UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K




[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934




For the
fiscal year ended December 31, 2008




[
 ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934




For the
transition period from ______ to ______





Commission
file number: 333-139117





EPAZZ,
Inc.


(Exact
name of registrant as specified in its charter)





Nevada
                    
                    36-4313571(State
      or other jurisdiction of
                      incorporation
      or organization)
                    
                    (IRS
      Employer Identification No.)





50
N Brockway St. Suite 3-5


Palatine, IL
60067


(Address
of principal executive offices)





(312)
955-8161


(Registrant's
telephone number)





SECURITIES
REGISTERED PURSUANT TO SECTION 12(B)


OF THE EXCHANGE
ACT:




None




SECURITIES
REGISTERED PURSUANT TO 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 [  ]  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 [  ] 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 [  ]





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-K. [   ]





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





Large
      accelerated filer  [ ]
            Accelerated
      filer[ ]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 Exchange Act). Yes [   ] No [X].





The
aggregate market value of the issuer's voting and non-voting common equity held
by non-affiliates computed by reference to the average bid and ask price of such
common equity on the Over-The-Counter Bulletin Board as of June 30, 2008 (the
last business day of the registrant’s most recently completed second fiscal
quarter) was $402,358.




At April
30, 2009, there were 42,482,940 shares of the issuer's common stock
outstanding.





TABLE
OF CONTENTS




Part
I





PageItem
      1.Business
            4Item
      1A.Risk Factors
            13Item
      2.Properties
            32Item
      3.Legal Proceedings
            33Item
      4.Submission of Matters to a Vote of Security Holders
            33





Part
II





Item
      5.Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases of Equity Securities
            34Item
      6.Selected Financial Data
            35Item
      7.Management's Discussion and Analysis of Financial Condition and Results
      of Operations
            36Item
      7A.Quantitative and Qualitative Disclosures About Market
    Risk
            40Item
      8.Financial Statements and Supplementary Data
            F-1Item
      9.Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            41Item
      9A.Controls and Procedures
            42Item
      9B.Other Information
            43





Part
III





Item
      10.Directors, Executive Officers and Corporate Governance
            44Item
      11.Executive Compensation
            45Item
      12.Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters
            48Item
      13.Certain Relationships and Related Transactions, and Director
      Independence
            49Item
      14.Principal Accountant Fees and Services
            49




Part
IV





Item
      15.Exhibits, Financial Statement Schedules
            50





PART
I


ITEM
1.  BUSINESS




FORWARD-LOOKING
STATEMENTS




ALL
STATEMENTS IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE INCLUDE
THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS",
"ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS OR
FUTURE OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE
GENERALLY FORWARD-LOOKING IN NATURE AND NOT HISTORICAL FACTS. THESE
FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED
UTILIZING NUMEROUS IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR
FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY, PROJECTED PLANS AND OBJECTIVES.
THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE
HEADING "RISK FACTORS." ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN
THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS
ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY BEYOND OUR CONTROL. WE ARE
UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS.   REFERENCES IN
THIS FORM 10-K, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31,
2008.  AS USED HEREIN, THE “COMPANY,” “EPAZZ,” “WE,” “US,” “OUR” AND
WORDS OF SIMILAR MEANING REFER TO EPAZZ, INC., AND INCLUDE EPAZZ’S WHOLLY OWNED
SUBSIDIARIES, DESK FLEX, INC., AN ILLINOIS CORPORATION (“DFI”), AND PROFESSIONAL
RESOURCE MANAGEMENT, INC., AN ILLINOIS CORPORATION UNLESS OTHERWISE STATED, OR
THE CONTEXT SUGGESTS OTHERWISE.





Business
Overview




The
Company was incorporated in the State of Illinois on March 23, 2000, to create
software to help college students organize their college information and
resources. The idea behind the Company was that if the information and resources
provided by colleges and universities was better organized and targeted toward
each individual, the students would encounter a personal experience with the
college or university that could lead to a lifetime relationship with the
institution. This concept is already used by business software designed to
retain relationships with clients, employees, vendors and
partners.


-4-


The
Company developed a web portal infrastructure operating system product called
BoxesOS v3.0. BoxesOS provides a web portal infrastructure operating system
designed to increase the satisfaction of key stakeholders (students, faculty,
alumni, employees, and clients) by enhancing the organizational experience
through the use of enterprise web-based applications to organize their
relationships and improve the lines of communication. BoxesOS decreases an
organization’s operating expenses by providing development tools to create
advanced web applications. The applications can be created by non-technical
staff members of each institution. BoxesOS creates sources of revenue for Alumni
Associations and Non-Profit organizations through utilizing a web platform to
conduct e-commerce and provides e-commerce tools for small businesses to easily
create "my accounts" for their customers. It further reduces administrative
costs, by combining technology applications into one package, providing an
alternative solution to enterprise resource planner (“ERP”) modules and showing
a return on investment for institutions by reducing the need for 3rd party
applications license fees. BoxesOS can also link a college or university’s
resources with the business community by allowing businesses to better train
their employees by utilizing courseware development from higher education
institutions.





Recent
2008 Events





On or
about June 18, 2008, the Company entered into a Stock Purchase Agreement (the
“Purchase Agreement”) with Desk Flex, Inc., an Illinois corporation (“DFI”),
Professional Resource Management, Inc., an Illinois corporation (“PRMI” and
collectively with DFI, the “Target Companies”) and Arthur A. Goes, an individual
and the sole stockholder of the Target Companies.  The Purchase
Agreement consummated the transactions contemplated by the February 25, 2008,
non-binding letter of intent (the “Letter of Intent”) the Company entered into,
to acquire 100% of the outstanding shares of the Target
Companies.  Pursuant to the Purchase Agreement, the Company agreed to
purchase 100% of the outstanding shares of the Target Companies for an aggregate
purchase price of $445,000 (the “Purchase Price”).  The Purchase Price
was payable as follows:





(a)
            Mr.
      Goes retained the $10,000 originally paid by the Company in connection
      with the parties’ entry into the Letter of
  Intent;





(b)
            The
      Company paid Mr. Goes $210,000 in cash (the “Cash Consideration”) at the
      Closing (as defined below) of the Purchase Agreement;
  and(c)
            The
      Company provided Mr. Goes with a 7% Promissory Note in the amount of
      $225,000 (the “Note”), described in greater detail
  below.




Additionally,
the Company agreed to assume an aggregate of $15,475 in outstanding liabilities
of DFI and PRMI in connection with the Closing.


-5-


The
Purchase Agreement closed on June 18, 2008 (“Closing”), at which time Mr. Goes
delivered to the Company, 2,000 shares of DFI stock, representing 100% of the
issued and outstanding shares of DFI, and 1,000 shares of PRMI stock,
representing 100% of the issued and outstanding shares of PRMI.  Also
at Closing, the Company delivered the Cash Consideration and the Note to Mr.
Goes.  As a result of the Closing, DFI and PRMI became wholly-owned
subsidiaries of the Company.





The Note
bears interest at the rate of seven percent (7%) per annum, and all past due
principal and interest (which failure to pay such amounts after a fifteen (15)
day cure period, shall be defined herein as an “Event of Default”) bear interest
at the rate of twelve percent (12%) per annum until paid in full.  The
Note, however, additionally provides that the Company shall have two additional
fifteen (15) day cure periods during the term of the Note resulting in two
thirty (30) day cure periods before an Event of Default occurs.  The
principal amount of the Note is due on June 18, 2011.  The Note is
payable in monthly installments of $6,947.35 (each a “Monthly Payment”), with
the first such Monthly Payment due on September 18, 2008, until such time as
this Note is paid in full.  Provided, however, that if the total
amount due under the Note is less than any Monthly Payment, the Company shall
only be obligated to pay the remaining balance of the Note.  The Note
may be prepaid at any time without penalty.  As of the date of this
report, the Company is current with all of its required Monthly
Payments.





Additionally,
the Company agreed to secure the payment of the Note with a Uniform Commercial
Code Security Interest filing, which the Company agreed to file at Mr. Goes’
request, at the Company’s expense, to grant Mr. Goes a security interest over
all of the Target Companies’ tangible and intangible assets, and the outstanding
stock of both of the Target Companies until the Note is repaid, but which filing
has not occurred to date.  Pursuant to such requirement of the Note,
at the Closing, the Company entered into a Security Agreement with Mr. Goes,
whereby the Company granted Mr. Goes a security interest in all inventory,
equipment, appliances, furnishings and fixtures, stock certificates and
intellectual property now or hereafter owned by the Target
Companies.  Pursuant to the Security Agreement, the Company also
assigned to Mr. Goes a security interest in all of its right, title, and
interest to any trademarks, trade names, contract rights, and leasehold
interests in which it now has or hereafter acquires to secure repayment of the
Note.


-6-


Professional Resource
Management, Inc. and Desk Flex, Inc. Business Overview




Professional
Resource Management, Inc. was incorporated under the laws of Illinois in June
1985.  On or around December 31, 1997, Professional Resource
Management, Inc. established a wholly owned subsidiary, PRM Transfer
Corp.  On or around December 31, 1997, Professional Resource
Management, Inc., PRM Transfer Corp. and Arthur Goes entered into a
Reorganization Agreement, whereby Professional Resource Management, Inc.
transferred all of its assets and liabilities to PRM Transfer Corp., with the
exception of those assets pertaining to its proprietary source code or software
product, Desk/Flex.  Also pursuant to the Reorganization Agreement,
Professional Resource Management, Inc. amended its corporate charter to change
its name to Desk Flex, Inc. (“DFI”), and PRM Transfer Corp. amended its charter
to change its name to Professional Resources Management, Inc.
(“PRMI”).  The transfer was effected in an effort by Mr. Goes to
better promote the Desk/Flex product.





PRMI and
DFI are separate legal entities, but operate in conjunction.  PRMI and
DFI share office space and certain employees.  DFI’s main source of
revenue comes from the “Desk/Flex Software” product, which it owns, and PRMI’s
main source of revenue comes from the “Agent Power” product line, which it
owns.  PRMI also acts as the general agent for DFI; however, there is
no formal agency agreement between the two companies.





Our
Products




After the
acquisition of the Target Companies which are now wholly owned subsidiaries of
the Company (described in detail above), the Company offers three primary
product lines under three different Company names.  The EPAZZ BoxesOS
v3.0 product is offered through EPAZZ, Inc., the Desk/Flex Software product is
offered through Desk Flex, Inc. and the Agent Power product is offered through
Professional Resource Management, Inc.





EPAZZ BoxesOS
v3.0





EPAZZ
BoxesOS v3.0 (Web Infrastructure Operating System) is the Company's flagship
product. It is the core package of EPAZZ, Inc.’s products and services. EPAZZ
BoxesOS integrates with each organization's back-end systems and provides a
customizable personal information system for each stakeholder.




Services
include:




· Single
      sign-on: Provides a powerful single-sign-on with security procedure to
      product users' information and
identity.





· Course
      Management System: Manage distance, traditional courses and
      Calendar.





· Enterprise
      Web Site Content Management: Manage public sites with multi
      contributors.





·          ·Integration Management Services: Integrated into
      Enterprise Resource Planning (“ERP”) and
  Mainframes.


-7-


· Email
      Management: Email server and web
client.





· Instant
      Messenger Services: Instant messaging and
  alerts.





· Customer
      Relationship Management: Prospective students and
  alumni.





· Calendar/Scheduler
      Management: Event directory, groupware, and personal
    calendar.





· Administrative
      Support Services: Online payment
services.





· Business
      Services: Facility Management and Online
  Bookstore.




BoxesOS
software provides:




Web Portal
Component





BoxesOS
Web Portal Component is a gateway to all of an organization’s online services
and information resources. The Web Portal Component provides a Personal
Information System, which refers to the user's entire online environment - the
user’s resources, information, graphics, color, layout, and organization. All
resources are customizable. The Web Portal Component simplifies organizations’
ability to create and deploy custom web applications with a common graphic user
interface and connectivity to the back-end systems.





Administrative Content
Management





BoxesOS
Content Management Component provides an organization with enterprise level
tools for creating, managing, organizing, archiving and sharing content. Content
can be delivered in many forms such as web pages, emails, polls, documents, web
forms, rich site summaries (“RSS”), and “hot news.” The Content Management
Component enables staff members with little technical skills to create web pages
and processes without having any programming skills.





Work Hub





Work Hub
provides a host of applications that can empower an organization to increase
productivity while decreasing costs. Work Hub helps to manage work flow
throughout an organization. Senior management is able to view a document for
approval before it is sent out to a client. A company can view all projects of
the enterprise in one page. Some of the applications in Work Hub are
products/services management, project management, invoice management, time
management, content management and sales management. Work Hub has clear graphic
charts with detail reports on many areas.





Central
Repository





BoxesOS
Central Knowledge Repository is a collection and indexing of shareable content.
Central Knowledge Repository installs a server index application on the Windows
2003 platform to identify an organization’s current knowledge assets. All
knowledge assets will be imported into a storage device. The server index
application will import the knowledge assets into a temporary folder before
moving into a main folder. The server index application will prompt the
organization’s administrators to add detailed information about the knowledge
assets into the database by using a web form. These forms will allow the
administrators to add custom fields; therefore, allowing the organization to add
custom information to the database in the present and at a future date. The
organization would be able to group their knowledge objects by program, course,
subject, topic, users, content, or date.


-8-


ViewPoint





ViewPoint
is BoxesOS central communication hub, calendaring, contact management and
scheduling system. ViewPoint works with or can be used as an alternative to MS
Outlook/MS Exchange Server. The web applications provide the institution with an
extensive range of options including communication system email web client and
an email server. Email applications provide features you would find on popular
web-based e-mail providers. ViewPoint provides robust threaded discussion boards
and a “chatting” environment. ViewPoint provides each user with a personal
calendar, which notifies users of scheduling conflicts and appointments
priorities. ViewPoint makes it easy to create group calendars and public
calendars. With the ViewPoint scheduling system users are able to schedule group
meetings together. The scheduling system will view each user's calendar to see
the next available time and date the group can meet.





Learning Management
System




BoxesOS
My Courses is an extensive application for learning management, and e-learning.
My Courses is an effective means for managing traditional courses, distance
learning courses, and self-paced courses. My Courses is a powerful communication
tool that can be effectively used by students, instructors, employees and
corporate trainers to make information flow easily, clearly and faster. My
Courses provides a robust grade book, powerful authoring content tools, easy to
use drop box, sharable folders, wide-ranging course calendar and many more
features all designed to provide customization to key stakeholders.
Organizations will be able to train their employees on systems using My Courses
self-paced settings, as well as test candidates on their skill sets before they
are hired.




