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,
                2005.




OR




o
            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)




Nevada
              (State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            88-0241079
              (I.R.S.
                Employer Identification No.)1327
                Ocean Avenue, Suite E
              Santa
                Monica, California
              (Address
                of Principal Executive Offices)
            90401
              (Zip
                Code)




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 o




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. o




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 x
      No o.









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 December 31, 2005, was $38,500. The
      Company’s Common Stock is traded on the Pink Sheets.




There
      were 42,860,002 shares of Common Stock issued and outstanding as of March 24,
      2006.




Transitional
      Small Business Disclosure Format (check one): Yes o No x




2




**TABLE
      OF CONTENTS**




Page**PART
                I.**ITEM
                1.
            Description
                  of Business
            4ITEM
                2.
            Description
                  of Property
            7ITEM
                3.
            Legal
                  Proceedings
            8ITEM
                4.
            Submission
                  of Matters to a Vote of Security Holders
            8**PART
                II.**ITEM
                5.
            Market
                  for Common Equity and Related Stockholder Matters
            8ITEM
                6.
            Management’s
                  Discussion and Analysis or Plan of Operation
            10ITEM
                7.
            Financial
                  Statements
            F-1ITEM
                8.
            Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
            14ITEM
                8A.
            Controls
                  and Procedures
            14ITEM
                8B.
            Other
                  Information
            15**PART
                III.**ITEM
                9.
            Directors,
                  Executive Officers, Promoters, and Control Persons
            16ITEM
                10.
            Executive
                  Compensation
            18ITEM
                11.
            Security
                  Ownership of Certain Beneficial Owners and Management and
                  Related Stockholder Matters
            19ITEM
                12.
            Certain
                  Relationships and Related Transactions
            20ITEM
                13.
            Exhibits,
                  Financial Statements and Reports on Form 8-K
            20ITEM
                14.
            Principal
                  Accountant Fees and Services
            21Signatures
            
            22







3




**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 will be operating 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.




4





*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”).
      It was delisted from trading on the Over-The-Counter Bulletin Board in early
      2005 and fell to the pink sheets.





The
      Company was adversely impacted during this period by 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. 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 3, Joint Employers Group,
        Inc.”). 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.
  *Management
        Change*


On
      May
      31, 2005, Mark M. Laisure (“Laisure”) accepted the resignation of Holtz as
      Chairman and CEO, and assumed control of the Company. Concurrently, Laisure
      was
      elected as Chairman and CEO, and remained President. Holtz continued as a member
      of the Board of Directors until December 21, 2005, when he agreed to resign
      as a
      Director of the Company. Laisure had originally joined the Company in May,
      2003,
      in accordance with the terms of an intended acquisition arrangement. Holtz
      appointed Laisure President of Zeros & Ones, Inc. at that time.





*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.




5




*Competitive
      Business Environment*




Competition
      within the technology and data transmission industry is 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 of the Company
      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.




6




*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.




Irrespective
      of the foregoing, the Company cannot be sure 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.




*Product
      Development*




The
      Company’s research and development expenses totaled $104,500 in 2005, compared
      to $195,563 in 2004. The majority of the Company’s development costs are focused
      on meeting its technical plan, which calls for further developments and
      enhancements of software to enable the Company to cater to a wider audience
      of
      users and thereby remain competitive.




*Employees*




The
      Company has one full-time and two part-time employees, and continues to rely
      on
      a number of independent consultants who provide administrative, business
      development, and management services similar to those that would be provided
      by
      full and part-time employees. The Company has also entered into consulting
      agreements to obtain counsel and services relating to marketing, media relations
      and financing services.




**ITEM
                2.**
              **Description
                  of Property**




The
      Company has its executive offices at 1327 Ocean Avenue, Suite E, Santa Monica,
      California 90401. The Company leases this facility on a month-to-month
      basis.




7




**ITEM
                3.**
              **Legal
                  Proceedings**




The
      Company is not aware of any pending litigation as of March 24,
      2006.




**ITEM
                4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**




None.




**PART
      II.**




**ITEM
                5.**
              **Market
                  for Common Equity and Related Stockholder
                  Matters**




The
      Common Stock currently trades on the Pink Sheets under the symbol “ZROS.” In the
      first half of 2006, the Company intends to cooperate with appropriate financial
      broker-dealers to file a Form 15c2-11 to gain a listing on the
      Over-the-Counter Bulletin Board (“ OTC
      Bulletin Board ”).
      Although acceptance of Form 15c2-11 and the subsequent listing of the Common
      Stock on the Nasdaq OTC Bulletin Board market would provide access to a much
      broader base of investors, there is no guaranty that this Form 15c2-11 will
      be
      accepted. Until that time, investors may find it more difficult to obtain
      accurate quotations of the market value of the Common Stock and to dispose
      of
      shares of the Common Stock in the secondary market.




The
      following table sets forth the quarterly high and low closing sales prices
      of
      the Common Stock for 2004 and 2005 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.







**2004**
            
            **High**
            
            **Low**
            
            **2005**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            0.24
            
            $
            0.12
            
            First
              Quarter
            
            $
            0.32
            
            $
            0.13Second
                Quarter
            
            $
            0.26
            
            $
            0.13
            
            Second
              Quarter
            
            $
            0.16
            
            $
            0.06Third
                Quarter
            
            $
            0.18
            
            $
            0.10
            
            Third
              Quarter
            
            $
            0.12
            
            $
            0.08Fourth
                Quarter
            
            $
            0.43
            
            $
            0.12
            
            Fourth
              Quarter
            
            $
            0.11
            
            $
            0.04




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, 2005 was $0.09 and the closing price on
      March 24, 2006 was $0.12. 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, 2005, there were approximately 508 holders of record of the Common
      Stock. The Company believes that additional beneficial owners of Common Stock
      hold shares in street names.




8




*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”). As of December 31, 2005 the Company had
      not yet offered any options to employees under the Plan.




During
      the years ended December 31, 2005, 2004 and 2003, the Company approved the
      granting of options of 5,000, 1,115,000, and 0, respectively, to certain
      consultants for services under the Plan. During the year ended December 31,
      2004, 600,000 options were exercised per the terms of the option agreement.
      Prior to 2003 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 9, 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, 2003 the Company issued 335,000 shares of its
        Common
        Stock to a professional services firm pursuant to an agreement executed on
        behalf of the Company by Holtz. The Company incurred compensation expenses
        of
        $44,550 in connection with this stock issuance. 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.
  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.




