter additional five year Series D warrants to purchase 500,000 shares
of its common stock at an exercise price of $2.25 per share which warrants
expire on September 27, 2012. These warrants were treated as a discount on the
secured promissory note and were valued at $252,361 amortized over the 4-month
extension.  The fair market value of each stock warrant was estimated
on the date of grant using the Black-Scholes option-pricing model in accordance
with SFAS No. 123R using the following weighted-average assumptions: expected
dividend yield 0%; risk-free interest rate of 4.23%; volatility of 116% and an
expected term of 5 years.
 
 Upon
extending the principal payment date to February 1, 2008, we issued to
Gottbetter an amended and restated version of the Senior Note that we issued to
Gottbetter on October 20, 2006 and an amended and restated version of the Senior
Note that we issued to Gottbetter on November 9, 2006.  The Senior
Notes are now due and payable on October 1, 2011, bearing interest at the rate
of 8% per annum and interest and principal payments have been deferred and are
payable monthly, in arrears on the first day of each month commencing January 1,
2010.
 
 In
connection with obtaining the consent and waiver of Gottbetter to the financing
provided by Vicis Capital Master Fund, an unaffiliated accredited investor
(“Vicis”) described below, we entered into the Gottbetter Consent Agreement,
pursuant to which Gottbetter agreed to waive its anti-dilution rights under the
Series D Warrants, Series E Warrants and promissory notes that we previously
issued to Gottbetter and Gottbetter consented to the financing provided by
Vicis.
  F-16
 
 MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
5 — NOTES PAYABLE (continued)
 
 On March
1, 2008, the Company and Gottbetter amended the Senior Notes to extend the
maturity date of the Senior Notes to January 1, 2011 and to delay principal
payments until March 1, 2008.  In consideration of the amendment to
the Senior Notes, the Company issued to Gottbetter 1,000,000 Series I
warrants.  The Series I Warrants are exercisable at a price of $0.75
per share for a period of five years from the date of issuance.
 
 December
      31,
                          2008
                        
                        
                        December
      31,
                          2007Notes
      payable
                        
                        $
                        5,300,000
                        
                        
                        $
                        5,575,000Less
      principal repayments
                        
                        
                        (1,683,334
                        )
                        
                        
                        —Notes
      payable outstanding
                        
                        
                        3,616,666
                        
                        
                        
                        5,575,000Less:
      unamortized discount on notes payable
                        
                        
                        (2,325,796
                        )
                        
                        
                        (2,566,395
                        )Notes
      payable, net
                        
                        
                        1,290,870
                        
                        
                        
                        3,008,605Less
      current portion
                        
                        
                        (1,290,870
                        )
                        
                        
                        (2,942,842
                        )Notes
      payable, net of discount of $2,325,796 at December 31, 2008 and $2,566,395
      at December 31, 2007, less current portion
                        
                        $
                        —
                        
                        
                        $
                        65,763
  On
November 6, 2008, the Company temporarily reduced the conversion price set forth
in the Senior Note issued to Gottbetter on October 19, 2006 (the “October Note”)
from $2.25 per share to $0.303 per share with respect to a one-time conversion
of  $433,333 of Conversion Amount (as defined in the October Note). 
After the conversion price was reduced, Gottbetter converted $433,333 of
Conversion Amount into 1,430,143 shares of Common Stock of the Company. 
The Company recorded a debt conversion expense of $371,265 for the difference
between the original conversion price of $2.25 per share and the one-time
conversion price of $0.303 per share.  In connection with the
reduction in the conversion price of the October Note, both Gottbetter and Vicis
waived all anti-dilution adjustments to which they would have been entitled
under the terms of the securities that they hold as result of the reduction
of the conversion price of the October Note.   In connection with the
waiver by Vicis of the anti-dilution adjustments to which Vicis was entitled as
described above, the Company agreed to pay Vicis $250,000.  The
remaining principal balance of these Notes at December 31, 2008 was $3,316,667
which are convertible to purchase shares of our common stock, at the original
conversion price of $2.25 per share.
  On
November 6, 2008, pursuant to a Securities Purchase Agreement by and between
Vicis and Gottbetter, Vicis  purchased from Gottbetter, for a purchase
price of $2,250,000, all of Gottbetter's rights, title and interest in and
to:
  (i) that
certain Securities Purchase Agreement, dated as of October 19, 2006, by and
between the Company and Gottbetter pursuant to which the Company issued to
Gottbetter: (A) the Senior Notes, (B) Series D Warrants to purchase an aggregate
of 375,000 shares of Common Stock; and (C) Series E Warrants to purchase an
aggregate of 541,667 shares of Common Stock of the Issuer (the “Series E
Warrants”),
  (ii) the
Senior Notes;
  (iii)
Series D Warrants to purchase an aggregate of 875,000 shares of Common
Stock;
  (iv)
Series E Warrants to purchase an aggregate of 541,667 shares of Common
Stock;
  (v) the
Security Agreement, dated as of October 19, 2006, by and between the Company and
Gottbetter;
  (vi) the
Guaranty Agreement, dated as of October 19, 2006, by and among the Company,
Mdwerks Global Holdings, Inc., Xeni Medical Systems, Inc., Xeni Financial
Services, Corp., Xeni Medical Billing Corp. and Gottbetter; and
  (vi) the
Registration Rights Agreement, dated as of October 19, 2006, by and between the
Company and Gottbetter.
  F-17
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
5 — NOTES PAYABLE (continued)
 
 On
November 14, 2008, we, along with our subsidiary Xeni Financial Services, Corp.
(“XFS”), entered into a Loan and Securities Purchase Agreement (the “Loan
Agreement”) with Debt Opportunity Fund LLLP (“DOF”), pursuant to which DOF was
going to lend the Company up to $10,300,000 (subsequently increased to
$11,800,000 on December 31, 2008).   The proceeds were to be used
primarily to purchase medicinal preparations prescription workers’ compensation
claims from a client, pursuant to a claims assignment agreement.
 