Single
Sign-on




Single
Sign-on provides organizations the ability to log into multiple systems with a
single unique username and password. The username and password authenticates the
user’s credentials to make sure the person who is accessing the data is
authorized to. BoxesOS uses Microsoft Active Directory Identity Management to
accomplish single sign on. Microsoft Active Directory allows institutions to
centrally manage and share user information. Active Directory also acts as the
single sign on point for bringing systems and applications together. BoxesOS
user management integrates with Active Directory.


-9-


Pathways Real-time
Integration





EPAZZ
Pathways is an integration suite enabling real-time connectivity with ERP and
Legacy systems. Pathways integration suite allows organizations to retrieve data
from ERPs and write data back to ERPs in real-time.





Desk Flex
Software





DFI
developed the Desk/Flex Software (“Desk/Flex”) to enhance the value of
businesses’ real estate investments and modernize their office
space.  Desk/Flex lets businesses make better use of office space
restrictions by enabling employees to instantly access their workstation tools
from multiple areas in and outside of the office.  Desk/Flex lets
employees reserve space in advance or claim space instantly. It adjusts the
telephone switch (Private Branch Exchange or “PBX”) so that calls ring at the
'desk du jour', or go directly to voice mail when a worker is not checked
in.





Key
Features of Desk/Flex include:





Quick and Easy Check-In -
Check-in and Check-out to a workstation takes less than 8 seconds, and advance
reservations take only a few seconds more.





Point-and-Click Floor Maps -
Desks that are available are identified by green dots. Those that are in use are
identified by red. An employee needs only to click or touch (using an optional
touch-screen) a green dot to select his or her desk.





PBX Interaction - Desk/Flex
connects to an employee’s Nortel, Avaya or Cisco PBX to ensure that the employee
has phone access at his or her desk; the message waiting light becomes
operational; outside calls can be made only after checking in; and an employee
is automatically checked out overnight if he or she leaves a workstation without
checking out.





Web Browser and Local "Kiosk"
Access - On site, the Desk/Flex kiosk(s) makes it easy to select a vacant
desk near a co-worker or centrally located at the office. Even before leaving
home a worker with access to the company intranet can reserve a desk or locate a
co-worker at any desk in the company’s office via a web browser.





Advance Reservations -
Workers can easily choose and reserve workspaces ahead of time for a particular
date or range of dates.





Occupancy Reports -
Management reports allow accurate measures of occupancy in total or by type of
desk so the total number or mix of desks can be adjusted to meet client demand
and save more office space expense in future months.





Desk/Flex
is responsive to office size and needs, servicing small to large businesses.
Desk/Flex can be configured to administer a single site or multiple sites
locally or remotely.  Desk/Flex has full integration capabilities with
both Nortel and Avaya, which combined represent the majority of the
telecommunications and inbound automatic call distributor (“ACD”)
market.


-10-


Agent Power
Software





Agent
Power Software (“Agent Power”) is PRMI’s proprietary software
line.  PRMI believes Agent Power provides vital information and tools
for call centers to help improve their workforce management. Historical,
real-time, and forecast information is available at the touch of a button to
plan, control, and monitor a business’s call center. Coordinated stand-alone
modules allow a company to develop employee schedules, track queue and agent
performance, communicate this information with the company’s agents and improve
workforce management.




Agent
Power is a suite of six (6) applications. Each can operate on a stand-alone
basis, or can work in conjunction with the other applications.  The
applications feature the following workforce management components:





§
            Planning
      and Scheduling;§
            Agent
      Adherence;§
            Agent
      Performance;§
            ACD
      Group Performance;§
            Real-Time
      Agent Status; and§
            Info
      Screen.





All
modules of Agent Power have full integration capabilities with Nortel, Avaya,
and ROLM ACDs, and the Planning and Scheduling module works with any modern ACD
system.





Sales
& Marketing




EPAZZ
uses telemarketing and email campaigns to meet with key decision makers in order
to demonstrate the significant customer satisfaction, cost savings, and revenue
enhancement benefits they can realize by using the EPAZZ systems.





EPAZZ plans
to contract with independent sales representatives as independent
contractors for IT sales. Independent representatives are independent
contractors who work on a performance basis and are located throughout the
United States. EPAZZ will pay commission on sales. Since the sales teams will be
independent and not employees of EPAZZ we do not plan to pay such sales
representatives salaries, travel expenses or office expenses. Furthermore, EPAZZ
we believe that we will be able to enter into more markets at less cost allowing
us to invest more in product development.





EPAZZ
hopes to receive revenues from the following sources; however, we only generated
$184,341 revenues for the year ended December 31, 2008:





1.
            Product:
      One time License fee.





2.
            Maintenance:
      Annual support service packages.





3.
            Partnership:
      Access fees, commissions.


-11-


4.
            Business
      Services: Subscription fees from relationship programs for universities
      and the business community.





5.
            Technical
      consulting services: Ongoing fees from
upgrades.





6.
            Online
      services: enhanced membership fees and pay-per-use fees from the
      stakeholders.





7.
            License
      Technology: License and royalties for EPAZZ technology in Data Centers for
      providing ASP (Application Service
Providers).




Research
and Development





Over the
previous two years we have issued 1,000,000 Class A Common Shares to software
developers in consideration for research and product development of
BoxesOS.  The Company has spent no other resources on research and
development activities for the fiscal years ended December 31, 2008 and
December 31, 2007.





Employees




We
currently employ four (4) full-time employees.  Three of those
employees are provided to us by Administaff Companies II, L.P. (“Administaff”),
with whom we have a client service agreement.





Competition





The
environment for our products and services is intensely competitive. Our current
and potential competitors include many large and well capitalized software
companies and many smaller less-known software companies.





We
believe that the principal competitive factors in our market segments include
selection, price, availability, convenience, brand recognition, customer
service, reliability, ease of use, and ability to adapt to changing conditions,
as well as our future customers' overall trust in the entire experience in
transactions with us.




Our
overall market is intensely competitive, and there are a number of other
competitors that are much larger than us and have significantly greater
resources at their disposal. We believe that our product offerings are
competitive with others in the marketplace; however, we do not have a dominant
market share.





Intellectual
Property





We
received a trademark for “EPAZZ” on March 5, 2002 (Serial Number 75930172).
We regard our trademark, copyrights, domain names, trade dress, trade secrets,
proprietary technologies, and similar intellectual property as important to our
success, and we plan to rely on trademark and copyright law, trade-secret
protection, and confidentiality and/or license agreements with our employees,
customers, partners, and others to protect our proprietary
rights.


-12-


Policing
unauthorized use of our proprietary rights is inherently difficult, and we may
not be able to determine the existence or extent of any unauthorized use. The
protection of our intellectual property may require the expenditure of
significant financial and managerial resources. Moreover, we cannot be certain
that the steps we take to protect our intellectual property will adequately
protect our rights or that others will not independently develop or otherwise
acquire equivalent or superior technology or other intellectual property
rights.





Material
Events





In March
2009, we issued an aggregate of 3,000,000 shares of our restricted common stock
to 538 Investments LTD (“538 Investments”) in connection with a Consulting
Agreement entered into with 538 Investments, and in consideration for consulting
services rendered in connection with market research, business plan development
and media monitoring services.  The consulting agreement was effective
March 1, 2009, and expires September 1, 2009.  The shares provided to
538 Investments represented the full compensation due to 538 Investments under
the terms of the agreement.  The shares were valued at $30,000 in
aggregate based on the market price on the grant date.








ITEM
1A. RISK FACTORS





Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in this report before deciding whether to make an equity investment in
our Company. Our business, financial condition or results of operations,
including those of our wholly owned subsidiaries DFI and PRMI, could be
materially adversely affected by these risks if any of them actually occur. Some
of these factors have affected our financial condition and operating results in
the past or are currently affecting us.




RISKS
RELATED TO OUR BUSINESS





We
owed $960,689 as of December 31, 2008, to repay our liabilities and we will need
to raise additional funds in the future to repay these obligations and continue
our operations and these funds may not be available on acceptable terms or at
all. Failure to raise additional funds could require us to substantially reduce
or terminate our operations.





As of
December 31, 2008, we owed $501,057 in outstanding notes payable, which included
$119,381 which is due in the next 12 months, not including any interest due on
the Note (defined below) and the June 2008 Note, described above.  We
also owed $100,000 on our line of credit and an additional $116,179 to our Chief
Executive Officer as of December 31, 2008.  Finally, we owed $243,453
in other current liabilities.  We anticipate raising additional funds
through public or private financing, strategic relationships or other
arrangements in the near future to support our business operations; however we
currently do not have commitments from third parties for additional capital.


-13-


We
currently anticipate that we will only be able to continue our business
operations for the next three (3) months with our current cash on hand and the
revenues we generate and will need approximately $100,000 to continue our
operations for the next 12 months, including any funds we will need to make the
Monthly Payments on our Note with Mr. Goes and the June 2008 Note, as described
above.   We cannot be certain that any such financing will be
available on acceptable terms, or at all, and our failure to raise capital when
needed could limit our ability to continue and expand our business. We intend to
overcome the circumstances that impact our ability to remain a going concern
through a combination of the commencement of additional revenues, of which
there can be no assurance, with interim cash flow deficiencies being addressed
through additional equity and debt financing. Our ability to obtain additional
funding throughout the 2009 year and thereafter will determine our ability to
continue as a going concern. There can be no assurances that these plans for
additional financing will be successful. Failure to secure additional financing
in a timely manner to repay our obligations and supply us sufficient funds to
continue our business operations and on favorable terms if and when needed in
the future could have a material adverse effect on our financial performance,
results of operations and stock price and require us to implement cost reduction
initiatives and curtail operations. Furthermore, additional equity financing may
be dilutive to the holders of our common stock, and debt financing, if
available, may involve restrictive covenants, and strategic relationships, if
necessary to raise additional funds, and may require that we relinquish valuable
rights.  In the event that we are unable to repay our current and
long-term obligations as they come due, we could be forced to curtail or abandon
our business operations, and/or file for bankruptcy protection; the result of
which would likely be that our securities would decline in value and/or become
worthless.




The
Note payable in connection with the acquisition of DFI and PRMI is secured by a
security interest in substantially all of the assets of DFI, PRMI and the
Company.





We
provided Mr. Goes, the seller of the DFI and PRMI with a 7% Promissory Note in
the amount of $225,000 (the “Note”) in connection with the Closing of the
purchase of DFI and PRMI. The Note bears interest at the rate of seven percent
(7%) per annum, and all past due principal and interest (which failure to pay
such amounts after a thirty (30) day cure period, shall be defined herein as an
“Event of Default”) bear interest at the rate of twelve percent (12%) per annum
until paid in full.  The principal amount of the Note is due on June
18, 2011.  The Note is payable in monthly installments of $6,947.35
(each a “Monthly Payment”), with the first such Monthly Payment due on September
18, 2008, until such time as this Note is paid in full.  As of the
date of this report, the Company is current with all Monthly
Payments.  We agreed to secure the payment of the Note with a Uniform
Commercial Code Security Interest filing, which we agreed to file, at Mr. Goes’
request, at our expense, to grant Mr. Goes a security interest over all of DFI’s
and PRMI’s tangible and intangible assets, and the outstanding stock of DFI and
PRMI until the Note is repaid.  Pursuant to such requirement of the
Note, at the Closing, we entered into a Security Agreement with Mr. Goes,
whereby we granted Mr. Goes a security interest in all inventory, equipment,
appliances, furnishings and fixtures, stock certificates and intellectual
property now or hereafter owned by DFI and PRMI.  Pursuant to the
Security Agreement, we also assigned to Mr. Goes a security interest in all of
our right, title, and interest to any trademarks, trade names, contract rights,
and leasehold interests in which we now have or hereafter acquire to secure
repayment of the Note.  If we default on the repayment of the Note,
Mr. Goes may enforce his security interest over the assets of the DFI and PRMI
and our assets which secure the repayment of the Note, and we could be forced to
curtail or abandon our current business plans and operations. If that were to
happen, any investment in the Company could become worthless.


-14-


If
we are deemed to be a “shell company,” shareholders who hold unregistered shares
of our common stock will be subject to resale restrictions pursuant to Rule
144.





Pursuant
to Rule 144 of the Securities Act of 1933, as amended (“Rule 144”), a “shell
company” is defined as a company that has no or nominal operations; and, either
no or nominal assets; assets consisting solely of cash and cash equivalents; or
assets consisting of any amount of cash and cash equivalents and nominal other
assets.  We do not currently believe that we are a “shell company”
however, we may be deemed to be a “shell company.” If we are deemed to be a
“shell company” pursuant to Rule 144, sales of our securities pursuant to Rule
144 will not be able to be made until 1) we have ceased to be a “shell company;
2) we are subject to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, and have filed all of our required periodic reports for the prior
one year period; and a period of at least twelve months has elapsed from the
date “Form 10 information” has been filed with the Commission reflecting the
Company’s status as a non-“shell company.”  Because none of our
securities will be able to be sold pursuant to Rule 144, until at least a year
after we cease to be a “shell company” (as described in greater detail above),
any securities we issue to consultants, employees, in consideration for services
rendered or for any other purpose will have no liquidity in the event we are
deemed to be a “shell company” until and unless such securities are registered
with the Commission and/or until a year after we cease to be a “shell company”
and have complied with the other requirements of Rule 144, as described
above.  As a result, it may be harder for us to fund our operations
and pay our consultants with our securities instead of
cash.  Furthermore, it will be harder for us to raise funding through
the sale of debt or equity securities unless we agree to register such
securities with the Commission, which could cause us to expend additional
resources in the future.  If we are deemed a “shell company,” it could
prevent us from raising additional funds, engaging consultants using our
securities to pay for any acquisitions, which could cause the value of our
securities, if any, to decline in value or become
worthless.





We
have a history of losses and we anticipate that our expenses will dramatically
increase as we execute our business plan. Thus, we will likely experience
continued losses in the near future and may not ever achieve or maintain
profitability.





The
Company has yet to initiate significant sales or demonstrate that it can
generate sufficient sales to become profitable. The Company incurred significant
net losses since its inception in March 2000, including a net loss of $264,107
and $152,658 for the years ended December 31, 2008 and 2007, respectively. 
As of December 31, 2008, the Company had an accumulated deficit of $1,937,310
and negative working capital of $433,920.  We expect to continue to
incur operating losses in the future. Furthermore, we expect operating expenses
to increase as we seek to update our products, build relationships with future
customers, build additional distribution channels for our products, continue
design and development projects, and increase administrative activities to
support our planned growth. We expect to need approximately $100,000 to sustain
our operations for the next 12 months. We anticipate only being able to continue
our operations for the next three months if no additional funding is
raised.  The extent of our future operating losses and the timing of
our profitability are highly uncertain, we may never generate sufficient
revenues to achieve or sustain profitability.