In
      February 2005, the Company issued 3,000,000 shares of its Common Stock to a
      public relations firm, for services rendered pursuant to a Consulting Agreement
      executed on behalf of the Company by Holtz. As of December 31, 2005 the Company
      maintained a Deferred Compensation balance of $462,000 with this firm as
      services have not yet been rendered. 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.




In
      November 2005, the Company issued 2,000,000 shares of its Common Stock to a
      law
      firm as a deposit for services. 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.




During
      the year ended December 31, 2005 the Company issued 2,297,870 shares of its
      Common Stock to certain firms for services rendered in 2003, 2004 and 2005
      pursuant to agreements executed on behalf of the Company by Holtz. The Company
      retired accrued liabilities of $102,873 and incurred Compensation expense of
      $30,127 in connection with these stock issuances. 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.




9




During
      the year ended December 31, 2005 the Company issued 4,335,960 shares of its
      Common Stock in connection with certain investors requests to exchange the
      Convertible Notes to Common Stock. The note holders requested conversion of
      their notes in 2003 and 2004, but the Company issued the stock certificates
      in
      2005. 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.




**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 2005*




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.




*Resignation
      of Chief Executive Officer and Chairman*




In
      July
      2005 the Company accepted the resignation of its Chairman of the Board of
      Directors and Chief Executive Officer, Robert J. Holtz (“Holtz”) who had held
      this position since inception. The Company appointed Mark M. Laisure (“Laisure”)
      to replace this position. Holtz remained on the Company’s Board of Directors. In
      December 2005, Holtz resigned from the Board of Directors and terminated all
      connection with the Company. The Company does not intend to retain Holtz for
      any
      operating, advisory or directorship capacity subsequent to accepting his full
      resignation. As of December 31, 2005 Laisure was the sole member of the Board
      of
      Directors.




*Convertible
      Notes*




In
      May
      2003, the Company offered a certain amount of convertible notes, at various
      interest ranges ranging from 8% to 12% per annum, 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 $135,000 of Notes during the year ended December 31, 2005,
      $512,527 of the Notes during the year ended December 31, 2004, and $474,000
      of
      the Notes during the year ended December 31,2003.




10




*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 1 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 2006. The Company anticipates that revenue
      from normal operations will occur in 2006, 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
      2006.






11




*Results
      of Operations*




*Twelve
      months ended December 31, 2004 and 2003*


The
        Company had no revenues for the twelve months ended December 31, 2004, or
        for
        the corresponding period ended December 31, 2003. The Company’s spending
        for the twelve months ended December 31, 2004 increased from the same period
        in
        2003 as the Company furthered the development of certain technical resources,
        and expanded its management team. The Company’s research and development
        spending increased from $75,000 to $195,563 from 2003 to 2004, and sales
        and
        marketing expenses increased to $74,784 in 2004 from $930 in 2003. In 2004
        total
        general and administrative expenses of $1,226,364 were related to costs for
        management and outside services.




*Twelve
      months ended December 31, 2005 and 2004*




The
      Company had no revenues for the twelve months ended December 31, 2005, or for
      the corresponding period ended December 31, 2004. The Company’s spending
      for the twelve months ended December 31, 2005 decreased from the same period
      in
      2004 as the Company had limited financial resources. The Company’s sales and
      marketing expenses decreased to $24,527 in 2005 from $74,784 in 2004, and
      research and development spending decreased from $195,563 to $104,500
      during the same period. In 2005 total general and administrative expenses of
      $340,327 were primarily related to costs for management, most of which
      have been accrued as of December 31, 2005.




*Liquidity
      and Capital Resources*




At
      December 31, 2005, the Company had working capital of ($1,406,118) as compared
      to working capital of ($1,929,202) at December 31, 2004. During the twelve
      months ended December 31, 2005, net cash used in operations was $449,975
      and consisted principally of a net loss of $543,321 and was offset by
      stock-based compensation and services of $13,850. Cash flows were also affected
      by the sale of Notes for $547,359, and the accrual of notes payable to officers
      in the amount of $250,000.




The
      Company’s current cash on hand at December 31, 2005, 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. The Company will need to rely upon continued borrowing and/or sales
      of
      additional equity instruments to support its continued growth. The Company’s
      management believes it will be able to obtain sufficient cash resources and
      working capital to meet the Company’s present cash requirements through debt
      and/or equity-based fund raising. Following the fiscal year ended
      December 31, 2005, the Company has been successful in closing upon
      approximately $50,000 received under the Convertible Notes (see “Item 6,
      Management’s Discussion and Analysis or Plan of Operation, under the caption
“Events Subsequent to Fiscal Year Ended December 31, 2005” below). 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, 2005, the Company incurred a net
      pre-tax loss of $542,521 and, for the fiscal year ended December 31, 2004,
      the
      Company incurred a net pre-tax loss of $1,691,379. The Company’s auditors,
      Armando Ibarra LLC, issued an opinion in connection with the Company’s financial
      statements for the fiscal year ended December 31, 2005 noting that while
      the Company has recently obtained additional financing, the sustained recurring
      losses raise substantial doubt about its ability to continue as a going
      concern.




12




*Events
      Subsequent to Fiscal Year Ended December 31, 2005*




*Convertible
      Notes*




On
      January 18, 2006, the Company issued Convertible Notes (“ Notes ”)
      to
      certain parties (“ Payees ”)
      providing for an aggregate $50,000 principal amount loan to the Company.
      Principal amounts owing under this Note bears interest at a fixed rate of 8%
      per
      annum (verify APR). The Notes are due and payable on January 18, 2007. The
      Notes provides for terms similar to Notes previously issued, including the
      right
      to convert to Common Stock at a discount, and the right to a certain number
      of
      Note Warrants. (see “Item 7, Financial Statements, Note 4, Debt, Convertible
      Notes”).




*Common
      Stock Issued for Compensation and Consulting Services*




Subsequent
      to December 31, 2005 the Company issued 2,673,798 shares of its Common Stock
      to
      certain firms for services rendered in 2003, 2004 and 2005 pursuant to
      agreements executed on behalf of the Company by Holtz. 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.


*Common
        Stock Issued for Conversion of Notes*
  Subsequent
        to December 31, 2005 the Company issued 1,686,285 shares of its Common Stock
        in
        connection with certain investors requests to exchange the Convertible Notes
        to
        Common Stock. The note holders requested conversion of their notes in 2003,
        2004
        and 2005, but the Company issued the stock certificates subsequent to December
        31, 2005. 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.




