UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549









FORM 10-KSB



FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



|           |                                                                                                                                  
|---------- | ---------------------------------------------------------------------------------------------------------------------------------
|(Mark One)
|[ X ]      | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2004.



OR



|      |                                                                                                                                              
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------
|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ________ to ________.



Commission file number: 33-26531-LA



ZEROS & ONES, INC.

(Exact Name of Registrant as Specified in Its Charter)



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|NEVADA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | 88-0241079            
|(State or other jurisdiction of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | (I.R.S. Employer      
|incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | Identification Number)
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|7119 Sunset Blvd #318                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Los Angeles, California  90046                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(Address of principal executive offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
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|Registrants telephone number, including area code:  (800) 710-6637                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

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

State issuer's revenues for the most recent fiscal year: $0.00.

Check if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [ X ].

The aggregate market value of common stock of the Company, par value $0.001 per share (Common Stock), held by non-affiliates of the registrant as of March 23, 2007, was $99,360,000. The Company's Common Stock is currently traded on the Over the Counter Bulletin Board.

There were 116,872,816 shares of Common Stock issued and outstanding as of March 23, 2007.

Transitional Small Business Disclosure Format (check one): Yes [   ] No [ X ].











1



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EXPLANATORY NOTE



This Annual Report on Form 10-KSB is being filed by the Registrant to satisfy its filing obligations under the Securities Act of 1933. The Registrant has not previously filed its annual reports for this period. The Registrant in filing this Form 10-KSB for the period ended December 31, 2004 has omitted certain disclosures related to subsequent events that are more fully described in Form 10-KSBs for subsequent periods and other SEC filings. This has been done to limit confusion and to enhance the readers understanding of the events that occurred during the fiscal year presented.





2



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TABLE OF CONTENTS



|           |                                                                                                |     
|---------- | ---------------------------------------------------------------------------------------------- | ----
|           |                                                                                                | Page
|PART I.    |                                                                                                |     
|           |                                                                                                |     
|ITEM 1.    | Description of Business                                                                        | 4   
|ITEM 2.    | Description of Property                                                                        | 6   
|ITEM 3.    | Legal Proceedings                                                                              | 6   
|ITEM 4.    | Submission of Matters to a Vote of Security Holders                                            | 6   
|           |                                                                                                |     
|PART II.   |                                                                                                |     
|           |                                                                                                |     
|ITEM 5.    | Market for Common Equity and Related Stockholder Matters                                       | 7   
|ITEM 6.    | Management's Discussion and Analysis or Plan of Operation                                      | 8   
|ITEM 7.    | Financial Statements                                                                           | F-1 
|ITEM 8.    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           | 10  
|ITEM 8A.   | Controls and Procedures                                                                        | 10  
|ITEM 8B.   | Other Information                                                                              | 11  
|           |                                                                                                |     
|PART III.  |                                                                                                |     
|           |                                                                                                |     
|ITEM 9.    | Directors, Executive Officers, Promoters, and Control Persons                                  | 12  
|ITEM 10.   | Executive Compensation                                                                         | 12  
|ITEM 11.   | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 13  
|ITEM 12.   | Certain Relationships and Related Transactions                                                 | 13  
|ITEM 13.   | Exhibits, Financial Statements and Reports on Form 8-K                                         | 13  
|ITEM 14.   | Principal Accountant Fees and Services                                                         | 14  
|           |                                                                                                |     
|Signatures |                                                                                                | 15  







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PART I.



This Annual Report on Form 10-KSB contains forward-looking statements including, without limitation, statements concerning the future of the industry in which Zeros & Ones, Inc. (the Company) operates, its product development plans, business strategy, financial estimates, continued acceptance of its products and dependence on significant distributors and customers. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expects, plans, anticipates, believes, estimated, predicts, potential, continue or the negative of such terms or other comparable terminology. You should not place undue reliance on the forward-looking statements contained in this document. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements made in this Annual Report on Form 10-KSB. Forward-looking statements, particularly those concerning anticipated events relating to the development and marketing of the Company's products and services, and the timing or magnitude of those events, are inherently uncertain. The risk factors discussed below and other considerations noted throughout this Annual Report on Form 10-KSB could cause its actual results to differ significantly from those contained in any forward-looking statements.



Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. The Company is under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-KSB to conform forward-looking statements to actual results.



|        |                        
|------- | -----------------------
|ITEM 1. | Description of Business



The Company operates on limited capital resources. The Company cannot provide assurances regarding its ability to meet any sales targets, as it may be affected by many factors not within its control, including acceptance of its products by consumers, competition, technological advances by others, and general economic and political issues. Further, all of the potentially adverse factors that can affect a business in its line are more likely to affect a new company than an established enterprise.



History of Zeros & Ones, Inc.



Zeros & Ones, Inc., (the Company) is a holding company focused on identifying and developing different media-based technologies, media assets, and strategic partnerships, and bringing those together to deliver next-generation commercial and consumer solutions.



Founding and Merger



Zeros & Ones, Inc. was originally founded in 1994 by Robert J. Holtz (Holtz). At that time the Company was focused on delivering products and services to the entertainment industry. In July, 1999 the Company, along with several other companies with technologies, products, and services focused on digital convergence, all merged with Commercial Labor Management, Inc., a publicly traded company. This entity became the predecessor of the Company. Immediately following that transaction, Commercial Labor Management, Inc. changed its name to Zeros & Ones, Inc.. Under the Merger the entities were combined into one company and were accounted for in a manner similar to a pooling of interests.



Market Conditions and Business Events



Due to changed and unfavorable market conditions, the Company redirected its focus in the technology and entertainment industries which it had followed from its founding. During 2003 the Company entered into several acquisition agreements as part of a roll-up strategy to become a holding company focused on identifying and developing different media-based technologies, media assets, and strategic partnerships, and bringing those together to deliver next-generation commercial and consumer solutions. The Company was unable to complete the acquisitions as intended, and subsequently the Company became delinquent on its mandated annual and quarterly filings under Section 15(d) of the Securities Act of 1933, as amended (Securities Act) with the Securities and Exchange Commission (SEC).



The Company was adversely impacted during this period by an ongoing legal issue with Allied Boston Group (Allied). In a 2001 agreement the Company pledged a substantial portion of its available Common Stock for a transaction whereby Allied promised a contemporaneous exchange of equity related to a proposed acquisition. Allied failed to complete the transaction, however the Company shares remained with Allied until the Company brought litigation against Allied to cause such shares to be returned to the Company. The litigation was settled in November 2004 and the shares were cancelled.



The Company was also affected by the cessation of operations of Joint Employers Group. (see Item 7, Financial Statements, Note 4, Discontinued Operations). This decision was due to the loss of workers compensation insurance coverage for its employees. As a result, the Company is deemed to have re-entered the development stage on January 1, 2003.



4



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Current Plan of Operations



Zeros & Ones, Inc. is a holding company now focused on identifying and developing different media-based technologies, media assets, and strategic partnerships, and bringing those together to deliver next-generation commercial and consumer solutions. The Company believes that technology has created a world where everyone is connected - at home, in the office, and in transit. In the last decade, the Internet has empowered consumers with choice, immediate gratification, and the ability to quickly evaluate, purchase, consume, contribute, and share information in an unprecedented manner. The technology and entertainment industries are two of the wealthiest and dynamic industries in the world, yet they work, play, and create using very different approaches to business.



Zeros & Ones, Inc. sees these two industries as complementary, if not overlapping. Many technology companies are already entering the entertainment industry and becoming a viable force in their respective markets. Likewise, the Company believes that the entertainment industry is realizing the true economic and long-term value of their media, the content itself, as the future driver for technology adoption by consumers. With the rapid transition from a predominantly analog world into a fully digital environment, the Company intends to position itself to capitalize on these changing dynamics by acquiring intellectual property, developing strategic partnerships, and leveraging industry relationships to streamline and enhance the business models surrounding content creation, media distribution, and consumer commerce.



