** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-KSB**

 

**QUARTERLYREPORT UNDER SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**FOR QUARTER ENDED DECEMBER 31, 2001**

 

**ZEROS & ONES, INC.**

(Exact Name of Registrant as specified in its Charter)

 

**COMMERCIAL LABOR MANAGEMENT, INC.**

(Former Name: Change Effective July 1, 1999)

 
| **NEVADA**                                                                  |   | **88-0241079**                       |
|-----------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other Jurisdiction of Incorporation or Organization)              |   | (I.R.S. Employer Identification No.) |
|                                                                        |   |                                 |
| **11611 SAN VICENTE BLVD., SUITE 615, LOS  ANGELES, CA 90049**              |
| (Address of Principal Executive Offices)(Zip Code)                          |
|                                                                        |
| Registrant’s Telephone Number, including Area Code: **(310) 399-9901** |

 

Indicate by check mark whetherthe Registrant (i) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports)and (ii) has been subject to such filing requirements for the past 90 days.

 

Yes No

 

ý   o

 

Indicate the number of sharesoutstanding of each of the issuer’s classes

 

 

**ARMANDO C. IBARRA**

**CERTIFIED PUBLICACCOUNTANTS**

**(A ProfessionalCorporation)**

 
| Armando C.  Ibarra, C.P.A.   | Members of  the California Society of |
|------------------------------|---------------------------------------|
| Armando  Ibarra, Jr., C.P.A. | Certified  Public Accountants         |

 

 

To the Board of Directors of

Zeros & Ones, Inc.

(A Development Stage Company)

 

 

**INDEPENDENTACCOUNTANTS’ REPORT**

 

We have compiled theaccompanying balance sheet of Zeros & Ones, Inc. (A Development StageCompany) as of December 31, 2001 and the related statements of operations,changes in stockholders’ equity, and cash flows for the year then ended, inaccordance with Statements on Standards for Accounting and Review Servicesissued by the American Institute of Certified Public Accountants.

 

A compilation is limited topresenting in the form of financial statements information that is therepresentation of management.  We havenot audited or reviewed the accompanying 2001 financial statements and, accordingly,do not express an opinion or any other form of assurance on them.

 

The financial statements forthe year ended December 31, 2000 were audited by other accountants, whosereport dated January 26, 2001, included an explanatory paragraph that describedthe Company’s going concern uncertainty discussed in Note 2 to the financialstatements.

 

 

 
|                        |   |
|-----------------------------|--------|
| Armando C.  Ibarra, CPA-APC |   |

 

 

April 13, 2002

Chula Vista, California

 

2

----

 

**ZEROS & ONES, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**Consolidated Balance Sheets**

 
|                                                                                                                                                                      |   | **Year Ended  December 31,  2001** |        | **Year Ended********December 31,****2000** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|-------------|--------------------------------------------|------------|
|                                                                                                                                                                      |   | **(Unaudited)**                    |        | **(Audited)**                              |       |
| **ASSETS**                                                                                                                                                                |   |                               |        |                                       | ** ** |
| **Current Assets**                                                                                                                                                        |   |                               | ** **  |                                       | ** ** |
| Cash                                                                                                                                                                      |   | $                                  | —      | ** **                                 | $          | 2,071,695 | ** ** |
| Trade accounts receivable - net of allowance for doubtful accounts                                                                                                        |   | 7,000                              |        | 100,000                                    |       |
| Employee advances - related party                                                                                                                                         |   | —                             |        | 44,500                                     |       |
| Prepaid expenses                                                                                                                                                          |   | 13,570                             |        | 85,387                                     |       |
| **Total Current Assets**                                                                                                                                                  |   | 20,570                             |        | 2,301,582                                  |       |
|                                                                                                                                                                      |   |                               |        |                                       |       |
| **Property & equipment - net of accumulated  depreciation &amortization**                                                                                         |   | 583,658                            |        | 746,939                                    |       |
|                                                                                                                                                                      |   |                               |        |                                       |       |
| **Other Assets**                                                                                                                                                          |   |                               |        |                                       |       |
| Intangible assets - net of accumulated amortization                                                                                                                       |   | 131,129                            |        | 160,254                                    |       |
| Other assets                                                                                                                                                              |   | 126,120                            |        | 136,189                                    |       |
| **Total Other Assets**                                                                                                                                                    |   | 257,249                            |        | 296,443                                    |       |
|                                                                                                                                                                      |   |                               |        |                                       |       |
| **TOTAL ASSETS**                                                                                                                                                          |   | **$**                              | **861,477** | ** **                                 | **$**      | **3,344,964** | ** ** |
|                                                                                                                                                                      |   |                               |        |                                       |       |
| **LIABILITIES  & STOCKHOLDERS’ EQUITY / (DEFICIT)**                                                                                                              |   |                               |        |
| **Current Liabilities**                                                                                                                                                   |   |                               |        |                                       |       |
| Accounts payable and accrued expenses                                                                                                                                     |   | $                                  | 340,824     | ** **                                 | $          | 165,857 | ** ** |
| Accrued payroll and vacation                                                                                                                                              |   | 40,000                             |        | 76,055                                     |       |
| Deferred rent                                                                                                                                                             |   | 151,784                            |        | 112,692                                    |       |
| Deferred stock option compensation                                                                                                                                        |   | 400,300                            |        | 21,156                                     |       |
| Unearned revenue                                                                                                                                                          |   | —                             |        | 40,000                                     |       |
| Due to officer                                                                                                                                                            |   | 68,657                             |        | —                                     |       |
| Current portion of obligations under capitalized leases                                                                                                                   |   | 67,505                             |        | 68,205                                     |       |
| **Total Current Liabilities**                                                                                                                                             |   | 1,069,070                          |        | 483,965                                    |       |
|                                                                                                                                                                      |   |                               |        |                                       |       |
| **Long-Term Liabilities**                                                                                                                                                 |   |                               |        |                                       |       |
| Deferred stock option compensation                                                                                                                                        |   | —                             |        | 54,066                                     |       |
| Obligations under capitalized leases, less current maturities                                                                                                             |   | 11,434                             |        | —                                     |       |
| **Total Long-Term Liabilities**                                                                                                                                           |   | 11,434                             |        | 54,066                                     |       |
| **TOTAL LIABILITIES**                                                                                                                                                     |   | 1,080,504                          |        | 538,031                                    |       |
|                                                                                                                                                                      |   |                               |        |                                       |       |
| **STOCKHOLDERS’ EQUITY / (DEFICIT)**                                                                                                                                 |   |                               | ** **  |                                       | ** ** |
| Preferred stock, ($.001 par value, 2,000,000 shares authorized;  none issued and outstanding as of December 31, 2001 and 2000.)                                      |   | —                             |        | —                                     |       |
| Common stock, ($.001 par value, 100,000,000 shares authorized;  23,911,858 and 23,695,190 shares issued and outstanding as of December 31,  2001 and 2000, respectively.) |   | 23,912                             |        | 23,695                                     |       |
| Paid-in capital                                                                                                                                                           |   | 17,228,472                         |        | 17,161,821                                 |       |
| Accumulated deficit during development stage                                                                                                                              |   | (17,471,411                        | )           | (14,378,583                                | )          |
| **Total Stockholders’ Equity / (Deficit)**                                                                                                                           |   | (219,027                           | )           | 2,806,933                                  |       |
|                                                                                                                                                                      |   |                               |        |                                       |       |
| **TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY /  (DEFICIT)**                                                                                                        |   | **$**                              | **861,477** | ** **                                 | **$**      | **3,344,964** | ** ** |
|                                                                                                                                                                           |        |                                    |             |                                            |            |  |  |  |

 

See Notes to Consolidated Financial Statements

 

3

----

 

**ZEROS & ONES, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**Consolidated Statements of Operations**

 
|                                                     |   | **Year Ended********December 31,********2001****** |       | **Year Ended********December 31,********2000****** |   | **From Inception   to December 31,****2001** |       |
|----------------------------------------------------------|--------|----------------------------------------------------|------------|----------------------------------------------------|--------|----------------------------------------------|------------|
|                                                     |   | **(Unaudited)**                                    |       | **(Audited)**                                      |   |                                         |       |
| Revenues                                                 |   | $                                                  | 344,253    | ** **                                         | $      | 805,004                                      | ** ** | $ | 1,972,478 | ** ** |
| Cost of sales                                            |   | 235,986                                            |       | 658,112                                            |   | 1,325,146                                    |       |
| **Gross Profit**                                         |   | 108,267                                            |       | 146,892                                            |   | 647,332                                      |       |
|                                                     |   |                                               |       |                                               |   |                                         |       |
| Loss on investment in related party                      |   | —                                             |       | —                                             |   | 5,143,351                                    |       |
| Bad debt for related party                               |   | —                                             |       | 89,800                                             |   | 573,469                                      |       |
| Bad debt expense                                         |   | —                                             |       | 234,639                                            |   | 234,639                                      |       |
| Write-off of capitalized software costs                  |   | —                                             |       | 322,993                                            |   | 322,993                                      |       |
| Research & development expense                       |   | 55,101                                             |       | —                                             |   | 55,101                                       |       |
| General & administrative expenses                    |   | 3,179,711                                          |       | 4,453,004                                          |   | 11,852,837                                   |       |
| **Total Expenses**                                       |   | 3,234,812                                          |       | 5,100,436                                          |   | 18,182,390                                   |       |
|                                                     |   |                                               |       |                                               |   |                                         |       |
| **Other Income & (Expenses)**                        |   |                                               |       |                                               |   |                                         |       |
|                                                     |   |                                               |       |                                               |   |                                         |       |
| Interest income                                          |   | —                                             |       | 169,160                                            |   | 169,160                                      |       |
| Settlement of lawsuit                                    |   | —                                             |       | 100,546                                            |   | 100,546                                      |       |
| Miscellaneous other income                               |   | 33,717                                             |       | 1,620                                              |   | 35,337                                       |       |
|                                                     |   |                                               |       |                                               |   |                                         |       |
| **Total Other Income & (Expenses)**                  |   | 33,717                                             |       | 271,326                                            |   | 305,043                                      |       |
| **Net Loss**                                             |   | $                                                  | (3,092,828 | )                                                  | $      | (4,682,218                                   | )          | $ | (17,230,015 | ) |
|                                                     |   |                                               |       |                                               |   |                                         |       |
| **Basic loss per share**                                 |   | $                                                  | (0.13      | )                                                  | $      | (0.21                                        | )          |   | ** ** |
|                                                     |   |                                               |       |                                               |   |                                         | ** ** |
| **Weighted average number of common shares outstanding** |   | 23,799,360                                         |       | 22,652,268                                         |   |                                         |       |

 

4

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**ZEROS & ONES, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**Statement of Changes in Stockholders’ Equity /(Deficit)**

**From Inception through December 31, 2000 (Audited) andthrough December 31, 2001 (Unaudited)**

 
|                                                             |   | **Common Stock** |       | **Preferred Stock** |       | **Additional   Paid in  Capital** |       | **Receivable  from   Stockholder** |       | **Accumulated   Deficit During********Development********Stage** |       | **Total**    |           |
|------------------------------------------------------------------|--------|------------------|------------|---------------------|------------|-----------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------|------------|--------------|----------------|
|                                                             |
|                                                             |
|                                                             |   | **Shares**       |       | **Amount**          |       | **Shares**                        |       | **Amount**                         |       |
| Balance at  January 1, 1999                                 |   | 7,038,000        |       | $                   | 55,000     |                              | 605,180    |                               | $          | 6,051,800                                                        |       | $            | 247,932        |   | $ | — |   | $ | (6,117,654 | ) | $ | 237,078 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued to  shareholders  of CLMI                     |   | 2,663,823        |       | —              |       | —                            |       | —                             |       | —                                                           |       | —       |           | — |   | — |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for cash                                           |   | —           |       | —              |       | 252,128                           |       | 2,521,284                          |       | —                                                           |       | —       |           | — |   | 2,521,284 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for assets purchased at transferor’s basis    |   | 660,000          |       | —              |       | —                            |       | —                             |       | 421,957                                                          |       | (292,300     | )              | — |   | 129,657 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Exchange of preferred stock to common stock at exchange ratio    |   | 8,773,878        |       | 8,573,084           |       | (857,308                          | )          | (8,573,084                         | )          | —                                                           |       | —       |           | — |   | — |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for services                                       |   | 122,724          |       | 61                  |       | —                            |       | —                             |       | 191,870                                                          |       | —       |           | — |   | 191,931 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for deferred offering cost                         |   | 150,000          |       | 50                  |       | —                            |       | —                             |       | 257,950                                                          |       | —       |           | — |   | 258,000 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for private placement                              |   | 122,727          |       | 41                  |       | —                            |       | —                             |       | 179,959                                                          |       | —       |           | — |   | 180,000 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Exercise of warrants                                             |   | 92,883           |       | 31                  |       | —                            |       | —                             |       | 92,852                                                           |       | —       |           | — |   | 92,883 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Cancellation of shares                                           |   | (2,120,541       | )          | —              |       | —                            |       | —                             |       | —                                                           |       | —       |           | — |   | — |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Net loss, December 31, 1999                                      |   | —           |       | —              |       | —                            |       | —                             |       | —                                                           |       | —       |           | (3,578,711 | ) | (3,578,711 | ) |
| **Balance, December 31, 1999**                                   |   | **17,503,494**   | ** ** | **8,628,267**       | ** ** | **—**                        | ** ** | **—**                         | ** ** | **1,392,520**                                                    | ** ** | **(292,300** | **)**          | **(9,696,365** | **)** | **32,122** | ** ** |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Net proceeds from private placement and warrants                 |   | 5,988,568        |       | 5,974               |       | —                            |       | —                             |       | 6,949,555                                                        |       | —       |           | — |   | 6,955,529 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Payments on receivable from stockholder                          |   | —           |       | —              |       | —                            |       | —                             |       | —                                                           |       | 202,500      |           | — |   | 202,500 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Write off of receivable from stockholder                         |   | —           |       | —              |       | —                            |       | —                             |       | —                                                           |       | 89,800       |           | — |   | 89,800 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for offering services related to private placement |   | 148,128          |       | 148                 |       | —                            |       | —                             |       | 118,852                                                          |       | —       |           | — |   | 119,000 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for services rendered                              |   | 55,000           |       | 55                  |       | —                            |       | —                             |       | 90,145                                                           |       | —       |           | — |   | 90,200 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Allocation of par value to additional paid-in capital            |   | —           |       | (8,610,749          | )          | —                            |       | —                             |       | 8,610,749                                                        |       | —       |           | — |   | — |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Net loss,  December 31, 2000                                |   | —           |       | —              |       | —                            |       | —                             |       | —                                                           |       | —       |           | (4,682,218 | ) | (4,682,218 | ) |
| **Balance, December 31, 2000**                                   |   | **23,695,190**   | ** ** | **23,695**          | ** ** | **—**                        | ** ** | **—**                         | ** ** | **17,161,821**                                                   | ** ** | **—**   | ** **     | **(14,378,583** | **)** | **2,806,933** | ** ** |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for services                                       |   | 33,410           |       | 33                  |       | —                            |       | —                             |       | 14,093                                                           |       | —       |           | — |   | 14,126 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for services                                       |   | 90,000           |       | 90                  |       | —                            |       | —                             |       | 24,173                                                           |       | —       |           | — |   | 24,263 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Shares issued for employee compensation                          |   | 3,000            |       | 3                   |       | —                            |       | —                             |       | 1,425                                                            |       | —       |           | — |   | 1,428 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Exercise of warrants                                             |   | 80,258           |       | 81                  |       | —                            |       | —                             |       | 24,570                                                           |       | —       |           | — |   | 24,651 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Options granted for  services                                    |   | —           |       | —              |       | —                            |       | —                             |       | 2,400                                                            |       | —       |           | — |   | 2,400 |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Exercise of warrants                                             |   | 10,000           |       | 10                  |       | —                            |       | —                             |       | (10                                                              | )          | —       |           | — |   | — |   |
|                                                             |   |             |       |                |       |                              |       |                               |       |                                                             |       |         |           |   |   |   |   |
| Net loss, December 31, 2001                                      |   | —           |       | —              |       | —                            |       | —                             |       | —                                                           |       | —       |           | (3,092,828 | ) | (3,092,828 | ) |
| **Balance, December 31, 2001**                                   |   | **23,911,858**   | ** ** | **$**               | **23,912** | ** **                        | **—** | ** **                         | **$**      | **—**                                                       | ** ** | **$**        | **17,228,472** | ** ** | **$** | **—** | ** ** | **$** | **(17,471,411** | **)** | **$** | **(219,027** | **)** |