-15-


We
have conditions that raise substantial doubt that we can continue as a going
concern, which may negatively affect our ability to raise additional funds and
otherwise operate our business. If we fail to raise sufficient capital, we will
not be able to implement our business plan, we may have to liquidate our
business, and you may lose your investment.




There is
substantial doubt about our ability to continue as a going concern given our
recurring losses from operations, deficiencies in working capital and equity and
our failure to make payments related to our notes payable as described herein.
This substantial doubt could materially limit our ability to raise additional
funds by issuing new debt or equity securities or otherwise. If we fail to raise
sufficient capital, we will not be able to implement our business plan, we may
have to liquidate our business and you may lose your investment. You should
consider our independent registered public accountants’ comments when
determining if an investment in us is suitable.




Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common
stock. Additionally, shares issued in our planned offering will cause
immediate and substantial dilution to our existing shareholders.




Shares
eligible for future sale may have an adverse effect on the market price of our
common stock by creating an excessive supply. We currently plan to raise
additional funding through the sale of debt or equity securities, which would
cause a significant increase in the number of outstanding shares which we
currently have, and would cause immediate and substantial dilution to our
existing shareholders.  Additionally in the future, shareholders,
including our President and Chief Executive Officer, and any shareholders who
purchase shares in the planned offering may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to Rule 144, if the Company remains
a reporting company, a non “affiliate” stockholder (or stockholders whose shares
are aggregated) who has satisfied a six month holding period may sell their
securities free of any volume limitations. Rule 144 also permits, under certain
circumstances, the sale of securities, with certain volume limitations, by an
affiliate, if the Company is a reporting company, the “affiliate” has held such
shares for six months, and the Company continues to file periodic reports with
the commission.  The rules are different however for non-reporting
companies in that non-“affiliate” and “affiliate shareholders must hold their
securities for at least a year, and no sales by “non-affiliates” are able to be
made unless certain requirements are met, including, but not limited to that
there is current public information available regarding the Company and the
“affiliate” complies with the applicable volume limitations.  The
disclosures in this paragraph assume for all purposes that the Company is not a
“shell company,” as described above. Any substantial sale of common stock
pursuant to any resale prospectus or Rule 144 may have an adverse effect on the
market price of our common stock by creating an excessive
supply.


-16-


Our
success and the success of DFI and PRMI depend in part upon our ability to
develop new products and enhance our existing products. Failure to successfully
introduce new or enhanced products to the market may adversely affect our
business.





We may
not be successful in achieving market acceptance of our products, including the
products of DFI and PRMI. Any failure or delay in diversifying our existing
product offerings could harm our business, results of operations and financial
condition.





Our
future success depends in part on our ability to develop enhancements to our
existing products and to introduce new products that keep pace with rapid
technological developments. We must continue to modify and enhance our products
to keep pace with changes in technologies. We may not be successful in
developing these modifications and enhancements or in bringing them to market in
a timely manner. In addition, uncertainties about the timing and nature of new
technologies and platforms or modifications to existing platforms or
technologies, could increase our research and development expenses. Any failure
of our products to operate effectively with future network platforms and
technologies could reduce the demand for our products, result in customer
dissatisfaction and harm our business.  Additionally, accelerated
product introductions and short product life cycles require high levels of
expenditures for research and development that could adversely affect our
operating results.




Our
operating results, including the operating results of DFI and PRMI, are
difficult to predict and fluctuate substantially from quarter to quarter and
year to year, which may increase the difficulty of financial planning and
forecasting and may result in declines in our stock price.




Our
future operating results may vary from our past operating results, are difficult
to predict and may vary from year to year due to a number of factors. Many of
these factors are beyond our control. These factors include:




●
      the potential delay in recognizing revenue from transactions due to
      revenue recognition rules which we must
follow;





●
      customer decisions to delay implementation of our
  products;





●
      any seasonality of technology
purchases;





●
      demand for our products, which may fluctuate
  significantly;





●
      the timing of new product introductions and product enhancements by both
      us and our competitors;





●
      changes in our pricing policy; and





●
      the publication of opinions concerning us, our products or technology by
      industry analysts.


-17-


As a
result of these and other factors, our operating results for any fiscal quarter
or fiscal year will be subject to significant variation, and we believe that
period-to-period comparisons of our results of operations are not necessarily
meaningful in terms of their relation to future performance. You should not rely
upon these comparisons as indications of future performance. It is likely that
our future quarterly and annual operating results from time to time will not
meet the expectations of public market analysts or investors, which could cause
a drop in the price of our common stock.




Defects or errors in our software
could adversely affect our reputation, result in significant costs to us and
impair our ability to sell our software.




If our
software is determined to contain defects or errors, our reputation could be
materially adversely affected, which could result in significant costs to us and
impair our ability to sell our software in the future. The costs we would incur
to correct product defects or errors may be substantial and would materially
adversely affect our operating results. After the release of our software,
defects or errors may be identified from time to time by our internal team and
by our clients. Such defects or errors may occur in the future.





Any
defects in our applications, or defects that cause other applications to
malfunction or fail, could result in:





●
      lost or delayed market acceptance and sales of our
    software;




●
      loss of clients;





●
      product liability suits against us;





●
      diversion of development resources;





●
      injury to our reputation; and





●
      increased maintenance and warranty
costs.





Our
market is subject to rapid technological change and if we fail to continually
enhance our products and services in a timely manner, our revenue and business
would be harmed.





We must
continue to enhance and improve the performance, functionality and reliability
of our products in a timely manner. The software industry is characterized by
rapid technological change, changes in user requirements and preferences,
frequent new product and services introductions embodying new technologies, and
the emergence of new industry standards and practices that could render our
products and services obsolete. Our failure to continually enhance our products
and services in a timely manner would adversely impact our business and
prospects. Our success will depend, in part, on our ability to internally
develop and license leading technologies to enhance our existing products and
services, to develop new products and services that address the increasingly
sophisticated and varied needs of our future customers, and to respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. Our product development efforts are expected to
continue to require substantial investments, and we may not have sufficient
resources to make the necessary investments. If we are unable to adapt our
products and services to changing market conditions, customer requirements or
emerging industry standards, we may not be able to maintain or increase our
revenue and expand our business.


-18-


Our
management has no senior management experience in the software industry which
may hinder our ability to manage our operations.





Our
Company is a new software company and our management has limited experience
managing in our industry and our management and employees have limited
experience developing and selling software. The lack of experience in software
design and sales may make it difficult to compete against companies that have
more senior management and design experience. We expect to add additional key
personnel in the future. Our failure to attract and fully integrate our new
employees into our operations or successfully manage such employees could have a
material adverse effect on our business, financial condition and results of
operations.




Significant
unauthorized use of our products would result in material loss of potential
revenues and our pursuit of protection for our intellectual property rights
could result in substantial costs to us.




Our
software is planned to be licensed to customers under license agreements, which
license may include provisions prohibiting the unauthorized use, copying and
transfer of the licensed program. Policing unauthorized use of our products will
likely be difficult and, while we are unable to determine the extent to which
piracy of our software products exists, any significant piracy of our products
could materially and adversely affect our business, results of operations and
financial condition. In addition, the laws of some foreign countries do not
protect the proprietary rights to as great an extent as do the laws of the
United States and our means of protecting our proprietary rights may not be
adequate.





We
may face product liability claims from our future customers which could lead to
additional costs and losses to the Company.




Our
license agreements with our future customers will contain provisions designed to
limit our exposure to potential product liability claims. It is possible,
however, that the limitation of liability provisions contained in the license
agreements may not be effective under the laws of some jurisdictions. A
successful product liability claim brought against us could result in payment by
us of substantial damages, which would harm its business, operating results and
financial condition and cause the price of its common stock to
fall.




We may not be able to respond to
technological changes with new software applications, which could materially
adversely affect our sales and profitability.





The
markets for our software applications are characterized by rapid technological
changes, changing customer needs, frequent introduction of new software
applications and evolving industry standards. The introduction of software
applications that embody new technologies or the emergence of new industry
standards could make our software applications obsolete or otherwise
unmarketable. As a result, we may not be able to accurately predict the
lifecycle of our software applications, which may become obsolete before we
receive any revenue or the amount of revenue that we anticipate receiving from
them. If any of the foregoing events were to occur, our ability to retain or
increase market share could be materially adversely affected.


-19-


To be
successful, we need to anticipate, develop and introduce new software
applications on a timely and cost-effective basis that keep pace with
technological developments and emerging industry standards and that address the
increasingly sophisticated needs of our future customers and their budgets. We
may fail to develop or sell software applications that respond to technological
changes or evolving industry standards, experience difficulties that could delay
or prevent the successful development, introduction or sale of these
applications or fail to develop applications that adequately meet the
requirements of the marketplace or achieve market acceptance. Our failure to
develop and market such applications and services on a timely basis, or at all,
could materially adversely affect our sales and profitability.





Our failure to offer high quality
customer support services could harm our reputation and could materially
adversely affect our sales of software applications and results of
operations.




Our
future customers, if any, will depend on us to resolve implementation, technical
or other issues relating to our software. A high level of service is critical
for the successful marketing and sale of our software. If we do not succeed in
helping our customers quickly resolve post-deployment issues, our reputation
could be harmed and our ability to make new sales or increase sales to customers
could be damaged.




We
expect to rely on off-shore independent contract service providers and, as a
result, will be exposed to potential service problems from those
providers.





Certain
Company functions, such as software development, will be provided through
off-shore contract providers. Any material disruption or slowdown in service
resulting from telephone or Internet failures, power or service outages, natural
disasters, labor disputes, or other events could make it difficult or impossible
to provide adequate off-shore services. Furthermore, we may be unable to attract
and retain an adequate number of competent software developers, which is
essential in creating a favorable customer experience. In addition, because our
outsourced software development is located in India, we may experience
difficulties in training or monitoring the level of support provided. If we are
unable to continually provide adequate and trained staffing for our software
development operations, our reputation could be seriously harmed and our sales
could decline. Further, we cannot assure you that our needs will not exceed our
capacities. If this occurs, we could experience delays in developing software
and addressing customer concerns. Because our success depends in large part on
keeping our future customers satisfied, any failure to provide satisfactory
levels of software development would likely impair our reputation and we could
lose customers.


-20-


Our
business could be harmed if our independent third party contractors violate
labor or other laws.





Once we
are able to retain them, our independent contract third party contractors may
not operate in compliance with applicable United States and foreign laws and
regulations, including labor practices. If one of any of our possible future
independent contractors violates labor or other laws or diverges from those
labor practices generally accepted as ethical in the United States, it could
result in adverse publicity for us, damage our reputation in the United States
or render our conduct of business in a particular foreign country undesirable or
impractical, any of which could harm our business.





Our
future success depends on our ability to respond to changing customer demands,
identify and interpret trends and successfully market new products.





The
software industry is subject to rapidly changing customer demands, particularly
in the “enterprise” market that we intend to market our product. Accordingly, we
must identify and interpret trends and respond in a timely manner. Demand for
and market acceptance of new products are uncertain and achieving market
acceptance for new products generally requires substantial product development
and marketing efforts and expenditures. If we do not meet changing customer
demands or are unable to develop products that appeal to current customer
demands, our results of operations will be negatively impacted. In addition, we
will have to make decisions about product development and marketing expenditures
in advance of the time when customer acceptance can be determined. If we fail to
anticipate, identify or react appropriately to changes and trends or are not
successful in marketing our products, we could experience excess inventories,
higher than normal markdowns or an inability to sell our products once and if
the products are available.




Our
business and the success of our products could be harmed if we are unable to
establish and maintain a brand image.





We
believe that establishing a brand is critical to achieving acceptance of our
software products and to establishing key strategic relationships. As a new
company with a new brand, we believe that we have little to no brand recognition
with the public. We may experience difficulty in establishing a brand name that
is well-known and regarded, and any brand image that we may be able to create
may be quickly impaired. The importance of brand recognition will increase when
and if our competitors create products that are similar to our products. Even if
we are able to establish a brand image and react appropriately to changes in
customer preferences, customers may consider our brand image to be less
prestigious or trustworthy than those of our larger competitors. Our results of
operations may be affected in the future should our products even be
successfully launched.




We
may fail in introducing and promoting our products to the software market, which
will have an adverse effect on our ability to generate revenues.




Demand
for and market acceptance of new products is inherently uncertain. Our revenue
will come from the sale of our products, and our ability to sell our products
will depend on various factors, including the eventual strength, if any, of our
brand name, competitive conditions and our access to necessary capital. If we
fail to introduce and promote our products, we may not be able to generate any
significant revenues. In addition, as part of our growth strategy, we intend to
expand our product offerings to introduce more products in other categories.
This strategy may however prove unsuccessful and our association with failed
products could impair our brand image. Introducing and achieving market
acceptance for these products will require, among other things:


-21-


●
      the establishment of our brand;





●
      the development and performance to our planned product
      introductions;





●
      the establishment of key relationships with customers for our software
      products; and





●
      substantial marketing and product development efforts and expenditures to
      create and sustain customer demand.





We
will face intense competition, including competition from companies with
significantly greater resources than ours, and if we are unable to compete
effectively with these companies, our business could be harmed.





We will
face intense competition in the software industry from other established
companies. We have a very limited market for our product, product sales, brand
recognition, manufacturing or brand equity. Almost all of our competitors have
significantly greater financial, technological, engineering, manufacturing,
marketing and distribution resources than we do. Their greater capabilities in
these areas will enable them to better withstand periodic downturns in the
software industry, compete more effectively on the basis of price and production
and more quickly develop new products. In addition, new companies may enter the
markets in which we expect to compete, further increasing competition in the
software industry.





We
believe that our ability to compete successfully will depend on a number of
factors, including the functionality of our products once marketed and the
strength of our brand, once established, as well as many factors beyond our
control. We may not be able to compete successfully in the future, and increased
competition may result in price reductions, reduced profit margins, loss of
market share and an inability to generate cash flows that are sufficient to
maintain or expand our development and marketing of new products.





We
depend on key personnel to manage our business effectively in a rapidly changing
market, and if we are unable to retain existing personnel, our business could be
harmed.





Our
future success depends upon the continued services of key employees especially
Shaun Passley, our President and Chief Executive Officer. The loss of the
services of Mr. Passley or any other key employee could harm us. Our future
success also depends on our ability to identify, attract and retain additional
qualified personnel. Competition for employees in our industry is intense and we
may not be successful in attracting and retaining such personnel.


-22-


The
disruption, expense and potential liability associated with unanticipated future
litigation against us could have a material adverse effect on our business,
results of operations and financial condition.