Competitive Business Environment



The technology and data transmission industries are highly competitive and the Company's management expects this competition to intensify in the future. The industry is characterized by rapidly changing technologies and customer demands for newer and better products. Third party competitors could develop products and technologies that could render the Company's products and technologies obsolete. Many of the Company's competitors have greater resources, including financial and scientific personnel, marketing and sales capacity, established distribution networks, significant goodwill and greater brand name recognition. As a result, these competitors may be in a better position than the Company to respond quickly to, or significantly influence, rapid technological change and consumer demand.



Competition within the technology and data transmission industry is characterized by several key factors, including, but not limited to, the following:



| |    |                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Rapid changes in technology and customer requirements. New opportunities for existing and new competitors can quickly render existing technologies less valuable.



| |    |                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Relatively low barriers to entry. Startup capital requirements for technology companies can be very small, and software distribution over the Internet is inexpensive and easily outsourced.



| |    |                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | Significant price competition. Direct distribution of competing products, particularly over the Internet, may cause prices and margins to decrease in traditional sales channels.



| |    |                                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. | Consolidations and mergers. Technology companies and their individual products have a high rate of mergers, product line sales, and other transfers and consolidations; consequently, there is a tendency to have a higher concentration of able competitors within the industry.



In addition to the foregoing, a slowdown affecting the general growth in demand for data transmission and related products and services could harm the Company's plan of operations and prospects for achieving profitability. The markets for the Company's potential products and services depend upon economic conditions that affect the broader computer technology and related markets. Downturns in any of these markets may cause end-users to delay or cancel orders for such products and services.



Patents, Proprietary Technology and Other Intellectual Property



As the Company develops or acquires new assets that could have commercial value and would be protected under current or future patent laws, the Company will then rely on a combination of copyright, trademark and patent laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary technology. For example, the Company seeks to avoid disclosure of any trade secrets by requiring those persons with access to the Company's proprietary information to execute confidentiality agreements with the Company. The Company also relies on unpatented proprietary know-how in developing its products and services, and employs various methods, including confidentiality agreements with employees, consultants and others, to protect its trade secrets and know-how.





5



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Irrespective of the foregoing, the Company cannot be certain that these methods of protecting its proprietary technology, information and know-how will afford complete protection. Patents may not be enforceable or provide the Company with meaningful protection from competitors. If a competitor were to infringe on the Company's patents, the costs of enforcing the Company's patent rights might be substantial or even prohibitive. Likewise, the Company cannot be sure that others will not independently develop any trade secrets and know-how or obtain access to them.



Governmental Regulation



The Company currently believes that any acquired assets in the intended entertainment or technology fields will not be subject to approval from the United States government, with the exception of export restrictions to certain countries. Any acquired business operations in such industries will likely not fall under federal, state, or local environmental regulations.



Sales and Marketing



The Company has not expended material amounts on sales and marketing  in calendar year 2003 or 2004.



Research and Development



The Company has not expended material amounts on research and development in calendar year 2003 or 2004.



Employees



As of March 6, 2007, the Company has 6 full-time employees, 2 of which perform general management, 2 of which perform technical management functions, 1 of which performs marketing and sales functions, and 1 of which performs administrative and financial functions. All employees are located in California. None of its employees are represented by a labor union, and we consider our employee relations to be good.



|        |                        
|------- | -----------------------
|ITEM 2. | Description of Property



As of March 23, 2007 the Company has its executive offices at 7119 Sunset Blvd. Suite #318, Hollywood, California 90046. The Company leases this facility on a month-to-month basis.





|        |                  
|------- | -----------------
|ITEM 3. | Legal Proceedings



The Company is aware of pending claims filed subsequent to the period ending December 31, 2004. See Item 7, Financial Statements, Note 12, Commitments and Contingencies.



|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | Submission of Matters to a Vote of Security Holders



None.







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PART II.



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|------- | --------------------------------------------------------
|ITEM 5. | Market for Common Equity and Related Stockholder Matters



The Common Stock currently trades on the Over-the-Counter Bulletin Board (OTC Bulletin Board )under the symbol ZROS.



The following table sets forth the quarterly closing sales prices of the Common Stock for 2003 and 2004 as reported by Yahoo! Finance. Such prices represent prices between dealers and do not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.





|               |  |      |      |     |   |      |  |                |  |     |      |  |   |     
|-------------- |  | ---- | ---- | --- | - | ---- |  | -------------- |  | --- | ---- |  | - | ----
|2003           |  | High |      | Low |   | 2004 |  | High           |  | Low
|First Quarter  |  | $    | 0.04 |     | $ | 0.01 |  | First Quarter  |  | $   | 0.24 |  | $ | 0.12
|Second Quarter |  | $    | 0.07 |     | $ | 0.01 |  | Second Quarter |  | $   | 0.26 |  | $ | 0.13
|Third Quarter  |  | $    | 0.25 |     | $ | 0.05 |  | Third Quarter  |  | $   | 0.18 |  | $ | 0.10
|Fourth Quarter |  | $    | 0.24 |     | $ | 0.16 |  | Fourth Quarter |  | $   | 0.43 |  | $ | 0.12



The market price of the Common Stock, like the price of shares of technology companies generally, has been and may continue to be volatile. The closing price of the Common Stock on December 31, 2004 was $0.34 and the closing price on March 23, 2007 was $1.11. If the Company's future operating results are below the expectations of stock market analysts and investors, its stock price may decline. Public announcements of the Company's financial results and business developments may have a significant impact on the market price of the Common Stock.



Common Stock Holders



As of December 31, 2004, there were approximately 500 holders of record of the Common Stock. The Company believes that additional beneficial owners of Common Stock hold shares in street names.



Dividends



The Company has not declared any cash dividends on its Common Stock. The declaration and payment of dividends is within the discretion of the Company's Board of Directors and will depend, among other factors, on results of operations, capital requirements and general business conditions.



Equity Compensation Plan



In July 2000, the Company's Board of Directors approved a stock option plan for employees and consultants (the Plan). During the year ended December 31, 2004, the Company did not grant any new options under the Plan. Prior to 2004 the Company had outstanding 100,000 options under the Plan. For further information on the Company's equity compensation plan see Item 7, Financial Statements under Note 10, Stock Options.



Recent Issuances of Unregistered Securities



The following is a description of all equity securities of the Company sold by the Company during the period covered by this Annual Report on Form 10-KSB that were not registered under the Securities Act of 1933, as amended (Securities Act) and not previously reported in a Quarterly Report on Form 10-QSB, or in a Current Report on Form 8-K.



During the year ended December 31, 2004 the Company issued 600,000 shares of its Common Stock to a firm for marketing services rendered in 2003 pursuant to an agreement executed on behalf of the Company by Holtz. The Company incurred compensation expenses of $81,000 in connection with this stock issuance. Also during the year the Company issued 650,000 shares of Common Stock related to the exercise of warrants. No cash was received by the Company related to this exercise. The Company relied on Section 4(2) of the Securities Act, and Regulation D promulgated thereunder, as providing an exemption from registering the sale of these shares of Common Stock under the Securities Act.



7



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|        |                                                          
|------- | ---------------------------------------------------------
|ITEM 6. | Management's Discussion and Analysis or Plan of Operation



The following information should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this Annual Report on Form 10-KSB. This Annual Report on Form 10-KSB, and in particular this Item 6, Management's Discussion and Analysis or Plan of Operation, may contain forward-looking statements regarding future events or future performance. These future events and future performance involve certain risks and uncertainties, which have described in this Annual Report on Form 10-KSB under this Part 1, Item 1, Description of Business. Actual events or actual future results may differ materially from any forward-looking statements due to those risks and uncertainties. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting our forward-looking statements. This analysis is not intended to serve as a basis for projection of future events.