 

See Notes to Consolidated Financial Statements

 

5

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**ZEROS & ONES, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**Consolidated Statements of Cash Flows**

 
|                                                                       |   | **Year Ended   December 31,   2001** |       | **Year Ended   December 31,   2000** |       | **From Inception   to December 31,  2001** |       |
|----------------------------------------------------------------------------|--------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------------|------------|
|                                                                       |   | **(Unaudited)**                      |       | **(Audited)**                        |       |                                       |       |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                   |   |                                 |       |                                 |       |                                       |       |
|                                                                       |   |                                 |       |                                 |       |                                       |       |
| Net loss                                                                   |   | $                                    | (3,092,828 | )                                    | $          | (4,682,218                                 | )          | $ | (17,230,015 | ) |
| Depreciation and amortization expense                                      |   | 197,979                              |       | 183,772                              |       | 571,704                                    |       |
| Stock issued for services                                                  |   | 66,868                               |       | 209,240                              |       | 467,997                                    |       |
| Bad debt - trade accounts receivable                                       |   | —                               |       | 234,639                              |       | 628,508                                    |       |
| Bad debt from stockholder                                                  |   | —                               |       | 89,800                               |       | 179,600                                    |       |
| Write-off of software development costs                                    |   | —                               |       | 322,993                              |       | 322,993                                    |       |
| Loss on investment in related party                                        |   | —                               |       | —                               |       | 5,143,351                                  |       |
| Write-off of investment                                                    |   | —                               |       | 50,000                               |       | 50,000                                     |       |
| Loss on retirement of property & equipment                             |   | 6,861                                |       | —                               |       | 6,861                                      |       |
| (Increase)/Decrease in trade accounts receivable                           |   | 93,000                               |       | (309,639                             | )          | (241,639                                   | )          |
| (Increase)/Decrease in accounts receivable - stockholders                  |   | —                               |       | 202,500                              |       | 202,500                                    |       |
| (Increase)/Decrease in due to and from related party                       |   | —                               |       | —                               |       | (339,869                                   | )          |
| (Increase)/Decrease in employee advances - related party                   |   | 44,500                               |       | (44,500                              | )          | —                                     |       |
| (Increase)/Decrease in prepaid expenses                                    |   | 71,817                               |       | (85,387                              | )          | (35,170                                    | )          |
| (Increase)/Decrease in gain from disposal of assets                        |   | 779                                  |       | —                               |       | 779                                        |       |
| Increase/(Decrease) in accounts payable & accrued exp.                 |   | 174,967                              |       | 23,076                               |       | 309,182                                    |       |
| Increase/(Decrease) in accrued officer salary                              |   | —                               |       | (107,500                             | )          | —                                     |       |
| Increase/(Decrease) in accrued payroll & vacation                      |   | (36,055                              | )          | 76,055                               |       | 40,000                                     |       |
| Increase/(Decrease) in deferred rent                                       |   | 39,092                               |       | 112,692                              |       | 151,784                                    |       |
| Increase/(Decrease) in deferred stock option compensation                  |   | 379,144                              |       | 21,156                               |       | 400,300                                    |       |
| Increase/(Decrease) in unearned revenue                                    |   | (40,000                              | )          | 40,000                               |       | 0                                          |       |
| ***Net cash (used) by operating  activities***                             |   | **(2,093,876**                       | **)**      | **(3,663,321**                       | **)**      | **(9,371,134**                             | **)**      |
|                                                                       |   |                                 |       |                                 |       |                                       |       |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                   |   |                                 |       |                                 |       |                                       |       |
|                                                                       |   |                                 |       |                                 |       |                                       |       |
| Acquisition of property and equipment                                      |   | (12,888                              | )          | (658,959                             | )          | (743,412                                   | )          |
| Proceeds from disposal of property and equipment                           |   | 4,675                                |       | —                               |       | 4,675                                      |       |
| Acquisition of goodwill                                                    |   | —                               |       | —                               |       | (120,000                                   | )          |
| Acquisition of intellectual property                                       |   | (5,000                               | )          | —                               |       | (5,000                                     | )          |
| Investment in related party                                                |   | —                               |       | —                               |       | (5,143,351                                 | )          |
| Increase in software development costs                                     |   | —                               |       | (282,993                             | )          | (322,993                                   | )          |
| Other assets                                                               |   | 10,069                               |       | (191,600                             | )          | (142,494                                   | )          |
| ***Net cash (used) by investing  activities***                             |   | **(3,144**                           | **)**      | **(1,133,552**                       | **)**      | **(6,472,575**                             | **)**      |
|                                                                       |   |                                 |       |                                 |       |                                       |       |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                   |   |                                 |       |                                 |       |                                       |       |
|                                                                       |   |                                 |       |                                 |       |                                       |       |
| Proceeds from line of credit                                               |   | —                               |       | —                               |       | 10,919                                     |       |
| Proceeds on notes payable - stockholders                                   |   | —                               |       | —                               |       | 330,000                                    |       |
| Increase in due to officer                                                 |   | 68,657                               |       | —                               |       | 68,657                                     |       |
| Proceeds from issuance of warrants and private placements                  |   | —                               |       | 7,213,488                            |       | 7,486,368                                  |       |
|                                                                       |   |                                 |       |                                 |       |                                       |       |
| Proceeds from issuance of common stock                                     |   | —                               |       | —                               |       | 259,078                                    |       |
| Payments on obligations under capitalized leases                           |   | (43,332                              | )          | (56,625                              | )          | (118,990                                   | )          |
| Payments on notes payable - stockholders                                   |   | —                               |       | (270,724                             | )          | (330,000                                   | )          |
| Payments on notes payable - goodwill                                       |   | —                               |       | (87,500                              | )          | (87,500                                    | )          |
| Payment on line of credit                                                  |   | —                               |       | (10,919                              | )          | (10,919                                    | )          |
| Issuance of preferred stock                                                |   | —                               |       | —                               |       | 8,573,084                                  |       |
| Dividends distributed                                                      |   | —                               |       | —                               |       | (232,988                                   | )          |
| Draws by proprietor                                                        |   | —                               |       | —                               |       | (104,000                                   | )          |
|                                                                       |   |                                 |       |                                 |       |                                       |       |
| ***Net cash provided by financing  activities***                           |   | **25,325**                           | ** ** | **6,787,720**                        | ** ** | **15,843,709**                             |       |
| ***Net increase (decrease) in cash***                                      |   | **(2,071,695**                       | **)**      | **1,990,847**                        | ** ** | **—**                                 |       |
|                                                                       |   |                                 |       |                                 |       |                                       |       |
| ***Cash at beginning of year***                                            |   | **2,071,695**                        | ** ** | **80,848**                           |       | —                                     |       |
| ***Cash at end of year***                                                  |   | **$**                                | **—** | ** **                           | **$**      | **2,071,695**                              | ** ** | **$** | **—** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| SUPPLEMENTAL DISCLOSURES  OF CASH FLOW INFORMATION:                        |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Interest paid                                                              |   | **$**                                | **5,894**  | ** **                           | **$**      | **23,700**                                 | ** ** | **$** | **28,816** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Income taxes paid                                                          |   | **$**                                | **5,600**  | ** **                           | **$**      | **11,309**                                 | ** ** | **$** | **11,309** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:      |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Acquisition of fixed assets under capitalized leases                       |   | **$**                                | **—** | ** **                           | **$**      | **130,527**                                | ** ** | **$** | **298,030** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Stock issued for services                                                  |   | **$**                                | **66,868** | ** **                           | **$**      | **90,200**                                 | ** ** | **$** | **282,089** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Stock issued for offering services related to private placement            |   | **$**                                | **—** | ** **                           | **$**      | **119,000**                                | ** ** | **$** | **119,000** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Stock issued for deferred offering cost                                    |   | **$**                                | **—** | ** **                           | **$**      | **—**                                 | ** ** | **$** | **258,000** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Issuance of common stock for equipment                                     |   | **$**                                | **—** | ** **                           | **$**      | **—**                                 | ** ** | **$** | **161,839** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Issuance of common stock for accounts receivable                           |   | **$**                                | **—** | ** **                           | **$**      | **—**                                 | ** ** | **$** | **292,300** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Issuance of common stock for accounts payable                              |   | **$**                                | **—** | ** **                           | **$**      | **—**                                 | ** ** | **$** | **(5,459** | **)** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Notes payable issuance for goodwill                                        |   | **$**                                | **—** | ** **                           | **$**      | **—**                                 | ** ** | **$** | **87,500** | ** ** |
|                                                                       |   |                                 | ** ** |                                 | ** ** |                                       | ** ** |
| Services received from  stockholders for settlement of accounts receivable |   | **$**                                | **—** | ** **                           | **$**      | **202,500**                                | ** ** | **$** | **202,500** | ** ** |

 

6

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**ZEROS & ONES, INC. AND SUBSIDIARIES**

**(A Development Stage Company)**

**Weighted Average Analysis**

 
| **Year Ended  December 31,   2001**                      |                                                | **Common  Shares** |   | **Cumulative********Common  Shares** |          | **Days********365** |   | **Weighted********Average** |    |    |   |
|----------------------------------------------------------|-----------------------------------------------------|--------------------|--------|--------------------------------------|---------------|---------------------|--------|-----------------------------|---------|---------|--------|
|                                                     |                                                | 1-Jan-01           |   |                                 |          | 792,200             |   | 0                           |    | 0       |   |   |   |
|                                                     |                                                | 1-Jan-01           |   | 4,000                                |          | 796,200             |   | 39                          |    | 85,073  |   |   |   |
|                                                     |                                                | 9-Feb-01           |   | 113,500                              |          | 909,700             |   | 83                          |    | 206,863 |   |   |   |
|                                                     |                                                | 3-May-01           |   | 83,300                               |          | 993,000             |   | 131                         |    | 356,392 |   |   |   |
|                                                     |                                                | 11-Sep-01          |   | 453,846                              |          | 1,446,846           |   | 19                          |    | 75,315  |   |   |   |
|                                                     |                                                | 30-Sep-01          |   | 3,500,000                            |          | 4,946,846           |   | 33                          |    | 447,249 |   |   |   |
|                                                     |                                                | 2-Nov-01           |   | 200,000                              |          | 5,146,846           |   | 60                          |    | 846,057 |   |   |   |
|                                                     |                                                | 1-Jan-02           |   |                                 |          |                |   |                        |    |    |   |   |   |
|                                                     |                                                |               |   |                                 |          |                |   |                        |    |    |   |   |   |
| **Shares Issued ‘00**                               |                                                |               |   |                                 |          |                |   |                        |    |    |   |   |   |
|                                                     |                                                |               |   |                                 |          |                |   |                        |    |    |   |   |   |
| **Cumulative Shares ‘00**                           |                                                |               |   |                                 |          | **0**               |   | **365**                     |    |    |   |   |   |
|                                                     |                                                |               |   |                                 |          |                |   |                        |    |    |   |   |   |
| **Weighted Average Number of Common Shares Outstanding** |                                                |               |   |                                 | **2,016,950** |                |   |                        |
|                                                     |                                                |               |   |                                 |          |                |   |                        |    |    |   |   |   |
|                                                     | **Earning (Loss) Available to Common Stockholders** |               |   |                                 |          | (3,092,828          | )      |
|                                                     |                                                |               |   | **Basic Earnings (Loss) Per Share**  |          |                |   |                        | (1.5334 | )       |

 
| **Year Ended** **December 31,  2000**               |   | **Common********Shares**                             |   | **Cumulative********Common********Shares** |          | **Days********366** |       | **Weighted********Average** |    |      |   |
|----------------------------------------------------------|--------|------------------------------------------------------|--------|--------------------------------------------|---------------|---------------------|------------|-----------------------------|---------|-----------|--------|
|                                                     |   | 1-Jan-00                                             |   |                                       |          | 3,860,000           |       | 208                         |    | 2,193,661 |   |   |   |
|                                                     |   | 27-Jul-00                                            |   | 2,022,000                                  |          | 5,882,000           |       | 27                          |    | 433,918   |   |   |   |
|                                                     |   | 23-Aug-00                                            |   | 1,000,000                                  |          | 6,882,000           |       | 23                          |    | 432,475   |   |   |   |
|                                                     |   | 15-Sep-00                                            |   | 1,000,000                                  |          | 7,882,000           |       | 80                          |    | 1,722,842 |   |   |   |
|                                                     |   | 4-Dec-00                                             |   | 40,000                                     |          | 7,922,000           |       | 28                          |    | 606,055   |   |   |   |
|                                                     |   | 1-Jan-01                                             |   |                                       |          |                |       |                        |    |      |   |   |   |
|                                                     |   |                                                 |   |                                       |          |                |       |                        |    |      |   |   |   |
| **Shares Issued ‘00**                               |   |                                                 |   | **4,062,000**                              |          |                |       |                        |    |      |   |   |   |
|                                                     |   |                                                 |   |                                       |          |                |       |                        |    |      |   |   |   |
| **Cumulative Shares ‘00**                           |   |                                                 |   |                                       |          | **7,922,000**       |       | **366**                     |    |      |   |   |   |
|                                                     |   |                                                 |   |                                       |          |                |       |                        |    |      |   |   |   |
| **Weighted Average Number of Common Shares Outstanding** |   |                                                 |   |                                       | **5,388,951** |                |       |                        |
|                                                     |   |                                                 |   |                                       |          |                |       |                        |    |      |   |   |   |
|                                                     |   | **Earning (Loss) Available to Common  Stockholders** |   |                                       |          |                | (4,682,218 | )                           |
|                                                     |   |                                                 |   |                                       |          |                |       |                        |    |      |   |   |   |
|                                                     |   |                                                 |   | **Basic Earnings (Loss) Per Share**        |          |                |       |                        | (0.8689 | )         |

* *

***NOTE:******        *********EARNING PER SHARE = EARNING (LOSS AVAILABLE TOCOMMON STOCKHOLDERS / WEIGHTED) SHARES OUTSTANDING

 

See Notes to Consolidated Financial Statements

 

7

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**ZEROS & ONES,INC. AND SUBSIDIARIES**

**(A Development StageCompany)**

**Notes to ConsolidatedFinancial Statements**

**As of December 31,2001**

 

**NOTE 1.        HISTORY AND ORGANIZATION OF THE COMPANY**

 

Zeros & Ones, Inc.(formerly Commercial Labor Management, Inc.) is a Nevada corporation (the“Company”) organized October 19, 1988. The Company was originally incorporatedin Nevada under the name Tokyo Raiders on October 19, 1988. In 1990, theCompany acquired certain rights to a pizza franchise and changed its name toClub USPN, Inc. In June 1993, the Company acquired Sono International, Inc.(“Sono”), but those operations were discontinued and the shares of Sono weresold to the original shareholders of Sono. In March 1995, the Board approvedthe merger with Commercial Labor Management, Ltd. Which was handled as areverse merger, and also approved a name change to Commercial Labor Management,Inc. The name change was made, but the merger was rescinded and nevercompleted.