 Subsequent
to year end, the possible transaction with a new client, for which funds from
DOF had been escrowed, was aborted and the Company discussed the DOF escrowed
funds with Vicis Capital, the manager of DOF.   It was suggested
that a portion of such funds be loaned to the Company for use in further
developing and promoting its new digital pen and paper business. Terms of a loan
in the amount of $3,200,000 were agreed upon in March 2009 and a closing is
anticipated no later than April 17, 2009. The loan will be reflected as a Senior
Secured Promissory Note in the amount of $3,856,925 which, in addition to the
loan proceeds, includes a $300,000 advance made to the Company in December 2008,
$236,000 for fees related to the cancelled transaction, $27,925 of accrued
interest and $93,000 for professional and other fees. An original issue discount
of 2% is payable upon takedown and annual interest of 13% will accrue through
September 2009 and is payable on October 1, 2009 at which time monthly interest
payments will commence and are payable in arrears on the first business day of
each following month. Monthly principal payments of $40,000 will also commence
on October 1, 2009 and the Note balance is due on October 30, 2011. In addition,
Vicis will receive 10 year warrants to purchase 3,043,142 shares of Company
common stock at $0.35 per share. The warrants include piggy back registration
rights and the right to cashless exercise. There are no prepayment penalties on
this loan.
 
 NOTE
6 — LOAN PAYABLE
  The
Company had a loan payable to an unrelated individual in the amount of $69,559
at December 31, 2007. During June 2008, per agreement with the unrelated
individual, this loan was offset against receivables owed from the unrelated
individual.
 
 The
Company also had a net loan payable at December 31, 2007 to a customer of the
Company in the amount of $40,000.  During March 2008, the remaining
$40,000 of this loan payable was paid in full to the customer.
  F-18
 
 NOTE
7 — TEMPORARY EQUITY
 
 On August
31, 2007 we received gross proceeds of $250,000 from Vicis and issued a 31-day
Convertible Note.
 
 On
September 28, 2007 we received gross proceeds of $2,000,000 (net proceeds of
$1,691,445 after repayment of the $250,000 31-day August 31, 2007 Convertible
Note, interest and closing expenses) from Vicis.  In connection with
the financing, pursuant to the terms of a Securities Purchase Agreement, we
issued 200 shares of Series B Convertible Preferred Stock (a “Series B Preferred
Stock”), a seven year Series F Warrant to purchase 1,500,000 shares of our
common stock at a price of $2.25 per share and a seven year Series G Warrant to
purchase 1,000,000 shares of our common stock at a price of $2.50 per
share.  As security for our obligations, we, along with our
subsidiaries entered into Security Agreements with the Investor, pursuant to
which we granted a security interest in all of our assets, except for the
accounts receivable and certain contract rights of Xeni Financial, to the
Investor. The fair market value of each stock warrant was estimated on the date
of grant using the Black-Scholes option-pricing model in accordance with SFAS
No. 123R using the following weighted-average assumptions: expected dividend
yield 0%; risk-free interest rate of 4.23%; volatility of 116% and an expected
term of 7 years.
 
 On
December 3, 2007 we received gross proceeds of $575,000 from Vicis and in
connection with the financing.  We issued a Convertible Note to Vicis
which bore interest at the rate of 8% per year.  Subject to certain
prepayment provisions, unpaid principal and interest due under the Convertible
Note was due and payable on December 2, 2008.  On March 31, 2008, both
interest and principal on this Note were paid in full as part of the March
Securities Purchase Agreement described below.
 
 On
January 17, 2008 we filed an amended and restated Certificate of Designations
(as amended and restated, the “Certificate of Designations”) with the Secretary
of State of the State of Delaware, to, among other things, increase the number
of authorized shares of Series B Preferred Stock from 250 shares to 325
shares.
 
 On
January 18, 2008, we received net proceeds of $500,000 from Vicis.  In
connection with the financing, we and Vicis entered into a Securities Purchase
Agreement, dated January 18, 2008 (the “January Securities Purchase Agreement”),
pursuant to which we issued 50 shares of Series B Preferred Stock, a seven year
Series F Warrant to purchase 375,000 shares of our common stock at a price of
$2.25 per share and a seven year Series G Warrant to purchase 250,000 shares of
our common stock at a price of $2.50 per share. The fair market value of each
stock warrant was estimated on the date of grant using the Black-Scholes
option-pricing model in accordance with SFAS No. 123R using the following
weighted-average assumptions: expected dividend yield 0%; risk-free interest
rate of 4.75%; volatility of 118% and an expected term of 7 years.
 