Significant Events During Fiscal Year 2004



The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of its results of operations and financial condition, and is used by management in assessing the Company's performance and making managerial decisions. The following significant events impacted the Company's financial condition during this fiscal year and will have a significant influence on its condition in future reporting periods.



Convertible Notes



In May 2003, the Company offered for sale and sold a certain amount of convertible notes, with an interest rates ranging from 8% to 12% per annum, and with a maturity of 1 year (the Notes). The terms of the Notes provide that the holder of the Notes, at its option, could convert the principal and interest of the Notes into Common Stock at any time at a conversion price equal to the average of the last five (5) trading days closing price, less a discount ranging from 25% to 35%. The Company issued approximately $487,527 of the Notes during the year ended December 31, 2004.



Critical Accounting Policies



In accordance with SEC guidance, those material accounting policies that the Company believes are the most critical to an investor's understanding of the Company's financial results and condition are discussed below.



The Company's significant accounting policies are more fully described in Note 2 to the consolidated financial statements. Certain of these policies are particularly important to the portrayal of the Company's financial position and results of operations and require the application of significant judgment by the Company's management to determine the appropriate assumptions to be used in the determination of certain estimates.



Going Concern



The Company is subject to the risks and uncertainties associated with a new business, have no established source of revenue, and have incurred significant losses from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Since inception the Company has not been profitable and has sustained substantial net losses from operations. There can be no assurance that it will generate positive operating income from its operating activities again, or that it will achieve and sustain a profit during any future period, particularly if operations remain at current levels. Failure to achieve significant revenues or profitability would materially and adversely affect the Company's business, financial condition, and results of operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.



Management estimates that the current funds available and on-hand will not be adequate to fund operations throughout fiscal 2007. The Company anticipates that revenue from normal operations will occur in 2007, and will have a material impact offsetting operating expenses during the year. However, the Company is uncertain whether it will achieve profit from normal operations, and expects that additional capital will be required to support both on-going losses and the anticipated revenue. Currently the Company has not arranged sources for, nor does it have commitments for, adequate outside investment, either in the form of debt or equity, for the funds required to continue operations during 2007.





8



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Results of Operations



Twelve months ended December 31, 2004



The Company had no revenues for the twelve months ended December 31, 2004. The Company's spending for operations for the twelve months ended December 31, 2004 totaled $1,544,711. The Company's spent $195,563 on research and development, compared with $75,000 during the prior year, the increase was due to higher expenses with its development service provider. Sales and marketing expenses were $74,784 compared with $930 during the prior year, the increase due to the hiring of a marketing services firm who was compensated in common stock. In 2004 total general and administrative expenses of $1,274,364 were related to costs for management and outside services. Non-operating expenses of $505,530 were related to financing costs. The net loss for the period was $2,051,041.



Liquidity and Capital Resources



At December 31, 2004, the Company had working capital of ($1,655,713). During the twelve months ended December 31, 2004, net cash used in operations was $605,346 and consisted principally of a net loss of $2,051,041 and was offset by stock-based compensation and services of $244,769 and debt discount amortization of $431,476. Cash flows were also affected by the sale of Notes for $591,663,



The Company's current cash on hand at December 31, 2004, would not be adequate to fund the Company's operations for more than a short period if the Company were to continue to use cash in operating activities at the same rate as in prior months. As a result the Company sharply reduced the amount of operating activities.  The Company relied upon continued borrowing and/or sales of additional equity instruments to support its ongoing operations. Following the fiscal year ended December 31, 2004, the Company has been successful in closing additional funding under the Convertible Notes. The Company contemplates additional sales of debt instruments during the current year, although whether it will be successful in doing so, and the additional amounts it will receive as a result, cannot be assumed or predicted.



Recent and Expected Losses



There can be no assurance that the Company will generate positive revenues from its operating activities, or that it will achieve and sustain a profit during any future period, particularly if operations remain at current levels. Failure to achieve significant revenues or profitability would materially and adversely affect the Company's business, financial condition, and results of operations. For the fiscal year ended December 31, 2004, the Company incurred a net pre-tax loss from continuing operations of $2,050,241.



Events Subsequent to Fiscal Year Ended December 31, 2004



See Explanatory Note.



9



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|        |                     
|------- | --------------------
|ITEM 7. | Financial Statements



Index to Financial Statements



|                                                                                                                                                                       |     
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                                                                       | Page
|Consolidated Balance Sheet  As of December 31, 2004 (Unaudited)                                                                                                       | F-2 
|                                                                                                                                                                       |     
|Consolidated Statement of Operations  For the Years Ended December 31, 2004 and 2003 and the period from January 1, 2003 (Inception) to December 31, 2004 (Unaudited) | F-3 
|                                                                                                                                                                       |     
|Consolidated Statement of Changes in Stockholders Equity (Deficit)  For the period from January 1, 2003 (Inception) to December 31, 2004 (Unaudited)                 | F-4 
|                                                                                                                                                                       |     
|Consolidated Statement of Cash Flows  For the Years Ended December 31, 2004 and 2003 and the period from January 1, 2003 (Inception) to December 31, 2004 (Unaudited) | F-5 
|                                                                                                                                                                       |     
|Notes to the Consolidated Financial Statements                                                                                                                         | F-6 





F-1



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Zeros & Ones, Inc. and Subsidiary

(A Development Stage Company)



Consolidated Balance Sheet

(Unaudited)



|                                                                                                      |              |             
|----------------------------------------------------------------------------------------------------- | ------------ | ------------
|                                                                                                      | As of       
|                                                                                                      | December 31,
|                                                                                                      | 2004        
|Assets                                                                                                |             
|Current Assets:                                                                                       |              |             
|Cash and cash equivalents                                                                             | $            | 2,954       
|Other current assets                                                                                  |              | 84,500      
|Total current assets                                                                                  |              | 87,454      
|Total Assets                                                                                          | $            | 87,454      
|Liabilities and Stockholders Equity (Deficit)                                                        |              |             
|Current Liabilities:                                                                                  |              |             
|Accounts payable                                                                                      | $            | 468,719     
|Accrued liabilities                                                                                   |              | 205,118     
|Convertible debt, net of debt discount                                                                |              | 963,308     
|Settlements payable                                                                                   |              | 106,023     
|Total Current Liabilities                                                                             |              | 1,743,167   
|Long Term Liabilities                                                                                 |              |             
|Notes payable  Officers                                                                              |              | 350,000     
|Total Liabilities                                                                                     |              | 2,093,167   
|Commitments and Contingencies                                                                         |              |             
|Stockholders Equity (Deficit):                                                                       |              |             
|Preferred stock, $.001 par value; 2,000,000 shares authorized; no shares issued and outstanding       |              | -           
|Common stock, $.001 par value; 100,000,000 shares authorized 27,801,005 shares issued and outstanding |              | 27,801      
|Additional paid in capital in excess of par value                                                     |              | 18,418,944  
|Accumulated deficit  prior operations                                                                |              | (17,711,359)
|Deficit accumulated in the development stage                                                          |              | (2,051,040) 
|Total stockholders equity (deficit)                                                                  |              | (2,005,713) 
|Total Liabilities and Stockholders Equity (Deficit)                                                  | $            | 87,454      





The accompanying notes are an integral part of the consolidated financial statements.