 

Effective July 1, 1999, theCompany entered into a Plan of Reorganization and Asset Purchase Agreement topurchase 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 ofa note in the amount of $300,000 payable to the stockholder of QA forreimbursement of expenses. As of part of the overall reorganization, the Companyalso made an exchange offer to the shareholders of Pillar West Entertainment,inc. (“PWE”) to acquire 100% of the total issued and outstanding capital stockof PWE in consideration for the issuance of the shareholders of PWE. Under thePlan of reorganization, QA, EKO, PRC, KV, WRTG, PWE, and assets acquired fromZOI-DE, referred as “the Group”, are merged into one company and are accountedfor in a manner similar to a pooling of interest as if they under commoncontrol. After the effective date of the business combination of the Group andthe Company, the original stockholders of the Group own a majority of theshares of common stock of the Company. The Group is treated as the acquirer inthis business combination under the Accounting Principal Board PronouncementNo. 16, paragraph 70, reverse to a reverse merger. The business combination ofthe Group and the Company is accounted for under the purchase method in whichthe purchase price $207,500 cash paid and liabilities assumed of the Companyare allocated to the fair market value of assets and liabilities acquired. Theexcess of the purchase price over the fair values of the net assets acquiredhas been recorded as goodwill.

 

8

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**NOTE 2.        ACCOUNTING POLICIES AND PROCEDURES**

 

**a.   BusinessActivity**

 

The Company creates proprietarytechnology and content-based intellectual property to advance the convergenceof the Internet with television, wireless and high-speed networks. In additionto fees generated from development of software, content, and other technologyproducts, the Company may also, from time to time, receive royalty income fromsales of certain software products developed for others.

 

**b.   DevelopmentStage Enterprise**

 

The Company is a developmentstage enterprise company as defined in Statement of Financial AccountingStandards No. 7, “Accounting and Reporting by Development Stage Enterprises.”All loses accumulated since inception of Zeros & Ones, Inc. have beenconsidered as part of the Company’s development stage activities.

 

The unaudited cumulativestatements of operations and cash flows during the development stage consist ofthe results from operations from various entities within the group. The date ofinception of each entity within the group of companies comprising the parentand its wholly owned subsidiaries (collectively the “Group”). The date ofinception of each entity within the Group varies with dates of inceptionranging from January 19, 1996 to April 1, 1998. Information from dates of inceptionto December 31, 1997 and for the twelve months ended December 31, 2001 isunaudited.

 

**c.   RevenueRecognition**

 

The Company generallyrecognizes sales under fixed-price-type contracts as deliveries are made or atthe completion of contractual billing milestones that equate to the completionof a specific component of the contract.

 

**d.   Principlesof Consolidation**

 

The consolidated financialstatements include the accounts of its wholly owned subsidiaries of QuantumArts, Inc., EKO Corporation, Pillar West Entertainment, Inc. (PWE), PolygonalResearch Corporation, KidVision, Inc. and Wood Ranch Technology Group, Inc. Allsignificant intercompany transactions and balances have been eliminated.

 

9

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**e.   Net Loss per Share**

 

All presented data reflects theretroactive effect of the three-for-one stock split on February 25, 2000.

 

For the year ended December 31,2001, the per share data is based on the weighted average number of commonequivalents shares outstanding and are calculated in accordance with theFinancial Accounting Standards Board (FASB) No. 128 and Staff AccountingBulletin of Securities and Exchange Commission (SAB) No. 98 whereby commonstock, options or warrants to purchase common stock or other potentiallydilutive instruments issued for nominal consideration must be reflected inbasic and diluted per share calculation for all periods in manner similar to astock split, even if anti-dilutive.

 

**f.   ComprehensiveIncome**

 

Comprehensive loss consists ofnet loss from operations only.

 

**g.   Useof Estimates**

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from thoseestimates.

 

**h.   CashEquivalents**

 

The Company considers allhighly liquid investments with a maturity of three months or less to be cashequivalents.

 

10

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**i.   Propertyand Equipment**

 

Property and equipment,recorded at cost, are depreciated or amortized using the straight-line methodover the estimated useful lives of the assets, which are generally three tofive years.  Leasehold improvements areamortized using the straight-line method over the shorter of their estimatedlives or lease. The Company has adopted Statement of Financial AccountingStandards No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed of “(SFAS No. 121”). SFAS No. 121 requiresthat long-lived assets and certain identifiable intangibles be reviewed forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. Recoverability of asset tobe held and used is measured by a comparison of the carrying amount of an assetto the future net cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment to be recognized ismeasured by the amount by which the carrying amounts of the assets exceed theirfair values of the assets. Assets to be disposed of are reported at the lowerof the carrying amount of fair value less cost of sell. Adoption of thisstatement did not materially impact the Company’s financial position, resultsof operations or liquidity.

 

**NOTE 3.        MAJOR CUSTOMERS**

 

For the year ended December 31,2000, 76.2% of the Company’s revenues were generated by two customers. Thesesame two customers represents 61.6% of the trade accounts receivable atDecember 31, 2000.

 

**NOTE 4.        ACCOUNT RECEIVABLE FROM STOCKHOLDERS**

 

In July 1999, the Companyreceived $292,300 of accounts receivable from stockholder as part of assetspurchased in exchange for the Company’s stock and accordingly, these accountsreceivable from the stockholder are classified as contra account to stockholder’sequity. As of March 31, 2000, services performed by stockholder in the amountof $202,500 were used to offset a portion of the balance of the accountreceivable from the stockholder. In June 2000, the Company determined that thebalance of the account receivable from the stockholder was uncollectible and,therefore, wrote off the balance.

 

11

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**NOTE 5.****                         PROPERTY & EQUIPMENT**

 

| A summary is as follows :                 |   |     |    |
|-------------------------------------------|--------|----------|---------|
| Computer & equipment                  |   | $        | 122,653 |   |
| Furniture & Fixtures                  |   | 64,997   |    |
| Electronic Equipment                      |   | 29,693   |    |
| Office Equipment                          |   | 2,016    |    |
| Software-Internal Use                     |   | 3,219    |    |
| Leasehold   Improvements             |   | 476,453  |    |
| Equipment Under Capitalized Leases        |   | 185,829  |    |
|                                      |   |     |    |
|                                      |   | 884,860  |    |
| Accumulated depreciation and amortization |   | (137,921 | )       |
|                                      |   |     |    |
| Property & Equipment - net            |   | $        | 746,939 |   |

 

Accumulated depreciation onequipment under capitalized leases amounted to $58,189 for the year endedDecember 31, 2000. Depreciation and amortization expense totaled $142,276 forthe year ended December 31, 2000.

 

**NOTE 6.****                         INTANGIBLES**

 

| Goodwill                                  |   | $       | 207,500 |   |
|-------------------------------------------|--------|---------|---------|--------|
| Intellectual Property                     |   | 64,997  |    |
|                                      |   |    |    |
|                                      |   | 222,500 |    |
| Accumulated depreciation and amortization |   | (62,246 | )       |
|                                      |   |    |    |
| Intangible Assets – net              |   | $       | 160,254 |   |

 

Amortization expenses totaled$41,496 for the year ended December 31, 2000.

 

12

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**NOTE 7.        INCOME TAXES**

 

For federal income taxpurposes, the Company has available a net operating loss carryforward ofapproximately $17,471,411. The net operating loss carryforwards expire through2012 and are available to offset future income tax liabilities.

 

Temporary differences, whichgive, rise to deferred tax assets and liabilities at December 31, 2001 are asfollows:

 

| Net operating loss carryfoward |   | $      | 5,503,494       |   |
|--------------------------------|--------|--------|-----------------|--------|
| Valuation allowance            |   | $      | 5,503,494       |   |
|                           |   |   |            |
| Net deferred taxes             |   | $      | — 0 — |   |

 

A full valuation allowance hasbeen established for the Company’s net deferred tax assets since therealization of such assets through the generation of future taxable income is uncertain.

 

Under the Tax Reform Act of1986, the amount of benefit from net operating losses and tax creditcarryfowards may be impaired, or limited to, a cumulative stock ownershipchange of greater than 50%, as defined, over a three year period.  During 2000 and 2001 the Company experiencedstock ownership changes as described in Note 1, which could limit theutilization of its net operating loss carryforward in future periods.

 

**NOTE 8.        CAPITALSTOCK**

 

**a.   Preferredstock**

 

The authorized capital stock ofthe Company includes 2,000,000 shares of preferred stock, par value $0.001 pershare, none of which is issued or outstanding.

 

**b.   Commonstock**

 

During the first quarter of2000, pursuant to a Confidential Private Placement Memorandum, the Company sold5,523,204 shares of the Company’s common stock at a purchase price $1.46 pershare and 5,523,204 warrants at an exercise price of $1.83 per share. TheConfidential Private Placement was exempt from the registration provisions ofthe Act pursuant to Section 4(2) of the Act, as transactions by an issuer notinvolving any public offering.  Thesecurities issued pursuant to the Confidential Private Placement wererestricted securities as defined in Rule 144. The offering generated gross proceeds

 

13

----

 

of approximately $8,100,000subject to various offering costs. Additionally 150,000 shares of the Company’scommon stock were issued for services rendered in connection with thisconfidential private placement.  An additional180,300 warrants exercisable until March 31, 2005 at a price of $1.83 per shareand 77,200 warrants exercisable until March 31, 2001 at a price of $5.00 pershare, were issued for services rendered in connection with this confidentialprivate placement.

 

During February 2000, theCompany amended its Articles of Incorporation to provide for an increase in thenumber of authorized shares of common stock to 100,000,000 par value$.001.  The Company also declared a three-for-onestock split.  The stock split waseffective on February 2000.  In July2000, the Company’s Board of Directors authorized the adoption of the 2000Employee Stock Incentive Plan (the “Plan”). Under the Plan, the Company may grant up to 4,500,000 stock options topurchase up to 4,500,000 share of the Company’s common stock.

 

The Company reallocated$8,610,749 between common stock and paid in capital to reflect the par value ofshares outstanding as of December 31, 2000.

 

**NOTE 9.        STOCKOPTIONS**

 

In July 2000, the Company’sBoard of directors authorized the adoption of the 2000 Employee Stock IncentivePlan (the “Plan”). The Company’s 2000 nonqualified stock option plan permitsthe grant of stock options to any employee or director of the Company. Underthe terms of the plan 4,500,000 shares are authorized for issuance uponexercise of options. Under the nonqualified plan, options have been grantedwith an exercise price equal to the fair market value of the Company’s stock onthe date of the grant and expire ten years after the grant date. Vesting isover a four-year period commencing with the employees’ hire date, with portionsof a grant becoming exercisable at one year after the vesting start date andthen one-thirty-sixth (1/36) per month to complete the four year vesting.

 

Information concerning stock options issuedto directors, officers, and other employees is presented in the followingtable.

 

14

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|                               |   | **2001** |   | **2000** |   | **Weighted   Average   Option Price** |   |
|------------------------------------|--------|----------|--------|----------|--------|---------------------------------------|--------|
| Outstanding at beginning of year   |   | 778,100  |   | 0        |   | $                                     | 1.00   |   |
| Granted                            |   | 0        |   | 923,100  |   | $                                     | 0.98   |   |
| Exercised                          |   | 0        |   | 0        |   | N/A                                   |   |
| Canceled, expired, or forfeited    |   | 0        |   | (145,000 | )      | $                                     | 1.00   |   |
| Outstanding at end of year         |   | 778,100  |   | 778,100  |   | $                                     | 0.98   |   |
| Options exercisable at end of year |   | 86,455   |   | 81,830   |   | $                                     | 1.00   |   |

 

Fixed options outstanding andexercisable at December 31, 2001 are as follows:

 
|                                                  |   | **Options Outstanding**  |   | **Options Exercisable**                         |   |
|-------------------------------------------------------|--------|--------------------------|--------|-------------------------------------------------|--------|
| **Range of   Exercise Prices**                        |   | **Number   Outstanding** |   | **Weighted-Average Remaining Contractual life** |   | **Weighted-  Average Exercise Price** |   | **Number   Exercisable** |   | **Weighted-  Average Exercise Price** |   |
|                                                  |   |                     |   |                                            |   |   |   |   |   |   |   |
| $  0.63   to    $  1.06 |   | 778,100                  |   | 9.75 years                                      |   | $ | 0.98 |   | 81,830 |   | $ | 1.00 |   |
|                                                       |        |                          |        |                                                 |        |  |  |  |  |  |  |  |  |

 

The Company has elected to apply APB OpinionNo. 25 in accounting for the non-qualified stock option plan. Therefore, theCompany does not recognize compensation expense for the fixed stock optionsbecause the exercise price of the option equals the fair value of the stock onthe effective date of the grant.  On thevariable stock options, a total of $21,156 was recognized as expense in2000.  If the Company had recognizedcompensation expense for the fixed options based on the value as determined bythe Black-Scholes option pricing model, in accordance with SFAS No. 123, thepro forma net income and earnings per share would be as follows for 2000.  The effect of SFAS No. 123 for 2001 has notbeen determined.

 

15

----

 

| Net income (loss)-as reported           |   | $          | (4,682,218 | ) |
|-----------------------------------------|--------|------------|------------|---|
| Net income (loss)-pro forma             |   | (5,577,018 | )          |
| Basic and fully diluted EPS-as reported |   | (0.21      | )          |
| Basic and fully diluted EPS-pro forma   |   | (0.25      | )          |

 

The effects of applying SFAS No. 123 in thispro forma disclosure are not necessarily indicative of future amounts.

 

The following assumptions were used inBlack-Scholes model determining fair value:

 

| Risk-free interest rate |   | 5.80   | % |
|-------------------------|--------|--------|---|
| Expected life in years  |   | 10.00  | % |
| Expected volatility     |   | 150.00 | % |
| Expected dividend yield |   | 0.00   | % |

 

**NOTE 10.      CONTINGENCIES**

 

In July 2001, the Company reached a finalsettlement with Steve Schklair, former director and officer, in regards totheir respective legal action against each other. The settlement involves noexchange of cash between the parties. The Company will not have to recognizeany expense as the result of this settlement. The settlement puts certainrestrictions on how Mr. Schklair may sell the Company’s shares that he owns onthe open market.

 

On August14, 2000, a complaint was filed inthe Superior Court for the State of California and for the County of LosAngeles in an action entitled ICU Security, Inc. v. Zeros & Ones, Inc.,Robert Holtz, Bernard Butler-Smith. The complaint alleged that trade secretinformation was improperly passed from Butler-Smith to the Company and Mr.Holtz.  The complaint had sought damagesin the amount of $10,000,000. The Company and the individual defendants filedmultiple counterclaims against ICU Security, Inc. The named individualdefendants ant the Company denied any wrongdoing and vigorously defended thisaction. Investigation into this matter resulted in substantial defenses.

 

16

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During the first week of November of 2001,that lawsuit filed by ICU Security, Inc. against Zeros & Ones, Inc. wassettled out of court. Under the terms of the settlement, ICU has entirelydropped is lawsuit and waives any and all claims against Zeros & Onesincluding without limitation any and all claims related to the compressiontechnology of Zeros & Ones.  Zeros& Ones, accordingly, agreed to drop its counterclaims against ICU, convey200, 000 shares of restricted Zeros & Ones stock and pay $20,000 in cash toICU as opposed to the original sought after $10,000,000 figure.

 

Paul Frank Industries (“PFI”) filed a legalaction against the Company requesting that the court advise them and theCompany of their respective rights under the Exclusive Media Rights Agreementbetween the parties. In addition, PFI requested the court to prevent theCompany from entering into future third party agreements under the ExclusiveMedia Rights Agreement without the prior approval of PFI. The Company disputesthe approval rights the PFI is claming and intends to vigorously and broadlydefends its rights. PFI’s action has no effect on existing agreements relatedto the Company’s production of Paul Frank’s Julius & Friends.

 

In a related action, PFI’s requested for atemporary restraining order to prevent the Company for entering into thirdparty agreements involving PFI characters was denied by the court because,among other things, PFI did not demonstrate to the court that PFI was likely tosucceed on the merits.