13




**ITEM
                7.**
              **Financial
                  Statements**




**Index
      to Financial Statements**




Page**Report
                of Independent Registered Public Accounting Firm**
            F-2**Consolidated
                Balance Sheets**-
                As of December 31, 2005, 2004, and 2003
            F-3**Consolidated
                Statements of Operations**-
                For the Years Ended December 31, 2005, 2004, and 2003
            F-4**Consolidated
                Statements of Stockholders’ Equity (Deficit)**-
                For the Period from January 1, 2003 to December 31, 2005
            F-5**Consolidated
                Statements of Cash Flows**-
                For the Years Ended December 31, 2005, 2004, and 2003
            F-6**Notes
                to the Consolidated Financial Statements**
            F-7




F-1




**Report
      of Independent Registered Public Accounting Firm**






Board
      of
      Directors and Stockholders of


Zeros
      & Ones, Inc.


(A
      Development Stage Company)


Santa
      Monica, CA




We
      have
      audited the accompanying consolidated balance sheets of Zeros & Ones, Inc.
      (A Development Stage Company) (the “ Company ”)
      as of
      December 31, 2005, 2004 and 2003, and the related consolidated statements of
      operations, stockholders’ equity, and cash flows for the year s then
      ended. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Zeros & Ones, Inc. at
      December 31, 2005, 2004 and 2003, and the results of its operations and its
      cash flows for the years then ended, in conformity with accounting principles
      generally accepted in the United States of America.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 13 to the financial
      statements, the Company has returned to the development stage, has suffered
      recurring losses from operations, and has a net working capital deficiency
      that
      raise substantial doubt about its ability to continue as a going concern.
      Management’s plans in regard to these matters are also described in
      Note 13. The financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.






Armando
      C. Ibarra, CPA


Chula
      Vista, CA


March
      11, 2006


F-2




**Zeros
      & Ones, Inc.**


( *A
      Development Stage Company* )




**Consolidated
      Balance Sheets**


**As
                  of**
                **December
                  31,**
                **2005**
              
              **As
                  of**
                **December
                  31,**
                **2004**
              
              **As
                  of**
                **December
                  31,**
                **2003****Assets****Current
                  Assets:**Cash
                  and cash equivalents
              
              $
              58,175
              
              $
              2,954
              
              $
              16,637Prepaid
                  expenses
              
              
              2,120
              
              
              -
              
              
              -Other
                  current assets
              
              
              80,000
              
              
              84,500
              
              
              169,000Total
                  current assets
              
              
              140,295
              
              
              87,454
              
              
              185,637**Total
                  Assets**
              
              $
              140,295
              
              $
              87,454
              
              $
              185,637**Liabilities
                  and Stockholders’ Equity (Deficit)****Current
                  Liabilities:**Accounts
                  payable
              
              $
              477,360
              
              $
              468,718
              
              $
              316,208Accrued
                  liabilities
              
              
              153,323
              
              
              390,845
              
              
              195,600Convertible
                  debt, net of debt discount
              
              
              503,711
              
              
              1,051,070
              
              
              468,885Settlements
                  payable
              
              
              404,519
              
              
              106,023
              
              
              66,702Other
                  payables
              
              
              7,500
              
              
              -
              
              
              -**Total
                  Current Liabilities**
              
              
              1,546,413
              
              
              2,016,656
              
              
              1,047,395**Long
                  Term Liabilities**Notes
                  payable - Officers
              
              
              600,000
              
              
              350,000
              
              
              50,000Options
                  issued for services
              
              
              163,319
              
              
              163,169
              
              
              -**Total
                  Long Term Liabilities**
              
              
              763,319
              
              
              513,169
              
              
              50,000**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; 38,499,919,
                  26,866,089, and 25,916,089 shares issued and
                  outstanding
              
              
              38,500
              
              
              26,866
              
              
              25,916Additional
                  paid in capital in excess of par value
              
              
              18,246,591
              
              
              17,441,970
              
              
              17,281,355Deficit
                  accumulated in the development stage
              
              
              (20,454,528
              )
              
              (19,911,027
              )
              
              (18,219,029
              )Total
                  stockholders’ equity (deficit)
              
              
              (2,169,438
              )
              
              (2,442,371
              )
              
              (911,758
              )**Total
                  Liabilities and Stockholders’ Equity (Deficit)**
              
              $
              140,295
              
              $
              87,454
              
              $
              185,637






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




F-3




**Zeros
      & Ones, Inc.**


( *A
      Development Stage Company* )




**Consolidated
      Statements of Operations**


**For
                  the Year Ended December 1, 2005**
              
              **For
                  the Year Ended December 1, 2004**
              
              **For
                  the Year Ended December 1, 2003**
              
              **For
                  the**
                **Period
                  from**
                **January
                  1, 2003(Inception) to**
                **December
                  31, 2005****Revenues**
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -**Cost
                  of Sales**
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Gross
                  Profit (Loss)**
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Operating
                  Expenses:**Research
                  and development
              
              
              104,500
              
              
              195,563
              
              
              75,000
              
              
              375,063Sales
                  and marketing
              
              
              24,527
              
              
              74,784
              
              
              930
              
              
              100,241General
                  and administrative
              
              
              340,327
              
              
              1,226,364
              
              
              540,678
              
              
              2,107,369Total
                  operating expenses
              
              
              469,354
              
              
              1,496,711
              
              
              616,608
              
              
              2,582,673**Non-Operating
                  Expenses:**Interest
                  expense (income)
              
              
              31,797
              
              
              155,923
              
              
              112,685
              
              
              300,405Other
                  (income) expense
              
              
              41,370
              
              
              38,745
              
              
              257,827
              
              
              337,942Total
                  non-operating expenses
              
              
              73,167
              
              
              194,668
              
              
              370,512
              
              
              638,347**Loss
                  Before Income Taxes**
              
              
              542,521
              
              
              1,691,379
              
              
              987,120
              
              
              3,221,020**Provision
                  for Income Taxes**
              
              
              800
              
              
              800
              
              
              800
              
              
              2,400**Net
                  Loss**
              
              $
              543,321
              
              $
              1,692,179
              
              $
              987,920
              
              $
              3,223,420Deemed
                  Dividends
              
              
              (5,593
              )
              
              (173,637
              )
              
              (177,826
              )
              
              (357,056
              )**Net
                  Loss Allocable to Common Shareholders**
              
              $
              548,914
              
              $
              1,865,816
              
              $
              1,165,746
              
              $
              3,580,476**Net
                  Loss Per Share Allocable to Common Shareholders - Basic and
                  Diluted**
              