F-2



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Zeros & Ones, Inc. and Subsidiary

(A Development Stage Company)



Consolidated Statement of Operations

(Unaudited)





|                                                    |                                      |            |                                      |   |                                                              |  |   |          
|--------------------------------------------------- | ------------------------------------ | ---------- | ------------------------------------ | - | ------------------------------------------------------------ |  | - | ---------
|                                                    | For the Year Ended December 31, 2004 |            | For the Year Ended December 31, 2003 |   | For the Period from January 1, 2003(Inception) to 12/31/2004
|                                                    |                                      |            |                                      |   |                                                              |  |   |          
|Revenues                                            | $                                    | -          |                                      | $ | -                                                            |  | $ | -        
|Cost of Sales                                       |                                      | -          |                                      |   | -                                                            |  |   | -        
|Gross Profit (Loss)                                 |                                      | -          |                                      |   | -                                                            |  |   | -        
|Operating Expenses:                                 |                                      |            |                                      |   |                                                              |  |   |          
|Research and development                            |                                      | 195,563    |                                      |   | 75,000                                                       |  |   | 270,563  
|Sales and marketing                                 |                                      | 74,784     |                                      |   | 930                                                          |  |   | 75,714   
|General and administrative                          |                                      | 1,274,364  |                                      |   | 540,678                                                      |  |   | 1,815,042
|Total operating expenses                            |                                      | 1,544,711  |                                      |   | 616,608                                                      |  |   | 2,161,319
|Non-Operating Expenses:                             |                                      |            |                                      |   |                                                              |  |   |          
|Interest expense (income)                           |                                      | 466,785    |                                      |   | 295,074                                                      |  |   | 761,859  
|Other (income) expense                              |                                      | 38,745     |                                      |   | -                                                            |  |   | 38,745   
|Total non-operating expenses                        |                                      | 505,530    |                                      |   | 295,074                                                      |  |   | 800,604  
|Loss From Continuing Operations Before Income Taxes |                                      | 2,051,241  |                                      |   | 911,682                                                      |  |   | 2,961,923
|Provision for Income Taxes                          |                                      | 800        |                                      |   | 800                                                          |  |   | 1,600    
|Loss from Continuing Operations                     |                                      | 2,051,041  |                                      |   | 912,482                                                      |  |   | 2,963,523
|Discontinued Operations (Note 3):                   |                                      |            |                                      |   |                                                              |  |   |          
|Loss from Operations, net of tax ($0)               |                                      | -          |                                      |   | (257,827)                                                    |  |   | (257,827)
|Gain from Disposal, net of tax ($0)                 |                                      | -          |                                      |   | 480,250                                                      |  |   | 480,250  
|Gain from Discontinued Operations                   |                                      | -          |                                      |   | 222,423                                                      |  |   | 222,423  
|Net Loss                                            | $                                    | 2,050,041  |                                      | $ | 690,059                                                      |  | $ | 2,741,100
|Net Loss Per Share  Basic and Diluted:             |                                      |            |                                      |   |                                                              |  |   |          
|Continuing Operations                               | $                                    | (0.08)     |                                      | $ | (0.04)                                                       |  |   |          
|Discontinued Operations                             |                                      | -          |                                      |   | 0.01                                                         |  |   |          
|Net Loss                                            | $                                    | (0.08)     |                                      | $ | (0.03)                                                       |  |   |          
|Weighted Average Common Shares  Basic and Diluted  |                                      | 27,086,591 |                                      |   | 25,644,242                                                   |  |   |          





The accompanying notes are an integral part of the consolidated financial statements.





F-3



---

Zeros & Ones, Inc. and Subsidiary

(A Development Stage Company)



Statement of Changes in Stockholders' Equity / (Deficit)

For the Period from January 1, 2003 (Inception) through December 31, 2004 (Unaudited)



|                                                     |                 |  |              |   |                            |              |                       |   |                                        |  |   |             |  |       |   |   |              |              |   |                                              |             |           |   |             | 
|---------------------------------------------------- | --------------- |  | ------------ | - | -------------------------- | ------------ | --------------------- | - | -------------------------------------- |  | - | ----------- |  | ----- | - | - | ------------ | ------------ | - | -------------------------------------------- | ----------- | --------- | - | ----------- | 
|                                                     |                 |  |              |   |                            |              |                       |   |                                        |  |   |             |  |       |   |   |              |              |   | Deficit Accumulated in the Development Stage |             |           |  
|                                                     |                 |  |              |   |                            |              |                       |   |                                        |  |   |             |  |       |   |   |              |              |   |                                              |             |          
|                                                     | Preferred Stock |  | Common Stock |   | Additional Paid-in Capital |              | Deferred Compensation |   | Accumulated Deficit - Prior Operations |  |   |             | 
|                                                     | Shares          |  | Amount       |   | Shares                     |              | Amount                |   |                                        |  |   |             |  | Total
|                                                     |                 |  |              |   |                            |              |                       |   |                                        |  |   |             |  |       |   |   |              |              |   |                                              |             |           |   |            
|Balance, December 31, 2002                           | -               |  | $            | - |                            | 48,511,858   |                       | $ | 48,512                                 |  | $ | 20,886,872  |  | $     |   | $ | (17,711,359) |              | $ |                                              | $           | 3,224,025
|Shares retired in JEG disposition                    |                 |  |              |   |                            | (24,000,000) |                       |   | (24,000)                               |  |   | (3,576,000) |  |       |   |   |              |              |   |                                              |             |           |   | (3,600,000)
|Reconcile outstanding shares with transfer agent     |                 |  |              |   |                            | 1,069,231    |                       |   | 1,069                                  |  |   | (1,069)     |  |       |   |   |              |              |   |                                              |             |           |   | -          
|Shares issued for services                           |                 |  |              |   |                            | 335,000      |                       |   | 335                                    |  |   | 44,215      |  |       |   |   |              |              |   |                                              |             |           |   | 44,550     
|Fair value of warrants issued with Convertible Notes |                 |  |              |   |                            | -            |                       |   | -                                      |  |   | 102,794     |  |       |   |   |              |              |   |                                              |             |           |   | 102,794    
|Beneficial Conversion Feature of Convertible Notes   |                 |  |              |   |                            | -            |                       |   | -                                      |  |   | 260,795     |  |       |   |   |              |              |   |                                              |             |           |   | 260,795    
|Net Loss                                             | -               |  |              | - |                            | -            |                       |   | -                                      |  |   | -           |  |       | - |   |              | -            |   |                                              | (690,059)   |           |   | (690,059)  
|Balance, December 31, 2003                           | -               |  |              | - |                            | 25,916,089   |                       |   | 25,916                                 |  |   | 17,717,607  |  |       | - |   |              | (17,711,359) |   |                                              | (690,059)   |           |   | (657,895)  
|Shares issued in exchange for Convertible Notes      |                 |  |              |   |                            | 634,916      |                       |   | 635                                    |  |   | 99,365      |  |       |   |   |              |              |   |                                              |             |           |   | 100,000    
|Shares issued for services                           |                 |  |              |   |                            | 600,000      |                       |   | 600                                    |  |   | 81,000      |  |       |   |   |              |              |   |                                              |             |           |   | 81,600     
|Options issued for services                          |                 |  |              |   |                            |              |                       |   |                                        |  |   | 163,169     |  |       |   |   |              |              |   |                                              |             |           |   | 163,169    
|Exercise of warrants                                 |                 |  |              |   |                            | 650,000      |                       |   | 650                                    |  |   | (650)       |  |       |   |   |              |              |   |                                              |             |           |   | -          
|Fair value of warrants issued with Convertible Notes |                 |  |              |   |                            |              |                       |   |                                        |  |   | 260,481     |  |       |   |   |              |              |   |                                              |             |           |   | 260,481    
|Beneficial Conversion Feature of Convertible Notes   |                 |  |              |   |                            |              |                       |   |                                        |  |   | 97,972      |  |       |   |   |              |              |   |                                              |             |           |   | 97,972     
|Net Loss                                             |                 |  |              |   |                            |              |                       |   |                                        |  |   |             |  |       |   |   |              |              |   |                                              | (2,051,041) |           |   | (2,051,041)
|Balance, December 31, 2004                           | -               |  | $            | - |                            | 27,801,005   |                       | $ | 27,801                                 |  | $ | 18,418,944  |  | $     | - |   | $            | (17,711,359) |   | $                                            | (2,741,100) |           | $ | (2,005,714)





The accompanying notes are an integral part of the consolidated financial statements.