 The January Securities Purchase
Agreement provides that our obligations to Vicis under the Series B Preferred
Stock, the January Securities Purchase Agreement and the various transaction
documents entered into in connection with the January Securities Purchase
Agreement (the “January Transaction Documents”) are secured by a lien on all of
our assets pursuant to the Security Agreement, dated September 28, 2007, between
us and Vicis. The January
Securities Purchase Agreement further provides that our obligations under the
Series B Preferred Stock, the January Securities Purchase Agreement and the
January Transaction Documents are guaranteed by each of our subsidiaries
pursuant to the terms of the Guaranty Agreements, dated September 28, 2007,
between Vicis and each of our subsidiaries in September 2007.  The
January Securities Purchase Agreement are secured by the liens on all of the
assets of each our subsidiaries, except for the accounts receivable and certain
contract rights of Xeni Financial Services, Corp., created pursuant to the
Security Agreements, and previously entered into by and between our subsidiaries
and Vicis in September 2007.
  F-19
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
7 — TEMPORARY EQUITY (continued)
  We
amended the Registration Rights Agreement, previously entered into, by and
between Vicis and us in September 2007.  We agreed, in addition to
registering the securities previously covered by such Registration Rights
Agreement, to register for resale, the common stock relating to convertible
shares of our preferred stock and the Series F Warrants and the Series G
Warrants that are exercisable pursuant to the January Securities Purchase
Agreement.
  March
Securities Purchase Agreement
 
 On March
31, 2008, we received net proceeds of $6,809,794 from Vicis.  In
connection with this $7,500,000 Note Payable to Vicis, we and Vicis entered into
a Securities Purchase Agreement, dated March 31, 2008 (the “March Securities
Purchase Agreement”), pursuant to which we issued 750 shares of Series B
Convertible Preferred Stock, par value $0.001 ( “Series B Preferred Stock”), a
ten year Series H Warrant to purchase 53,333,334 shares of our common stock at a
price of $0.75 per share (the “Series H Warrant”), and pursuant to which Vicis
Surrendered for cancellation all Series F Warrants and all Series G Warrants
held by Vicis, which warrants were exercisable in the aggregate for 3,125,000
shares of our common stock. The fair market value of each stock warrant was
estimated on the date of grant using the Black-Scholes option-pricing model in
accordance with SFAS No. 123R using the following weighted-average assumptions:
expected dividend yield 0%; risk-free interest rate of 2.46%; volatility of 117%
and an expected term of 7 years.
 
 In
connection with the sale of the Series B Preferred Stock, we amended and
restated the Registration Rights Agreement, dated September 28, 2007, by and
between Vicis and us (as amended and restated, the “Amended and Restated
Registration Rights Agreement”), pursuant to which, among other things, we
agreed, to register for resale all of the shares of our common stock into which
the outstanding Series B Preferred Stock is convertible and all of the shares of
our common stock for which the Series H is exercisable.
 
 In
connection with obtaining the consent and waiver of Gottbetter to the financing
provided by Vicis, we entered into an Amendment, Consent and Waiver Agreement
(the “Gottbetter Consent Agreement”), pursuant to which (i) we issued to
Gottbetter a five year Series I warrant to purchase 1,000,000 shares of our
common stock at an exercise price of $0.75 per share; (ii) Gottbetter agreed to
waive its anti-dilution rights under the Series D Warrants, Series E Warrants
and Promissory Notes that we previously issued to Gottbetter and (iii)
Gottbetter consented to the financing provided by Vicis.  The Series I
Warrant may be exercised on a cashless basis to the extent that the resale of
shares of common stock underlying the Series I Warrant is not covered by an
effective registration statement.  The exercise price will be subject
to adjustment in the event of subdivision or combination of shares of our common
stock and similar transactions, distributions of assets, issuances of shares of
common stock with a purchase price below the exercise price of the Series I
Warrant, issuances of any rights, warrants or options to purchase shares of our
common stock with an exercise price below the exercise price of the Series I
Warrant and issuances of convertible securities with a conversion price below
the exercise price of the Series I Warrant. The fair market value of each stock
warrant was estimated on the date of grant using the Black-Scholes
option-pricing model in accordance with SFAS No. 123R using the following
weighted-average assumptions: expected dividend yield 0%; risk-free interest
rate of 2.46%; volatility of 117% and an expected term of 5 years.
  The March
Securities Purchase Agreement provided for the sale by us to Vicis of (i) 750
shares of Series B Preferred Stock (ii) and a Series H Warrant to purchase an
aggregate of 53,333,334 shares of our common stock at a price of $0.75 per
share.  Pursuant to the March Securities Purchase Agreement, the
aggregate gross purchase price for the Series B Preferred Stock and the Series H
Warrant was $7,500,000, which was paid by wire transfer of immediately available
funds and the surrender for cancellation of a promissory note that we issued to
Vicis in the principal amount of $575,000.  Principal and accrued
interest under the promissory note and $100,000 of Vicis’ expenses were applied
against the purchase price.  The Vicis expenses are being amortized
over 24 months.
  The March
Securities Purchase Agreement provides to Vicis, for a period of eighteen months
after the closing date, a right of first refusal with respect to subsequent
placements of equity or equity equivalent securities by us.  The right
of first refusal is on a pro rata basis (based upon the amount invested) with
Gottbetter.
 