              $
              0.02
              
              $
              0.06
              
              $
              0.04**Weighted
                  Average Common Shares - Basic and Diluted**
              
              
              30,321,750
              
              
              26,516,362
              
              
              25,644,242






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




F-4




**Zeros
      & Ones, Inc.**


( *A
      Development Stage Company* )




**Consolidated
      Statements of Cash Flows**


**For
                    the Year Ended**
              
              **For
                    the Year Ended**
              
              **For
                  the period from January 1, 2003 (Inception) to****December
                  31, **2005****
              
              **December
                  31, **2004****
              
              **December
                  31, 2005**Cash
                  Flows from Operating ActivitiesNet
                  loss
              
              
              (543,321
              )
              
              (1,692,179
              )
              
              (3,223,420
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activitiesCommon
                  stock issued for services
              
              
              33,600
              
              
              30,127
              
              
              414,997Depreciation
                  and amortization expense
              
              
              —
              
              
              —
              
              
              4,700Bad
                  debt trade accounts receivable
              
              
              —
              
              
              —
              
              
              147,736Loss
                  on retirement of property & equipment
              
              
              —
              
              
              —
              
              
              406,890Changes
                  in operating assets and liabilitiesPrepaids
              
              
              (2,120
              )
              
              —
              
              
              (7,880
              )Other
                  deposits
              
              
              4,500
              
              
              (84,500
              )
              
              (167,146
              )Accounts
                  payable
              
              
              8,642
              
              
              152,510
              
              
              60,652Accrued
                  liabilities
              
              
              (237,522
              )
              
              195,245
              
              
              486,126Settlements
                  payable
              
              
              298,496
              
              
              39,321
              
              
              404,519Other
                  payables
              
              
              7,500
              
              
              —
              
              
              7,500Net
                  cash used in operating activitiesfrom
                  continuing operations
              
              
              (434,985
              )
              
              (1,359,476
              )
              
              (1,465,326
              )Cash
                  Flows from Financing ActivitiesConvertible
                  Notes
              
              
              (547,359
              )
              
              582,185
              
              
              478,711Notes
                  payable - Officers
              
              
              250,000
              
              
              (300,000
              )
              
              600,000Transactions
                  affecting paid in capital
              
              
              (300,000
              )
              
              —
              
              
              —Proceeds
                  from conversions to Common Stock
              
              
              1,087,415
              
              
              900,439
              
              
              —Options
                  issued for services
              
              
              150
              
              
              163,169
              
              
              163,319Net
                  cash provided by financing activities
              
              
              490,206
              
              
              1,345,793
              
              
              1,242,030Net
                  Increase in cash and cash equivalents
              
              
              55,221
              
              
              (13,683
              )
              
              (223,296
              )Cash
                  and Cash Equivalents, beginning of period
              
              
              2,954
              
              
              16,637
              
              
              281,471Cash
                  and Cash Equivalents, end of period
              
              
              58,175
              
              
              2,954
              
              
              58,175






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




F-5


**Zeros
        & Ones, Inc.**
 (*A
        Development Stage Company*)
  **Statement
        of Changes in Stockholders' Equity / (Deficit)**
 **From
        January 1, 2003 through December 31, 2005 - Audited**
 **Common
                  Stock**
              
              **Preferred
                  Stock**
              
              **Additional**
              
              
              
              
              
              **Total****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Paid
                  - in**
              
              **Other**
              
              **Accumulated****Capital**
              
              **Compensation**
              
              **Deficit****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 through exercise of options
              
              
              335,000
              
              
              335
              
              
              —
              
              
              —
              
              
              44,215
              
              
              —
              
              
              —
              
              
              44,550Retire
                  assets and liabilities based on revaluation to current value
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              480,250
              
              
              480,250Deemed
                  dividend related to Beneficial Conversion feature of Convertible
                  Notes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              177,826
              
              
              —
              
              
              —
              
              
              177,826Amortization
                  of Debt Discount related to the issuance of Convertible Notes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              118,500
              
              
              —
              
              
              —
              
              
              118,500Stock
                  based compensation not yet expensed
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (191,163
              )
              
              —
              
              
              (191,163
              )Dividends
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (177,825
              )
              
              —
              
              
              (177,825
              )Net
                  loss, December 31, 2003
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (987,920
              )
              
              (987,920
              )**Balance,
                  December 31, 2003**
              
              
              **25,916,089**
              
              **$**
              **25,916**
              
              **$**
              **—**
              
              **$**
              **—**
              
              **$**
              **17,650,344**
              
              **$**
              **(368,988**
              **)**
              **$**
              **(18,219,029**
              **)**
              **$**
              **(911,757**
              **)**Shares
                  issued for services
              
              
              300,000
              
              
              300
              
              
              —
              
              
              —
              
              
              33,300
              
              
              —
              
              
              —
              
              
              33,600Exercise
                  of warrants
              
              
              650,000
              
              
              650
              
              
              —
              
              
              —
              
              
              (650
              )
              
              —
              
              
              —
              
              
              —Deemed
                  dividend related to Beneficial Conversion feature of Convertible
                  Notes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              173,637
              
              
              —
              
              
              —
              
              
              173,637Amortization
                  of Debt Discount related to the issuance of Convertible Notes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              139,245
              
              
              —
              
              
              —
              
              
              139,245Stock
                  based compensation not yet expensed
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (11,280
              )
              
              —
              
              
              (11,280
              )Dividends
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (173,637
              )
              
              —
              
              
              (173,637
              )Net
                  loss, December 31, 2004
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,692,179
              )
              
              (1,692,179
              )**Balance,
                  December 31, 2004**
              
              
              **26,866,089**
              
              **$**
              **26,866**
              
              **$**
              **—**
              
              **$**
              **—**
              
              **$**
              **17,995,876**
              
              **$**
              **(553,905**
              **)**
              **$**
              **(19,911,208**
              **)**
              **$**
              **(2,442,371**
              **)**Shares
                  issued in exchange for Convertible Notes
              
              
              4,335,960
              
              
              4,336
              
              
              —
              
              
              —
              
              
              684,465
              
              
              —
              
              
              —
              
              
              688,801Shares
                  issued for services
              
              
              7,297,870
              
              
              7,298
              
              
              —
              
              
              —
              
              
              817,702
              
              
              —
              
              
              —
              
              
              825,000Deemed
                  dividend related to Beneficial Conversion feature of Convertible
                  Notes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              5,593
              