F-4



---



Zeros & Ones, Inc. and Subsidiary

(A Development Stage Company)



Consolidated Statement of Cash Flows

(Unaudited)



|                                                                           |   |                              |  |   |                              |  |                                                                      |            
|-------------------------------------------------------------------------- | - | ---------------------------- |  | - | ---------------------------- |  | -------------------------------------------------------------------- | -----------
|                                                                           |   | Year Ended December 31, 2004 |  |   | Year Ended December 31, 2003 |  | For the period from January 1, 2003 (Inception) to December 31, 2004
|                                                                           |   |                              |  |   |                              |  |                                                                      |            
|Cash Flows from Operating Activities                                       |   |                              |  |   |                              |  |                                                                      |            
|Net loss                                                                   | $ | (2,051,041)                  |  | $ | (690,059)                    |  | $                                                                    | (2,741,100)
|Adjustments to reconcile net loss to net cash used in operating activities |   |                              |  |   |                              |  |                                                                      |            
|Common stock and options issued for services                               |   | 244,769                      |  |   | 44,550                       |  |                                                                      | 289,319    
|Amortization of debt discount and debt issue costs                         |   | 431,476                      |  |   | 289,774                      |  |                                                                      | 721,250    
|Gain from disposal of discontinued operations                              |   | --                           |  |   | (480,250)                    |  |                                                                      | (480,250)  
|Changes in operating assets and liabilities:                               |   |                              |  |   |                              |  |                                                                      |            
|Notes payable - officers                                                   |   | 300,000                      |  |   | 50,000                       |  |                                                                      | 350,000    
|Prepaid expenses and other current assets                                  |   | 84,500                       |  |   | (169,000)                    |  |                                                                      | (84,500)   
|Accounts payable                                                           |   | 152,511                      |  |   | 258,446                      |  |                                                                      | 410,957    
|Accrued liabilities                                                        |   | 193,118                      |  |   | (24,608)                     |  |                                                                      | 168,510    
|Settlements payable                                                        |   | 39,321                       |  |   | 1,313                        |  |                                                                      | 40,634     
|                                                                           |   |                              |  |   |                              |  |                                                                      |            
|Net cash used in operating activities                                      |   | (605,346)                    |  |   | (719,834)                    |  |                                                                      | (1,325,180)
|                                                                           |   |                              |  |   |                              |  |                                                                      |            
|Cash Flows from Financing Activities                                       |   |                              |  |   |                              |  |                                                                      |            
|Proceeds from convertible debt                                             |   | 591,663                      |  |   | 474,000                      |  |                                                                      | 1,065,663  
|Repayment of convertible debt                                              |   |                              |  |   | (19,000)                     |  |                                                                      | (19,000)   
|                                                                           |   |                              |  |   |                              |  |                                                                      |            
|Net cash provided by financing activities                                  |   | 591,663                      |  |   | 455,000                      |  |                                                                      | 1,046,663  
|                                                                           |   |                              |  |   |                              |  |                                                                      |            
|Net decrease in cash and cash equivalents                                  |   | (13,683)                     |  |   | (264,834)                    |  |                                                                      | (278,517)  
|                                                                           |   |                              |  |   |                              |  |                                                                      |            
|Cash and Cash Equivalents, beginning of period                             |   | 16,637                       |  |   | 281,471                      |  |                                                                      | 281,471    
|                                                                           |   |                              |  |   |                              |  |                                                                      |            
|Cash and Cash Equivalents, end of period                                   | $ | 2,954                        |  | $ | 16,637                       |  | $                                                                    | 16,637     
|Supplemental Schedule of Non-Cash Investing and Financing Activities:      |   |                              |  |   |                              |  |                                                                      |            
|Debt converted to Common Stock                                             | $ | 99,365                       |  |   | --                           |  | $                                                                    | 99,365     
|Rescission of JEG purchase                                                 |   | --                           |  | $ | 3,600,000                    |  |                                                                      | 3,600,000  





The accompanying notes are an integral part of the consolidated financial statements.





F-5



---





Zeros & Ones, Inc. Subsidiary

(A Development Stage Company)



Notes to Consolidated Financial Statements

For the year ended December 31, 2004



|   |                                      
|-- | -------------------------------------
|1. | Organization and Nature of Operations



Development Stage Operations - Zeros & Ones, Inc. (a Development Stage Company) (formerly Commercial Labor Management, Inc.) (the Company) is a development stage company under the provisions of Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises, and is incorporated in Nevada. The Company was originally incorporated under the name Tokyo Raiders on October 19, 1988. In 1990, the Company acquired certain rights to a pizza franchise and changed its name to Club USPN, Inc. In June 1993, the Company acquired Sono International, Inc. ("Sono"), but those operations were discontinued and the shares of Sono were sold to the original shareholders of Sono. In March 1995, the Board approved the merger with Commercial Labor Management, Ltd. which was handled as a reverse merger, and also approved a name change to Commercial Labor Management, Inc. The name change was made, but the merger never completed.



Effective July 1, 1999, the Company entered into a Plan of Reorganization and Asset Purchase Agreement to purchase 100% of the assets of Zeros & Ones, Inc., a Delaware corporation ("ZOI-DE"), and Plans of Reorganization and Exchange Agreements to acquire 100% of the total issued and outstanding shares of stock of (1) Quantum Arts, Inc.("QA"), (2) EKO Corporation("EKO"), (3) Polygonal Research Corporation ("PRC"), (4) KidVision, Inc. ("KV"), and (5) Wood Ranch Technology Group, Inc.("WRTG"), in exchange for the issuance of the Company's common stock plus the issuance of a note in the amount of $300,000 payable to the stockholder of QA for reimbursement of expenses. As of part of the overall reorganization, the Company also made an exchange offer to the shareholders of Pillar West Entertainment, inc. ("PWE") to acquire 100% of the total issued and outstanding capital stock of PWE in consideration for the issuance of the shareholders of PWE. Under the Plan of Reorganization, QA, EKO, PRC, KV, WRTG, PWE, and assets acquired from ZOI-DE, referred as "the Group", are merged into one company and are accounted for in a manner similar to a pooling of interest as if they under common control. After the effective date of the business combination of the Group and the Company, the original stockholders of the Group own a majority of the shares of common stock of the Company. The Group is treated as the acquirer in this business combination under the Accounting Principal Board Pronouncement No. 16, paragraph 70, reverse to a reverse merger.



The business combination of the Group and the Company was accounted for under the purchase method in which the purchase price $207,500 cash paid and liabilities assumed of the Company were allocated to the fair market value of assets and liabilities acquired. The excess of the purchase price over the fair values of the net assets acquired was recorded as goodwill.



During the first quarter of 2002, the Company announced the completion of the acquisition of Joint Employers Group (JEG) which was intended to become a wholly owned subsidiary of the Company. During the first quarter of 2003 the acquisition was rescinded and all consideration was returned. Operating results for JEG during 2003 were treated as Discontinued Operations (see Note 4). As a result, the Company is deemed to have re-entered the development stage on January 1, 2003.