 F-20
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
7 — TEMPORARY EQUITY (continued)
 
 The March
Securities Purchase Agreement contains certain restrictions on our ability to:
(i) declare dividends; (ii) reclassify, combine or reverse split our Common
Stock; (iii) incur liens; (iii) incur certain types of indebtedness; (iv) issue
classes of securities senior to, or pari passu with, the Series B Preferred
Stock; (v) liquidate or sell a substantial portion of our assets; (vi) enter
into transactions that would result in a Change of Control (as defined in the
January Securities Purchase Agreement); (vii) amend our charter documents in a
way that adversely affects the rights of Vicis; (viii) except through Xeni
Financial Services, Corp., make loans to, or advances or guarantee the
obligations of,  third parties; (ix) make intercompany transfers; (x)
engage in transactions with officers, directors, employees or affiliates; (xi)
divert business to other business entities; (xii) make investments in securities
or evidences of indebtedness (excluding loans made by Xeni Financial Services,
Corp.) in excess of $250,000 in a calendar year; and (xiii) file registration
statements.
 
 Events of
default under the March Securities Purchase Agreement include: (i) default in
the payment  of dividends on or the failure to redeem the Series B
Preferred Stock when due; (ii) failure to perform the covenants contained in the
Securities Purchase Agreement or the related transaction documents; (iii)
suspension from listing on the OTC Bulletin Board or other exchange for 10
consecutive trading days; (iv) the failure to timely deliver shares of common
stock upon conversion of the Series B Preferred Stock or exercise of the Series
H Warrant ; (v) default in the payment of indebtedness in excess of $250,000;
(vi) a judgment entered against us in excess of $250,000; and (vii) insolvency,
bankruptcy and similar circumstances.
 
 The March
Securities Purchase Agreement further provides that our obligations to Vicis
under the Series B Preferred Stock, the March Securities Purchase Agreement and
the various transaction documents entered into in connection with the March
Securities Purchase Agreement (the “March Transaction Documents”) are secured by
a lien on all of our assets pursuant to the Security Agreement, dated September
28, 2007, between us and Vicis (the “Company Security Agreement”).
 
 Series B
Preferred Stock
 
 On March
31, 2008 we filed an amended and restated Certificate of Designations (as
amended and restated, the “Certificate of Designations”) with the Secretary of
State of the State of Delaware to, among other things, increase the number of
authorized shares of Series B Preferred Stock from 325 shares to 1,250 shares to
provide additional preferred shares for the March Securities Purchase
Agreement
 
 The
Certificate of Designations, which designates the rights, preferences,
privileges and terms of the Series B Preferred Stock, provides that the Series B
Preferred Stock will rank senior to other classes of Common Stock and Preferred
Stock that are currently outstanding as to distributions of assets upon
liquidation, dissolution or winding up and as to payment of dividends on shares
of equity securities.
 
 Each
share of Series B Preferred Stock is entitled to cumulative dividends at the
annual rate of 12% of the stated value of the Series B Preferred
Stock.  The stated value of each share of Series B Preferred Stock is
$10,000.  Dividends are payable in cash or additional shares of Series
B Preferred Stock.  Dividends and interest on dividends not paid of
$948,222 have been accrued for 2008.
 
 Each
share of Series B Preferred Stock is convertible, at any time, at the option of
the holder, into the number of shares of Common Stock determined by dividing the
stated value of the Series B Preferred Stock by the conversion
price.  The initial conversion price of the Series B Preferred Stock
is $0.75 per share.
 
 The
conversion price is subject to adjustment for stock splits, dividends,
subdivisions, distributions, reorganizations and similar
transactions.  Furthermore, the conversion price is also subject to
adjustment in the event of the issuance of securities for a price below the
conversion price then in effect or the issuance of convertible securities with
an exercise or conversion price that is less than the then current conversion
price for the shares of Series B Preferred Stock.
 
 Since the
redeemable preferred stock contains substantive conversion rights that remain
with the holder until maturity, this preferred stock is required to be recorded
as “temporary equity” according to ASR 268 and Topic No. D-98.
  F-21
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 NOTE
7 — TEMPORARY EQUITY (continued)
 
 To the
extent that any shares of Series B Preferred Stock remain outstanding on March
31, 2010, each holder thereof shall have the option to either require us to
redeem such holder’s shares of Series B Preferred Stock or convert such holder’s
shares of Series B Preferred Stock into shares of Common Stock at the conversion
price then in effect.  Since the redemption is contingent upon the
holder’s not exercising their option to convert into a fixed number of shares,
the Series B Preferred Stock is classified as temporary equity.
 
 Holders
of Series B Preferred Stock have the option to require us to redeem shares of
Series B Preferred Stock in the event of a Change of Control (as defined in the
Certificate of Designations).
 
 Holders
of Series B Preferred Stock are entitled to vote on matters submitted to our
stockholders as if the Series B Preferred Stock had been converted into shares
of Common Stock pursuant to the terms of the Certificate of
Designations.  To the extent the holders of Series B Preferred Stock
are required to vote separately, as a class, the affirmative vote of the holders
of a majority of the outstanding shares of Series B Preferred Stock will be
required to approve the matter to be voted upon.
 
 As of
December 31, 2008, there were 1,000 shares of Series B Preferred Stock issued
and outstanding.  As of December 31, 2007, there were 250 shares of
Series B Preferred Stock issued and outstanding.
 