              
              —
              
              
              —
              
              
              5,593Amortization
                  of Debt Discount related to the issuance of Convertible Notes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              36,976
              
              
              —
              
              
              —
              
              
              36,976Stock
                  based compensation not yet expensed
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (434,523
              )
              
              —
              
              
              (434,523
              )Transactions
                affecting paid in capital
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (300,000
              )
              
              
              
              
              
              
              
              (300,000
              )Dividends
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (5,593
              )
              
              —
              
              
              (5,593
              )Net
                  loss, December 31, 2005
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (543,321
              )
              
              (543,321
              )**Balance,
                  December 31, 2005**
              
              
              **38,499,919**
              
              **$**
              **38,500**
              
              **$**
              **—**
              
              **$**
              **—**
              
              **$**
              **19,240,612**
              
              **$**
              **(994,021**
              **)**
              **$**
              **(20,454,529**
              **)**
              **$**
              **(2,169,438**
              **)**




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




F-6




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




**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. As a result, the
      Company is deemed to have re-entered the development stage on January 1,
      2003.




F-7




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




The
      Company has limited operating history and no revenues. Located in Santa Monica,
      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 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
      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 2006. The Company anticipates that revenue
      from normal operations will occur in 2006, 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 2006.




Subsequent
      to December 31, 2005, the Company successfully completed the sale of
      additional Convertible Notes for $50,000 from certain investors. These loans
      are
      to be repaid one year from the date of issuance, unless converted prior into
      Common Stock. (see Note 4, Debt).




*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.




F-8




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




*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, 2005 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,
      2005 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, 2005 the Company had no Long-Lived
      Assets.




*Basic
      and Diluted Loss Per Share* - In
      accordance with the Financial Accounting Standards Board’s (“ FASB ”)
      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 4,763,054 and 4,488,054 shares at December 31, 2005 and 2004,
      respectively.




*Stock-Based
      Compensation* - In
      December 2004, the FASB issued SFAS No. 123R, “Share Based Payment.” SFAS
      No. 123R establishes the accounting for grants of stock options and other
      transactions in which an entity exchanges its equity instruments for goods
      or
      services. It also addresses transactions in which an entity incurs liabilities
      in exchange for goods or services that are based on the fair value of the
      entity’s equity instruments or that may be settled by the issuance of those
      equity instruments. SFAS No. 123R (1) revises SFAS No. 123,
“Accounting for Stock-Based Compensation,” (2) supersedes Accounting
      Principles Bulletin (“ APB ”)
      Opinion No. 25, “Accounting for Stock Issued to Employees,” and
      (3) establishes fair value as the measurement objective for share-based
      payment transactions. The Company has adopted SFAS No. 123R effective
      January 1, 2006 in accordance with the standard’s early adoption
      provisions. Prior to January 1, 2006, the Company’s Board of Directors had
      not approved the granting of any employee stock options. As such, the Company
      decided that it will follow the provisions of SFAS No. 123R on a
      prospective basis, and will record compensation expense related to the granting
      of stock options to employees should that occur in 2006.




F-9




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




*Research
      and Development* -
      Research and Development costs are charged to operations as incurred, and
      totaled $104,500 for 2005 and $195,563 for 2004. Some of the Company’s products
      include infrastructure media delivery technology. The costs to develop such
      technology have not been capitalized, as the Company is still determining the
      market requirements for its technology.




*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.




*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.




F-10




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




*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.




*Recently
      Issued Accounting Pronouncements* - In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary
      Assets”. SFAS No. 153 amends the guidance in APB Opinion No. 29,
“Accounting for Non-monetary Transactions”, to eliminate certain exceptions for
      non-monetary exchanges of similar productive assets, and replaces it with a
      general exception for exchanges of non-monetary assets that do not have
      commercial substance. The Company does not believe that adoption of SFAS
      No. 153 will have a material effect on its financial position, results of
      operations, or cash flows.




In
      September 2004, the Emerging Issues Task Force (“ EITF ”)
      issued
      EITF No. 04-8, “The Effect of Contingently Convertible Instruments on
      Diluted Earnings per Share.” EITF No. 04-8 provides new guidance on when
      the dilutive effect of contingently convertible securities with a market price
      trigger should be included in diluted earnings per share. The new guidance
      states that these securities should be included in the diluted earnings per
      share computation regardless of whether the market price trigger has been met.
      The guidance in EITF 04-8 is effective for all periods ending after
      December 15, 2004 and would be applied by retrospectively restating
      previously reported earnings per share. The adoption of this pronouncement
      is
      not expected to have material effect on the Company’s financial
      statements.




F-11




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




**3.**
              **Joint
                  Employers Group,
                  Inc.**




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 were included in the Consolidated Statement of Loss since the dates
      of
      the acquisition. During 2003 the Company determined that the operations of
      JEG
      had been discontinued, and accounted for the operating loss of $257,827 as
      Discontinued Operations. The Company did not test for impairment of the asset
      during its ownership, and has not recognized a gain or loss on the subsequent
      return of consideration.




**4.**
              **Debt**




*Convertible
      Notes* - From
      October 2003 through December 2005 the Company issued approximately $1,171,527
      of unsecured convertible notes (“Notes”) and warrants (“Note Warrants”) to
      individual investors. The Notes accrued interest at various rates between 8%
      and
      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,
      2005 there were $503,711 Notes outstanding, $246,017 of this the Note holder
      had
      requested conversion to Common Stock but had not yet received the shares,
      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 ranges from 3 to 6 years. As of December 31, 2005 the Company has
      issued 2,243,054 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 began amortizing to interest
      expense over the term of the Notes along with the debt discount.




F-12




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




In
      total,
      the Company recorded $46,733 of debt discount and $247,988 of beneficial
      conversion, of which $10,832 had been recorded as interest expense for the
      year
      ended December 31, 2005.




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 ”).
      Under
      EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments
      Indexed to, and Potentially Settled in, a Company’s Own Stock,” the ability to
      register stock is deemed to be outside of the Company’s control. Accordingly,
      the fair value of the warrants will be recorded as an accrued warrant liability
      once issued and valued.




**5.**
              **Accrued
                  Liabilities**




Accrued
      liabilities consist of the following as of December 31:




**2005**
            
            **2004**
            
            2003Accrued
                operating expenses
            
            $
            153,323
            
            $
            390,845
            
            $
            195,600Settlements
                payable
            
            
            404,519
            
            
            106,023
            
            
            66,702Due
                to Officer
            
            
            7,500
            
            
            —
            
            
            –$
            565,342
            
            $
            496,868
            
            $
            262,302




Accrued
      operating expenses decreased due to the issuance of Common Stock for services.
      Settlements payable increased due to amounts owed to a former employee as a
      result of his resignation. (see Note 10, Agreement with Former Officer).