 

**NOTE 11.      LEASE COMMITMENTS**

 

In July 2000, the Company entered into anoperating lease for its operating facility for $20,000 per month subject toannual increases. The lease was to expire June 2005, with an option to renewthe lease for an additional five-year period. The Company was responsible forall operating expenses of the building, which included property taxes andinsurance. Under this lease, the Company was provided free rent for the firsteight and one-half months. Rental expense is recognized on a straight-linebasis over the term of the lease. In October 2001 the Company reached anagreement with the landlord to cancel the remaining obligation of the leasewithout incurring additional costs. Physical operations are now beingconsolidated with Join Employers Group’s offices at 12070 Telegraph Road, Suite100, Santa Fe Springs, California, 90670.

 

17

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**NOTE 12.      SUBSEQUENT EVENTS**

 

In the first quarter 2001 the Company enteredinto an agreement to purchase Joint Employers Group (A California Corporation).Proforma and details of this transaction have been filed with the SEC.

 

18

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION**

 

**CAUTIONARYSTATEMENTS**

 

This Form 10-KSB contains financialprojections, synergy estimates and other “forward-looking statements” as thatterm is used in federal securities laws about Zeros & Ones, Inc.’s (“ZROS”or the “Company”, or “Division”) financial condition, results of operations andbusiness. These statements include, among others:

 

•   statements concerning the benefits thatZROS expects will result from its business activities and certain transactionsZROS has completed, such as increased revenues, decreased expenses and avoidedexpenses and expenditures; and

 

•   statements of ZROS’s expectations, beliefs,future plans and strategies, anticipated developments and other matters thatare not historical facts. These statements may be made expressly in this Form10-KSB. You can find many of these statements by looking for words such as“believes,” “expects,” “anticipates,” “estimates,” “opines,” or similarexpressions used in this Form 10-KSB. These forward-looking statements aresubject to numerous assumptions, risks and uncertainties that may cause ZROS’sactual results to be materially different from any future results expressed orimplied by ZROS in those statements. The most important facts that couldprevent ZROS from achieving its stated goals include, but are not limited to,the following:

 

(a) volatility and/or decline of ZROS’s stockprice;

 

(b) potential fluctuation in quarterlyresults;

 

(c) barriers to raising the additionalcapital or to obtaining the financing needed to implement its full businessplans;

 

(d) changes in demand for ZROS’s products andservices;

 

(e) rapid and significant changes intechnology and markets;

 

(f) litigation with and/or legal claims/allegationsby outside parties;

 

ZROS is a development stagecompany that has incurred operating losses since inception. There is noassurance that the Company’s research and development projects will result incommercially successful products or services, or whether patents will begranted for any of them. There is no assurance that the Company will ever beprofitable, the Company may not be able to successfully develop, manage ormarket its products and services, the Company may not be able to attract orretain qualified executives and technology personnel, the Company’s productsand services may become obsolete, government regulation may hinder theCompany’s business, additional dilution in outstanding stock ownership may beincurred due to the issuance of more shares, warrants and stock options, or theexercise of 

 

19

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outstanding warrants and stockoptions, and other risks inherent in the Company’s businesses.

 

Because the statements aresubject to risks and uncertainties, actual results may differ materially fromthose expressed or implied by the forward-looking statements. ZROS cautions younot to place undue reliance on the statements, which speak only as of the dateof this Form 10-KSB. The cautionary statements contained or referred to in thissection should be considered in connection with any subsequent written or oralforward-looking statements that ZROS or persons acting on its behalf may issue.ZROS does not undertake any obligation to review or confirm analysts’expectations or estimates or to release publicly any revisions to anyforward-looking statements to reflect events or circumstances after the date ofthis Form 10-KSB or to reflect the occurrence of unanticipated events.

 

**CURRENTOVERVIEW**

 

During the fourth quarter of2001, the Company began discussions to acquire Joint Employers Group, Inc. andbegan the process of developing a plan whose key focus was servicing andexpanding that business.

 

The Company has sincesuccessfully completed the acquisition of Joint Employers Group andsuccessfully obtained two letters of intent from outside sources to provide theCompany with Letters of Credit intended to replace an existing reserve alreadyin place between Joint Employers Group and one of its insurance carriers.  The insurance carrier is currentlyconsidering these offers and has indicated a willingness to complete thistransaction, provided it were guaranteed by a banking institution that has beenapproved by the NAIC (National Association of Insurance Carriers).  The Company is presently in negotiationswith a particular NAIC-approved source. This process is expected to release approximately $1.5 million dollars inworking capital in the form of cash and letters of credit already in JEG.

 

In addition to stabilizing bothcompanies, the funds will be utilized on the ongoing development of theCompany’s technology holdings, with special focus on its MC-10 imagecompression and BetterThanSource image filtering.

 

Joint Employers Group provides outsource PEOsolutions for handling all aspects of human resources, payroll, healthcare,benefits, safety, workers compensation issues, and employment complianceadministration.  The acquisition addsapproximately $47 million in annual revenues and has also empowered the Companyto migrate its e-business services from the shrinking dot-com space into thegrowing PEO/employee leasing industry.

 

**OVERVIEWOF JEG GROWTH PLAN**

 

The Company has two independent but fullycompatible growth opportunities that it intends to pursue in parallel.  One of these growth opportunities involvesdoubling the Company’s core business within 18 months will little additionaloverhead, while the other involves an innovative approach to dealing withindividual entrepreneurs, such as freelance writers, animators, graphicartists, and attorneys, for example.  Italso involves the strategic 

 

20

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application of its corporate parent’sexisting Internet and Intranet technologies, expertise, and large software codebase.

 

The PEO industry is growing by more than 35%every year (source: peo.com).  Ten yearsago, the industry was still in its infancy. Today, there are more than 2,000 PEOs in the United States co-employingmore than two (2) million workers — from lawn maintenance workers toattorneys.  It is a conservative growthtrend that the Company expects to accelerate in coming years.

 

Typically when a PEO reaches 600 to 800employees, it begins to realize stable profitability.  Most “mom & pop”-owned PEOs stay at that level.  When those PEOs become medium-sized (atapproximately 2,000) employees they often begin finding that their “home-grown”systems become increasingly inadequate to handle sustained growth beyond adoubling or tripling of their business-base (often with a declining percentageof profitability).  Hence,administration becomes increasingly labor intensive, and they remain staticwithin this middle category level due to their administrative infrastructure.

 

On the other hand, those PEOs that develop ahigh degree of automation and integration within their administrative systemsas they reach a business base of 2,000 employees normally scale to double insize very rapidly with little additional overhead required, which in turn yieldsincreasing rates of net profit.

 

In concert with the planned revenue growth,the Company intends to improve profitability and the average quality of itsclient base by achieving the following objectives:

 

1.               Increaseboth the number of employees under the Company’s management as well as theaverage income level of employees under contract; thus increasing revenue andprofitability.  The Company will achievethis, in part, by targeting growth in market sectors with per capita incomesexceeding $30,000/annum.

 

2.               Diversifythe customer mix.

 

3.               Targetgeographic areas in California for development as technology centers, in bothSouthern and Northern California.

 

4.               Achievea broader base of investor and strategic partners that can leverage and expandthe PEO customer base.

 

5.     Takeadvantage of the Company’s management team’s recognition that the networkwithin the PEO and insurance industries supports numerous opportunities forcost containment above and beyond those cost containment measures already implementedby the Company.

 

6.               Implementinformation systems upgrades in both front office and back office operationsthat can facilitate significant growth without commensurate increases inoperating expenses.

 

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7.               Shiftsales focus to target industries with higher potential for reference-basedsales.

 

8.               Leveragerelationships of the parent company to introduce new value-added revenuestreams that contribute to the bottom line with virtually zero cost of sales.

 

**JEGSTRATEGY**

 

1.       Doubling the Company’s Existing CoreBusiness:

 

The core businessof the Company is a conservative and highly predictable business that can beeasily scaled at certain revenue milestones in an almost “cookie cutter”fashion.  JEG is at a point where theexisting infrastructure and facilities are able to handle a doubling of thebusiness with a disproportionately small increase in headcount or overhead.

 

The Zeros &Ones Studios group will automate JEG operations, create new revenue streams,introduce an Internet-based direct marketing campaign geared to entrepreneursand small business owners, and to create a new innovative e-business platformfor JEG clients called the “JEGPortal.”

 

2.       JEGPortal - Innovative Intranet/InternetTechnology-Driven Program

 

The JEGPortal isbeing created to achieve three key goals: 1) Better serve the JEG client base with anytime/anywhere access tomajor JEG services, and 2) Add more value to the outsourcing concept bybringing in other services every business needs beyond standard PEO offerings,and 3) Introduce a business-to-business platform for other Zeros & Onestechnologies and applications.

 

The customizableJEGPortal is designed specifically for business, provides an easy-to-use yetpowerful application that functions as an integrated corporate communicationcenter, payroll, and human resource system. Functioning as a company’s “view screen,” it combines two key conceptsin knowledge management: portals and intranets.

 

Portals are themeddoorways to the vast resources of the Internet. They bring information andservices together for employees so they don’t spend unnecessary time searchingfor them.  Intranets are online closedcommunities. They allow secure communication, file sharing, collaboration, andapplication sharing for intranet members. The benefits of integrating Intranet features into the Company’s corebusiness will not only help reduce the costs, but it will greatly assist in itssales and support efforts by allowing JEG to become more seamlessly blendedinto each client’s day-to-day operations.

 

Not only will thisnew level of automation make it possible to more responsively and profitablyrespond to client needs on-the-fly, but it will also make it possible for theCompany to expand its offerings to small groups and individuals that wouldotherwise 

 

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be unviableprospects.  Individual entrepreneurs,freelance workers, and self-employed clients would be able to participate inthe Individual Entrepreneur Program.

 

The JEGPortal as a Revenue Center

 

1.       Business Services from Global Brand Names

The establishmentof a large dedicated user group of the Company’s Intranet systems will yieldimmediate and material opportunities to create additional and novel revenuestreams for the Company.  Theseadditional revenue streams will be nearly transparent to the Company’s clientusers.  In fact, the creation of theseadditional revenue streams, which are by no means mutually exclusive orinsignificant, will create a strong perceived added value for the Company’sclients.

 

There are manynationally known companies that offer commissions and other payments for“click-through” Internet traffic or services integrated in portals such as theJEGPortal.

 

Among the types ofcompanies that pay significant referral fees are financial services companies;shipping companies; online trading services; and office supply stores.  The goal for the Company is essentially zerocost to capture the business and a constant connection to repeat orders foroffice or other supplies every typical business needs.  Even Starbucks Coffee has such a program forits in-office coffee service.  TheCompany has both the expertise, the technology and an existing large softwarecode base to implement both the Intranet systems and the referral relationshipsmentioned above.

 

Supplemental tosuch referral based revenue streams are banner ad and text-based ad revenuestreams.  Such revenue streams aredirectly proportional to the number of users of the particular Intranet.  The Company has entered discussions withover a dozen national companies for referral relationships pertaining to theJEGPortal.

 

The JEGPortal movesthis concept into the core of every client’s operations and adds to the convenienceof running his or her business.  Thesystem also offers convenient online payroll entry, employee records/reporting,attendance management, HR document workflow, employee handbook, compliancetraining, performance management and employee self-service.

 

2.       Individual Entrepreneur Program

The JEGPortal,along with Internet-based permission marketing makes it possible to for theCompany to expand its offerings to small groups and individuals that wouldotherwise be unviable prospects. Individual entrepreneurs, freelance workers, and self-employed clientswould be able to participate in the Individual Entrepreneur Program.

 

The Company hascalculated that each participant in its Individual Entrepreneur Program willyield $40 per month of profit and substantially more than that in grossrevenue.  The Company’s short-term goalwith this program is to sign up 10,000 individuals in California. The Companyanticipates that it will be able to create a compelling case for smallbusinesses and entrepreneurs to tap into the services that would otherwise belimited only to large businesses.

 

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**SUMMARYOF JEG OPPORTUNITY**

 

The PEO concept delivers buying power tosmall business.  We believe thecombination of technology and expertise brought about by the Company’sacquisition of Joint Employers Group makes it possible to take that to the nextlevel.

 

JEG is now a major aspect of the Company’soperations.  That said, the Companyintends to continue most of its key non-JEG projects in some form –either directly from the parent, in a spin-off entity, or integrated into theJEG business unit.

 

**ZEROS& ONES TECHNOLOGIES, INC.**The Company believes its technological developmentsrepresent the most significant aspect of current and future shareholdervalue.  To focus on those opportunities,Zeros & Ones Technologies, Inc. was recently formed as a privately heldsubsidiary. On November 30, 2001, a dividend transaction representing 10%direct ownership by the public shareholders of record on September 24, 2001 ofZROS. Zeros & Ones, Inc., the publicly held parent company, owns theremaining 90%. Additional dividend(s) will be issued directly to publicshareholders in the future.

 

During the first week ofNovember of 2001, Zeros & Ones reached what we believe to be a majorachievement in protecting its proprietary technology. The previously disclosedmulti-million dollar lawsuit filed by ICU Security, Inc. against Zeros &Ones, Inc. was settled out of court. Under the terms of the settlement, ICU hasentirely dropped its lawsuit and waives any and all claims against Zeros &Ones including without limitation any and all claims related to the compressiontechnology of Zeros & Ones.

 

Zeros & Ones, accordingly,agreed to drop its counterclaims against ICU, convey 200,000 shares ofrestricted Zeros & Ones stock and pay $20,000 in cash to ICU as opposed tothe original sought after $10 million figure. The Company was successful in having the D&O (Directors andOfficers) insurance provider cover this cash settlement plus $10,000 towardsthe associated legal fees to defend this matter.

 

The Company owns more than 75(seventy-five) inventions, which include, but are not limited to, Motion VideoCompression, Image Compression, Visual Noise Reduction, Stereoscopic 3D,Wireless Data Error Correction, Video-to-Vector Conversion, T-commerceprocessing, and Image Recognition. For the purpose of protecting theconfidentiality of these inventions to maximize the patent rights of theCompany, public statements concerning these proprietary technologies will beissued only after provisional patent applications have been filed with theUnited States Patent and Trademark Office (USPTO).

 

**ZEROS& ONES ENTERTAINMENT**

In September of 2001, Zeros& Ones Entertainment announced that it had successfully launched “PaulFrank’s Julius & Friends.” The show debuted exclusively on SONY’s broadbandcreativity platform ScreenBlast (www.screenblast.com).  The Julius & Friends is a featureattraction in the Comedy section of the SONY ScreenBlast entertainment website.

 

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The Company has successfullydelivered all episodes promised to Mondo Media as per an existing agreementwhereas Mondo Media is to syndicate the Company’s content to its network,beginning with SONY ScreenBlast. Mondo Media (www.mondomedia.com), which isprivately held, is the Internet’s leading syndicate of entertainment contentwith distribution partners that include the most recognized names on the Internet:SONY ScreenBlast, Yahoo! Broadcast, WB Online, Excite@Home, Lycos, NBCi, RealNetworks, AtomShockwave, and others. Mondo Media presents its “Mondo MiniShows” through its powerful distribution network to an audience of millions offans and animation enthusiasts.

 

The Company’s agreementpertaining to the distribution of this content includes 50 percent profitparticipation from advertising revenue. The Company believes that said revenue is already being generated butthe associated parties have failed to disperse these amounts as per itsagreements.  As part of its ongoing andalready disclosed litigation with Paul Frank Industries, the Company is seekingto identify those amounts and collect them.

 

**ZEROS& ONES STUDIOS**

Zeros & Ones Studios groupis being transposed into a small operating team geared to servicing thee-business aspects of the JEG Portal system for Joint Employers Group.

 

Clients that have used theseservices include but are not limited to, Pearson Television, Electronic Arts,NLSI, Blue Chip Films, Sonar, Zeros & Ones Entertainment (in cooperationwith Mondo Media), and Joint Employers Group.