 Series H
Warrant
  The
Series H Warrant is exercisable at a price of $0.75 per share for a period of
ten years from the date of issuance.  The Series H Warrant may be
exercised on a cashless basis to the extent that the resale of shares of common
stock underlying the Series H Warrant is not covered by an effective
registration statement.  The exercise price will be subject to
adjustment in the event of subdivision or combination of shares of our common
stock and similar transactions, distributions of assets, issuances of shares of
common stock with a purchase price below the exercise price of the Series H
Warrant, issuances of any rights, warrants or options to purchase shares of our
common stock with an exercise price below the exercise price of the Series H
Warrant, issuances of convertible securities with a conversion price below the
exercise price of the Series H Warrant.
  As of
December 31, 2008, the outstanding Series H Warrant is exercisable for an
aggregate of 53,333,334 shares or our common stock.
  CompanySecurity
Agreement
  Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the lien
granted pursuant to the Company Security Agreement would provide for a lien on
all of our assets in favor of Vicis.
  Guaranty
Agreements
  Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
Guaranty Agreements would, in addition to applying to the obligations previously
guaranteed thereby, apply to our obligations in connection with the March
Securities Purchase Agreement, the March Transaction Documents and the Series B
Preferred Stock issued pursuant to the January Securities Purchase
Agreement.  The Guaranty Agreements provide for unconditional
guaranties of the obligations guaranteed thereunder.
  F-22
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 NOTE
7 — TEMPORARY EQUITY (continued)
 
 Guarantor
Security Agreements
  Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
security interests granted by our subsidiaries pursuant to the Guarantor
Security Agreements would, in addition to securing the obligations previously
secured thereunder, secure the obligations of our subsidiaries under the
Guaranty Agreements insofar as those obligations related to the January
Securities Purchase Agreement, the March Transaction Documents and the Series B
Preferred Stock issued pursuant to March Securities Purchase
Agreement.  The Guarantor Security Agreements provide for liens in
favor of Vicis on all of the assets of each of our subsidiaries, except for the
accounts receivable and certain contract rights of Xeni Financial Services,
Corp.
 
 Amended
and Restated Registration Rights Agreement
  Pursuant
to the Amended and Restated Registration Rights Agreement, we agreed to register
for resale, the shares of our common stock into which the Series B Preferred
Stock is convertible and the shares of our common stock for which the Series H
Warrant is exercisable.
  The
Registration Rights Agreement requires us to file a registration statement
covering the resale of the shares underlying the Series B Preferred Stock and
the Series H warrant within 60 days after the closing date.  We are
only required to register up to thirty percent of the number of outstanding
shares of common stock in such registration statement and then file subsequent
registration statements after the later of (i) sixty days following the sale of
the securities covered by the initial registration statement or any subsequent
registration statement and (ii) six months following the effective date of the
initial registration statement or any subsequent registration
statement.  We are required to cause the initial registration
statement to become effective on or before the date which is 150 calendar days
after the closing date if the Securities and Exchange Commission (the “SEC”)
does not review the registration statement or 180 calendar days after the
closing if the registration statement receives a full review by the
SEC.  If we fail to file a registration statement in the time frame
required, fail to file a request for acceleration in the time frame required, or
fail to maintain the effectiveness of a registration statement as required by
the Registration Rights Agreement, we will be required to pay a cash penalty in
the amount of 1.5% of the aggregate stated value of the Series B Preferred Stock
for each month, or part thereof, that such registration statement is not filed
or effective, as the case may be.  The cash penalty is limited to 9%
of the aggregate stated value of the Series B Preferred
Stock.  The cash penalty will not apply to the registration of shares
of common stock underlying the Series H Warrant. The Registration Rights
Agreement also provides for piggyback registration rights.  On May 23,
2008, the Company filed the required Form S-1 registration statement with the
SEC.  On July 16, 2008, the Company filed Amendment Number 1 to the
Form S-1 in response to comments from the SEC.  On August 25, 2008,
the Company filed Amendment Number 2 to the Form S-1 in response to comments
from the SEC.
  For the
years ended December 31, 2008 and December 31, 2007, amortization of the debt
discount on notes payable amounted to $1,202,003 and $2,021,396,
respectively.
 
 The
mandatorily redeemable convertible Series B preferred stock has been recorded as
follows:
 
 December
      31,
                  2008
                
                
                December
      31,
                  2007Mandatorily
      redeemable convertible Series B preferred stock
                
                $
                10,000,000
                
                
                $
                2,000,000Less:
      unamortized discount on preferred stock
                
                
                (5,947,917
                )
                
                
                (653,674
                )Mandatorily
      redeemable convertible Series B preferred stock, net
                
                $
                4,052,083
                
                
                $
                1,346,326
  
 F-23
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 NOTE
8 — STOCKHOLDERS’ EQUITY
  Common stock
  The
Company is authorized to issue 200,000,000 shares of Common stock, $.001 par
value, with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. As of December 31, 2008, there are
14,370,208 shares issued and outstanding.
  Preferred
stock
  The
Company is authorized to issue 10,000,000 shares of preferred stock, $.001 par
value, with such designations, rights and preferences as may be determined from
time to time by the Board of Directors.
  The
Company is authorized to issue 1,000 shares of Series A Convertible Preferred
stock, $0.001 par value with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Between February 1, 2006
and September 30, 2006, the Company sold 28.3 Units to accredited investors.
Each unit consists of one share of our Series A Convertible Preferred Stock, par
value $.001 per share, and a detachable, transferable Series A Warrant to
purchase 20,000 shares of our common stock, at a purchase price of $3.00 per
share. Between August 11, 2006 and December 31, 2008, 26.3 shares of Series A
Convertible Preferred Stock were converted into 526,667 shares of common stock
leaving 2 Series A Convertible Preferred Stock outstanding as of December 31,
2008.
 