We may be
subject to various legal proceedings and threatened legal proceedings from time
to time as part of our ordinary business. We are not currently a party to any
legal proceedings. However, any unanticipated litigation in the future,
regardless of merits, could significantly divert management’s attention from our
operations and result in substantial legal fees to us. Further, there can be no
assurance that any actions that have been or will be brought against us will be
resolved in our favor or, if significant monetary judgments are rendered against
us, that we will have the ability to pay such judgments. Such disruptions, legal
fees and any losses resulting from these claims could have a material adverse
effect on our business, results of operations and financial
condition.




Protection of our intellectual
property is limited, and any misuse of our intellectual property by others could
materially adversely affect our sales and results of
operations.




Proprietary
technology in our software is important to our success. To protect our
proprietary rights, we plan to rely on a combination of patents, copyrights,
trademarks, trade secrets, confidentiality procedures and contractual
provisions. We do not own any issued patents and we have not emphasized patents
as a source of significant competitive advantage. We have sought to protect our
proprietary technology under laws affording protection for trade secrets,
copyright and trademark protection of our software, products and developments
where available and appropriate. In the event we are issued patents, our issued
patents may not provide us with any competitive advantages or may be challenged
by third parties, and the patents of others may seriously impede our ability to
conduct our business. Further, any patents issued to us may not be timely or
broad enough to protect our proprietary rights.





We also
have one registered trademark in the U.S. for our “EPAZZ” mark. Although we
attempt to monitor use of and take steps to prevent third parties from using our
trademark without permission, policing the unauthorized use of our trademark is
difficult. If we fail to take steps to enforce our trademark rights, our
competitive position and brand recognition may be diminished.




Protection
of trade secrets and other intellectual property rights in the markets in which
we operate and compete is highly uncertain and may involve complex legal and
scientific questions. The laws of countries in which we operate may afford
little or no protection to our trade secrets and other intellectual property
rights. Policing unauthorized use of our trade secret technologies and proving
misappropriation of our technologies is particularly difficult, and we expect
software piracy to continue to be a persistent problem. Piracy of our products
represents a loss of revenue to us. Furthermore, any changes in, or unexpected
interpretations of, the trade secret and other intellectual property laws in any
country in which we operate may adversely affect our ability to enforce our
trade secret and intellectual property rights. Costly and time-consuming
litigation could be necessary to enforce and determine the scope of our
confidential information and trade secret protection. If we are unable to
protect our proprietary rights or if third-parties independently develop or gain
access to our or similar technologies, our competitive position and revenue
could suffer.


-23-


We
may incur significant litigation expenses protecting our intellectual property
or defending our use of intellectual property, which may have a material adverse
effect on our cash flow and results of operations.





If our
efforts to protect our intellectual property rights are inadequate to prevent
imitation of our products by others or to prevent others from seeking to block
sales of our products as a violation of the intellectual property rights of
others, we could incur substantial significant legal expenses in resolving such
disputes.





Our
competitors may develop similar, non-infringing products that adversely affect
our ability to generate revenues.





Our
competitors may be able to produce a software product that is similar to our
product without infringing on our intellectual property rights. Since we have
yet to establish any significant brand recognition for our product, we could
lose a substantial amount of business due to competitors developing products
similar to our software products. As a result, our future growth and ability to
generate revenues from the sale of our product could suffer a material adverse
effect.




Claims that we misuse the
intellectual property of others could subject us to significant liability and
disrupt our business, which could materially adversely affect our results of
operations and financial condition.




Because
of the nature of our business, we may become subject to material claims of
infringement by competitors and other third-parties with respect to current or
future software applications, trademarks or other proprietary rights. Our
competitors, some of which may have substantially greater resources than us and
have made significant investments in competing technologies or products, may
have, or seek to apply for and obtain, patents that will prevent, limit or
interfere with our ability to make, use and sell our current and future
products, and we may not be successful in defending allegations of infringement
of these patents. Further, we may not be aware of all of the patents and other
intellectual property rights owned by third-parties that may be potentially
adverse to our interests. We may need to resort to litigation to enforce our
proprietary rights or to determine the scope and validity of a third party’s
patents or other proprietary rights, including whether any of our products or
processes infringe the patents or other proprietary rights of third-parties. The
outcome of any such proceedings is uncertain and, if unfavorable, could
significantly harm our business. If we do not prevail in this type of
litigation, we may be required to:




●
      pay damages, including actual monetary damages, royalties, lost profits or
      other damages and third-party’s attorneys’ fees, which may be
      substantial;




●
      expend significant time and resources to modify or redesign the affected
      products or procedures so that they do not infringe a third-party’s
      patents or other intellectual property rights; further, there can be no
      assurance that we will be successful in modifying or redesigning the
      affected products or procedures;


-24-


●
      obtain a license in order to continue manufacturing or marketing the
      affected products or processes, and pay license fees and royalties; if we
      are able to obtain such a license, it may be non-exclusive, giving our
      competitors access to the same intellectual property, or the patent owner
      may require that we grant a cross-license to part of our proprietary
      technologies; or




●
      stop the development, manufacture, use, marketing or sale of the affected
      products through a court-ordered sanction called an injunction, if a
      license is not available on acceptable terms, or not available at all, or
      our attempts to redesign the affected products are
      unsuccessful.




Any of
these events could adversely affect our business strategy and the value of our
business. In addition, the defense and prosecution of intellectual property
suits, interferences, oppositions and related legal and administrative
proceedings in the United States and elsewhere, even if resolved in our favor,
could be expensive, time consuming, generate negative publicity and could divert
financial and managerial resources.




We expect
that software developers will increasingly be subject to infringement claims as
the number of software applications and competitors in our industry segment
grows and the functionality of software applications in different industry
segments overlaps. Thus, we could be subject to additional patent infringement
claims in the future. There can be no assurance that the claims that may arise
in the future can be amicably disposed of, and it is possible that litigation
could ensue.





Intellectual
property litigation can be complex, costly and protracted. As a result, any
intellectual property litigation to which we are subject could disrupt our
business operations, require us to incur substantial costs and subject us to
significant liabilities, each of which could severely harm our
business.




Plaintiffs
in intellectual property cases often seek injunctive relief. Any intellectual
property litigation commenced against us could force us to take actions that
could be harmful to our business, including the following:





●
      stop selling our products or using the technology that contains the
      allegedly infringing intellectual
property;





●
      stop selling our products or using the technology that contains the
      allegedly infringing intellectual
property;





●
      attempt to obtain a license to use the relevant intellectual property,
      which may not be available on reasonable terms or at all;
    and





●
      attempt to redesign the products that allegedly infringed upon the
      intellectual property.





If we are
forced to take any of the foregoing actions, our business, financial position
and operating results could be harmed. We may not be able to develop, license or
acquire non-infringing technology under reasonable terms, if at all. These
developments would result in an inability to compete for customers and would
adversely affect our ability to increase our revenue. The measure of damages in
intellectual property litigation can be complex, and is often subjective or
uncertain. If we were to be found liable for the infringement of a third party’s
proprietary rights, the amount of damages we might have to pay could be
substantial and would be difficult to predict.


-25-


Our
business may be negatively impacted as a result of changes in the economy and
corporate and institutional spending.





Our
business will depend on the general economic environment and levels of corporate
and institutional spending. Purchases of software may decline in periods of
recession or uncertainty regarding future economic prospects. During periods of
recession or economic uncertainty, we may not be able to maintain or increase
our sales to customers, maintain sales levels, establish operations on a
profitable basis or create earnings from operations as a percentage of net
sales. As a result, our operating results may be adversely and materially
affected by downward trends in the economy or the occurrence of events that
adversely affect the economy in general. Our operating results and margins will
be adversely impacted if we do not grow as anticipated.




We may engage in future acquisitions
or investments that present many risks, and we may not realize the anticipated
financial and strategic goals for any of these
transactions.




We do not
have significant experience acquiring companies. However, in the future we may
acquire or make investments in companies, in addition to our acquisition of DFI
and PRMI, described above. If we acquire or make investments in complementary
companies, products, services and technologies, the acquisitions and investments
will involve a number of risks, including:




●
      we have limited experience acquiring or making investments in
      complementary companies, products, services and
    technologies;




●
      we may find that the acquired company or assets do not further our
      business strategy, or that we overpaid for the company or assets, or that
      industry or economic conditions change, all of which may generate a future
      impairment charge;





●
      we may have difficulty integrating the operations and personnel of the
      acquired business and may have difficulty retaining the key personnel of
      the acquired business;





●
      we may have difficulty incorporating the acquired technologies or products
      with our existing product lines;





●
      there may be customer confusion where our products overlap with those that
      we acquire;





●
      our ongoing business and management’s attention may be disrupted or
      diverted by transition or integration issues and the complexity of
      managing geographically and culturally diverse
  locations;


-26-


●
      we may have difficulty maintaining uniform standards, controls, procedures
      and policies across locations;





●
      the acquisition may result in litigation from terminated employees or
      third parties; and





●
      we may experience significant problems or liabilities associated with
      product quality, technology and legal
  contingencies.




These
factors could have a material adverse effect on our business, results of
operations and financial condition or cash flows, particularly in the case of a
larger acquisition or multiple acquisitions in a short period of time. From time
to time, we may enter into negotiations for acquisitions or investments that are
not ultimately consummated. These negotiations could result in significant
diversion of management time, as well as out-of-pocket costs.




The
consideration paid for an investment or acquisition may also affect our
financial results. If we were to proceed with one or more significant
acquisitions in which the consideration included cash, we could be required to
use a substantial portion of our available cash, including a portion of the net
proceeds of this offering. To the extent we issue shares of our capital stock or
other rights to purchase shares of our capital stock, including options or other
rights, our existing stockholders may be diluted, and our earnings per share may
decrease. In addition, acquisitions may result in the incurrence of debt, large
one-time write-offs, including write-offs of acquired in-process research and
development costs, and restructuring charges. They may also result in goodwill
and other intangible assets that are subject to impairment tests, which could
result in future impairment charges.





We
may be unable to scale our operations successfully and fail to attain our
planned growth.




Our plan
is to grow our business rapidly. Our growth, if it occurs as planned, will place
significant demands on our management, as well as our financial, administrative
and other resources. We will need to hire highly skilled personnel to effectuate
our planned growth. There is no guarantee that we will be able to locate and
retain qualified personnel for such positions, which would likely hinder our
ability to manage operations. Furthermore, we cannot guarantee that any of the
systems, procedures and controls we put in place will be adequate to support the
commercialization of our products or other operations. Our operating results
will depend substantially on the ability of our officers and key employees to
manage changing business conditions and to implement and improve our financial,
administrative and other resources. If we are unable to respond to and manage
changing business conditions, or the scale of our products, services and
operations, then the quality of our services, our ability to retain key
personnel and our business could be harmed.


-27-


RISKS
RELATED TO OUR CAPITAL STRUCTURE




There
is currently a limited public market for our securities. Moving forward, our
stock price may be volatile and illiquid.





Our
securities have been approved for quotation on the Over-The-Counter Bulletin
Board (“OTCBB”) under the symbol “EPAZ,” however; there is currently only a
limited market for our securities.  If there is a market for our
common stock in the future, we anticipate that such market would continue to be
illiquid and would be subject to wide fluctuations in response to several
factors, including, but not limited to:





(1)
            actual
      or anticipated variations in our results of operations;(2)
            our
      ability or inability to generate new revenues;(3)
            increased
      competition; and(4)
            conditions
      and trends in the market for organizational
  software.





Furthermore,
our stock price may be impacted by factors that are unrelated or
disproportionate to our operating performance. These market fluctuations, as
well as general economic, political and market conditions, such as recessions,
interest rates or international currency fluctuations may adversely affect the
market price and liquidity of our common stock.





The
price of our common stock may be volatile.




In the
past several years, technology stocks have experienced high levels of volatility
and significant declines in value from their historic highs. The trading price
of our common stock may fluctuate substantially. These fluctuations could cause
you to lose all or part of your investment in our common stock. Factors that
could cause fluctuations in the trading price of our common stock include the
following:




●
      price and volume fluctuations in the overall stock market from time to
      time;





●
      significant volatility in the market price and trading volume of software
      companies;





●
      actual or anticipated changes in our earnings or fluctuations in our
      operating results;





●
      actual or anticipated changes in the expectations of securities
      analysts;





●
      announcements of technological innovations, new solutions, strategic
      alliances or significant agreements by us or by our
      competitors;





●
      general economic conditions and
trends;





●
      major catastrophic events;


-28-


●
      sales of large blocks of our stock;
or





●
      recruitment or departures of key
personnel.





In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has often been brought against
that company. If our stock price is volatile, we may become the target of
securities litigation. Securities litigation could result in substantial costs
and divert our management’s attention and resources from our
business.





We
may experience a decline in revenue or volatility in our operating results,
which may adversely affect the market price of our common stock.




We cannot
predict our future revenue with certainty because of many factors outside of our
control. A significant revenue or profit decline, lowered forecasts or
volatility in our operating results could cause the market price of our common
stock to decline substantially. Factors that could affect our revenue and
operating results include the following:




●
      the possibility that our future customers may cancel, defer or limit
      purchases as a result of reduced information technology
      budgets;





●
      the possibility that our future customers may defer purchases of our
      software applications in anticipation of new software applications or
      updates from us or our competitors;





●
      the ability of the Company or its distributors to meet their sales
      objectives;





●
      market acceptance of our new applications and
  enhancements;




●
      our ability to control expenses;





●
      changes in our pricing and distribution terms or those of our
      competitors;





●
      the demands on our management, sales force and services infrastructure as
      a result of the introduction of new software applications or updates;
      and





●
      the possibility that our business will be adversely affected as a result
      of the threat of terrorism or military actions taken by the United States
      or its allies.





Our
expense levels are relatively fixed and are based, in part, on our expectations
of our future revenue. If revenue levels fall below our expectations, our net
income would decrease because only a small portion of our expenses varies with
our revenue. Therefore, any significant decline in revenue for any period could
have an immediate adverse impact on our results of operations for the period. We
believe that period-to-period comparisons of our results of operations should
not be relied upon as an indication of future performance. In addition, our
results of operations could be below expectations of public market analysts and
investors in future periods, which would likely cause the market price of our
common stock to decline.


-29-


The
President and Chief Executive officer of the Company has significant influence
over our company.




Shaun
Passley beneficially owns approximately 76% of our Class A Common Stock, and
100% of our Class B Common Stock, which is entitled to 100 votes per share,
which represents 96.7% of our aggregate outstanding voting stock.  Mr.
Passley, as majority shareholder, sole Director, President and Chief Executive
Officer of the Company possesses significant influence over our Company, giving
him the ability, among other things, to elect a majority of the Board of
Directors and to approve significant corporate transactions. Such stock
ownership and control may also have the effect of delaying or preventing a
future change in control, impeding a merger, consolidation, takeover or other
business combination or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of our Company. While Mr.
Passley has managed the Company since its inception, he has no other accounting
or finance experience and has no experience relating to a public
company.