**6.**
              **Long
                  term Liabilities**




Long
      term
      liabilities consist of the following as of December 31:


**2005**
            
            **2004**
            
            **2003**Notes
                payable to Officers
            
            $
            600,000
            
            $
            350,000
            
            $
            50,000Options
                issued for Services
            
            
            163,319
            
            
            163,319
            
            
            –$
            763,319
            
            $
            513,319
            
            $
            50,000




Notes
      payable to Officers represent unreimbursed fees and expenses due Officers of
      the
      Company. Options issued for Services represent liabilities for outstanding
      options held by certain consultants for past services.




**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 not 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.




F-13




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




There
      was
      an increase of $854,514 in the valuation allowance for the year ending December
      31, 2005. 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 the NOL carryforwards in 2024. 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 not realize
      the benefits of these deductible differences at December 31, 2005. 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 Issued for Compensation and Consulting Services* - For
      the year ended December 31, 2005, the Company issued 7,297,870 shares of
      Common Stock for services and future services, and recorded $745,000 of
      compensation expense related to these shares (as more fully described below).
      For the year ended December 31, 2004 the Company issued 300,000 shares of Common
      Stock for services for services performed during 2003. For the year ended
      December 31, 2003 the Company issued 335,000 shares of Common Stock for services
      performed during the year.




*Common
      Stock*




During
        the year ended December 31, 2003 the Company issued 335,000 shares of its
        Common
        Stock to a professional services firm for services pursuant to agreements
        executed on behalf of the Company by Holtz. The Company incurred compensation
        expenses of $44,550 in connection with this stock issuance. 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.
  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 agreements
        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.




In
      February 2005, the Company issued 3,000,000 shares of its Common Stock to a
      public relations firm, for services rendered pursuant to a Consulting Agreement
      executed on behalf of the Company by Holtz. As of December 31, 2005 the Company
      maintained a Deferred Compensation balance of $462,000 with this firm as
      services have not yet been rendered. 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.




In
      November 2005, the Company issued 2,000,000 shares of its Common Stock to a
      law
      firm as a deposit for services. 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-14




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




During
      the year ended December 31, 2005 the Company issued 2,297,870 shares of its
      Common Stock to certain firms for services rendered in 2003, 2004 and 2005
      pursuant to agreements executed on behalf of the Company by Holtz. The Company
      retired accrued liabilities of $102,873 and incurred Compensation expense of
      $30,127 in connection with these stock issuances. 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.




During
      the year ended December 31, 2005 the Company issued 4,335,960 shares of its
      Common Stock in connection with certain investors requests to exchange the
      Convertible Notes to Common Stock. The note holders requested conversion of
      their notes in 2003 and 2004, but the Company issued the stock certificates
      in
      2005. 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.




As
      of
      December 31, 2005 the Company had 38,499,919 shares of Common Stock issued
      and
      outstanding.




*Preferred
      Stock*




The
      Company has authorized 2,000,000 shares of Preferred Stock, par value $0.001.
      As
      of December 31, 2005 the Company had no Preferred Stock issued or
      outstanding.




Deemed
      Dividends




For
      the
      years ended December 31, 2005, 2004, and 2003 the Company recorded deemed
      dividends to arrive at net loss allocable to common shareholders as
      follows:


**2005**
            
            **2004**
            
            **2003**Amortization
                of discount related to Common Stock Purchase Warrants
            
            $
            26,144
            
            $
            139,745
            
            $
            118,500Deemed
                dividend related to beneficial conversion feature on Common
                Stock
            
            
            5,593
            
            
            173,637
            
            
            177,826$
            31,737
            
            $
            312,882
            
            $
            296,326




**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.




F-15




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




The
      fair
      value of each stock option is estimated using the Black-Scholes model. Expected
      volatility is based on management’s estimate using the historical stock
      performance of the Company, the expected term of the options is determined
      using
      the “simplified” method described in SEC Staff Accounting Bulletin No. 107,
      and the risk-free interest rate is based on the implied yield of U.S. Treasury
      zero-coupon bonds with a term comparable to the expected option
      term.




As
      of
      December 31, 2005 the Company had issued no options to employees under the
      Plan.
      Compensation expense relating to employee stock options recognized in the year
      ending December 31, 2005 was $0.




Consultants
      - During 2005, the Company granted a total of 5,000 options to a consultant
      for
      the purchase of the Company’s Common Stock based on contractual arrangements for
      which the Company accrued a liability of $150.




**10.**
              **Related
                  Party
                  Transactions**




*Agreement
      with Former Officer* - During
      the year ended December 31, 2005, the Company agreed to pay its former
      Chairman and CEO an amount equal to $300,000 in return for his resignation
      and
      full release of the Company. Payments are contingent upon the Company’s receipt
      and acceptance of adequate documentation that supports representations made
      by
      Holtz regarding his original investment into the Company. The payments are
      also
      contingent upon the availability of cash to pay this obligation. This agreement
      was executed December 21, 2005. Payment terms are based on certain events,
      and
      the Company’s ability to raise adequate capital to satisfy this
      obligation.




*Payable
      to Officer* - During
      the year ended December 31, 2005, the Company incurred obligations to its
      current Chairman and CEO, and its CTO in the amount of $155,000. 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 aggregate amount of these obligations is
      $605,000.




**11.**
              **Commitments
                  and
                  Contingencies**




*Litigation* - During
      the year the Company was not involved in any legal proceedings. The Company
      is
      not aware of any outstanding litigation as of March 29, 2006.




*Employment/Consulting
      Contracts*




In
      February 2005, the Company entered into a services agreement with a company
      for
      public relations services. The agreement called for various services to be
      performed during the following twelve (12) months. The firm was compensated
      with
      3,000,000 shares of Common Stock issued at the time the agreement was executed.
      As of December 31, 2005 the consultant had not performed any services under
      the
      agreement.




F-16




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




In
      December 2005, the Company entered into a consulting agreement with a consultant
      for various services related to its accounting and finance functions. The
      agreement calls for the payment of fees based on an hourly rate, payments are
      made in a combination of cash and Common Stock. As of December 31, 2005 the
      Company incurred expenses under this contract of approximately
      $1,200.