 The
Company is authorized to issue 1,250 shares of Series B Convertible Preferred
stock, $0.001 par value with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. On September 28, 2007,
200 shares of Series B convertible preferred stock were issued with the
September Securities Purchase Agreement.  On January 18, 2008, 50
shares of Series B convertible preferred stock were issued with the January
Securities Purchase Agreement.  On March 31, 2008, 750 shares of
Series B convertible preferred stock shares were issued with the March
Securities Purchase Agreement.  As of December 31, 2008, there are
1,000 issued and outstanding shares of Series B convertible preferred
stock.   Each share of our Series B Convertible Preferred Stock,
par value $.001 per share is convertible to purchase 10,000 shares of our common
stock, at a purchase price of $0.75 per share.  The conversion price
for the 200 shares of Series B convertible stock issued on September 28, 2007
was $2.25, but the conversion price was subsequently lowered to the $0.75 price
on March 31, 2008.
 
 Common
stock options
  A summary
of the status of the Company's outstanding stock options as of December 31, 2008
and changes during the period ending on that date is as follows:
  Shares
                
                
                Weighted
      Average
                  Exercise
      Price
                
                
                Aggregate
                  Intrinsic
      ValueOutstanding
      at December 31, 2006
                
                
                2,876,250
                
                
                $
                3.04
                
                
                $
                —Granted
                
                
                658,000
                
                
                $
                0.46
                
                
                
                —Exercised
                
                
                —
                
                
                $
                —
                
                
                
                —Forfeited
                
                
                (20,000
                )
                
                $
                1.39
                
                
                
                —Outstanding
      at December 31, 2007
                
                
                3,514,250
                
                
                $
                2.57
                
                
                $
                —Granted
                
                
                2,145,000
                
                
                $
                0.73
                
                
                
                —Exercised
                
                
                —
                
                
                $
                —
                
                
                
                —Forfeited
                
                
                (254,170
                )
                
                $
                3.06
                
                
                
                —Outstanding
      at December 31, 2008
                
                
                5,405,080
                
                
                $
                1.82
                
                
                $
                —Options
      exercisable at end of period
                
                
                4,827,161
                
                
                $
                1.72
                
                
                $
                —Weighted-average
      fair value of options granted during the period
                
                $
                0.73
  F-24
 
 MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
8 — STOCKHOLDERS’ EQUITY
  Common
stock options (continued)
  The
following information applies to options outstanding at December 31,
2008:
  Options
      Outstanding
              
              Options
      ExercisableRange
      of Exercise Prices
              
              Shares
              
              Weighted
      Average
                Remaining
                Contractual
                Life
      (Years)
              
              Weighted
      Average
                Exercise
      Price
              
              Shares
              
              Weighted
      Average
                Exercise
      Price$0.38
              
              
              483,000
              
              
              9.00
              
              $
              0.38
              
              
              483,000
              
              $
              0.38$0.60
              
              
              196,666
              
              
              9.25
              
              $
              0.60
              
              
              73,333
              
              $
              0.60$0.67
              
              
              175,000
              
              
              8.75
              
              $
              0.67
              
              
              91,666
              
              $
              0.67$0.75
              
              
              1,925,000
              
              
              9.25
              
              $
              0.75
              
              
              1,925,000
              
              $
              0.75$1.39
              
              
              95,000
              
              
              8.00
              
              $
              1.39
              
              
              95,000
              
              $
              1.39$2.25
              
              
              1,000,000
              
              
              7.75
              
              $
              2.25
              
              
              1,000,000
              
              $
              2.25$3.25
              
              
              154,999
              
              
              7.00
              
              $
              3.25
              
              
              154,999
              
              $
              3.25$3.40
              
              
              755,000
              
              
              7.00
              
              $
              3.40
              
              
              569,998
              
              $
              3.40$4.00
      - 4.25
              
              
              620,416
              
              
              7.50
              
              $
              4.03
              
              
              434,166
              
              $
              4.035,405,081
              
              
              
              
              $
              1.59
              
              
              4,827,162
              
              $
              1.72
  In
connection with previously granted stock options, the Company recognized
stock-based compensation expense of $2,374,905 for the year ended December 31,
2008 and $3,196,046 for the year ended December 31, 2007.
  As of
December 31, 2008, the total future compensation expense related to non-vested
options not yet recognized in the consolidated statement of operations is
approximately $175,000, which will be recognized through September
2010.
  Common
stock warrants
  A summary
of the status of the Company's outstanding stock warrants granted as of December
31, 2008 and changes during the period is as follows:
  Shares
                  
                  
                  Weighted
                    Average
                    Exercise
      PriceOutstanding
      at December 31, 2006
                  
                  
                  2,566,345
                  
                  
                  $
                  2.67Granted
                  
                  
                  3,166,667
                  
                  
                  $
                  2.21Exercised
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at December 31, 2007
                  
                  
                  5,733,012
                  
                  
                  $
                  2.42Granted
                  
                  
                  55,333,334
                  
                  
                  
                  0.75Exercised
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  (3,140,400
                  )
                  