If securities analysts do not publish
research or reports about our business or if they publish negative evaluations
of our stock, the price of our stock could decline.




The
trading market for our common stock will rely in part on the research and
reports that industry or financial analysts publish about us or our business. If
one or more of the analysts covering us downgrade their evaluations of our
stock, the price of our stock could decline. If one or more of these analysts
cease coverage of our company, we could lose visibility in the market for our
stock, which in turn could cause our stock price to decline.





Shareholders
may be diluted significantly through our efforts to obtain financing and satisfy
obligations through the issuance of additional shares of our common
stock.





We have
no committed source of financing. Wherever possible, our Board of Directors will
attempt to use non-cash consideration to satisfy obligations. In many instances,
we believe that the non-cash consideration will consist of restricted shares of
our common stock. Our Board of Directors has authority, without action or vote
of the shareholders, to issue all or part of the authorized but unissued shares
of common stock. In addition, if a trading market develops for our common stock,
we may attempt to raise capital by selling shares of our common stock, possibly
at a discount to market. These actions will result in dilution of the ownership
interests of existing shareholders, may further dilute common stock book value,
and that dilution may be material. Such issuances may also serve to enhance
existing management’s ability to maintain control of the Company because the
shares may be issued to parties or entities committed to supporting existing
management.


-30-


If
we are late in filing our Quarterly or Annual Reports with the SEC, we may be
de-listed from the Over-The-Counter Bulletin Board.





Pursuant
to Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing
of periodic reports with the SEC, any OTCBB issuer which fails to file a
periodic report (Form 10-Q's or 10-K's) by the due date of such report (not
withstanding any extension granted to the issuer by the filing of a Form
12b-25), three (3) times during any twenty-four (24) month period is
automatically de-listed from the OTCBB. Such removed issuer would not be
re-eligible to be listed on the OTCBB for a period of one-year, during which
time any subsequent late filing would reset the one-year period of de-listing.
If we are late in our filings three times in any twenty-four (24) month period
and are de-listed from the OTCBB, our securities may become worthless and we may
be forced to curtail or abandon our business plan.




In
the future, we will incur significant increased costs as a result of operating
as a fully reporting company in connection with Section 404 of the Sarbanes
Oxley Act, and our management will be required to devote substantial time to new
compliance initiatives.




Moving
forward, we anticipate incurring significant legal, accounting and other
expenses in connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, our management and other personnel will need to devote a substantial
amount of time to these new compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. In addition, the Sarbanes-Oxley
Act requires, among other things, that we maintain effective internal controls
for financial reporting and disclosure of controls and procedures. In
particular, commencing this calendar 2008 (one year after we began publicly
reporting), we must perform system and process evaluation and testing of our
internal controls over financial reporting to allow management to report on the
effectiveness of our internal controls over financial reporting, and in fiscal
2009, to allow our independent registered public accounting firm to report on
the effectiveness of our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing
by our independent registered public accounting firm, may reveal deficiencies in
our internal controls over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 will require that we incur
substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we will need to hire
additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.


-31-


State
securities laws may limit secondary trading, which may restrict the States in
which and conditions under which you can sell shares.





Secondary
trading in our common stock will not be possible in any state until the common
stock is qualified for sale under the applicable securities laws of the state or
there is confirmation that an exemption, such as listing in certain recognized
securities manuals, is available for secondary trading in the state. If we fail
to register or qualify, or to obtain or verify an exemption for the secondary
trading of, the common stock in any particular state, the common stock could not
be offered or sold to, or purchased by, a resident of that state. In the event
that a significant number of states refuse to permit secondary trading in our
common stock, the liquidity for the common stock could be significantly
impacted.





Investors
may face significant restrictions on the resale of our common stock due to
federal regulations of penny stocks.





Once our
common stock is listed on the OTC Bulletin Board, if ever, it will be subject to
the requirements of Rule 15(g)9, promulgated under the Securities Exchange Act
as long as the price of our common stock is below $5.00 per share. Under such
rule, broker-dealers who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser's
consent prior to the transaction. The Securities Enforcement Remedies and Penny
Stock Reform Act of 1990, also requires additional disclosure in connection with
any trades involving a stock defined as a penny stock. Generally, the Commission
defines a penny stock as any equity security not traded on an exchange or quoted
on NASDAQ that has a market price of less than $5.00 per share. The required
penny stock disclosures include the delivery, prior to any transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
with it. Such requirements could severely limit the market liquidity of the
securities and the ability of purchasers to sell their securities in the
secondary market.




ITEM
2.  PROPERTIES





Our
executive offices are located at 50 N. Brockway Suite 3-5, Palatine, Illinois
60067.  The executive offices represent approximately 1,060 square
feet.  We occupy this space under an amended lease agreement between
PRMI and Harris Bank Palatine, N.A. which has a three year term that began on
June 1, 2007 and ends on May 31, 2010.  The monthly rent under the
lease is $1,435.42 for the first year, $1,479.58 for the second year, and
$1,523.75 for the third year.  The lease may be cancelled by the
landlord with twelve months prior written notice or by us with ninety (90) days
prior written notice to the landlord. The lease can be extended for an
additional three year period, assuming we provide notice of our desire to extend
the lease to the landlord no later than four months prior to the end of the
lease period.  We also have a web server lease in place at a cost of
approximately $800 per month.


-32-


ITEM 3.  LEGAL PROCEEDINGS




From time
to time, we may become a party to litigation or other legal proceedings that we
consider to be a part of the ordinary course of our business. We are not
currently involved in legal proceedings that could reasonably be expected to
have a material adverse effect on our business, prospects, financial condition
or results of operations. We may become involved in material legal proceedings
in the future.




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





None
during the period of this report.


-33-


PART II




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





The
Company's Series A Common Stock has been quoted on the Over-the-Counter Bulletin
Board under the symbol "EPAZ" since January 24, 2008. As of April 30, 2009, the
Company had 42,482,940 shares of Series A Common Stock outstanding held by
approximately 55 shareholders of record.




The
following table sets forth the high and low trading prices of a share of our
common stock as reported for the past fiscal year (the Company’s common stock
was only approved for quotation on the Over-The-Counter Bulletin Board in
January 2008. The quotations provided are for the over the counter market, which
reflect interdealer prices without retail mark-up, mark-down or commissions, and
may not represent actual transactions.





QUARTER
      ENDED
                    
                    HIGH
                    
                    
                    LOWDecember
      31, 2008
                    
                    $
                    0.039
                    
                    
                    $
                    0.003September
      30, 2008
                    
                    $
                    0.070
                    
                    
                    $
                    0.040June
      30, 2008
                    
                    $
                    0.160
                    
                    
                    $
                    0.070March
      31, 2008
                    
                    $
                    0.310
                    
                    
                    $
                    0.100




As of April 30, 2009, the Company had 2,500,000
shares of Series B Common Stock outstanding, all of which are held by the
Company’s Chief Executive Officer, Shaun Passley. There is currently no
market for the Company’s Series B Common Stock.




CLASS
A COMMON STOCK, CLASS B COMMON STOCK AND SERIES A PREFERRED STOCK




Rights to
Dividends and on Liquidation. Each share of Class A Common Stock and Class B
Common Stock is entitled to share equally in dividends (other than dividends
declared with respect to any outstanding Preferred Stock) when and as declared
by our Board of Directors. Upon liquidation, each share of Class A Common Stock
and Class B Common Stock is entitled to share equally in our assets available
for distribution to the holders of those shares. Any outstanding Preferred Stock
would rank senior to the Class A Common Stock and Class B Common Stock in
respect of liquidation rights and could rank senior to that stock in respect of
dividend rights.





Voting--General.
All voting power is vested in the holders of Class A Common Stock, Class B
Common Stock, and Series A Preferred Stock voting together without regard to
class but with votes determined as described below. However, we could in the
future create a series of Preferred Stock with voting rights equal to or greater
than our Class A Common Stock or Class B Common Stock ("Full Voting Preferred
Stock").


-34-


Each
holder of Class A Common Stock is entitled to one vote per share, and each
holder of Class B Common Stock is entitled to 100 votes per share. Each holder
of Series A Preferred Stock is entitled to one vote per share.





Non-Cumulative
Voting Rights. Our Class A Common Stock and Class B Common Stock and Series A
Preferred Stock, as well as any Full Voting Preferred Stock we may issue, do not
have cumulative voting rights.




Voting by
Class. Holders of our Class A Common Stock and Class B Common Stock and Series A
Preferred Stock, vote as one class.




Miscellaneous
Rights and Provisions. There are no preemptive rights, subscription rights, or
redemption provisions relating to our Class A Common Stock and Class B Common
Stock and Series A Preferred Stock and none of the shares carries any liability
for further calls. Our Series A Preferred Stock is not convertible into any
other securities. We are not obligated to redeem or retire the Series A
Preferred Stock.




Ranking.
The Series A Preferred Stock ranks senior to the Class A Common Stock and Class
B Common Stock with respect to dividends and upon liquidation.




Dividends





We have
not paid any dividends on our common stock and do not anticipate paying any cash
dividends in the foreseeable future.  We intend to retain any earnings to
finance the growth of the business.  We cannot assure you that we will ever
pay cash dividends.  Whether we pay any cash dividends in the future will
depend on the financial condition, results of operations and other factors that
the Board of Directors will consider.





Recent
Sales of Unregistered Securities





In March
2009, we issued an aggregate of 3,000,000 shares of our restricted common stock
to 538 Investments LTD (“538 Investments”) in connection with a Consulting
Agreement entered into with 538 Investments, and in consideration for consulting
services rendered in connection with market research, business plan development
and media monitoring services.  The consulting agreement was effective
March 1, 2009, and expires September 1, 2009.  The shares provided to
538 Investments represented the full compensation due to 538 Investments under
the terms of the agreement.  The shares were valued at $30,000 in
aggregate based on the market price on the grant date.  We claim an
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended, since the foregoing issuance did not involve a public
offering, the recipient took the shares for investment and not resale and we
took appropriate measures to restrict transfer. No underwriters or agents were
involved in the foregoing issuance and we paid no underwriting discounts or
commissions.





ITEM
6. SELECTED FINANCIAL DATA





Not
required.


-35-


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




FORWARD
LOOKING STATEMENTS:





The
following discussion of our financial condition and plan of operation should be
read in conjunction with our financial statements and the related notes, and the
other financial information included in this report. This Management’s
Discussion and Analysis or Plan of Operation describes the matters EPAZZ
considers to be important to understanding EPAZZ’s history, technology, current
position, financial condition and future plans. Our fiscal year begins on
January 1 and ends on December 31.





The
following discussion includes forward looking statements and uncertainties,
including plans, objectives, goals, strategies, financial projections as well as
known and unknown uncertainties. The actual results of our future performance
may differ materially from the results anticipated in these forward-looking
statements. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we can not guarantee future results,
levels of activity, performance or achievement.





PLAN
OF OPERATION





During
the next twelve months, we plan to further develop our BoxesOS software, and
hope to expand our customer base for our Desk/Flex and Agent Power software
packages, funding permitting. We believe we can satisfy our cash requirements
for the next three months with our current cash on hand and revenues generated
from our operations. As such, continuing operations and completion of our plan
of operation, including making the Monthly Payments on our Note with Mr. Goes,
as described above, are subject to generating adequate revenue. We cannot assure
investors that adequate revenues will be generated. In the absence of our
projected revenues, we may be unable to proceed with our plan of operations.
Even without significant revenues within the next several months, we still
anticipate being able to continue with our present activities, but we may
require financing to potentially achieve our goal of profit, revenue and
growth.




We
anticipate needing to raise $100,000 in additional funds to continue our
business operations for the next 12 months, including administrative and other
costs, and the significant funds we will need to raise to make the Monthly
Payments on our Note with Mr. Goes and the June 2008 Note (described below),
which there can be no assurance will be raised. In the event we are not
successful in reaching our initial revenue targets, additional funds may be
required, and we would then not be able to proceed with our business plan for
the development and marketing of our various products offered through the
Company, including its subsidiaries. Should this occur, we would likely seek
additional financing to support the continued operation of our business. We
anticipate that, depending on market conditions and our plan of operations, we
will incur operating losses in the foreseeable future. We base this expectation,
in part, on the fact that we may not be able to generate enough gross profit
from sales to cover our operating expenses.


-36-


RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008, AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 2007





We had
revenue of $184,341 for the year ended December 31, 2008, compared to revenue of
$0 for the year ended December 31, 2007, an increase of $184,341 from the prior
period.  The increase in revenues is attributable to the Company’s
acquisition of DFI and PRMI, and revenues associated with our purchased
Desk/Flex and Agent Power product lines.





We had
cost of revenue of $16,260 for the year ended December 31, 2008, compared to
cost of revenue of $44,335 for the year ended December 31, 2007, a decrease of
$28,075 or 63.3% from the prior period.  This decrease in cost of
revenue is attributable to the fact that the Company had expenses associated
with the development of its BoxesOS software during the year ended December 31,
2007; while the Company had less such expenses during the year ended
December 31, 2008, as its Desk/Flex and Agent Power product lines are
already developed.





We had
general and administrative expenses of $325,321 for the year ended December 31,
2008, compared to general and administrative expenses of $90,701 for the year
ended December 31, 2007, an increase of $234,620 or 258.7% from the prior
period.  This increase in general and administrative expenses was due
to increased legal, accounting and filing expenses associated with our status as
a public reporting company during the year ended December 31, 2008, compared to
the year ended December 31, 2007, when we were not a public reporting company,
as well as increased expenses associated with the operations of DFI and PRMI,
which were not present during the prior period.





We had
depreciation and amortization of $54,965 for the year ended December 31, 2008,
compared to depreciation and amortization of $621 for the year ended December
31, 2007, an increase of $54,344 from the prior period.  This increase in
depreciation and amortization expenses is mainly attributable to amortization of
the technology-based intangible assets associated with the purchase of DFI and
PRMI which occurred in June 2008.





We had
total operating expenses of $396,546 for the year ended December 31, 2008,
compared to $135,657 for the year ended December 31, 2007, an increase of
$260,889 or 192.3% from the prior period primarily reflecting the acquisition of
DFI and PRMI.





We had an
operating loss of $212,205 for the year ended December 31, 2008, compared to an
operating loss of $135,657 for the year ended December 31, 2007, a decrease of
$76,539 or 56.4% from the prior period.