*Guarantees*




In
      November 2002, the FASB issued 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, 2005.




**12.**
              **Subsequent
                  Events**




*Convertible
      Note* - On
      January 18, 2006, the Company issued Convertible Notes (“ Notes ”)
      to
      certain parties (“ Payees ”)
      providing for an aggregate $50,000 principal amount loan to the Company.
      Principal amounts owing under this Note bears interest at a fixed rate of 12%
      per annum. The Notes are due and payable on January 18, 2007. The Notes
      provides for terms similar to Notes previously issued, included the right to
      convert to Common Stock at a discount, and the right to a certain number of
      Note
      Warrants. (see Note 4, Debt, Convertible Notes).




*Common
        Stock Issued for Compensation and Consulting Services* -
        Subsequent to December 31, 2005 the Company issued 2,673,798 shares of its
        Common Stock to certain firms for services rendered in 2003, 2004 and 2005
        pursuant to agreements executed on behalf of the Company by Holtz. 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.
  *Common
        Stock Issued for Conversion of Notes* -
        Subsequent to December 31, 2005 the Company issued 1,686,285 shares of its
        Common Stock in connection with certain investors requests to exchange the
        Convertible Notes to Common Stock. The note holders requested conversion
        of
        their notes in 2003, 2004 and 2005, but the Company issued the stock
        certificates subsequent to December 31, 2005. 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-17




**Zeros
        & Ones, Inc.**
 ( *A
        Development Stage Company* )
  **Notes
        to Consolidated Financial Statements**
 **For
        the year ended December 31, 2005**




**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 2006. The Company anticipates that revenue
      from normal operations will occur in 2006, 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
      2006.




F-18




**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 also reviewed its processes with its 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 audit of the Company’s consolidated financial statements for
      the year ended December 31, 2005, and in light of new, recently issued
      interpretative guidance in relation to the assessment of the operating
      effectiveness of internal controls, management and the Company’s independent
      registered public accounting firm, Armando Ibarra, LLC, 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, 2005:




(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.




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, 2005, the disclosure
      controls and procedures were not effective. However, subsequent to December
      31,
      2005, 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.




14




Changes
      in Internal Control Over Financial Reporting




Subsequent
      to the year ended December 31, 2005, 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 2006 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.





**ITEM
                      8B.**
                  **Other
                      Information**




None




15




**PART
      III.**




**ITEM
                9.**
              **Directors,
                  Executive Officers, Promoters, and Control
                  Persons**




On
      December 21, 2005, Robert J. Holtz resigned as Chairman of the Company. Upon
      his
      resignation Mark M. Laisure became the sole and remaining member of the Board
      of
      Directors. (see “Item 6, Management’s Discussion and Analysis or Plan of
      Operation, Resignation of the Chief Executive Officer and Chairman”)




On
      May
      31, 2005 William J. MacDonald joined the Board of Directors. On August 1, 2005
      Mr. MacDonald resigned from the Board of Directors due to a professional
      conflict of interest.




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.




The
      names
      of the members of the Company’s Board of Directors and other persons who make a
      significant contribution to the Company’s business, as well as biographical
      information for those persons as of December 31, 2005, are set forth
      below:




16


**Name**
            
            **Age**
            
            **Positions
                and Offices Held**
            
            **Since**Mark
                M Laisure
            
            35
            
            Director,
                Chief Executive Officer and Chairman of the Board
            
            May
                16, 2003Scott
                Fairbairn
            
            39
            
            Chief
                Technology Officer
            
            November
                21, 2003Thomas
                Fetzek
            
            47
            
            Vice
                President, Business Development
            
            April
                1, 2004







*Mark
      M. Laisure, Age 35*




Mark
      Laisure, the Company’s Chief Executive Officer and Chairman of the Board, joined
      the Company in 2003 as its President. Mark’s career started in securities
      brokerage and investment banking, serving as a principal for both UBS
      PaineWebber and Shields & Company. He was a member of the founding team of
      Inktomi Corporation, a leading provider of OEM Web search and paid inclusion
      services. Inktomi, which was acquired by Yahoo!, brought Amazon.com, eBay,
      HotBot, MSN, and WalMart.com as partners and customers.




In
      1999,
      Mark joined Military Commercial Technologies, Inc. (MILCOM), a venture-backed
      company that conceives, creates and launches technology companies in partnership
      with defense contractors, commercial companies, federal laboratories and other
      leading-edge research and development sources. At MILCOM, Mr. Laisure
      participated in the launch and growth of several affiliate companies.




Mark
      co-founded iNetNow, Inc. which pioneered the enhanced information delivery
      space
      and established alliances with Lycos, Telefonica and i3Mobile.




*Scott
      Fairbairn, Age 39*




Scott
      Fairbairn is the CTO of Zeros & Ones, Inc. Since 1985, he has contributed to
      the design, development, and delivery of technology solutions across a wide
      range of industries including telecom, financial services, multimedia, security,
      and internet commerce. From 1985 through 2005, he operated four entrepreneurial
      startups which were sold in acquisitions to certain private and publicly traded
      entities.




In
      1996
      he founded Breakthrough Technologies, Inc. which became a provider of
      enterprise-class rapid application development services. It developed and
      licensed a suite of platform components for XML-based content delivery, caching
      services, and data-driven internet applications used in many of its customer
      deployments. Breakthrough also developed the core technologies behind
      RocketStream, a patent-pending suite of technologies and products capable of
      delivering synchronized, high-fidelity video, audio, text, and VOIP data over
      a
      centralized network to worldwide participants in real-time.




Scott
      holds a BSEE degree from the Georgia Institute of Technology.




*Thomas
      Fetzek, Age 47*




17




Thomas
      Fetzek’s is the VP of Business Development for the Company and first joined in
      2004. From 1996 to 2003, Mr. Fetzek served as Chief Executive Officer of
      Secura-Code Corporation, a creator of patented Interactive Dynamic Personal
      Identification Number (PIN) Technology. Secura-Code’s PIN technology focuses on
      the strengthening of access control systems that are used to identify users.




In
      1992,
      he founded and served as Chairman and Co-Chief Executive Officer of Digital
      Information Systems Corporation (DISC) until his departure in 1996. DISC was
      created to provide nationwide enhanced information systems services under the
      brand name of One Call.




From
      1987
      to 1992, Mr. Fetzek served as Founder and Chief Executive Officer of Hello
      Pages, a company formed to provide enhanced operated assisted yellow page
      services (OAYP) to Hawaii.