                  
                  (2.38
                  )Outstanding
      at December 31, 2008
                  
                  
                  57,925,946
                  
                  
                  $
                  0.80Common
      stock issuable upon exercise of warrants
                  
                  
                  57,925,946
                  
                  
                  $
                  0.80
  F-25
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
8 — STOCKHOLDERS’ EQUITY
  Common
stock warrants (continued)
 
 Common
      Stock issuable upon
                  exercise
      of warrants outstanding
                
                Common
      Stock issuable upon
                  Warrants
      ExercisableRange of Exercise
      Price
                
                Number
                  Outstanding
                  at
                  December
      31, 2008
                
                Weighted
      Average
                  Remaining
                  Contractual
                  Life
      (Years)
                
                Weighted
      Average
                  Exercise
      Price
                
                Number
                  Exercisable
                  at
                  December
      31, 2008
                
                Weighted
      Average
                  Exercise
      Price$0.75
                
                
                56,750,001
                
                
                8.97
                
                $
                0.75
                
                
                56,375,001
                
                $
                0.75$1.25
                
                
                199,000
                
                
                1.47
                
                $
                1.25
                
                
                199,000
                
                $
                1.25$1.50
                
                
                56,667
                
                
                2.49
                
                $
                1.50
                
                
                56,667
                
                $
                1.50$2.25
                
                
                111,111
                
                
                2.31
                
                $
                2.25
                
                
                486,111
                
                $
                2.25$3.00
                
                
                579,167
                
                
                0.37
                
                $
                3.00
                
                
                579,167
                
                $
                3.00$3.76
                
                
                225,000
                
                
                0.80
                
                $
                3.76
                
                
                225,000
                
                $
                3.76$4.00
                
                
                5,000
                
                
                0.80
                
                $
                4.00
                
                
                5,000
                
                $
                4.0057,925,946
                
                
                
                
                $
                0.80
                
                
                57,925,946
                
                $
                0.80
  NOTE
9 — INCOME TAXES
  The
Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the recognition of deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets. Realization of deferred tax assets, including those
related to net operating loss carryforwards, are dependent upon future earnings,
if any, of which the timing and amount are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation
allowance.
  The
Company has net operating loss carryforwards for tax purposes totaling
approximately $13,089,000 at December 31, 2008, expiring through the year 2028
subject to the Internal Revenue Code Section 382, which places a limitation on
the amount of net operating losses that can offset taxable income after a change
in control (generally greater than a 50% change in ownership).
  The table
below summarizes the differences between the Company's effective tax rate and
the statutory federal rate as follows for fiscal 2008 and 2007:
  2008
                                      
                                      
                                      2007Computed
      "expected" tax benefit
                                      
                                      
                                      (34.0
                                      )%
                                      
                                      
                                      (34.0
                                      )%State
      income taxes
                                      
                                      
                                      (4.0
                                      )%
                                      
                                      
                                      (4.0
                                      )%Other
      permanent differences
                                      
                                      
                                      15.0
                                      %
                                      
                                      
                                      21.7
                                      %Change
      in valuation allowance
                                      
                                      
                                      23.0
                                      %
                                      
                                      
                                      16.3
                                      %Effective
      tax rate
                                      
                                      
                                      0.0
                                      %
                                      
                                      
                                      0.0
                                      %
  F-26
 
 MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
9 — INCOME TAXES  (continued)
  Deferred
tax assets and liabilities are provided for significant income and expense items
recognized in different years for tax and financial reporting purposes.
Temporary differences, which give rise to a net deferred tax asset is as
follows:
  2008Tax
      benefit of net operating loss carryforward
                          
                          $
                          4,974,000Non-qualified
      stock options
                          
                          
                          2,716,0007,690,000Valuation
      allowance
                          
                          
                          (7,690,000
                          )Net
      deferred tax asset
                          
                          $
                          —
  After
consideration of all the evidence, both positive and negative, management has
recorded a valuation allowance at December 31, 2008, due to the uncertainty of
realizing the deferred income tax assets. The valuation allowance was increased
by $1,328,000 from the prior year.
 
 NOTE 10
— COMMITMENTS
  Lease
agreements
  On
February 1, 2008, the Company was assigned a master lease on its facility and a
5-year lease option was exercised which extends the master lease until July
2013.  Rent expense for year ended December 31, 2008 and December 31,
2007 was $99,264 and $83,772, respectively.
 
 Future
minimum operating lease commitments as of December 31, 2008 are as
follows:
 
 Year
      Ending December 31
                    
                    Amount2009
                    
                    
                    47,8962010
                    
                    
                    50,2912011
                    
                    
                    52,8052012
                    
                    
                    55,4462013
                    
                    
                    33,267$
                    239,705
  Employment
agreements
 
 Effective
December 1, 2008, David M. Barnes entered into an employment agreement with
us.  Effective January 1, 2006, each of Vincent Colangelo and Stephen
W. Weiss entered into an employment agreement with us. The employment agreement
with Messrs. Barnes, Colangelo and Weiss expire on December 31,
2010.  Pursuant to these employment agreements, Messrs. Barnes,
Colangelo and Weiss have each agreed to devote all of their time, attention and
ability, to our business as our Chief Executive Officer and President, Chief
Financial Officer, and Chief Operating Officer, respectively. The employment
agreements provide that Messrs. Barnes, Colangelo, and Weiss will receive a base
salary during calendar year 2008 at an annual rate of $210,000, $200,000, and
$185,000 for services rendered in such positions. During calendar years 2009
under the employment agreements for Mr. Barnes, his annual base salary will
continue to be $210,000.  During calendar years 2009 under the
employment agreements for Mr. Colangelo, his annual base salary will be
increased to $220,000.  During calendar years 2009 under the
employment agreements for Mr. Weiss, his annual base salary will be increased to
$200,000, subject to performance acceptable to the Compensation
Committee.  During calendar years 2010, under the employment agreement
for Messrs. Barnes and Colangelo, the annual base salary will be increased to
$231,000 and $242,000.  During
 F-27
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
 