The Company has a limited operating history and no revenues. Located in Hollywood, California, the Company is a holding company focused on identifying and developing different media-based technologies, media assets, and strategic partnerships, and bringing those together to deliver next-generation commercial and consumer solutions. The Company's corporate website is www.zerosones.com.



|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies



Basis of Presentation - The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (US GAAP), which contemplate continuation of the Company as a going concern. However, the Company is subject to the risks and uncertainties associated with a new business, have no established source of revenue, and have incurred significant losses from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. For the last 5 fiscal years, the Company has not been profitable and has sustained substantial net losses from operations. There can be no assurance that it will generate positive revenues from its operating activities again, or that it will achieve and sustain a profit during any future period, particularly if operations remain at current levels. Failure to achieve significant revenues or profitability would materially and adversely affect the Company's business, financial condition, and results of operations. These consolidated financial



F-6



---

statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.



Management estimates that the current funds available and on-hand will not be adequate to fund operations throughout fiscal 2007. The Company anticipates that revenue from normal operations will occur in 2007, and will have a material impact offsetting operating expenses during the year. However, the Company is uncertain whether that it will report enough revenue to achieve profit from normal operations, and expects that additional capital will be required to support both ongoing losses and the anticipated revenue growth. Currently the Company has not arranged sources for, nor does it have commitments for, adequate outside investment, either in the form of debt or equity, for the funds required to continue operations during 2007.



Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiary, Zeros & Ones Technologies, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.



Use of Estimates - The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Management bases its estimates and assumptions on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results could differ from those estimates.



Cash and Cash Equivalents - The Company considers temporary liquid investments with an original maturity of three months or less to be cash equivalents.



Accounts Receivable - Accounts Receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible, based upon historical experience and management's evaluation of outstanding accounts receivable at the end of the year. At December 31, 2004 the Company had no Accounts Receivable.



Property and Equipment - Property and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life. The Company capitalizes costs associated with acquiring and installing software to be used for internal purposes. At December 31, 2004 the Company had no Property and Equipment.



Impairment of Long-Lived Assets - Long-lived assets, other than goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell. At December 31, 2004 the Company had no Long-Lived Assets.



Basic and Diluted Loss Per Share - In accordance with the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, the basic loss per common share, which excludes dilution, is computed by dividing the net loss available to Common Stock holders by the weighted average number of common shares outstanding. Diluted loss per common share reflects the potential dilution that could occur if all potential common shares had been issued and if the additional common shares were dilutive. As a result of net losses for all periods presented, there is no difference between basic and diluted loss per common share. Potential shares of Common Stock to be issued upon the exercise of options and warrants amounted to 5,138,054 shares at December 31, 2004.



Fair Value of Financial Instruments - The estimated fair values for financial instruments under SFAS No. 107, Disclosures about Fair Value of Financial Instruments, are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. For certain of the Company's financial instruments, including certain assets, accounts payable, accrued liabilities and debt, the carrying amounts approximate fair value due to their maturities.





F-7



---

Concentrations of Credit Risk - Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. The Company's product revenues are anticipated from, and will likely be concentrated in the technology industry, which is highly competitive and rapidly changing. Significant technological changes in the industry or customer requirements, or the emergence of competitive products with new capabilities or technologies, could adversely affect operating results. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions described below.



Financial instruments that subject the Company to credit risk could consist of cash balances maintained in excess of federal depository insurance limits and accounts receivable, which have no collateral or security. The Company maintains its cash accounts with high credit quality financial institutions. At times cash deposits may be in excess of Federal Deposit Insurance Corporation's limits. To date, the Company has not experienced any such losses and believes it is not exposed to any significant credit risk.



Income Taxes - The Company accounts for income taxes using the asset and liability method, as set forth in SFAS No. 109, Accounting for Income Taxes, wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. Reserves against deferred tax assets are provided when management cannot conclude their realization probable.





|   |                        
|-- | -----------------------
|3. | Discontinued Operations



In 2002 the Company purchased 100% of the outstanding stock of Joint Employers Group, Inc. (JEG) in exchange for 24.0 million shares of its own Common Stock. The transaction was valued at $3.6 million and accounted for using the purchase method of accounting. JEG operations are principally employee leasing. In early 2003 the Company was informed that JEG was unable to continue its normal operations due to its inability to maintain workers compensation insurance coverage with the California State Fund. As a result the Company sold JEG back to the original seller, in effect exchanging the consideration paid during the original transaction.



Operating results, including revenues of $9,905,272 and a pre-tax loss of $257,827, were included in the Consolidated Statement of Operations since the dates of the acquisition. During 2003 the Company determined that the operations of JEG had been discontinued, and for the period ending December 31, 2003 accounted for the operating loss of $257,827 as Discontinued Operations, and recorded a gain of $480,250 on the subsequent return of consideration.



|   |     
|-- | ----
|4. | Debt



Convertible Notes - For the year ending December 31, 2004 the Company issued approximately $487,527 of unsecured convertible notes (Notes) and warrants (Note Warrants) to individual investors. The Notes accrued interest ranging from 8% to 12% per annum commencing immediately from the date of issuance. The Notes were due at various dates and were generally 1 year in length. The principal balance of the Notes and any accrued and unpaid interest was convertible into shares of Restricted Common Stock. The decision to convert to Restricted Common Stock was at the sole election of the Note holder, and the conversion price was calculated using a discount to the closing price for the 5 trading days prior to the requested conversion, subject to a floor or minimum price per share calculated from the closing price of the Company's stock on the date on the Note. The discounts ranged from 25 to 35% of the average closing price. As of December 31, 2004 there were $963,308. Notes outstanding including accrued interest, and net of discount.



The Notes included Note Warrants to purchase shares of the Company's Common Stock at various prices ranging from $0.25 to $0.50. Each Note holder received two (2) Note Warrants for each dollar of their original investment. The term of the Note Warrants is 6 years. As of December 31, 2004 the Company has issued 1,923,054 Note Warrants, and none have been exercised.



The Company calculated the fair value of the warrants using the Black-Scholes model and recorded a debt discount against the face of the Notes (based on the relative fair value of the warrants and the debt) to be amortized to interest expense over the 12-month life of the Notes. In accordance with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, which provides guidance on the calculation of a beneficial conversion feature on a convertible instrument, the Company determined that the Notes also had a beneficial conversion feature, which the Company recognized as interest expense immediately as the notes were convertible upon issuance.





F-8



---

In total, the Company recorded $260,481 of debt discount and $97,972 of beneficial conversion, of which $434,708 was recorded as interest expense for the year ended December 31, 2004.



The holders of the Notes and Note Warrants have registration rights that require the Company to register the resale of the Common Stock issuable upon conversion of the Notes or the exercise of the Note Warrants issued hereunder should the Company file a registration statement with the Securities and Exchange Commission (SEC).



|   |                    
|-- | -------------------
|5. | Accrued Liabilities



Accrued liabilities, amounting to $205,118 at December 31, 2004, consist of accrued operating expenses.



|   |                      
|-- | ---------------------
|6. | Long term Liabilities



Long term liabilities, amounting to $300,000 at December 31, 2004, represent notes payable to officers. Such notes represent unreimbursed fees and expenses due Officers of the Company. The liabilities are classified as long-term since the Company has received assurances from the officers that they will not seek reimbursements of the amounts due within the next twelve months.



|   |                           
|-- | --------------------------
|7. | Provision for Income Taxes



Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.



There was an increase of $2,051,041 in the accumulated deficit for the year ending December 31, 2004. In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $21,000,000 prior to the expiration of Net Operating Loss carryforwards in 2022. Based upon the level of historical taxable losses and after considering projections for future taxable income over the periods in which the deferred tax assets are expected to be deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences at December 31, 2004. Accordingly, the Company has recorded a full valuation allowance against its deferred tax assets. Management will continue to assess the valuation allowance. To the extent it is determined that a valuation allowance is no longer required with respect to certain deferred tax assets, the tax benefit, if any, of such deferred tax assets will be recognized in the future.



|   |                     
|-- | --------------------
|8. | Stockholders' Equity



Common Stock -The Company has authorized 100,000,000 shares of Common Stock, $001 par value. As of December 31, 2004 the Company had 27,801,005 shares of Common Stock issued and outstanding.