 

**PARENTCOMPANY STRATEGIC RELATIONSHIPS**

 

**MicrosoftCorporation**

The Company continues itsexpanded support of Microsoft-based enabling solutions for ITV and anticipatesadditional activity on this front that will be disclosed publicly at theappropriate time, and in coordination with the management of MicrosoftCorporation.

 

In 2001, the Company enteredinto a mutual non-disclosure confidentiality agreement with MicrosoftCorporation whereas Microsoft has disclosed and will continue to discloseconfidential strategic plans and developmental tools to the Company forenhanced and interactive television. As a result of this agreement, andassociated consideration, the Company was officially recognized by Microsoft asan authorized Microsoft TV Content Developer, in addition to its otherdistinctions. The developments and details of the aforementioned with theCompany remain confidential in nature, at this time, but generally relate to..NET, Microsoft TV, and UltimateTV.

 

Since .NET is aimed ataccelerating this next generation of distributed computing, the Company seesmany opportunities for T-Commerce and ITV solutions that harness the power of..NET, including the repositioning of ZROS’ own Z-Transact engine, originallyintended for e-commerce applications, as a .NET T-commerce software service.

 

The JEGPortal is being builtutilizing all .NET and object-oriented technology.

 

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**ICTV,Inc.**

 

ICTV continues to be a key partner for theCompany’s efforts.ICTV supplies world-leading communications and Interactive TV(ITV) infrastructure solutions to network operators. The company’s digital ITVdelivery platform provides cable operators with a head-end solution thatenables delivery of broadband Internet, e-mail, and Interactive TV applicationsto any digital set top device.

 

Any application running on theICTV platform can run on any digital set top box. The system does not requireany sort of middleware application in the set top. Employing a patentedfrequency reuse solution, ICTV is fully scalable on any two-way HFC cablesystem.

 

Investors and strategicpartners of ICTV include ACTV (Nasdaq:IATV), Adelphia (Nasdaq:ADLAC), Cox(NYSE:COX), Lauder Partners, Liberty Digital (Nasdaq:LDIG), Motorola(NYSE:MOT), OpenTV (Nasdaq:OPTV), Shaw Communications (NYSE:SJR and TSE:SJR.B),and Gemstar – TV Guide (Nasdaq:GMST).

 

**WildTangent,Inc.**

WildTangent creates enabling technologyto build richer, more exciting Internet experiences by blending 3D graphics,sound, animation and interactivity using the WildTangent Web Driver(TM). TheCompany has ahead-of-general-release access to advanced code from WildTangentsuch as their “virtual bandwidth” technology and “Updater” technology.

 

Founded by former MicrosoftEvangelist and DirectX creator Alex St. John, and Cambridge mathematicianJeremy Kenyon, WildTangent serves as a valued partner for both the Company’scontent-oriented and technology-oriented initiatives.

 

**LOOKINGFORWARD**

 

The Company’s overall focusthroughout the rest of 2001 and beginning of 2002 was on the survivability ofits businesses, stability of internal operations, and vigorous enforcement ofthe Company’s ownership of both key rights and proprietary holdings.  In our opinion, the collective andindividual track records of the Company’s management team, the current andfuture worth of the intellectual property, proprietary technology, and rightsowned by ZROS and its subsidiaries provide sustained value to existingshareholders and potential investors.

 

Leveraging its technology prowess andtransitioning its core competencies out of dot-com and into the growingrevenue-oriented PEO business segment by way of acquisition, Zeros & Onesbelieves it has virtually re-invented itself and, as a result, is currentlyquite undervalued.

 

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**PART II. OTHER INFORMATION**

 

**Item1. LEGAL PROCEEDINGS**

 

During the first week ofNovember of 2001, Zeros & Ones reached what we believe to be a majorachievement in protecting its proprietary technology. The previously disclosedmulti-million dollar lawsuit filed by ICU Security, Inc. against Zeros &Ones, Inc. was settled out of court. Under the terms of the settlement, ICU hasentirely dropped its lawsuit and waives any and all claims against Zeros &Ones including without limitation any and all claims related to the compressiontechnology of Zeros & Ones.

 

Zeros & Ones, accordingly,agreed to drop its counterclaims against ICU, convey 200,000 shares ofrestricted Zeros & Ones stock and pay $20,000 in cash to ICU as opposed tothe original sought after $10 million figure. The Company was successful in having the D&O (Directors andOfficers) insurance provider cover this cash settlement plus $10,000 towardsthe associated legal fees to defend this matter.

 

Paul Frank Industries (“PFI”)filed a legal action against the Company requesting that the court advise themand the Company of their respective rights under the Exclusive Media RightsAgreement between the parties. In addition, PFI requested the court to preventthe Company from entering into future third party agreements under theExclusive Media Rights Agreement without the prior approval of PFI. The Companydisputes the approval rights that PFI is claiming and intends to vigorously andbroadly defend its rights. PFI’s action has no effect on existing agreementsrelated to the Company’s production of Paul Frank’s Julius & Friends.

 

In a related action, PFI’srequest for a temporary restraining order to prevent the Company from enteringinto third party agreements involving PFI characters was denied by the courtbecause, among other things, PFI did not demonstrate to the court that PFI was likelyto succeed on the merits.

 

The Company has filedcounterclaims to recover substantial merchandising revenue it believes theCompany is owed under the terms of the agreement, along with other damagesincurred as a result of this matter. Paul Frank Industries and Zeros & Ones are set for trial in FederalCourt on June 4, 2002.  The parties arecurrently engaged in depositions and other pre-trial activities andpreparations.  The Company is beingrepresented by the Wilshire Palisades Law Group on a contingency basis.

 

**Item2. CHANGES IN SECURITIES**

None.

 

**Item3. DEFAULTS UPON SENIOR SECURITIES**

None.

 

**Item4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS**

None.

 

**Item5. OTHER INFORMATION**

None.

 

**Item6. EXHIBITS AND REPORTS ON FORM 8-K**

(a) Exhibits None. (b) Reports on Form 8-K

 

 

The following 8-K statement wasreleased in February of 2002:

 

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**[ACILETTERHEAD]**

 

 

*INDEPENDENTAUDITORS’ REPORT*

 

The Boardof Directors and Stockholders of

Joint EmployersGroup

(ACalifornia Corporation)

 

We have audited the accompanying balance sheets of Joint EmployersGroup (a California corporation) as of June 30, 2001 and 2000 and therelated statements of operations, stockholders’ equity and cash flows for the yearsthen ended. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted our audit in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Joint EmployersGroup as of June 30, 2001 and 2000, and the results of its operations andcash flows for the years then ended in conformity with generally acceptedaccounting principles.

 
| /s/    |   |
|--------|--------|
|   |   |
|   |   |

 

 

ChulaVista,California

November 19,2001

 

----

 

**JOINT EMPLOYERS GROUP**

**(A Corporation)**

**Balance Sheets**

 

 
|                                      |   | **Year Ended   June 30, 2001** |       | **Year Ended   June 30, 2000** |       |
|-------------------------------------------|--------|--------------------------------|------------|--------------------------------|------------|
| **ASSETS**                                |   |                           | ** ** |                           | ** ** |
| **Current  Assets**                       |   |                           |       |                           |       |
| Cash in Bank                              |   | $                              | 120,548    |                           | $          | 151,251 |   |
| Accounts  Receivable                      |   | 607,998                        |       | 64,725                         |       |
| Insurance  Receivable                     |   | —                         |       | 285,541                        |       |
| Federal Income  Tax Benefit               |   | 28,750                         |       | 12,669                         |       |
| Prepaid Income  Taxes                     |   | 2,332                          |       | —                         |       |
|                                      |   |                           |       |                           |       |
| **Total  Current Assets**                 |   | 759,628                        |       | 514,186                        |       |
| **Net  Office Furniture & Equipment** |   | 117,744                        |       | 117,300                        |       |
| **Other  Assets**                         |   |                           |       |                           |       |
| Worker’s Comp.  Deposit              |   | 1,302,762                      |       | 195,000                        |       |
| Worker’s  Comp.Fund                  |   | 214,000                        |       | 25,000                         |       |
| Rent Deposit                              |   | 5,625                          |       | 5,625                          |       |
| Other Deposits                            |   | 1,685                          |       | 1,685                          |       |
|                                      |   |                           |       |                           |       |
| **Total  Other Assets**                   |   | 1,524,072                      |       | 227,310                        |       |
|                                      |   |                           |       |                           |       |
| **TOTAL  ASSETS**                         |   | $                              | 2,401,444  |                           | $          | 858,796 |   |

 

See Notes to Financial Statements

 

2

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|                                                                                                        |   | **Year Ended   June 30, 2001** | ** ** | **Year Ended   June 30, 2000** | ** ** |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|--------------------------------|------------|
| **LIABILITIES & STOCKHOLDERS’ EQUITY**                                                             |   |                           |       |                           |       |
| **Current  Liabilities**                                                                                    |   |                           |       |                           |       |
| Accounts  Payable                                                                                           |   | $                              | 156,135    |                           | $          | 66,087 |   |
| Payroll Taxes  Payable                                                                                      |   | 358,370                        |       | 275,232                        |       |
| Employee  Benefits Payable                                                                                  |   | 264,153                        |       | 150,832                        |       |
| Lines of Credit                                                                                             |   | 204,385                        |       | 125,687                        |       |
| Credit Cards  Payable                                                                                       |   | 39,603                         |       | 43,168                         |       |
| Income Tax  Payable                                                                                         |   | —                         |       | 3,613                          |       |
| Rent Payable                                                                                                |   | —                         |       | 5,625                          |       |
| Short Term  Notes for Workers’ Comp. Deposits                                                          |   | 986,595                        |       | 95,000                         |       |
| Workers’ Comp.  Premium Payable                                                                        |   | 70,959                         |       | —                         |       |
| Accrued  Interest                                                                                           |   | 73,031                         |       | —                         |       |
| **Total  Current Liabilities**                                                                              |   | 2,153,230                      |       | 765,245                        |       |
|                                                                                                        |   |                           |       |                           |       |
| **Long-Term  Liabilities**                                                                                  |   |                           |       |                           |       |
| Client Workers’  Comp. Deposits                                                                        |   | 60,146                         |       | —                         |       |
|                                                                                                        |   |                           |       |                           |       |
| **Total  Long-Term Liabilities**                                                                            |   | 60,146                         |       | —                         |       |
|                                                                                                        |   |                           |       |                           |       |
| **TOTAL  LIABILITIES**                                                                                      |   | 2,213,376                      |       | 765,245                        |       |
|                                                                                                        |   |                           |       |                           |       |
| **Stockholders’  Equity**                                                                              |   |                           |       |                           |       |
| Common Stock No  par Value, 5,000,000 shares authorized; 955,000 shares issued and   outstanding. |   | 5,000                          |       | 5,000                          |       |
| Paid in Capital                                                                                             |   | 71,000                         |       | 71,000                         |       |
| Retained  Earnings                                                                                          |   | 112,068                        |       | 17,551                         |       |
| **Total  Stockholders’ Equity**                                                                        |   | 188,068                        |       | 93,551                         |       |
| **TOTAL  LIABILITIES & STOCKHOLDER’S EQUITY**                                                      |   | $                              | 2,401,444  |                           | $          | 858,796 |   |

 

See Notes to Financial Statements

 

3

----

 

**JOINT EMPLOYERS GROUP**

**(A Corporation)**

**Statements ofOperations**

 
|                              |   | **Year Ended   June 30, 2001** |       | **Year Ended   June 30, 2000** |   |
|-----------------------------------|--------|--------------------------------|------------|--------------------------------|--------|
| REVENUES                          |   | $                              | 47,256,886 |                           | $      | 36,138,242 |   |
|                              |   |                           |       |                           |   |
| COST OF  REVENUES                 |   | 45,423,164                     |       | 35,124,172                     |   |
|                              |   |                           |       |                           |   |
| GROSS PROFIT                      |   | 1,833,722                      |       | 1,014,070                      |   |
|                              |   |                           |       |                           |   |
| OPERATING  EXPENSES               |   |                           |       |                           |   |
| Selling  Expenses                 |   | 79,092                         |       | 177,415                        |   |
| New Client  Start-up Expenses     |   | 87,254                         |       | —                         |   |
| General &  Operating Expenses |   | 971,402                        |       | 286,942                        |   |
| Salaries, Wages  and Related      |   | 559,388                        |       | 439,637                        |   |
| TOTAL OPERATING  EXPENSES         |   | 1,697,136                      |       | 903,994                        |   |
|                              |   |                           |       |                           |   |
| INCOME BEFORE  OTHER EXPENSES     |   | 136,586                        |       | 110,076                        |   |
|                              |   |                           |       |                           |   |
| Other Expenses                    |   |                           |       |                           |   |
| Interest Expense                  |   | 70,819                         |       | 9,954                          |   |
| Loss Due to  Embezzlement         |   | 180,779                        |       | 0                              |   |
| Total Other  Expenses             |   | 251,598                        |       | 9,954                          |   |
| NET INCOME  (LOSS) BEFORE TAXES   |   | (115,012                       | )          | 100,122                        |   |
| Income Tax  (Provision)\Benefit   |   | 28,750                         |       | (3,984                         | )      |
| NET INCOME  (LOSS)                |   | $                              | (86,262    | )                              | $      | 96,138 |   |

 

See Notes to Financial Statements

 

4

----

 

**JOINT EMPLOYERS GROUP**

**(A Corporation)**

**Schedules of Costs ofServices and Sales Expenses**

 
|                                    |   | **Year Ended   June 30, 2001** |       | **Year Ended   June 30, 2000** |       |
|-----------------------------------------|--------|--------------------------------|------------|--------------------------------|------------|
| **Costs  of Revenues**                  |   |                           |       |                           |       |
| Salary/Wages –  Leased             |   | $                              | 40,575,541 |                           | $          | 31,610,409 |   |
| Payroll Taxes                           |   | 3,457,091                      |       | 2,768,227                      |       |
| Worker’s  Compensation Insurance   |   | 803,451                        |       | 685,467                        |       |
| ELP Insurance                           |   | 0                              |       | 58,870                         |       |
| Printing  (Manuals, etc.)               |   | 0                              |       | 1,199                          |       |
| Medical  Insurance                      |   | 322,430                        |       | —                         |       |
| Employer  Contribution to Med.          |   | 244,180                        |       | —                         |       |
| ER 401k  Contributions                  |   | 20,471                         |       | —                         |       |
| **Total  Costs of Revenues**            |   | $                              | 45,423,164 |                           | 35,124,172 |   |
|                                    |   |                           |       |                           |       |
| **Selling  Expenses**                   |   |                           |       |                           |       |
| Sales-Gas and  Other Expenses           |   | $                              | 0          |                           | $          | 9,254 |   |
| Consulting Fees                         |   | 0                              |       | 37,231                         |       |
| Commissions                             |   | 50,717                         |       | 111,984                        |       |
| Travel                                  |   | 9,396                          |       | 719                            |       |
| Promotional                             |   | 10,345                         |       | 5,254                          |       |
| Sales  Leads/Listings                   |   | 3,464                          |       | 3,228                          |       |
| Printing                                |   | 5,170                          |       | 9,745                          |       |
| **Total  Selling Expenses**             |   | $                              | 79,092     |                           | 177,415    |   |
|                                    |   |                           |       |                           |       |
| **New  Client Start-Up Expenses**       |   |                           |       |                           |       |
| Office                                  |   | $                              | 30,025     |                           | $          | — |   |
| Contract Labor                          |   | 1,659                          |       | —                         |       |
| Miscellaneous                           |   | 55,570                         |       | —                         |       |
| **Total  New Client Start-Up Expenses** |   | $                              | 87,254     |                           | 0          |   |

 

See Notes to Financial Statements

 

5

----

 