Mr.
      Fetzek has also served as President and Director of InfoAmerica, a
      telecommunications company which specialized in business information storage
      and
      dissemination, and was EVP of Sales and Marketing for ExxpoMedia, a company
      that
      pioneered some of the first efforts in the digital evolution movement in Silicon
      Valley, including touch screen technology.




*Audit
      Committee Financial Expert*




Due
      to
      limited resources, the Company does not yet 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 yet 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 yet adopted a Code of Ethics. The Company
      expects to adopt its Code of Ethics before June 30, 2006.




**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 each
      of
      the fiscal years ended December 31, 2005 and 2004 to (i) the individual who
      served as the Company’s chief executive officer (“ CEO ”)
      during
      fiscal year 2005; and (ii) the Company’s four most highly compensated
      employees other than the CEO who were serving as executive officers as of
      December 31, 2005.




18




*Summary
      Compensation Table*




**Annual
      Compensation**




**Name
                and Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Other
                ($)**
            
            **Annual**
              **Compensation
                ($)**Mark
                M. Laisure,
            
            2005
            
            
            41,664
            
            
            —
            
            
            —
            
            
            41,664*Chairman,
                CEO and President*
            
            2004
            
            
            87,100
            
            
            —
            
            
            —
            
            
            87,1002003
            
            
            16,000
            
            
            —
            
            
            —
            
            
            16,000Robert
                J. Holtz,
            
            2005
            
            
            —
            
            
            —
            
            
            —
            
            
            —*CEO
                (until December 21, 2005)*
            
            2004
            
            
            106,000
            
            
            —
            
            
            —
            
            
            106,0002003
            
            
            18,500
            
            
            —
            
            
            —
            
            
            18,500Scott
                Fairbairn,
            
            2005
            
            
            —
            
            
            —
            
            
            —
            
            
            —*CTO*
            
            2004
            
            
            —
            
            
            —
            
            
            —
            
            
            —2003
            
            
            —
            
            
            —
            
            
            —
            
            
            —Thomas
                Fetzek,
            
            2005
            
            
            8,000
            
            
            —
            
            
            —
            
            
            8,000*Vice
                President, Business Development*
            
            2004
            
            
            19,864
            
            
            —
            
            
            —
            
            
            19,8642003
            
            
            —
            
            
            —
            
            
            —
            
            
            —




*Option/SAR
      Grants in Fiscal Year 2005*




The
      Company did not grant any stock options during the fiscal year ended December
      31, 2005. The Company did not grant any stock appreciation rights (“ SARs ”)
      during
      the fiscal year ended December 31, 2005.




There
      were no exercises of options for the fiscal year ended December 31, 2005 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*




No
      officers have entered into any employment contracts with the
      Company.




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





The
      following table sets forth certain information known to the Company with respect
      to the beneficial ownership of the Company’s common stock as of March 24, 2006
      by (i) all persons who are beneficial owners of five percent (5%) or more of
      the
      Company’s common stock, (ii) each current director, (iii) the executive officers
      named in the Summary Compensation Table of the Executive Compensation section
      of
      this Form 10-KSB and (iv) all current directors and executive officers as a
      group. As of March 24, 2006, there were 42,860,002 shares of common stock
      outstanding. Unless otherwise indicated, each of the stockholders has sole
      voting and investment power with respect to the shares beneficially owned,
      subject to community property laws, where applicable.




19





**Beneficial
                Owner**
            
            **Shares**
              **Beneficially**
              **Owned**
            
            **Percentage**
              **of
                Shares**
              **Beneficially**
              **Owned
                (1)**Mark
                Laisure
            
            
            0
            
            
            0
            %Scott
                Fairbairn
            
            
            0
            
            
            0
            %Thomas
                Fetzek
            
            
            0
            
            
            0
            %All
                current directors and executive officers as a group (3 persons)
            
            
            0
            
            
            0
            %




*
            Represents
                less than 1%.





(1)
            Beneficial
                ownership is determined in accordance with the rules of the Securities
                and
                Exchange Commission and includes voting or investment power with
                respect
                to the securities. Common stock subject to options or warrants that
                are
                currently exercisable or exercisable within 60 days of March 24,
                2006 are
                deemed to be outstanding and to be beneficially owned by the person
                or
                group holding such options or warrants for the purpose of computing
                the
                percentage ownership of such person or group but are not treated
                as
                outstanding for the purpose of computing the percentage ownership
                of any
                other person or group. Unless otherwise indicated, the address for
                each of
                the individuals listed in the table is care of Zeros & Ones, Inc.,
                1327 Ocean Avenue, Suite E, Santa Monica, California. Unless otherwise
                indicated by footnote, the persons named in the table have sole voting
                and
                sole investment power with respect to all shares of the Company common
                stock shown as beneficially owned by them, subject to applicable
                community
                property laws. Percentage of beneficial ownership is based on 42,860,002
                shares of common stock outstanding as of March 24,
                2006.




**ITEM
                12.**
              **Certain
                  Relationships and Related
                  Transactions**




During
      the year ended December 31, 2005 the Company incurred costs related to its
      CEO
      and President 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
      December 31, 2005 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




23.1.
            Consent
                of Armando Ibarra, LLC




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




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




20




**ITEM
                14.**
              **Principal
                  Accountant Fees and
                  Services**




The
      following table sets forth fees for services Armando Ibarra, LLC provided during
      fiscal years 2005, 2004 and 2003:




**2005**
            
            **2004**
            
            **2003**Audit
                fees
            
            $
            5,000
            
            $
            4,000
            
            $
            3,125Audit
                related fees(1)
            
            
            —
            
            
            —
            
            
            –Tax
                fees
            
            
            —
            
            
            —
            
            
            –All
                other fees
            
            
            —
            
            
            —
            
            
            –Total
            
            $
            5,000
            
            $
            4,000
            
            $
            3,125




(1)
            During
                fiscal years 2005, 2004 and 2003 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.




21




**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:  March
                28, 2006
            By:
            /s/ Mark
              M. LaisureMark
              M. LaisureChairman
                of the Board , Chief Executive Officer
              and
                Chief Financial Officer
                (Principal
                  Executive Officer and Principal Financial
                and
                  Accounting 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.






Date:  March
                28, 2006
            By:
            /s/ Mark
              M. LaisureMark
              M. LaisureChairman
                of the Board, Chief Executive Officer
              and
                Chief Financial Officer
              (Principal
                Executive Officer and Principal Financial
              and
                Accounting Officer)







22