We had
interest expense of $51,944 for the year ended December 31, 2008, compared to
interest expense of $17,020 for the year ended December 31, 2007, an increase of
$34,924 or 205.2% from the prior period.  Interest expense increased
for the year ended December 31, 2008 due to increased borrowings from our Chief
Executive Officer, Shaun Passley, which bear interest at the rate of 15% per
annum during the year ended December 31, 2008, compared to the year ended
December 31, 2007, and our borrowings under the Art Goes and Star Financial
notes (both described below), which were outstanding as of December 31, 2008,
but not as of December 31, 2007, and the fact that the bank line of credit was
outstanding for the full year ended December 31, 2008, compared to less than
seven months during the year ended December 31, 2008.


-37-


We had
net loss of $264,107 for the year ended December 31, 2008, compared to net loss
of $152,658 for the year ended December 31, 2007, an increase in net loss of
$111,449 or 73.0% from the prior period.  Net loss increased mainly
due to the $260,889 or 192.3% increase in total operating expenses, the $34,924
or 205.2% increase in interest expense and the $54,344 increase in deprecation
and amortization expense, which was not sufficiently offset by the $184,341
increase in revenues for the year ended December 31, 2008, compared to the year
ended December 31, 2007.





LIQUIDITY
AND CAPITAL RESOURCES





We had
total current assets of $45,043 as of December 31, 2008, which included $5,487
of cash, accounts receivable of $35,298 and $4,258 of deferred financing
costs.





We had
total assets of $484,222 as of December 31, 2008, which included total current
assets of $45,043, property and equipment, net, of $3,036, deferred financing
costs of $6,967, and intangible assets, net of $429,176.





We had
negative working capital of $433,920 and a total accumulated deficit of
$1,937,310 as of December 31, 2008.





We had
net cash used in operating activities of $137,241 for the year ended December
31, 2008, which was mainly due to $264,107 of net loss and $22,540 of increase
in accounts receivable, partially offset by $79,644 of increase in accounts
payable and accrued liabilities and $52,090 of depreciation and
amortization.





We had
$220,593 of net cash used in investing activities for the year ended December
31, 2008 which consisted of $1,904 of the purchase of fixed assets and $218,689
relating to the purchase of DFI and PRMI.





We had
$360,305 of net cash provided by financing activities during the year ended
December 31, 2008, which represented $282,000 of proceeds from notes
payable to related parties and $198,684 of proceeds from loans payable to
related parties, offset by $20,043 of repayment of notes payable and $100,335 of
repayment of loans payable to related parties.





On June
5, 2007, we obtained a line of credit of $100,000 from a bank.  The
outstanding balance on the line of credit bears interest at prime plus 4.5%
(7.75% as of the filing of this report, with the prime rate at 3.25% as of April
1, 2009), resetting every January 1, April 1, July 1, and October 1, that the
line of credit is outstanding, and expiring on July 5, 2010.  Interest
is due monthly.  Combined equal installments of principal and interest
are to be paid monthly beginning July 5, 2010 until June 5, 2014.  We
agreed pursuant to the line of credit to pay a late fee equal to 4% of any
payment due under the line of credit which is more than fifteen days
late.  As of the date of this report, the entire $100,000 has been
borrowed under the line of credit.


-38-


We also
borrow from our Chief Executive Officer, Shaun Passley and other related parties
periodically under verbal agreements.  The loans bear interest at 15%
per year.  During the year ended December 31, 2008, we borrowed an
additional $98,349 from our Chief Executive Officer and other related
parties.  At December 31, 2008, the total principal outstanding was
$196,162, and we had accrued interest payable of $40,530 related to these
loans.





In June
2008, the Company provided Arthur A. Goes a promissory note in the amount of
$225,000 (the “Note”) in connection with the Stock Purchase Agreement entered
into with Desk Flex, Inc., Professional Resource Management, Inc. and Mr.
Goes.  The Note bears interest at the rate of seven percent (7%) per
annum, and all past due principal and interest (which failure to pay such
amounts after a fifteen (15) day cure period, shall be defined herein as an
“Event of Default”) bear interest at the rate of twelve percent (12%) per annum
until paid in full.  The Note, however, additionally provides that the
Company shall have two additional fifteen (15) day cure periods during the term
of the Note resulting in two thirty (30) day cure periods before an Event of
Default occurs.  The principal amount of the Note is due on June 18,
2011.  The Note is payable in monthly installments of $6,947.35, with
the first such monthly payment due on September 18, 2008, until such time
as this Note is paid in full.  Provided, however, that if the total
amount due under the Note is less than any monthly payment, the Company shall
only be obligated to pay the remaining balance of the Note.  The Note
may be prepaid at any time without penalty.  As of the date of this
report, the Company is current with all such monthly payments.





On June
4, 2008, the Company issued a note payable in the amount of $296,100 due to Star
Financial Corporation, which is owned by Fay Passley, the mother of our Chief
Executive Officer, Shaun Passley, which has since been amended (the “June 2008
Note”, as amended from time to time).  The loan is unsecured and bears
interest at 10%, with annual payments of principal and interest in the amount of
$75,495, due and payable beginning on August 1, 2009.  The maturity
date of the note is June 4, 2013.  In connection with the loan, the
Company paid $14,100 (5%) in financing costs that are being amortized over the
life of the loan using the effective interest method.  The majority of
the funds borrowed pursuant to the June 2008 Note were used to pay the seller
the $210,000 payment in connection with the purchase of DFI and PRMI, as
described above.





We have
no current commitment from our officers and Directors or any of our shareholders
to supplement our operations or provide us with financing in the future. If we
are unable to raise additional capital from conventional sources and/or
additional sales of stock in the future, we may be forced to curtail or cease
our operations. Even if we are able to continue our operations, the failure to
obtain financing could have a substantial adverse effect on our business and
financial results.





In the
future, we may be required to seek additional capital by selling debt or equity
securities, selling assets, or otherwise be required to bring cash flows in
balance when we approach a condition of cash insufficiency. The sale of
additional equity or debt securities, if accomplished, may result in dilution to
our then shareholders. We provide no assurance that financing will be available
in amounts or on terms acceptable to us, or at all.


-39-


Critical
Accounting Policies:





Use of
Estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as certain financial statement
disclosures. While management believes that the estimates and assumptions used
in the preparation of the financial statements are appropriate, actual results
could differ from these estimates.





Revenue
Recognition





All
revenue is recognized when persuasive evidence of an arrangement exists, the
sale is complete, the price is fixed or determinable and collectibility is
reasonably assured.  Revenue from maintenance arrangements are
recorded as deferred revenue and recognized as revenue ratably over the billing
coverage period.





Intangible
Assets





Intangible
assets are amortized using the straight-line method over their estimated period
of benefit of five years.  We evaluate the recoverability of
intangible assets periodically and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate that impairment
exists.  All of our intangible assets are subject to
amortization.  No material impairments of intangible assets have been
identified during any of the periods presented.





Recently
Issued Accounting Pronouncements





The
Company does not expect the adoption of recently issued accounting
pronouncements to have a significant impact on the Company’s results of
operations, financial position or cash flow.





ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
required.


-40-


ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA




EPAZZ,
INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




PageAnnual
      Financial StatementsReport
      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' Equity (Deficit) 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


F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To the
Board of Directors


Epazz,
Inc.


Palatine,
IL








We have
audited the accompanying consolidated balance sheets of Epazz, Inc. as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, changes in stockholders’ deficit and cash flows for the years ended
December 31, 2008 and 2007.  These consolidated financial statements
are the responsibility of Epazz, Inc.'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 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 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 for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe 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 Epazz, Inc. as of December
31, 2008 and 2007, and the results of its operations and its 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
Epazz will continue as a going concern.  As discussed in Note 2 to the
consolidated financial statements, Epazz has incurred losses since inception and
has a stockholders’ deficit at December 31, 2008.  Those conditions,
among others, raise substantial doubt about the Company's ability to continue as
a going concern.  Management's plans regarding these matters are also
described in Note 2.  The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.








/s/ GBH
CPAs, PC


GBH CPAs,
PC


www.gbhcpas.com


Houston,
Texas





April 30,
2009


F-2


EPAZZ,
INC.


CONSOLIDATED
BALANCE SHEETS


As
of December 31, 2008 and 2007




2008
                    
                    
                    2007ASSETSCurrent
      AssetsCash
                    
                    $
                    5,487
                    
                    
                    $
                    3,016Accounts
      receivable
                    
                    
                    35,298
                    
                    
                    
                    –Deferred
      financing costs
                    
                    
                    4,258
                    
                    
                    
                    –Total
      current assets
                    
                    
                    45,043
                    
                    
                    
                    3,016Property
      and equipment, net of accumulated depreciation of $11,530 and
      10,984
                    
                    
                    3,036
                    
                    
                    
                    1,678Deferred
      financing costs
                    
                    
                    6,967
                    
                    
                    
                    –Intangible
      assets, net of accumulated amortization of $51,544
                    
                    
                    429,176
                    
                    
                    
                    –TOTAL
      ASSETS
                    
                    $
                    484,222
                    
                    
                    $
                    4,694LIABILITIES
      AND STOCKHOLDERS’ DEFICITLIABILITIESCurrent
      LiabilitiesAccounts
      payable and accrued liabilities
                    
                    $
                    98,884
                    
                    
                    $
                    19,240Deferred
      revenue
                    
                    
                    64,586
                    
                    
                    
                    –Current
      portion of notes payable
                    
                    
                    71,283
                    
                    
                    
                    –Current
      portion of related party notes payable
                    
                    
                    48,048
                    
                    
                    
                    –Loans
      payable to related parties
                    
                    
                    196,162
                    
                    
                    
                    97,814Total
      current liabilities
                    
                    
                    478,963
                    
                    
                    
                    117,054Long-term
      notes payable, net of current portion
                    
                    
                    133,674
                    
                    
                    
                    –Long-term
      related party notes payable, net of current portion
                    
                    
                    248,052
                    
                    
                    
                    –Long-term
      line of credit
                    
                    
                    100,000
                    
                    
                    
                    100,000TOTAL
      LIABILITIES
                    
                    
                    960,689
                    
                    
                    
                    217,054STOCKHOLDERS’
      DEFICITCommon
      stock, Series A, $0.01 par value, 60,000,000 shares authorized, 39,482,940
      shares issued and outstanding
                    
                    
                    394,829
                    
                    
                    
                    394,829Common
      stock, Series B, $0.01 par value, 60,000,000 shares authorized, 2,500,000
      shares issued and outstanding
                    
                    
                    25,000
                    
                    
                    
                    25,000Additional
      paid-in capital
                    
                    
                    1,041,014
                    
                    
                    
                    1,041,014Accumulated
      deficit
                    
                    
                    (1,937,310
                    )
                    
                    
                    (1,673,203
                    )Total
      stockholders’ deficit
                    
                    
                    (476,467
                    )
                    
                    
                    (212,360
                    )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
                    
                    $
                    484,222
                    
                    
                    $
                    4,694





See notes
to consolidated financial statements.


F-3


EPAZZ,
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


Years
Ended December 31, 2008 and 2007




2008
                  
                  
                  2007Revenue
                  
                  $
                  184,341
                  
                  
                  $
                  –Operating
      expenses:Cost
      of revenue
                  
                  
                  16,260
                  
                  
                  
                  44,335General
      and administrative
                  
                  
                  325,321
                  
                  
                  
                  90,701Depreciation
      and amortization
                  
                  
                  54,965
                  
                  
                  
                  621Total
      operating expenses
                  
                  
                  396,546
                  
                  
                  
                  135,657Operating
      loss
                  
                  
                  (212,205
                  )
                  
                  
                  (135,657
                  )Other
      income (expense):Interest
      income
                  
                  
                  42
                  
                  
                  
                  19Interest
      expense
                  
                  
                  (51,944
                  )
                  
                  
                  (17,020
                  )Total
      other income (expense)
                  
                  
                  (51,902
                  )
                  
                  
                  (17,001
                  )Net
      loss
                  
                  $
                  (264,107
                  )
                  
                  $
                  (152,658
                  )Basic
      and diluted net loss per common share
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.00
                  )Weighted
      average common shares outstanding
                  
                  
                  41,982,940
                  
                  
                  
                  41,982,940





See notes
to consolidated financial statements.


F-4


EPAZZ,
INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT


Years
Ended December 31, 2008 and 2007








Series A Common Stock
                                        
                                        
                                        Series B Common Stock
                                        
                                        
                                        Additional
      Paid-In
                                        
                                        
                                        Accumulated
                                        
                                        
                                        Total
      Stockholders’Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        Shares
                                        
                                        
                                        Amount
                                        
                                        
                                        Capital
                                        
                                        
                                        Deficit
                                        
                                        
                                        DeficitBalance
      at December 31, 2006
                                        
                                        
                                        39,482,940
                                        
                                        
                                        $
                                        394,829
                                        
                                        
                                        
                                        2,500,000
                                        
                                        
                                        $
                                        25,000
                                        
                                        
                                        $
                                        1,041,014
                                        
                                        
                                        $
                                        (1,520,545
                                        )
                                        
                                        $
                                        (59,702
                                        )Net
      loss
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (152,658
                                        )
                                        
                                        
                                        (152,658
                                        )Balance
      at December 31, 2007
                                        
                                        
                                        39,482,940
                                        
                                        
                                        
                                        394,829
                                        
                                        
                                        
                                        2,500,000
                                        
                                        
                                        
                                        25,000
                                        
                                        
                                        
                                        1,041,014
                                        
                                        
                                        
                                        (1,673,203
                                        )
                                        
                                        
                                        (212,360
                                        )Net
      loss
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (264,107
                                        )
                                        
                                        
                                        (264,107
                                        )Balance
      at December 31, 2008
                                        
                                        
                                        39,482,940
                                        
                                        
                                        $
                                        394,829
                                        
                                        
                                        
                                        2,500,000
                                        
                                        
                                        $
                                        25,000
                                        
                                        
                                        $
                                        1,041,014
                                        
                                        
                                        $
                                        (1,937,310
                                        )
                                        
                                        $
                                        (476,467
                                        )




See notes
to consolidated financial statements.