Common Stock Issued for Compensation and Consulting Services -During the year ended December 31, 2004 the Company issued 300,000 shares of its Common Stock to a firm for marketing services rendered in 2003 pursuant to an agreement executed on behalf of the Company by Holtz. The Company incurred compensation expenses of $33,600 in connection with this stock issuance. Also during the year the Company issued 650,000 shares of Common Stock related to the exercise of options. No cash was received by the Company related to this exercise. The Company relied on Section 4(2) of the Securities Act, and Regulation D promulgated thereunder, as providing an exemption from registering the sale of these shares of Common Stock under the Securities Act.







F-9



---

Preferred Stock -The Company has authorized 2,000,000 shares of Preferred Stock, par value $0.001. As of December 31, 2004 the Company had no Preferred Stock issued or outstanding.





|   |        
|-- | -------
|9. | Options



Stock Option Plan -In July 2000, the Company's Board of directors authorized the adoption of the 2000 Employee Stock Incentive Plan (the "Plan"). The Plan permits the granting of stock options to any employee or director of the Company. Under the terms of the Plan, 4,500,000 shares are authorized for issuance upon exercise of options. Under the nonqualified plan, options can be granted with an exercise price equal to the fair market value of the Company's stock on the date of the grant and expire 10 (ten) years after the grant date. Vesting is over a four-year period commencing with the employees' hire date, with portions of a grant becoming exercisable at one year after the vesting start date and then one-thirty-sixth (1/36) per month to complete the four-year vesting.



The Company issued options for 100,000 shares prior to 2004. During the year ending December 31, 2004, the Company issued no new options to employees under the Plan. Compensation expense relating to employee stock options recognized in the year ending December 31, 2004 was $0.





|    |                           
|--- | --------------------------
|10. | Related Party Transactions



Payable to Officer - During the year ended December 31, 2004, the Company incurred obligations to its current Chairman and CEO, and its CTO, in the amount of $250,000. The total for these obligations was $300,000 as of December 31, 2004. These amounts represent estimates of unreimbursed expenses and other costs incurred while performing services for the Company. The obligation has no due date and is not accruing interest. The obligations are classified as long-term since the Company has received assurances from the officers that they will not seek repayment of the amounts within the next twelve months.



|    |                              
|--- | -----------------------------
|11. | Commitments and Contingencies



Litigation  During the year the Company was involved in an on-going legal issue with Allied Boston Group (Allied). In a 2001 agreement the Company pledged a substantial portion of its available Common Stock for a transaction whereby Allied promised a contemporaneous exchange of equity related to a proposed acquisition. Allied failed to complete the transaction, however the Company shares remained with Allied until the Company brought litigation against Allied to cause such shares to be returned to the Company. During the year ended December 31, 2004 the litigation was settled and the shares were cancelled.



IRS Claim  During 2006, the Company became aware that the Internal Revenue Service (IRS) had determined that the proper payroll tax returns were not filed during the 3rd and 4th quarters of 2001. Without response from the Company, the IRS completed returns on behalf of the Company, assessed interest and penalties for late filing, and began collection procedures against the Company for approximately $410,000 as of December 31, 2006. The Company believes that the IRS claims are in error, and has begun discussions with the IRS to resolve the matter.



Guarantees -In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantee of Indebtedness of Others. The Company has determined that certain agreements, described below, fall within the scope of FIN 45.



Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director's serving in such capacity. The Company has applied for a directors and officers liability insurance policy that would limit the Company's exposure and would enable it to recover a portion of any future amounts paid resulting from the indemnification of its officers and directors. In addition, the Company enters into indemnification agreements with other parties in the ordinary course of business. In some cases the Company may obtain liability insurance providing coverage that limits its exposure for these other indemnified matters. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. The Company believes the estimated fair value of these indemnification agreements is minimal and has not recorded a liability for these agreements as of December 31, 2004.



|    |                  
|--- | -----------------
|12. | Subsequent Events



See Explanatory Note.





F-10



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|    |              
|--- | -------------
|13. | Going Concern



The Company is subject to the risks and uncertainties associated with a new business, have no established source of revenue, and have incurred significant losses from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.



Management estimates that the current funds available and on-hand will not be adequate to fund operations throughout fiscal 2007. The Company anticipates that revenue from normal operations will occur in 2007, and will have a material impact offsetting operating expenses during the year. However, the Company is uncertain whether it will achieve profit from normal operations, and expects that additional capital will be required to support both on-going losses and the anticipated revenue growth. Currently the Company has not arranged sources for, nor does it have commitments for, adequate outside investment, either in the form of debt or equity, for the funds required to continue operations during 2007.



F-11



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|        |                                                                                     
|------- | ------------------------------------------------------------------------------------
|ITEM 8. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



|         |                        
|-------- | -----------------------
|ITEM 8A. | Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Under the supervision and with the participation of its senior management, including the Chief Executive Officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Annual Report (the Evaluation Date). Among other things, the Company evaluated its accounting procedures and control processes related to its closing procedures for timely and accurate preparation of its financial statements. It did not review its processes with any outside auditors to ensure erroneous data is not contained in any filings. Based on this evaluation, the Company's CEO concluded as of the Evaluation Date that certain of the Company's disclosure controls and procedures were not effective.



In connection with the preparation of the Company's consolidated financial statements for the year ended December 31, 2004, and in light of new, recently issued interpretative guidance in relation to the assessment of the operating effectiveness of internal controls, management identified certain "material weaknesses" (as such term is defined under Public Company Accounting Oversight Board Auditing Standard No. 2) in its internal controls.



The Company identified the following material weaknesses as of December 31, 2004:



(1) insufficient numbers of internal personnel possessing the appropriate knowledge, experience and training in applying US GAAP and in reporting financial information in accordance with the requirements of the SEC; and



(2) lack of audit committee to oversee the Company's accounting and financial reporting processes, as well as approval of the Company's independent auditors.



(3) lack of independent auditors engaged to audit its accounting procedures, control processes, and financial reports.



These material weaknesses may also constitute deficiencies in the disclosure of controls and procedures. In light of these weaknesses, the Company's management, including the CEO, have concluded that as of December 31, 2004, the disclosure controls and procedures were not effective. However, subsequent to December 31, 2004, and during the calendar year 2006, the Company undertook corrective actions, including the search for additional staff with certain qualifications and independent internal reviews of key account reconciliations, to ensure that the financial statements and other financial information included in this annual report are complete and accurate in all material respects. It also identified and retained an outside auditor that is qualified with the PCAOB.



Changes in Internal Control Over Financial Reporting



Subsequent to the year ended December 31, 2004, and during the calendar year 2006, the Company made certain changes in its internal controls and procedures over financial reporting. Following a comprehensive review, the Company concluded that the weaknesses it had found, as noted above, were a direct result of its being understaffed in its accounting area. The Company retained an outside consultant to support and extend the capabilities of its internal staff. The Company intends to prepare a comprehensive set of accounting procedures for use in connection with assuring the timely, complete and accurate recording of all its transactions and the preparation and filing of its required reports under the Exchange Act. The Company will continue to engage its outside consultant until its internal staff is adequate and has demonstrated an ability to fulfill all the aforementioned requirements.



A material weakness is a control deficiency (within the meaning of PCAOB Auditing Standard No. 2), or combination of control deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by employees in the normal course of their assigned functions.