**JOINT EMPLOYERS GROUP**

**(A Corporation)**

**Schedules of Generaland Operating Expenses**

 
|                                        |   | **Year Ended   June 30, 2001** |    | **Year Ended   June 30, 2000** |   |
|---------------------------------------------|--------|--------------------------------|---------|--------------------------------|--------|
| **General &  Operating Expenses**       |   |                           |    |                           |   |
| Auto Expense                                |   | $                              | 10,505  |                           | $      | 4,908 |   |
| Auto Reimbursement                          |   | 19,717                         |    | 28,472                         |   |
| Bad Debts                                   |   | 72,489                         |    | —                         |   |
| Bank Charges                                |   | 53,686                         |    | 8,215                          |   |
| Casual Labor                                |   | —                         |    | 1,151                          |   |
| Client Employee Recruiting  Exp.            |   | 684                            |    | 869                            |   |
| Consulting                                  |   | 174,710                        |    | 2,284                          |   |
| Contractual Services                        |   | 173,155                        |    | —                         |   |
| Credit Card Expenses                        |   | 21,002                         |    | —                         |   |
| Delivery/Payroll Clients                    |   | —                         |    | 5,321                          |   |
| Depreciation                                |   | 36,740                         |    | 23,952                         |   |
| Donations                                   |   | —                         |    | 200                            |   |
| Dues & Subscriptions                    |   | 2,572                          |    | 547                            |   |
| Employee First Aid Injuries                 |   | 4,877                          |    | 1,361                          |   |
| Employee Testing                            |   | 5,682                          |    | 2,133                          |   |
| Freight                                     |   | —                         |    | 9,093                          |   |
| Insurance                                   |   | 16,937                         |    | 3,577                          |   |
| Insurance-Life                              |   | 10,121                         |    | 4,337                          |   |
| Leases                                      |   | 71,533                         |    | 68,595                         |   |
| Legal                                       |   | 133,908                        |    | 37,867                         |   |
| Licenses & Permits                      |   | 39,252                         |    | 276                            |   |
| Miscellaneous                               |   | 18,246                         |    | 7,257                          |   |
| Office Expense                              |   | 42,679                         |    | 29,908                         |   |
| Printing                                    |   | 8,052                          |    | 8,965                          |   |
| Public Relations                            |   | 1,750                          |    | 358                            |   |
| Repairs & Maintenance                   |   | 876                            |    | 3,197                          |   |
| Software                                    |   | 9,150                          |    | 14,586                         |   |
| Storage                                     |   | —                         |    | 1,029                          |   |
| Telephone                                   |   | 9,309                          |    | 17,332                         |   |
| Travel                                      |   | 6,561                          |    | 480                            |   |
| Utilities                                   |   | 27,210                         |    | 672                            |   |
| **Total General  & Operating Expenses** |   | $                              | 971,402 |                           | $      | 286,942 |   |

 

See Notes to Financial Statements

 

6

----

 

**JOINT EMPLOYERS GROUP**

**(A Corporation)**

**Statement ofStockholders’ Equity**

**From June 30,1998 through June 30, 2001**

 
|                        |   | **Common********Stock********Shares** |   | **Common********Stock********Amount** |   | **Paid in********Capital** |   | **Retained********Earnings** |   | **Total** |    |
|-----------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|----------------------------|--------|------------------------------|--------|-----------|---------|
| **Balance,  June 30, 1998** |   | 955,000                               |   | $                                     | 5,000  |                       |   |                         | $      | (168,920  | )       | $ | (163,920 | ) |
| Net income                  |   |                                  |   |                                  |   |                       |   | 90,333                       |   | 90,333    |    |
|                        |   |                                  |   |                                  |   |                       |   |                         |   |      |    |
| **Balance,  June 30, 1999** |   | 955,000                               |   | $                                     | 5,000  |                       | $      | —                       |   | $         | (78,587 | ) | $ | (73,587 | ) |
| Paid in Capital             |   |                                  |   |                                  |   | 71,000                     |   | 71,000                       |   |      |    |
| Net income                  |   |                                  |   |                                  |   |                       |   | 96,138                       |   | 96,138    |    |
|                        |   |                                  |   |                                  |   |                       |   |                         |   |      |    |
| **Balance,  June 30, 2000** |   | 955,000                               |   | $                                     | 5,000  |                       | $      | 71,000                       |   | $         | 17,551  |   | $ | 93,551 |   |
| Loss due to  embezzlement   |   |                                  |   |                                  |   |                       |   | 180,779                      |   | 180,779   |    |
| Net income                  |   |                                  |   |                                  |   |                       |   | (86,262                      | )      | (86,262   | )       |
| **Balance,  June 30, 2001** |   | 955,000                               |   | $                                     | 5,000  |                       | $      | 71,000                       |   | $         | 112,068 |   | $ | 188,068 |   |

 

See Notes to Financial Statements

 

7

----

 

**JOINT EMPLOYERS GROUP**

**(A Corporation)**

**Statements of CashFlows**

 
|                                                   |   | **Year Ended********June 30, 2001** |    | **Year Ended********June 30, 2000** |   |
|--------------------------------------------------------|--------|-------------------------------------|---------|-------------------------------------|--------|
| ***CASH FLOWS FROM OPERATING ACTIVITIES***             |   |                                |    |                                |   |
| Net (Loss) Income                                      |   | $                                   | (86,262 | )                                   | $      | 96,138 |   |
|                                                   |   |                                |    |                                |   |
| Depreciation Expense                                   |   | 36,740                              |    | 23,952                              |   |
| (Increase) / Decrease in  Accounts Receivable          |   | (543,273                            | )       | (64,725                             | )      |
| (Increase) / Decrease in Other  Receivables            |   | —                              |    | 1,100                               |   |
| (Increase) / Decrease in  Security Deposits            |   | —                              |    | (221,685                            | )      |
| (Increase) / Decrease in Rent  Deposits                |   | —                              |    | 5,625                               |   |
| (Increase) / Decrease in  Income Tax Benefit           |   | (28,756                             | )       | 30,655                              |   |
| (Increase) / Decrease in  Income Tax Receivable        |   | 10,343                              |    | (10,343                             | )      |
| (Increase) / Decrease in  Insurance Receivable         |   | 285,541                             |    | (285,541                            | )      |
| (Increase) / Decrease in  Workers’ Comp. Funds    |   | (1,296,762                          | )       | —                              |   |
| Increase / (Decrease) in  Accounts Payable             |   | 90,048                              |    | 37,332                              |   |
| Increase / (Decrease) in  Payroll Taxes Payable        |   | 83,138                              |    | (180,556                            | )      |
| Increase / (Decrease) in  Employee Benefits Payable    |   | 113,321                             |    | 94,229                              |   |
| Increase / (Decrease) in Lines  of Credit              |   | 78,698                              |    | 125,687                             |   |
| Increase / (Decrease) in  Credit Cards                 |   | (3,565                              | )       | 12,007                              |   |
| Increase / (Decrease) in  Income Tax Liability         |   | (3,614                              | )       | 2,168                               |   |
| Increase / (Decrease) in Rent  Payable                 |   | (5,625                              | )       | —                              |   |
| Increase / (Decrease) in  Workers’ Comp. Premium  |   | 70,959                              |    | —                              |   |
| Net cash (used) by operating  activities               |   | (1,199,070                          | )       | (333,957                            | )      |
|                                                   |   |                                |    |                                |   |
| ***CASH FLOWS FROM INVESTING ACTIVITIES***             |   |                                |    |                                |   |
| Purchase of Equipment &  Adjustments               |   | (37,185                             | )       | (76,636                             | )      |
|                                                   |   |                                |    |                                |   |
| Net cash (used) by investing  activities               |   | (37,185                             | )       | (76,636                             | )      |
|                                                   |   |                                |    |                                |   |
| ***CASH FLOWS FROM FINANCING ACTIVITIES***             |   |                                |    |                                |   |
| Increase / (Decrease) in Short  Term Notes             |   | 891,595                             |    | 55,516                              |   |
| Increase / (Decrease) in  Accrued Interest             |   | 73,031                              |    | —                              |   |
| Increase / (Decrease) in Workers’  Comp. Deposits |   | 60,146                              |    | —                              |   |
| Prior Period Adjustment Due to  Embezzelment           |   | 180,779                             |    | —                              |   |
| Net cash provided by financing  activities             |   | 1,205,551                           |    | 55,516                              |   |
| Net (decrease) in cash                                 |   | (30,704                             | )       | (355,077                            | )      |
| Cash at beginning of year                              |   | 151,251                             |    | 506,328                             |   |
| Cash at end of year                                    |   | $                                   | 120,548 |                                | $      | 151,251 |   |
|                                                        |   |                                |    |                                |   |
| Supplemental Disclosures:                              |   |                                |    |                                |   |
| Cash Paid for Interest                                 |   | $                                   | 48,519  |                                | $      | 5,000 |   |
| Cash Paid for Income Taxes                             |   | $                                   | 5,945   |                                | $      | 6,310 |   |

 

See Notes to Financial Statements

 

8

----

 

**JOINT EMPLOYERS GROUP**

**(A Corporation)**

**Notes to FinancialStatements**

**For the Year EndedJune 30, 2001**

 

**NOTE 1. ORGANIZATION AND DESCRIPTION OFBUSINESS**

 

Joint Employers Group (the Company) is a California Corporation and isin the business of leasing its employees. The Company was incorporated onOctober 25, 1995 under the name of Eazy Ployer Global Resource SupervisoryNetwork. On November 22, 1995 the name was legally changed to JointEmployers Group (A Corporation).

 

**NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

***Accounting Method***

 

The Company’s financialstatements are prepared using the accrual method ofaccounting. The Company has elected a June 30, year end.

 

***Cash Equivalents***

 

The Company considers all highlyliquid investments with a maturity of three months or less when purchased to becash equivalents.

 

***Use of Estimates***

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

***Accounts Receivable***

 

The Company considers accountsreceivable to be fully collectible; accordingly, no allowance for doubtfulaccounts is required. If amounts become uncollectable, they are charged tooperations when that determination is made.

 

***Property andEquipment***

 

Property and equipment arecarried at cost. Equipment and fixtures are being depreciated using thestraight-line method over the estimated asset lives ranging from 3 to7 years. Leasehold improvements will be amortized using the straight-linemethod over the shorter of the life of the improvements or the length of thelease. Depreciation expense for the year was $36,740.

 

**NOTE 3. OFFICE FURNITURE AND EQUIPMENT**

 

Property is stated at cost.Additions, renovations, and improvements are capitalized. Maintenance andrepairs, which do not extend asset lives, are expensed as incurred.Depreciation is provided on a straight-line basis over the estimated usefullives ranging from 5 years for tenant improvements, and 5 - 7 yearsfor furniture and equipment.

 

9

----

 

| Office  Furniture & Equipment     |   | $       | 197,873 |   |
|--------------------------------------------|--------|---------|---------|--------|
|                                       |   |    |    |
| Less  Accumulated Depreciation             |   | (80,129 | )       |
|                                       |   |    |    |
| Net  Office Furniture & Equipment |   | $       | 117,744 |   |

 

**NOTE 4. WORKERS’ COMPENSATION DEPOSITS**

 

The Company is self insured forworkers’ compensation purposes up to $75,000. The Company also carries thirdparty insurance for claims above this threshold. This third party insurancepolicy requires the Company to maintain $1,300,000 in deposits. To help fulfillthis deposit requirement the Company had to borrow funds from third parties andare reflected in the balance sheet as short term notes.

 

**NOTE 5. LINES OF CREDIT**

 
|                             |   | **09/30/01** |    | **Monthly********Payments** |   | **Credit********Limit** |   | **Interest********Rate** |   |
|----------------------------------|--------|--------------|---------|-----------------------------|--------|-------------------------|--------|--------------------------|--------|
| Union  Bank Line of Credit       |   | $            | 46,651  |                        | Varies |                    | 50,000 |                     | 9.25   |   |
| Bank  of America Line of Credit  |   | 100,787      |    | Varies                      |   | 100,000                 |   | 9.16                     |   |
| Washington  Mutual LOC           |   | 39,597       |    | Varies                      |   | 40,000                  |   | 9.75                     |   |
| Southern  California Central LOC |   | 17,350       |    | Varies                      |   | 20,000                  |   | 10.00                    |   |
| **Total Other Payables**         |   | **$**        | 204,385 |                        |   |                    |   |                     |   |   |

 

The above is all revolvingcredit.

 

**NOTE 6. LEASE**

 

The Company entered into a leaseagreement with a non-related party to occupy office space on 12070 TelegraphRoad, Suite 100, Santa Fe Springs, CA. The commencement date wasMay 1, 1999 with an original term of three years and one three yearoption. Currently the minimum monthly rent is $6,087.60, and management expectsto exercise the option. Rent expense for the three months ended June 30,2001 was $74,657. Minimum rental payments per year are as follows:

 

| **Year:**        |   | **2001** |   | **2002** |   | **2003** |   | **2004** |   |
|------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Minimum  rental: |   | $        | 36,528 |     | $      | 73,056   |   | $        | 73,056 |   | $ | 73,056 |   |
|                  |        |          |        |          |        |          |        |          |        |  |  |  |  |

 

**NOTE 7. INCOME TAXES**

 

Income taxes are provided inaccordance with Statement of Financial Accounting Standards No. 109 (SFAS 109),Accounting for Income Taxes. A deferred tax asset or liability is recorded forall temporary differences between financial and tax reporting and net operatingloss carryfowards. Deferred tax expense (benefit) results from the net changeduring the year of deferred tax assets and liabilities.

 

Deferred tax assets are reducedby a valuation allowance when, in opinion of management, it is more likely thannot that some portion of all of the deferred tax assets will be realized.Deferred tax assets and liabilities are adjusted for the effects of changes intax laws and rates on the date of enactment.

 

10

----

 

Currently the Company does nothave any timing differences that would require a deferred tax expense orbenefit. Income tax benefit for June 30, 2001 is estimated as 25% of thenet loss and is due to expire in 20 years. The Company expects to utilizethe loss carryforward before it expires.

 

**NOTE 8. EMBEZZLEMENT AND RELATED LITIGATION**

 

The Company’s managementdiscovered a defalcation perpertrated by a former employee over several years.The Company feels it has uncovered the total amount of the loss pertaining tothis defalcation through June 30, 2000. The Company recovered a portion ofthe loss through insurance coverage. However, investigation and litigationrelated to this matter has generated significant costs. The Company estimatesthat a total of $447,494 has been spent on legal, audit, consulting, and otherrelated costs and are reflected in the current year statement of operations.

 

**NOTE 9. BASIS OF PRESENTATION ANDCONSIDERATIONS RELATED TO CONTINUED EXISTENCE (GOING CONCERN)**

 

The Company’s financialstatements have been presented on the basis that it is a going concern, whichcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business.

 

11

----

 

**JOINTEMPLOYERS GROUP**

**(ACorporation)**

**Notesto Financial Statements**

**Forthe Year Ended June 30, 2000**

 

***NOTE 1. ORGANIZATIONAND DESCRIPTION OF BUSINESS***

 

Joint Employers Group (theCompany) is a California Corporation and is in the business of leasing itsemployees. The Company was incorporated on October 25, 1995 under the nameof Eazy Ployer Global Resource Supervisory Network. On November 22, 1995the name was legally changed to Joint Employers Group (A Corporation).

 

***NOTE 2. SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES***

 

**a.             *Accounting Method***

 

The Company’s financialstatements are prepared using the accrual method of accounting. The Company haselected a June 30, year end.

 

**b.****                                       *CashEquivalents***

 

The Company considers all highlyliquid investments with a maturity of three months or less when purchased to becash equivalents.

 

**c.             *Use of Estimates***

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

**d.*             Accounts Receivable***

 

The Company considers accountsreceivable to be fully collectible; accordingly, no allowance for doubtfulaccounts is required. If amounts become uncollectable, they will be charged tooperations when that determination is made.