F-5


EPAZZ,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Years
Ended December 31, 2008 and 2007




2008
                      
                      
                      2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                      
                      $
                      (264,107
                      )
                      
                      $
                      (152,658
                      )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
                      
                      
                      52,090
                      
                      
                      
                      621Amortization
      of deferred financing costs
                      
                      
                      2,875
                      
                      
                      
                      –Changes
      in:Accounts
    receivable
                      
                      
                      (22,540
                      )
                      
                      
                      –Accounts payable and accrued
      liabilities
                      
                      
                      79,644
                      
                      
                      
                      11,536Deferred revenue
                      
                      
                      14,797
                      
                      
                      
                      –Net
      cash used in operating activities
                      
                      
                      (137,241
                      )
                      
                      
                      (140,501
                      )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of fixed assets
                      
                      
                      (1,904
                      )
                      
                      
                      (1,242
                      )Purchase
      of DFI and PRMI, net of cash received of $1,311
                      
                      
                      (218,689
                      )
                      
                      
                      –Net
      cash used in investing activities
                      
                      
                      (220,593
                      )
                      
                      
                      (1,242
                      )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from notes payable to related party, net of financing
costs
                      
                      
                      282,000
                      
                      
                      
                      –Repayment
      of notes payable
                      
                      
                      (20,043
                      )
                      
                      
                      –Proceeds
      from borrowings on line of credit
                      
                      
                      –
                      
                      
                      
                      100,000Proceeds
      from loans payable to related parties
                      
                      
                      198,684
                      
                      
                      
                      42,433Repayment
      of loans payable to related parties
                      
                      
                      (100,335
                      )
                      
                      
                      (3,055
                      )Net
      cash provided by financing activities
                      
                      
                      360,305
                      
                      
                      
                      139,378NET
      CHANGE IN CASH
                      
                      
                      2,471
                      
                      
                      
                      (2,365
                      )CASH
      AT BEGINNING OF YEAR
                      
                      
                      3,016
                      
                      
                      
                      5,381CASH
      AT END OF YEAR
                      
                      $
                      5,487
                      
                      
                      $
                      3,016Supplemental
      Disclosures:Interest
      paid
                      
                      $
                      19,226
                      
                      
                      $
                      5,418Income
      taxes paid
                      
                      
                      –
                      
                      
                      
                      –Non-cash
      investing and financing activities:Note
      payable for acquisition of business
                      
                      $
                      225,000
                      
                      
                      
                      –





See notes
to consolidated financial statements.


F-6


EPAZZ,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Nature of
Business





Epazz,
Inc. ("Epazz") was incorporated in Illinois on March 23, 2000. Epazz sells
software products.





Basis of
Consolidation





The
consolidated financial statements include the accounts of Epazz and its
subsidiaries. Intercompany transactions and balances have been
eliminated.





Use of
Estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as certain financial statement
disclosures. While management believes that the estimates and assumptions used
in the preparation of the financial statements are appropriate, actual results
could differ from these estimates.





Revenue
Recognition





All
revenue is recognized when persuasive evidence of an arrangement exists, the
sale is complete, the price is fixed or determinable and collectibility is
reasonably assured.  Revenue from maintenance arrangements are
recorded as deferred revenue and recognized as revenue ratably over the
billing coverage period.





Cash
Equivalents





Highly
liquid investments with original maturities of three months or less are
considered cash equivalents.





Allowance
for Doubtful Accounts





Bad debt
expense is recognized based on management’s estimate of likely losses per year,
based on past experience and an estimate of current year uncollectible
amounts.





Equipment





Equipment
is valued at cost. Maintenance and repairs are charged to expense as incurred.
Upon disposition or retirement of equipment, the cost and related accumulated
depreciation are removed and any resulting gain or loss is reflected in
operations. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets, which is five years.





Intangible
Assets





Intangible
assets are amortized using the straight-line method over their estimated period
of benefit of five years.  We evaluate the recoverability of
intangible assets periodically and take into account events or circumstances
that warrant revised estimates of useful lives or that indicate that an
impairment exists.  All of our intangible assets are subject to
amortization.  No material impairments of intangible assets have been
identified during any of the periods presented.


F-7


Income
Taxes





Epazz
utilizes the asset and liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for operating
loss and tax credit carryforwards and 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 year in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period
that includes the enactment date. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets unless it is more likely than not
that the value of such assets will be realized.





Earnings
(Loss) Per Share





Basic
earnings (loss) per share equals net earnings divided by weighted average shares
outstanding during the year.  Diluted earnings (loss) per share include the
impact on dilution from all contingently issuable shares, including options,
warrants and convertible securities.  The common stock equivalents from
contingent shares are determined by the treasury stock method. Epazz has
incurred net losses for the years ended December 31, 2008 and 2007 and has,
therefore, excluded certain securities from the computation of diluted earnings
per share as the effect would be anti-dilutive.





Reclassifications





Certain
amounts in the financial statements of the prior year have been reclassified to
conform to the presentation of the current year for comparative
purposes.





Recently
Issued Accounting Pronouncements





Epazz
does not expect the adoption of recently issued accounting pronouncements to
have a significant impact on Epazz results of operations, financial position or
cash flow.








NOTE 2 –
GOING CONCERN





As of
December 31, 2008, Epazz had an accumulated deficit of $1,937,310 and a working
capital deficit of $433,920.  In addition, Epazz has not generated any
cash from operating activities and had no cash reserve dedicated to fund
expenditures.  These factors create a substantial doubt as to Epazz'
ability to continue as a going concern.





Epazz
will require substantial additional funding for continuing research and
development, obtaining regulatory approval and for the commercialization of its
products.  Management expects to be able to raise enough funds to meet
its working capital requirements through through debt and/or equity
financing.  There is no assurance that Epazz will be able to obtain
sufficient additional funds when needed, or that such funds, if available, will
be obtainable on terms satisfactory to Epazz.  The financial
statements do not include any adjustments that might be necessary should Epazz
be unable to continue as a going concern.




NOTE 3 –
ACQUISITION





On June
18, 2008, Epazz purchased all of the issued and outstanding common stock of Desk
Flex, Inc., an Illinois corporation (“DFI”) and Professional Resource
Management, Inc., an Illinois corporation (“PRMI”) for an aggregate purchase
price of $445,000.  The purchase price was payable as
follows:


F-8


a)
            $10,000
      originally paid by Epazz as a deposit in connection with the parties’
      entry into a letter of intent;





b)
            Epazz
      paid $210,000 in cash; and





c)
            Epazz
      issued a 7% promissory note in the amount of $225,000, described in
      greater detail in Note 8.





As a
result, DFI and PRMI became wholly-owned subsidiaries of Epazz.





The
acquisition has been accounted for in accordance with the provisions of
Statement of Financial Standards No. 141, “Business Combinations.” The
total purchase price was allocated to the net tangible assets based on the
estimated fair values. No goodwill was recorded as there was no excess of the
purchase price over the net identifiable assets. The preliminary allocation of
the purchase price was based upon valuation data as of June 18, 2008 and
the estimates and assumptions are subject to change.  The initial
purchase price allocation may be adjusted within one year of the effective date
of the acquisition for changes in estimates of the fair value of assets acquired
and liabilities assumed based on the results of the purchase price allocation
process. The preliminary allocation of the purchase price is as
follows:





Assets:Cash
      and equivalents
                  
                  $
                  1,311Accounts
      receivable
                  
                  
                  12,758Intangible
      assets
                  
                  
                  480,720Liabilities:Deferred
      revenue
                  
                  
                  (49,789
                  )Total
      purchase price
                  
                  $
                  445,000





The
following unaudited pro forma information assumes the acquisition of DFI and
PRMI occurred as of the beginning of each period. The pro forma results are not
necessarily indicative of what actually would have occurred had the acquisition
been in effect for the period presented.





As Reported
                  
                  
                  Pro-FormaYear
      ended December 31, 2007Revenues
                  
                  $
                  –
                  
                  
                  $
                  393,785Net
      Loss
                  
                  
                  (152,658
                  )
                  
                  
                  (286,053
                  )Loss
      Per Share
                  
                  
                  (0.00
                  )
                  
                  
                  (0.01
                  )Year
      ended December 31, 2008Revenues
                  
                  $
                  184,341
                  
                  
                  $
                  352,086Net
      Loss
                  
                  
                  (264,107
                  )
                  
                  
                  (369,659
                  )Loss
      Per Share
                  
                  
                  (0.01
                  )
                  
                  
                  (0.01
                  )








NOTE 4 –
PROPERTY AND EQUIPMENT





Property
and equipment consisted of the following at December 31, 2008 and
2007:





Description
                      
                      Life
                      
                      2008
                      
                      
                      2007Computer
      equipment
                      
                      5
      years
                      
                      $
                      14,566
                      
                      
                      $
                      12,662Less:
      accumulated depreciation
                      
                      
                      
                      
                      (11,530
                      )
                      
                      
                      (10,984
                      )Equipment,
      net
                      
                      
                      
                      $
                      3,036
                      
                      
                      $
                      1,678


F-9


NOTE 5 –
INTANGIBLE ASSETS





Intangible
assets consisted of the following at December 31, 2008:





Description
                      
                      Life
                      
                      AmountTechnology-based
      intangible assets
                      
                      5
      years
                      
                      $
                      480,720Less:
      accumulated amortization
                      
                      
                      
                      
                      (51,544
                      )Intangible
      assets, net
                      
                      
                      
                      $
                      429,176




NOTE 6 –
LOANS PAYABLE TO RELATED PARTIES





During
the year ended December 31, 2008, we borrowed an additional $198,684 from our
Chief Executive Officer and other related parties and repaid
$100,335.  At December 31, 2008 and 2007, the total principal
outstanding was $196,162 and $97,814, respectively, and we had accrued interest
payable of $40,530 and $17,683, respectively, related to these
loans.




NOTE 7 –
LONG-TERM NOTE PAYABLE TO RELATED PARTY





On June
4, 2008, Epazz issued a note payable in the amount of $296,100 to a company
owned by the mother of Epazz’s Chief Executive Officer.  The loan is
unsecured and bears interest at 10% and matures on June 4, 2013.  In
connection with the loan, Epazz paid $14,100 in financing costs that are being
amortized over the life of the loan using the effective interest
method.  The payment terms of the note have been modified such that
the first annual payment is now due on August 1, 2009 in the amount of
$75,495.




NOTE 8 –
LONG-TERM NOTE PAYABLE





As part
of the acquisition of DFI and PRMI on June 18, 2008, Epazz issued a promissory
note in the amount of $225,000.  The promissory note bears interest at
the rate of 7% per annum, and all past-due principal and interest bear interest
at the rate of twelve percent (12%) per annum until paid in full.  The
principal amount of the note is due on June 18, 2011.  The note is
payable in monthly installments of $6,947 until such time as this note is paid
in full.  Additionally, Epazz agreed to secure the payment of the note
with a security interest over all of the tangible and intangible assets of DFI
and PRMI, and the outstanding stock of both companies until the note is
repaid.




NOTE 9 –
LINE OF CREDIT





On June
5, 2007, Epazz obtained a line of credit of $100,000 from a bank.  The
outstanding balance on the line of credit bears interest at prime plus 4.5%
(7.75% at December 31, 2008) and expires on July 5, 2010 at which time
principal and interest payments commence over four years.  Interest is
due monthly beginning on July 5, 2007.  Combined equal installments of
principal and interest are to be paid monthly beginning July 5, 2010 until June
5, 2014.




NOTE 10 –
COMMITMENT & CONTINGENCIES





After the
acquisition of PRMI, Epazz moved its corporate headquarters to Palatine,
Illinois, which was formerly PRMI’s corporate headquarters.  PRMI had
signed a 3 year lease extension in February 2007 for the 1,060 square foot
location with the lease term ending in May 2010.  Prior to the
acquisition, Epazz leased space on a month-to-month basis.  The lease
is cancellable with a one year notice and the monthly rental rate at December
31, 2008 was $1,478.  The remaining lease payment commitments are
$18,064 and $7,619, in 2009 and 2010, respectively.


F-10


NOTE 11 -
INCOME TAXES





During
2008 and 2007, Epazz incurred net losses and, therefore, had no tax
liability.  The net deferred tax asset of about $247,000 at December
31, 2008 generated by the loss carry-forward has been fully reserved. The
cumulative net operating loss carry-forward was approximately $727,000 at
December 31, 2008 and will expire in the years 2023 through
2028.




NOTE 12 –
SUBSEQUENT EVENT





In March
2009, Epazz issued 3,000,000 shares of common stock to a third party for
consulting services rendered in connection with market research, business plan
development and media monitoring services.  The shares were valued at
$30,000 in aggregate based on the market price on the grant date.


F-11


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




Effective September 10, 2007, the Company’s
Board of Directors terminated the client auditor relationship between the
Company and Malone & Bailey, PC ("Malone"). Effective September 10, 2007,
the Company engaged GBH CPAs, PC ("GBH") as its principal independent public
accountant for the fiscal year ended December 31, 2007. The Company’s financial
statements for the year ended December 31, 2006 have been re-audited by GBH, and
as such, only the report of independent registered public accounting firm GBH is
attached to this filing.





The
decision to change accountants was ratified and approved by the Company's Board
of Directors on September 21, 2007. Malone's report on the financial
statements of the Company for the fiscal years ended December 31, 2005 and
December 31, 2006, and any later interim period, including the interim period up
to and including the date the relationship with Malone ceased, did not contain
any adverse opinion or disclaimer of opinion and was not qualified or modified
as to uncertainty, audit scope or accounting principles except for concerns
about the Company's ability to continue as a going concern.





In
connection with the audit of the Company's fiscal years ended December 31, 2005
and December 31, 2006, and any later interim period, including the interim
period up to and including the date the relationship with Malone ceased, there
were no disagreements between Malone and the Company on a matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of Malone
would have caused Malone to make reference to the subject matter of the
disagreement in connection with its report on the Company's financial
statements.





There
have been no reportable events as provided in Item 304(a)(1)(v) of Regulation
S-K during the Company's fiscal years ended December 31, 2005 and December 31,
2006, and any later interim period, including the interim period up to and
including the date the relationship with Malone ceased.





The
Company has authorized Malone to respond fully to any inquiries of any new
auditors hired by the Company relating to their engagement as the Company's
independent accountant.  The Company has requested that Malone review
the disclosure and Malone has been given an opportunity to furnish the Company
with a letter addressed to the Commission containing any new information,
clarification of the Company's expression of its views, or the respect in which
it does not agree with the statements made by the Company in this section. Such
letter has been incorporated by reference as Exhibit 16.1 to this
report.





The
Company has not previously consulted with GBH regarding either (i) the
application of accounting principles to a specific completed or contemplated
transaction; (ii) the type of audit opinion that might be rendered on the
Company's financial statements; or (iii) a reportable event (as provided in Item
304(a)(1)(v) of Regulation S-K) during the Company's fiscal years ended December
31, 2005 and December 31, 2006, and any later interim period, including the
interim period up to and including the date the relationship with Malone ceased.
GBH has reviewed the disclosure required by Item 304 (a) before it was filed
with the Commission and has been provided an opportunity to furnish the Company
with a letter addressed to the Commission containing any new information,
clarification of the Company's expression of its views, or the respects in which
it does not agree with the statements made by the Company in response to Item
304 (a). GBH did not furnish a letter to the Commission.