The Company intends to continue to evaluate the remediation efforts addressing the material weaknesses identified, and to take appropriate action to correct the deficiencies identified. In addition, as part of the assessment of its internal controls over financial reporting that it will undergo during its 2007 fiscal year in connection with the process required by Section 404 of the Sarbanes-Oxley Act of 2002, the Company intends to continue to review, evaluate and strengthen its controls and processes. The Board of Directors is performing oversight of the implementation of enhancements and improvements to its internal controls, and will transfer this responsibility to the Audit Committee once formed.



10



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|         |                  
|-------- | -----------------
|ITEM 8B. | Other Information



None



11



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PART III.



|        |                                                              
|------- | -------------------------------------------------------------
|ITEM 9. | Directors, Executive Officers, Promoters, and Control Persons



On September 1, 2003 Mark M. Laisure joined the Board of Directors. On December 21, 2005, upon the resignation of Robert J. Holtz, Mr. Laisure became the Chairman and sole remaining member of the Board of Directors.  At March 26, 2007, the Board is comprised of four members, Mark M. Laisure (Chairman), Scott Fairbairn, Dana R. Waldman and Volker Anhaeusser



The names of the members of the Company's Board of Directors as of December 31, 2004, are set forth below:



|               |  |                                                                                       |  |                    
|-------------- |  | ------------------------------------------------------------------------------------- |  | -------------------
|Name           |  | Positions and Offices Held                                                            |  | Since              
|Robert Holtz   |  | Chairman of the Board, Chief Executive Officer, President and Chief Financial Officer |  | Inception (1999)(1)
|Mark M Laisure |  | Director                                                                              |  | May 16, 2003(2)    



(1)

Resigned from positions and offices held on December 21, 2005.

(2)

Mr. Laisure was a director as of December 31, 2004.  Since that time, he has been appointed Chairman of the Board, Chief Financial Officer and Secretary.



Audit Committee Financial Expert



Due to limited resources, the Company does not have an audit committee financial expert, as that term is defined in Item 401(e)(2) of Regulation S-B, on its audit committee.



Audit Committee



Due to limited resources, the Company does not have an audit committee in accordance with Section 3(2)(58)(A) of the Exchange Act.



Shareholder Recommendation of Board Nominees



The Company has not made any material changes to the procedures by which security holders may recommend nominees to the Company's board of directors.



Code of Ethics



Due to limited resources, the Company has not adopted a Code of Ethics.



|         |                       
|-------- | ----------------------
|ITEM 10. | Executive Compensation



The following table sets forth all compensation awarded, earned or paid for services rendered in all capacities to the Company and its subsidiaries during the fiscal year ended December 31, 2004 (i) the individual who served as the Company's chief executive officer (CEO) during fiscal year 2004; and (ii) the Company's four most highly compensated employees other than the CEO who were serving as executive officers as of December 31, 2004 that earned more than $100,000 for such fiscal year.



Summary Compensation Table

Annual Compensation





|                              |  |      |  |            |  |           |  |           |  |                 
|----------------------------- |  | ---- |  | ---------- |  | --------- |  | --------- |  | ----------------
|                              |  |      |  |            |  |           |  |           |  | Annual          
|Name and Position             |  | Year |  | Salary ($) |  | Bonus ($) |  | Other ($) |  | Compensation ($)
|Mark M. Laisure,              |  | 2004 |  | 87,100     |  | --        |  | --        |  | 87,100          
|Chairman, CEO and President   |  | 2003 |  | 66,000     |  | --        |  | --        |  | 66,000          
|Robert J. Holtz,              |  | 2004 |  | 106,000    |  | --        |  | --        |  | 106,000         
|CEO (until December 21, 2005) |  | 2003 |  | 144,612    |  | --        |  | --        |  | 144,612         





12



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Option/SAR Grants in Fiscal Year 2004



The Company did not grant any stock options during the fiscal year ended December 31, 2004. The Company did not grant any stock appreciation rights (SARs) during the fiscal year ended December 31, 2004.



There were no exercises of options for the fiscal year ended December 31, 2004 and the Company did not adjust or amend the exercise price of stock options or SARs previously awarded to any executive officer.



Director Compensation



No directors are compensated for their services as Directors.



Employment Contracts



There was no employment contract between the Company and its officers at December 31, 2004.  Subsequent to December 31, 2004, the Company entered into an employment agreement with Mr. Laisure and employment agreements with each of two other officers, Messrs. Dana Waldman and Scott Fairbairn. Information regarding the employment agreements are contained in the Companys Current Report on Form 8-K filed on February 15, 2007.



|         |                                                                                               
|-------- | ----------------------------------------------------------------------------------------------
|ITEM 11. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



The Company is unable to reliably provide this information for the period ended December 31, 2004 as of the filing date of this document.



|         |                                               
|-------- | ----------------------------------------------
|ITEM 12. | Certain Relationships and Related Transactions



During the year ended December 31, 2004 the Company incurred costs related to its CEO and CTO. Due to limited cash resources the Company has incurred liabilities on their behalf, primarily for the reimbursement of costs associated with the performance of their positions with the Company. For the year ended these costs totaled $250,000.



|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 13. | Exhibits, Financial Statements and Reports on Form 8-K



Exhibits



|     |                                                                                                                                                            
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1. | Amended Articles of Incorporation, hereby incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-KSB filed with the SEC on April 2, 2001.



|     |                                                                                                                                 
|---- | --------------------------------------------------------------------------------------------------------------------------------
|3.2. | Bylaws, hereby incorporated by reference to Exhibit 3.2 of the Annual Report on Form 10-KSB filed with the SEC on April 2, 2001.



|    |                     
|--- | --------------------
|21. | List of Subsidiaries



|      |                                                                                                    
|----- | ---------------------------------------------------------------------------------------------------
|31.1. | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



|      |                                                                                                    
|----- | ---------------------------------------------------------------------------------------------------
|31.2. | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



|      |                                                                                                    
|----- | ---------------------------------------------------------------------------------------------------
|32.1. | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



|      |                                                                                                    
|----- | ---------------------------------------------------------------------------------------------------
|32.2. | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.







13



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|         |                                       
|-------- | --------------------------------------
|ITEM 14. | Principal Accountant Fees and Services



The following table sets forth fees for audit services during the fiscal year 2004:



|                      |      |  
|--------------------- | ---- | -
|                      | 2004
|Audit fees            | $    | -
|Audit related fees(1) |      | -
|Tax fees              |      | -
|All other fees        |      | -
|Total                 | $    | -





|    |                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During year 2004 the Company did not incur fees for assurance services related to the audit of the Company's financials statements which services would be reported in this category.











14



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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.



|                     |                         |                    
|-------------------- | ----------------------- | -------------------
|                     |                         |                    
|                     | ZEROS & ONES, INC.     
|                     |                         |                    
|Date:  April 2, 2007 | By:                     | /s/ Dana R. Waldman
|                     | Dana R. Waldman        
|                     | Chief Executive Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.







|                      |  |                                                                                                            |               |     
|--------------------- |  | ---------------------------------------------------------------------------------------------------------- | ------------- | ----
|Signatures            |  | Title                                                                                                      |               | Date
|/s/ Dana R. Waldman   |  | Chief Executive Officer (Principal Executive Officer)                                                      |               |     
|DANA R. WALDMAN       |  |                                                                                                            | April 2, 2007
|/s/ Mark M. Laisure   |  | Chairman of the Board, Chief Financial Officer,
and Secretary
(Principal Financial and Accounting Officer) |               |     
|MARK M. LAISURE       |  |                                                                                                            | April 2, 2007
|/s/ Scott Fairbairn   |  | Director                                                                                                   |               |     
|SCOTT FAIRBAIRN       |  |                                                                                                            | April 2, 2007
|/s/ Volker Anhaeusser |  | Director                                                                                                   |               |     
|VOLKER ANHAEUSSER     |  |                                                                                                            | April 2, 2007









15