 

**e.*             Property and Equipment***

 

Property and equipment arestated at cost. The Company is currently capitalizing all leaseholdimprovements, equipment, and fixtures. Equipment and fixtures are beingdepreciated using the straight-line method over the estimated asset livesranging from 3 to 7 years. Leasehold improvements will be amortized usingthe straight-line method over the shorter of the life of the improvements orthe length of the lease.

 

***NOTE 3. OFFICEFURNITURE AND EQUIPMENT***

 

Property is stated at cost.Additions, renovations, and improvements are capitalized. Maintenance andrepairs, which do not extend asset lives, are expensed as incurred.Depreciation is provided on a

 

12

----

 

straight-line basis over the estimated usefullives ranging from 5 years for tenant improvements, and5 - 7 years for furniture and equipment.

 

| Office Furniture & Equipment         |   | 167,662 |        |
|------------------------------------------|--------|---------|-------------|
| Less Accumulated Depreciation            |   | (50,362 | )           |
| **Net Office Furniture & Equipment** |   | **$**   | **117,300** | ** ** |
| **Depreciation Expense**                 |   | **$**   | **23,952**  | ** ** |

 

***NOTE 4. BASIS OFPRESENTATION AND CONSIDERATIONS RELATED TO CONTINUED EXISTENCE (GOING CONCERN)***

 

The Company’s financialstatements have been presented on the basis that is a going concern, whichcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business.

 

***NOTE 5. OTHERCURRENT PAYABLES***

 
|                           |   | **06//30/99** |       | **Monthly********Payments** |    | **Credit********Limit** |   | **Interest********Rate** |   |
|--------------------------------|--------|---------------|------------|-----------------------------|---------|-------------------------|--------|--------------------------|--------|
| B  of A Credit Card            |   | $             | 2,503      |                        | Minimum |                    | $      | 5,000                    |   | 16.40 | % |
| American  Express- Credit Card |   | 19,015        |       | Minimum                     |    | 22,000                  |   | 19.50                    | %      |
| American  Express Credit Card  |   | 3,335         |       | Minimum                     |    | —                  |   | —                   |   |
| MBNA  American Credit Card     |   | 18,315        |       | Minimum                     |    | 24,000                  |   | 5.90                     | %      |
| **Total Other Payables**       |   | $             | **43,168** |                        |    |                    |   |                     |   |   |
|                                |        |               |            |                             |         |                         |        |                          |        |  |  |

 

The above is all revolvingcredit.

 

***NOTE 6. LEASE***

 

The Company entered into a leaseagreement with a non-related party to occupy office space on 12070 TelegraphRoad, Suite 100, Santa Fe Springs, Ca. Commencement date is May 1, 1999for $5,625 per month. Rent expense as of June 30, 2000 was $68,434.

 

 *Minimum Rental Payments:*

 

| 06/30/2001 |   | 70,808 |        |
|------------|--------|--------|-------------|
| 02/01/2002 |   | 48,701 |        |
| **Total**  |   | **$**  | **119,509** | ** ** |
|            |        |        |             |  |

 

***NOTE 7. INCOME TAXES***

 

Income taxes are provided inaccordance with Statement of Financial Accounting Standards No. 109(SFAS 109), Accounting for Income Taxes. A deferred tax asset or liabilityis recorded for all temporary differences between financial and tax reportingand net operating loss carryfowards. Deferred tax expense (benefit) resultsfrom the net change during the year of deferred tax assets and liabilities.

 

13

----

 

Deferred tax assets are reducedby a valuation allowance when, in opinion of management, it is more likely thannot that some portion of all of the deferred tax assets will be realized.Deferred tax assets and liabilities are adjusted for the effects of changes intax laws and rates on the date of enactment.

 

Provision for income taxes issummarized as follows:

 

|                     |   | **Year Ended********June 30, 2000** |      |
|--------------------------|--------|-----------------------------------------------|-----------|
| Current  Income Taxes    |   | $                                             | 6,310     |   |
| Less  Estimated Payments |   | (2,697                                        | )         |
| **Income Taxes Payable** |   | **$**                                         | **3,613** | ** ** |

 

The above represents CaliforniaFranchise Tax.

 

Deferred income taxes reflectthe next tax effects of temporary differences between the carrying amount ofassets and liabilities for reporting and the amounts used for income taxpurposes. The tax effects of items comprising the Company’s net deferred taxassets are as follows:

 

|                             |   | **June 30, 1999** |   |
|----------------------------------|--------|-----------------------------|--------|
| Income  Tax Benefit:             |   |                        |   |
| Income  Tax Benefit—Federal |   | $                           | 2,326  |   |
| Total  Income Tax Benefit:       |   | 2,326                       |   |
|                                  |        |                             |        |  |

 

Realization of deferred taxassets is dependent upon sufficient future taxable income during the periodthat deductible temporary differences and carryforward losses are expected tobe available to reduce taxable income.

 

As of June 30, 1999 theCompany has net operating loss carryforwards for federal income tax purposes ofapproximately $15,421, which expire through 2015. Under federal and state laws,the availability of the Company’s net operating loss carryforward may belimited if a cumulative change in ownership of more than 50% occurs within anythree year period.

 

***NOTE 8. SUBSEQUENTEVENTS***

 

The Company has made anagreement to be acquired by Group Now, Inc. (a private company). TheCompany’s financial statements for the year ended June 30, 2000 wereaudited.

 

The Company’s managementdiscovered a defalcation perpertrated by a former employee over several years.The Company feels it has uncovered the total amount of the loss pertaining tothis defalcation through June 30, 2000. However it has not been determinedhow much of this total amount belongs in the year ended June 30, 1999 orprior years.

 

Management believes that theCompany will be able to recover 100% of the loss through insurance coverage.

 

***NOTE 9. PRO-ACTIVEPAYABLE***

 

Represents an LOC pledged byPro-Active (a related company) and used as part of the required WorkmansCompensation deposit of $195,000. Interest is paid monthly and there is norepayment schedule.

 

***NOTE 10. WORKMANSCOMPENSATION—DEPOSIT AND WORKMANS COMP. FUND***

 

The Company is a self WorkmansCompensation insurer company and as such the Company is required to maintain adeposit and a revolving fund of $25,000 that is replenished every time a claimis paid.

 

***NOTE 11. PAID INCAPITAL***

 

A shareholder contributed topaid in capital a $71,000 note payable due to him.

 

14

----

 

**[ACILETTERHEAD]**

 

To the Board of Directors of

JOINT EMPLOYERS GROUP

(A California Corporation)

 

We have compiled theaccompanying balance sheets of Joint Employers Group as of December 31,2001 and 2000, and the related statements of operations and shareholders’equity and cash flows for the six months then ended, in accordance withStatements on Standards for Accounting and Review Services issued by theAmerican Institute of Certified Public Accountants.

 

A compilation is limited topresenting in the form of financial statements information that is the representationof management. We have not audited or reviewed the accompanying financialstatements and, accordingly, do not express an opinion or any other form ofassurance on them.

 
| /s/ ARMANDO C. IBARRA   |   |
|-------------------------|--------|
|                    |   |
| Armando  C. Ibarra, CPA |   |
|                    |   |
| February  22, 2002      |   |

 

----

 

**JOINTEMPLOYERS GROUP**

**(ACorporation)**

**BalanceSheets**

**Asof December 31, 2001 and 2000**

 
|                                                                                                                                            |   | **2001**  |      | **2000**  |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|---------|
| **ASSETS**                                                                                                                                      |   |      |      |      |    |
| **Current Assets**                                                                                                                              |   |      |      |      |    |
| Cash  in Bank                                                                                                                                   |   | $         | 12,952    |      | $       | 253,999 |   |
| Accounts  Receivable                                                                                                                            |   | 384,913   |      | 451,605   |    |
| Insurance  and Other Receivable                                                                                                                 |   | —    |      | 308,214   |    |
| Advance  on Commissions                                                                                                                         |   | 100       |      | —    |    |
| Prepaid  Income Taxes                                                                                                                           |   | 2,332     |      | —    |    |
| **Total Current Assets**                                                                                                                        |   | 400,297   |      | 1,013,818 |    |
|                                                                                                                                            |   |      |      |      |    |
| **Net Office Furniture & Equipment**                                                                                                        |   | 112,044   |      | 127,742   |    |
|                                                                                                                                            |   |      |      |      |    |
| **Other Assets**                                                                                                                                |   |      |      |      |    |
| Workers’  Comp. Deposit                                                                                                                    |   | 1,402,762 |      | 145,000   |    |
| Workers’  Comp. Loss Reserve                                                                                                               |   | 76,666    |      | —    |    |
| Workers’  Fund                                                                                                                             |   | 213,787   |      | 18,903    |    |
| Rent  Deposit                                                                                                                                   |   | 5,625     |      | 5,625     |    |
| Other  Deposits                                                                                                                                 |   | 1,685     |      | 1,685     |    |
| **Total Other Assets**                                                                                                                          |   | 1,700,525 |      | 171,213   |    |
| TOTAL  ASSETS                                                                                                                                   |   | $         | 2,212,866 |      | $       | 1,312,773 |   |
|                                                                                                                                            |   |      |      |      |    |
| **LIABILITIES & STOCKHOLDERS’ EQUITY**                                                                                                 |   |      |      |      |    |
| **Current Liabilities**                                                                                                                         |   |      |      |      |    |
|                                                                                                                                            |   |      |      |      |    |
| Accounts  Payable                                                                                                                               |   | $         | 481,145   |      | 151,075 |   |
| Payroll  Checks Accrued                                                                                                                         |   | 118,755   |      | —    |    |
| Payroll  Taxes Payable                                                                                                                          |   | 70,883    |      | 346,375   |    |
| Employee  Benefits Payable                                                                                                                      |   | 19,987    |      | 244,226   |    |
| Lines  of Credit                                                                                                                                |   | 197,562   |      | 138,620   |    |
| Credit  Cards Payable                                                                                                                           |   | 39,603    |      | 43,168    |    |
| Convertible  Notes                                                                                                                              |   | 25,000    |      | 32,199    |    |
| Short  Term Notes for Workers’ Comp. Deposits                                                                                              |   | 1,061,595 |      | 145,000   |    |
|                                                                                                                                            |   |      |      |      |    |
| **Total Current Liabilities**                                                                                                                   |   | 2,014,530 |      | 1,100,663 |    |
|                                                                                                                                            |   |      |      |      |    |
| **Long-Term Liabilities**                                                                                                                       |   |      |      |      |    |
| Client  Workers’ Comp. Deposits                                                                                                            |   | 70,929    |      | —    |    |
| **Total Long-Term Liabilities**                                                                                                                 |   | 70,929    |      | —    |    |
|                                                                                                                                            |   |      |      |      |    |
| TOTAL  LIABILITIES                                                                                                                              |   | 2,085,459 |      | 1,100,663 |    |
|                                                                                                                                            |   |      |      |      |    |
| **Stockholders’ Equity**                                                                                                                   |   |      |      |      |    |
| Common  Stock No par Value, 25,000,000 shares authorized; 20,105,000 and 955,000  shares issued and outstanding for 2001 and 2000, respectively |   | 5,000     |      | 5,000     |    |
| Paid  in Capital                                                                                                                                |   | 71,000    |      | 71,000    |    |
| Retained  Earnings                                                                                                                              |   | 51,407    |      | 136,110   |    |
| **Total Stockholders’ Equity**                                                                                                             |   | 127,407   |      | 212,110   |    |
| TOTAL  LIABILITIES & STOCKHOLDERS’ EQUITY                                                                                              |   | $         | 2,212,866 |      | $       | 1,312,773 |   |
|                                                                                                                                                 |        |           |           |           |         |  |  |  |  |  |

 

2

----

 

**JOINTEMPLOYERS GROUP**

**(ACorporation)**

**Statementsof Operations**

**Forthe Six Months Ended**

**December 31,2001 and 2000**

 
|                              |   | **2001**   |       | **2000**   |   |
|-----------------------------------|--------|------------|------------|------------|--------|
| **REVENUES**                      |   | $          | 25,900,197 |       | $      | 22,231,225 |   |
| COST  OF REVENUES                 |   | 24,966,029 |       | 21,645,364 |   |
| GROSS  PROFIT                     |   | 934,168    |       | 585,861    |   |
|                              |   |       |       |       |   |
| OPERATING  EXPENSES               |   |       |       |       |   |
| Selling  Expenses                 |   | 31,887     |       | 42,210     |   |
| New  Client Start-up Expenses     |   | 169        |       | 69,445     |   |
| General  & Operating Expenses |   | 581,490    |       | 312,355    |   |
| Salaries,  Wages and Related      |   | 355,745    |       | 270,395    |   |
| TOTAL  OPERATING EXPENSES         |   | 969,291    |       | 694,405    |   |
| LOSS  BEFORE OTHER EXPENSES       |   | (35,123    | )          | (108,544   | )      |
| Other  Expenses:                  |   |       |       |       |   |
| Interest  Expense                 |   | 25,538     |       | 10,015     |   |
| Total  Other Expenses             |   | 25,538     |       | 10,015     |   |
| NET  LOSS                         |   | $          | (60,661    | )          | $      | (118,559 | ) |

 

3

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**JOINTEMPLOYERS GROUP**

**(ACorporation)**

**Statementof Cash Flows**

**Forthe Six Months Ended December 31, 2001 and 2000**

 
|                                                         |   | **2001** |    | **2000** | ** ** |
|--------------------------------------------------------------|--------|----------|---------|----------|------------|
| ***CASH FLOWS FROM  OPERATING ACTIVITIES***                  |   |     |    |     |       |
| Net Loss                                                     |   | $        | (60,661 | )        | $          | (118,559 | ) |
| Depreciation Expense                                         |   | 20,075   |    | —   |       |
| (Increase) / Decrease in Accounts  Receivable                |   | 223,085  |    | (386,880 | )          |
| (Increase) / Decrease in Advance on  Commissions             |   | (100     | )       | (22,673  | )          |
| (Increase) / Decrease in Income Tax Benefit                  |   | 28,750   |    | (12,669  | )          |
| (Increase) / Decrease in Workers’ Comp.  Funds          |   | 213      |    | 6,097    |       |
| (Increase) / Decrease in Workers’ Comp.  Loss Reserve   |   | (76,666  | )       | 0        |       |
| Increase / (Decrease) in Accounts Payable                    |   | 325,011  |    | 75,750   |       |
| Increase / (Decrease) in Payroll Checks Accrued              |   | 118,755  |    | 0        |       |
| Increase / (Decrease) in Convertible Note                    |   | 25,000   |    | 32,199   |       |
| Increase / (Decrease) in Payroll Taxes  Payable              |   | (287,487 | )       | 71,143   |       |
| Increase / (Decrease) in Workers’ Comp.  Premium Pay.   |   | (70,959  | )       | 0        |       |
| Increase / (Decrease) in Employee Benefits  Payable          |   | (244,166 | )       | 93,394   |       |
| Increase / (Decrease) in Lines of Credit                     |   | (6,823   | )       | 12,933   |       |
| Increase / (Decrease) in Client Workers’  Comp. Deposit |   | 10,783   |    | 0        |       |
| Increase / (Decrease) in Short Term Notes                    |   | 75,000   |    | 50,000   |       |
| Net cash provided by operating activities                    |   | 79,810   |    | (199,265 | )          |
|                                                         |   |     |    |     |       |
| ***CASH FLOWS FROM  INVESTING ACTIVITIES***                  |   |     |    |     |       |
| Purchase of Equipment                                        |   | (14,375  | )       | (10,442  | )          |
| Net cash (used) by investing activities                      |   | (14,375  | )       | (10,442  | )          |
|                                                         |   |     |    |     |       |
| ***CASH FLOWS FROM  FINANCING ACTIVITIES***                  |   |     |    |     |       |
| Increase / (Decrease) in Accrued Interest                    |   | (73,031  | )       | 262,455  |       |
| Increase / (Decrease) in Workers’ Comp.  Deposits       |   | (100,000 | )       | 50,000   |       |
| Net cash (used) by financing activities                      |   | (173,031 | )       | 312,455  |       |
| Net decrease in cash                                         |   | (107,596 | )       | 102,748  |       |
| Cash at beginning of period                                  |   | 120,548  |    | 151,251  |       |
| Cash at end of period                                        |   | $        | 12,952  |     | $          | 253,999 |   |
|                                                         |   |     |    |     |       |   |   |
| Supplemental Disclosures:                                    |   |     |    |     |       |
| Cash Paid for Interest                                       |   | $        | 25,538  |     | $          | 10,015 |   |
| Cash Paid for Income Taxes                                   |   | $        | 0       |     | $          | 0 |   |