-41-


ITEM
9A.  CONTROLS AND PROCEDURES





(a)   Evaluation
of disclosure controls and procedures





We
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as of December 31, 2007.  This
evaluation was accomplished under the supervision and with the participation of
our Chief Executive Officer and the Chief Financial Officer who concluded that
our disclosure controls and procedures are not effective to ensure that all
material information required to be filed in the annual report on Form 10-K has
been made known to him.




Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Securities Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms.  Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosure.





Based
upon an evaluation conducted for the period ended December 31, 2008, Shaun
Passley who is our Chief Executive Officer and Chief Financial Officer (which
duties include that of principal accounting officer) as of December 31, 2008,
and the date of this Report, has concluded that as of the end of the period
covered by this report, we have identified the following material weakness of
our internal controls:




·
            Reliance
      upon independent financial reporting consultants for review of critical
      accounting areas and disclosures and material non-standard
      transactions.






·
            Lack
      of sufficient accounting staff, which results in a lack of segregation of
      duties necessary for a good system of internal
  control.




In order
to remedy our existing internal control deficiencies, as soon as our finances
allow, we will hire a Chief Financial Officer who will be sufficiently versed in
public company accounting to implement appropriate procedures for timely and
accurate disclosures.


-42-


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





(b)   Changes
in internal controls





We have
not yet made any changes in our internal control over financial reporting that
occurred during the period covered by this report on Form 10-K that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.





ITEM
9B. OTHER INFORMATION





None.


-43-


PART III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Directors
and Executive Officers




Our executive officers and director and
their ages as of April 10, 2009 are as follows:




NAME
                      AGE
                      POSITIONShaun
      Passley
                      30
                      President,
      Chief Executive Officer, Chief Financial Officer and Chairman of the Board
      of
Directors





Craig
      Passley
              37
              Secretary




Set forth
below is a brief description of the background and business experience of our
executive officers and director.




Shaun
Passley





Shaun
Passley has been the President, Chief Executive Officer, Chief Financial
Officer, and Chairman of the Board of Directors since our inception in March
2000.  Mr. Passley obtained his Bachelors degree from De Paul
University in Finance in 2000, his Master’s Degree from De Paul University in
Information Technology in 2006, and his MBA from Benedictine University in
2007.





Craig
Passley





Craig
Passley has served as our Secretary since May 2005.  Since November
2000, Mr. Passley has worked for KB Builders.  Mr. Passley obtained
his Bachelors degree from Bradley University in 1997 and his Masters Degree from
the Keller Graduate School of Management in 2001.





Shaun
Passley and Craig Passley are brothers.





The
Board of Directors and Committees





Our Board
of Directors does not maintain a separate audit, nominating or compensation
committee. Functions customarily performed by such committees are performed by
our Board of Directors as a whole. Our Director is elected annually and holds
office until our next annual meeting of the shareholders and until his
successors are elected and qualified. Officers will hold their positions at the
pleasure of the Board of Directors, absent any employment agreement. Our
officers and Director may receive compensation as determined by us from time to
time by vote of the Board of Directors. Such compensation might be in the form
of stock options. Directors may be reimbursed by the Company for expenses
incurred in attending meetings of the Board of Directors. Vacancies in the Board
are filled by majority vote of the remaining Director(s).


-44-


Independence
of Directors




We are
not required to have independent members of our Board of Directors, and do not
anticipate having independent Directors until such time as we are required to do
so.








ITEM 11. EXECUTIVE COMPENSATION




Summary
Compensation Table





The
following table sets forth information concerning the compensation for EPAZZ,
Inc. for the years ended December 31, 2008 and 2007.





SUMMARY
      COMPENSATION TABLEName
      and principal position
                    (a)
                  Year
                    (b)
                  Salary
                    ($)
                    (c)
                  Bonus
                    ($)
                    (d)
                  Stock
      Awards
                    ($)
                    (e)
                  Option
      Awards
                    ($)
                    (f)
                  Non-Equity
      Incentive Plan Compensation ($)
                    (g)
                  Nonqualified
      Deferred Compensation Earnings
                    ($)
                    (h)
                  All
      Other Compensation
                    ($)
                    (i)
                  Total
                    ($)
                    (j)Shaun
      Passley President, Chief Executive Officer,
                  2008
                  $30,000
                  -
                  -
                  -
                  -
                  -
                  -
                  $30,000(1)Chief
      Financial Officer and
                  2007
                  -
                  -
                  -
                  -
                  -
                  -
                  -
                  -Chairman
      of the Board of Directors





Other
than the named executive officer above, the Company had no other executive
officers who made more than $100,000 in total compensation for the years ended
December 31, 2008 and 2007.


-45-


(1) The
entire amount of Mr. Passley’s salary was loaned to the Company to pay ongoing
expenses after the payment to Mr. Passley.





Stock
Option Grants




We have
not granted any stock options to our executive officers since our
incorporation.




Employment
Agreements




We do not
have an employment or consultant agreement with Shaun Passley, our Chief
Executive Officer, President, and Chairman of the Board of Directors or Craig
Passley, our Secretary.





COMPENSATION
DISCUSSION AND ANALYSIS





Director
Compensation





Our Board
of Directors, currently consisting solely of Shaun Passley, does not currently
receive any consideration for its service as a member of the Board of
Directors.  The Board of Directors reserves the right in the future to
award the members of the Board of Directors cash or stock based consideration
for their services to the Company, which awards, if granted shall be in the sole
determination of the Board of Directors.





Executive
Compensation Philosophy





Our Board
of Directors, consisting solely of Mr. Passley, determines the compensation
given to our executive officers in its sole determination. Our Chief Executive
Officer and President, Mr. Passley, receives no compensation from us other than
the securities which he was previously issued in fiscal 2005.  As
such, we do not currently have any executive compensation program in place;
however, Mr. Passley in his capacity as our sole Director has the power to set
his own compensation, without the required approval of any other individual or
shareholder. Additionally, our Board of Directors, currently consisting solely
of Mr. Passley, reserves the right to pay our executives a salary, and/or issue
them shares of Common Stock issued in consideration for services rendered and/or
to award incentive bonuses which are linked to our performance, as well as to
the individual executive officer’s performance in the future. This package may
also include long-term stock based compensation to certain executives which is
intended to align the performance of our executives with our long-term business
strategies. Additionally, while our Board of Directors has not granted any
performance based stock options to date, the Board of Directors reserves the
right to grant such options in the future, if the Board in its sole
determination believes such grants would be in the best interests of the
Company.





Incentive
Bonus





The Board
of Directors may grant incentive bonuses to our executive officers in its sole
discretion, if the Board of Directors believes such bonuses are in the Company’s
best interest, after analyzing our current business objectives and growth, if
any, and the amount of revenue we are able to generate each month, which revenue
is a direct result of the actions and ability of such
executives.


-46-


Long-term,
Stock Based Compensation





In order
to attract, retain and motivate executive talent necessary to support the
Company’s long-term business strategy we may award certain executives with
long-term, stock-based compensation in the future, in the sole discretion of our
Board of Directors, which we do not currently have any immediate plans to
award.





CORPORATE
GOVERNANCE





The
Company promotes accountability for adherence to honest and ethical conduct;
endeavors to provide full, fair, accurate, timely and understandable disclosure
in reports and documents that the Company files with the Securities and Exchange
Commission (the “SEC”) and in other public communications made by the Company;
and strives to be compliant with applicable governmental laws, rules and
regulations. The Company has not formally adopted a written code of business
conduct and ethics that governs the Company’s employees, officers and Directors
as the Company is not required to do so.





In lieu
of an Audit Committee, the Company’s Board of Directors is responsible for
reviewing and making recommendations concerning the selection of outside
auditors, reviewing the scope, results and effectiveness of the annual audit of
the Company's financial statements and other services provided by the Company’s
independent public accountants. The Board of Directors reviews the Company's
internal accounting controls, practices and policies.


-47-


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





Security
Ownership of Certain Beneficial Owners and Management




The following table provides the names and
addresses of each person known to us to own more than 5% of our outstanding
shares of Class A common stock as of April 10, 2009, and by the officers and
directors, individually and as a group. Except as otherwise indicated, all
shares are owned directly.




Title
      of Class
                    Name
      and Address
                      of
      Beneficial Owner
                    Amount
      and Nature
                      of
      Beneficial Owner
                    Percent
                      of
      Class (1)Class
      A Common Stock
                    Shaun
      Passley (2)
                      CEO,
      CFO, and
                      Chairman
      of the Board of Directors
                      512
      N. McClurg Ct 602
                      Chicago,
      IL 60611
                    30,000,500(6)
                    71%Class
      B Common Stock
                    Shaun
      Passley (2)
                      CEO,
      CFO, and
                      Chairman
      of the Board of Directors
                      512
      N. McClurg Ct 602
                      Chicago,
      IL 60611
                    2,500,000
                    100%Class
      A Common Stock
                    Craig
      Passley
                      Secretary
                      445
      East Ohio, Suite 250
                      Chicago,
      IL 60611
                    100,500
                    0.2%Class
      B Common Stock
                    All
      executive officers
                      and
      directors as a group
                      (2
      Persons)
                    2,500,000
                    100%Class
      A Common Stock
                    All
      executive officers
                      and
      directors as a group (2 Persons)
                    30,101,000(3)
                    71%(2)






(1)
      The percent of class is based on 42,482,940 shares of our Class A common
      stock issued and outstanding as of April 10, 2009, and 2,500,000 shares of
      our Class B common stock issued and outstanding as of April 10,
      2009.(2)
      Based upon his ownership of Class A Common Stock and Class B Common Stock
      Shaun Passley controls 95.7% of our voting stock.(3)
      Includes 500 shares held in the name of IT Business Solutions Group, Inc.,
      which entity is now defunct and which shares Mr. Passley beneficially
      owns.


-48-


ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
INDEPENDENCE




We borrow money from our Chief Executive Officer,
Shaun Passley and other related parties periodically under verbal
agreements.  The loans bear interest at 15% per
year.  During the year ended December 31, 2008, we borrowed an
additional $196,684 from our Chief Executive Officer and other related
parties.  At December 31, 2008, the total principal outstanding was
$196,162, and we had accrued interest payable of $40,530 related to these
loans.





On June
4, 2008, the Company issued a note payable in the amount of $296,100 due to Star
Financial Corporation, which is owned by Fay Passley, the mother of our Chief
Executive Officer, Shaun Passley, which has since been amended (the “June 2008
Note”, as amended from time to time).  The loan is unsecured and bears
interest at 10%, with annual payments of principal and interest in the amount of
$75,495, due and payable beginning on August 1, 2009.  The maturity
date of the note is June 4, 2013.  In connection with the loan, the
Company paid $14,100 (5%) in financing costs that are being amortized over the
life of the loan using the effective interest method.  The majority of
the funds borrowed pursuant to the June 2008 Note were used to pay the seller
the $210,000 payment in connection with the purchase of DFI and PRMI, as
described above.




ITEM
14.  PRINCIPAL ACCOUNTING FEES AND SERVICES





Audit
Fees:  The aggregate fees, including expenses, billed by the
Company's principal accountants for professional services rendered for the audit
of the Company's consolidated financial statements and for the review of the
Company's financial information included in its quarterly reports or services
that are normally provided in connection with statutory and regulatory filings
or engagements during the fiscal years ended December 31, 2008 and 2007 were
$45,500 and $18,500, respectively.




Audit Related
Fees:  The aggregate fees, including expenses, billed by
principal accountants for assurance and related services reasonably related to
the performance of the Company's audit or review of the Company's financial
statements for the fiscal years ended December 31, 2008 and 2007 were $23,000
and $2,000, respectively.  The 2008 fees relate to the audit of the
combined financial statements of PRMI and DFI related to the acquisition by the
Company.




Tax
Fees:  The aggregate fees, including expenses, billed by
principal accountants for tax compliance, tax advice and tax planning during
years 2008 and 2007 were $0 and $0, respectively.





All Other
Fees:  The aggregate fees, including expenses, billed for all
other services rendered to the Company by principal accountants during years
2008 and 2007 were $0 and $0, respectively.


-49-


PART
IV





ITEM
15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES




Exhibit
      No.
            Description3.1(1)
            Articles
      of Incorporation (filed March 23, 2000)3.2(1)
            Articles
      of Amendment (filed April 5, 2005)3.3(1)
            Articles
      of Amendment (filed July 12, 2005)3.4(1)
            Articles
      of Amendment (filed March 2, 2006)3.5(1)
            Statement
      of Change of Registered Agent (filed January 12, 2006)3.6(1)
            Articles
      of Amendment (filed May 17, 2006)3.7(1)
            Amended
      and Restated By-Laws4.1(1)
            Specimen
      Stock Certificate10.1(2)
            Form
      of Subscription Agreement of July 2005 Private
  Placement.10.2(3)
            Promissory
      Note with Fay  Passley10.3(3)
            Promissory
      Note with L &  F  Lawn Service, Inc.10.4(3)
            Promissory
      Note with Shaun Passley10.5(5)
            Stock
      Purchase Agreement with DFI, PRMI and Arthur Goes10.6(5)
            Promissory
      Note between Epazz, Inc. and Arthur Goes10.7(5)
            Security
      Agreement with Arthur Goes10.8(6)
            June
      2008 Promissory Note with Star Financial Corporation16.1(4)
            Letter
      from Malone & Bailey, PC21.1*
            Subsidiaries31*
            Certificate
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232*
            Certificate
      of the Chief Executive Officer and Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002





* Filed
herewith.


-50-


(1)
            Filed
      as an Exhibit to our Form SB-2, filed with the Commission on December 4,
      2006, and incorporated herein by
reference.





(2)
            Filed
      as an Exhibit to our Form SB-2A, filed with the Commission on May 11,
      2007, and incorporated herein by
reference.





(3)
            Filed
      as an Exhibit to our Form SB-2A, filed with the Commission on
      September 24, 2007, and incorporated herein by
    reference.





(4)
            Filed
      as an Exhibit to our Form SB-2A, filed with the Commission on
      November 28, 2007, and incorporated herein by
    reference.





(5)
            Filed
      as an Exhibit to our Form 8-K, filed with the Commission on June 24, 2008,
      and incorporated herein by
reference.





(6)
            Filed
      as an Exhibit to our Form 10-Q Quarterly Report, filed with the Commission
      on August 19, 2008, and incorporated herein by
  reference.


-51-


SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





EPAZZ,
      Inc.DATED:
      May 1, 2009
              By:
      /s/ Shaun PassleyShaun
      PassleyChief
      Executive Officer (Principal Executive Officer), President, Chief
      Financial Officer (Principal Accounting Officer), and
    Director


-52-