 NOTE 10
— COMMITMENTS (continued)
 
 Employment
agreements (continued)
  calendar
years 2010, under the employment agreement for Mr. Weiss, his annual base salary
will be increased to $215,000, subject to performance acceptable to the
Compensation Committee. In addition, each executive may be entitled to receive,
at the sole discretion of our board of directors, cash bonuses based on the
executive meeting and exceeding performance goals. The cash bonuses range from
up to 25% of the executive’s annual base salary for Mr. Weiss and up to 100% of
the executive’s annual base salary for Messrs. Barnes and Colangelo. The cash
bonuses for Mr. Colangelo include a minimum bonus due of 25%. Mr. Colangelo has
agreed to defer his salary increase for 2009 to which he was entitled. Each of
our executive officers is entitled to participate in our 2005 Incentive
Compensation Plan. We have also agreed to pay or reimburse each executive
officer up to a specified monthly amount for the business use of his personal
car and cell phone. The employment agreements provide for termination by us upon
death or disability (defined as 90 aggregate days of incapacity during any
365-consecutive day period) of the executive or upon conviction of a felony or
any crime involving moral turpitude, or willful and material malfeasance,
dishonesty or habitual drug or alcohol abuse by the executive, related to or
affecting the performance of his duties. In the event any of the employment
agreements are terminated by us without cause, such executive will be entitled
to compensation for the balance of the term of his employment agreement. Messrs.
Barnes and Colangelo also have the right, if terminated without cause, to
accelerate the vesting of any stock options or other awards granted under our
2005 Incentive Compensation Plan. We intend
to obtain commitments for key-man life insurance policies for our benefit on the
lives of Messrs. Barnes and Colangelo equal to three times their respective
annual base salary. In addition to the key-man life insurance policies, we have
agreed to maintain throughout the term of each employment agreement 15-year term
life insurance policies on the lives of Messrs. Barnes and Colangelo, with
benefits payable to their designated beneficiaries, and to pay all premiums in
connection with those policies.
  In
the event of a change of control of our company, Messrs. Barnes and Colangelo
may terminate their employment with us within six months after such event and
will be entitled to continue to be paid pursuant to the terms of their
respective employment agreements.
  F-28
  MDWERKS,
INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2008 AND 2007
  NOTE
11 — SUBSEQUENT EVENTS
  On
February 16, 2009, Howard B. Katz resigned as Chairman, Chief Executive Officer
and Director of MDwerks, Inc. (the “Company”), positions he has held since
November 16, 2005.  The Company entered into a two-year Consultant
Agreement with Vandam Consulting Services, Inc. (“Vandam”) and Howard Katz to
assure itself of the future services of Mr. Katz.
  On
February 19, 2009, the Board of Directors of the Company appointed David M.
Barnes, age 66, Chairman of the Board of Directors and Chief Executive Officer
of the Company.  Mr. Barnes will continue to serve as President, a
position he has held since December 1, 2008.  The terms of Mr. Barnes’
employment agreement with the Company otherwise remain unchanged from the Form
8-K disclosure and Exhibits filed with the SEC on December 22,
2008.  Mr. Barnes has served as a member of our Board of Directors
since November 16, 2005.  Mr. Barnes also served as a member of the
Audit and Compensation Committees since November 16, 2005, positions from which
he resigned as of December 1, 2008.
  Subsequent
to year end, the possible transaction with a new client, for which funds from
DOF had been escrowed, was aborted and the Company discussed the DOF escrowed
funds with Vicis Capital, the manager of DOF. It was suggested that a portion of
such funds be loaned to the Company for use in further developing and promoting
its new digital pen and paper business. Terms of a loan in the amount of
$3,200,000 (net proceeds of $3,108,550) were agreed upon in March 2009 and
a closing is anticipated no later than April 17, 2009. The loan will be
reflected as a Senior Secured Promissory Note in the amount of $3,851,375 which,
in addition to the loan proceeds, includes a $300,000 advance made to the
Company in December 2008, $236,000 for fees related to the cancelled
transaction, $27,925 of accrued interest and $87,450 for professional and other
fees. An original issue discount of 2% is payable upon takedown and annual
interest of 13% will accrue through September 2009 and is payable on October 1,
2009 at which time monthly interest payments will commence and are payable in
arrears on the first business day of each following month. Monthly principal
payments of $40,000 will also commence on October 1, 2009 and the Note balance
is due on October 30, 2011. In addition, Vicis will receive 10 year warrants to
purchase 3,043,142 shares of Company common stock at $0.35 per share. The
warrants include piggy back registration rights and the right to cashless
exercise. There are no prepayment penalties on this loan.
  F-29