 

4

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**JOINT EMPLOYERS GROUP**

**(A Corporation)**

**Statement ofStockholders' Equity**

**As ofDecember 31, 2001**

 
|                           |   | **Common********Stock********Shares** |   | **Common********Stock********Amount** |   | **Paid in********Capital** |   | **Retained********Earnings** |   | **Total** |    |
|--------------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|----------------------------|--------|------------------------------|--------|-----------|---------|
| Balance,  June 30, 1998        |   | 955,000                               |   | $                                     | 5,000  |                       |   |                         | $      | (168,920  | )       | $ | (163,920 | ) |
| Net Income                     |   |                                  |   |                                  |   |                       |   | 90,333                       |   | 90,333    |    |
| **Balance, June 30, 1999**     |   | 955,000                               |   | $                                     | 5,000  |                       | $      | —                       |   | $         | (78,587 | ) | $ | (73,587 | ) |
| Paid in  Capital               |   |                                  |   |                                  |   | 71,000                     |   |                         |   | 71,000    |    |
| Net Income                     |   |                                  |   |                                  |   |                       |   | 96,138                       |   | 96,138    |    |
| **Balance, June 30, 2000**     |   | 955,000                               |   | $                                     | 5,000  |                       | $      | 71,000                       |   | $         | 17,551  |   | $ | 93,551 |   |
| Loss Due to  Embezzlement      |   |                                  |   |                                  |   |                       |   | 180,779                      |   | 180,779   |    |
| Net Income                     |   |                                  |   |                                  |   |                       |   | (86,262                      | )      | (86,262   | )       |
| **Balance, June 30, 2001**     |   | 955,000                               |   | $                                     | 5,000  |                       | $      | 71,000                       |   | $         | 112,068 |   | $ | 188,068 |   |
| New Stock  Issuances           |   | 19,150,000                            |   |                                  |   |                       |   |                         |   |      |    |
| Net Loss                       |   |                                  |   |                                  |   |                       |   | (60,661                      | )      | (60,661   | )       |
| **Balance, December 31, 2001** |   | 20,105,000                            |   | $                                     | 5,000  |                       | $      | 71,000                       |   | $         | 51,407  |   | $ | 127,407 |   |

 

5

----

 

**JOINTEMPLOYERS GROUP**

**(ACorporation)**

**Notesto Financial Statements**

**Forthe Six Months Ended December 31, 2001 and 2000**

 

**NOTE 1. ORGANIZATION AND DESCRIPTION OFBUSINESS**

 

Joint Employers Group (theCompany) is a California Corporation and is in the business of leasing itsemployees. The Company was incorporated on October 25, 1995 under the nameof Eazy Ployer Global Resource Supervisory Network. On November 22, 1995the name was legally changed to Joint Employers Group (A Corporation).

 

**NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

***Accounting Method***

 

The Company’s financial statementsare prepared using the accrual method of accounting. The Company has elected aJune 30, year end.

 

***Cash Equivalents***

 

The Company considers all highlyliquid investments with a maturity of three months or less when purchased to becash equivalents.

 

***Use of Estimates***

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

***Accounts Receivable***

 

The Company considers accountsreceivable to be fully collectible; accordingly, no allowance for doubtfulaccounts is required. If amounts become uncollectable, they are charged tooperations when that determination is made.

 

***Property andEquipment***

 

Property and equipment arecarried at cost. Equipment and fixtures are being depreciated using thestraight-line method over the estimated asset lives ranging from 3 to7 years. Leasehold improvements will be amortized using the straight-linemethod over the shorter of the life of the improvements or the length of thelease. Depreciation expense for the six months ended December 31, 2001 was$20,075.

 

**NOTE 3. OFFICE FURNITURE AND EQUIPMENT**

 

Property is stated at cost.Additions, renovations, and improvements are capitalized. Maintenance andrepairs, which do not extend asset lives, are expensed as incurred.Depreciation is provided on a

 

6

----

 

straight-line basis over the estimated usefullives ranging from 5 years for tenant improvements, and5 - 7 years for furniture and equipment.

 

| Office  Furniture & Equipment     |   | $        | 212,248 |   |
|---------------------------------------|--------|----------|---------|--------|
| Less  Accumulated Depreciation        |   | (100,204 | )       |
| Net  Office Furniture & Equipment |   | $        | 112,044 |   |

 

**NOTE 4. WORKERS’ COMPENSATION DEPOSITS**

 

The Company is self insured forworkers’ compensation purposes up to $75,000. The Company also carries thirdparty insurance for claims above this threshold. This third party insurancepolicy requires the Company to maintain $1,400,000 in deposits. To help fulfillthis deposit requirement the Company had to borrow funds from third parties andare reflected in the balance sheet as short term notes.

 

**NOTE 5. LINES OF CREDIT**

 
|                             |   | **12/31/01** |        | **Monthly********Payments** |   | **Credit********Limit** |   | **Interest********Rate** |   |
|----------------------------------|--------|--------------|-------------|-----------------------------|--------|-------------------------|--------|--------------------------|--------|
| Union  Bank Line of Credit       |   | $            | 46,584      |                        | Varies |                    | 50,000 |                     | 9.25   |   |
| Bank  of America Line of Credit  |   | 99,971       |        | Varies                      |   | 100,000                 |   | 9.16                     |   |
| Washington  Mutual LOC           |   | 37,556       |        | Varies                      |   | 40,000                  |   | 9.75                     |   |
| Southern  California Central LOC |   | 13,451       |        | Varies                      |   | 20,000                  |   | 10.00                    |   |
| **Total Lines of Credit**        |   | **$**        | **197,562** |                        |   |                    |   |                     |   |   |

 

The above is all revolving credit.

 

**NOTE 6. LEASE**

 

The Company entered into a leaseagreement with a non-related party to occupy office space on 12070 TelegraphRoad, Suite 100, Santa Fe Springs, Ca. The commencement date was May 1,1999 with an original term of three years and one three year option. Currentlythe minimum monthly rent is $6,087.60, and management expects to exercise theoption. Rent expense for the six months ended December 31, 2001 was$37,203. Minimum rental payments per year are as follows:

 

| **Year:**       |   | **2001** |   | **2002** |   | **2003** |   | **2004** |   |
|-----------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Minimum rental: |   | $        | 18,264 |     | $      | 73,056   |   | $        | 73,056 |   | $ | 73,056 |   |
|                 |        |          |        |          |        |          |        |          |        |  |  |  |  |

 

**NOTE 7. INCOME TAXES**

 

Income taxes are provided inaccordance with Statement of Financial Accounting Standards No. 109 (SFAS109), Accounting for Income Taxes. A deferred tax asset or liability isrecorded for all temporary differences between financial and tax reporting andnet operating loss carryfowards. Deferred tax expense (benefit) results fromthe net change during the year of deferred tax assets and liabilities.

 

Deferred tax assets are reducedby a valuation allowance when, in opinion of management, it is more likely thannot that some portion of all of the deferred tax assets will be realized.Deferred tax assets and liabilities are adjusted for the effects of changes intax laws and rates on the date of enactment.

 

7

----

 

Currently the Company does nothave any timing differences that would require a deferred tax expense orbenefit. Income tax benefit for December 31, 2001 is estimated as 25% ofthe net loss and is due to expire in 20 years. The Company expects toutilize the loss carryforward before it expires.

 

**NOTE 8. PAYROLL TAX LIABILITIES**

 

The Company is currentlynegotiating an outstanding liability to the Internal Revenue Service. Theamount due is approximately $275,000, and is wholly penalties and interest forlate deposits in 1999 and 2000. The Company expects to reduce this liabilitysignificantly or have it completely abated.

 

**NOTE 9. WORKERS’ COMPENSATION LOSS RESERVE**

 

The Company has paid $165,285 inworkers’ compensation claims. However, management has disputed a portion ofthese claims and believes that $76,666 can be recovered. The $76,666 isreflected on the balance sheet as a receivable and will be reviewed and adjustedon a quarterly basis.

 

**NOTE 10. BASIS OF PRESENTATION ANDCONSIDERATIONS RELATED TO CONTINUED EXISTENCE (GOING CONCERN)**

 

The Company’s financialstatements have been presented on the basis that it is a going concern, whichcontemplates the realization of assets and the satisfaction of liabilities inthe normal course of business.

 

8

----

 

**EXHIBIT7.1**

 

**STOCKPURCHASE AGREEMENT**

 

THIS STOCK PURCHASE AGREEMENT(“Agreement”) is entered into as of January 14, 2002, by and among JointEmployers Group, Inc. and Administrative Employers Group, Inc., bothCalifornia corporations (collectively, the “Company”), the shareholder of theCompany listed on Exhibit A to this Agreement (the “Shareholder”), andZeros & Ones, Inc., a Nevada corporation (“Purchaser”).

 

**RE C I T A L S**

 

A.            The Purchaser desires to purchase approximately 100% ofthe total issued and outstanding stock of the Company in consideration for theissuance of the Common Stock of the Purchaser to the Shareholder.

 

B.            The Purchaser will issue 24,000,000 shares (the“Purchaser Stock”) of its Common Stock to the Shareholder in consideration forapproximately 100% of the total issued and outstanding common stock of theCompany (collectively, the “Company Stock”), subject to the terms andconditions of this Agreement.

 

C.            The Company and the Purchaser believe that thetransactions contemplated by this Agreement are in the Company’s and thePurchaser’s best interests, and that the Company and the Purchaser will derivesubstantial benefits from them.

 

**Section 1. *SALE AND PURCHASE***

 

1.1*  Sale and Purchase of Stock.*  Subject to the terms and conditions of thisAgreement, the Shareholder shall sell and deliver to Purchaser, and Purchasershall purchase from the Shareholder, 20,000,000 shares of the issued andoutstanding shares of Company Stock.

 

1.2*  Purchase Price for CompanyStock.*  As consideration forthe sale by the Shareholder of the shares of Company Stock to Purchaser on theClosing Date (as defined in Section 2.1 of this Agreement), the Purchasershall issue to the Shareholder 24,000,000 shares of the Common Stock of thePurchaser, to be delivered on the Closing Date.

 

**Section 2. *CLOSING***

 

2.1*  Time and Place.*  The closing of the transactions contemplatedby this Agreement (the “Closing”) shall be held at the offices of the Companyat 1:00 p.m on or before January 31, 2002 (the “Closing Date”), or on suchother place, date and time as is mutually agreed upon by the parties to thisAgreement.

 

2.2*  Procedures at Closing.*  The following shall take place at theClosing:

 

(a)    The Company shall deliver to Purchaser thecertificates representing the shares of Company Stock being sold by theShareholder pursuant to this Agreement, with appropriate stock power(s)attached and endorsed in blank.

 

(b)    Purchaser shall deliver to the Shareholderthe Purchaser Stock, subject to Section 6.4 of this Agreement.

 

**Section 3. *REPRESENTATIONS AND WARRANTIES OF THE COMPANY***

 

The Company represents andwarrants to Purchaser as follows:

 

3.1*  Power and Authority; BindingNature of Agreement.*  TheCompany and the Shareholder have full power and authority to enter into thisAgreement and to perform their obligations hereunder. The execution, deliveryand performance of this Agreement by them has been duly authorized by allnecessary action on their part. Assuming that this Agreement is a valid andbinding obligation of each

 

----

 

of the other parties hereto, this Agreementis a valid and binding obligation of the Company and the Shareholders.

 

3.2*  Subsidiaries.*  There is no corporation, generalpartnership, limited partnership, joint venture, association, trust or otherentity or organization which the Company directly or indirectly controls or inwhich the Company directly or indirectly owns any equity or other interest.

 

3.3*  Good Standing.*  The Company (i) is duly organized,validly existing and in good standing under the laws of the jurisdiction inwhich it is incorporated, (ii) to its knowledge has all necessary powerand authority to own its assets and to conduct its business as it is currentlybeing conducted, and (iii) to its knowledge is duly qualified or licensedto do business and is in good standing in every jurisdiction (both domestic andforeign) where such qualification or licensing is required.

 

3.4*  Charter Documents andCorporate Records.*  TheCompany has delivered to Purchaser complete and correct copies of (i) thearticles of incorporation, bylaws and other charter or organizational documentsof the Company, including all amendments thereto, (ii) the stock recordsof the Company, and (iii) the minutes and other records of the meetingsand other proceedings of the shareholders and directors of the Company. TheCompany is not in violation or breach of (i) any of the provisions of itsarticles of incorporation, bylaws or other charter or organizational documents,or (ii) any resolution adopted by its shareholders or directors. Therehave been no meetings or other proceedings of the shareholders or directors ofthe Company that are not fully reflected in the appropriate minute books orother written records of the Company.

 

3.5*  Capitalization.*  The authorized capital stock of each Companyconsists of fifty million (50,000,000) shares of common stock, no par value pershare, of which, in each case, twenty million one hundred and seven thousandfive hundred (20,107,500) shares are issued and outstanding (including 107,500shares of common stock in each Company owned by Linda Tolman), and two million(2,000,000) shares of preferred stock, no par value per share, of which noneare issued or outstanding. All of the outstanding shares of the capital stockof the Company are validly issued, fully paid and nonassessable, and have beenissued in full compliance with all applicable federal, state, local and foreignsecurities laws and other laws. Except as disclosed in Exhibit B of thisAgreement, there are no (i) outstanding options, warrants or rights toacquire any shares of the capital stock or other securities of the Company,(ii) outstanding securities or obligations which are convertible into orexchangeable for any shares of the capital stock or other securities of theCompany, or (iii) contracts or arrangements under which the Company is ormay become bound to sell or otherwise issue any shares of its capital stock orany other securities.

 

3.6*  Financial Statements.*  The Company has delivered to Purchaser thefollowing financial statements (the “Existing Financial Statements”):(i) the audited balance sheet of the Company as of June 30, 2000 and 2001;(ii) the audited statements of income and retained earnings, stockholders’equity and changes in financial position of the Company for the years endedJune 30, 2000 and 2001; (iii) the unaudited balance sheet of theCompany as of December 31, 2001; (iv) the unaudited statements ofincome and retained earnings, stockholder’s equity and changes in financialposition of the Company for the three months ended December 31, 2001; and(v) supporting supplemental schedules. Except as stated therein or in the notesthereto, the Existing Financial Statements: (a) present fairly thefinancial position of the Company as of the respective dates thereof and theresults of operations and changes in financial position of the Company for therespective periods covered thereby; and (b) have been prepared inaccordance with generally accepted accounting principles applied on aconsistent basis throughout the periods covered.

 

2

----

 

3.7*  Absence of Changes.*  Except as otherwise disclosed to thePurchaser in writing in Exhibit B to this Agreement, sinceDecember 31, 2001:

 

(a)    There has not been any adverse change in thebusiness, condition, assets, operations or prospects of the Company and noevent has occurred that might have an adverse effect on the business,condition, assets, operations or prospects of the Company.

 

(b)    The Company has not (i) declared, setaside or paid any dividend or made any other contribution in respect of anyshares of capital stock, nor (ii) repurchased, redeemed or otherwisereacquired any shares of capital stock or other securities.

 

(c)    The Company has not sold or otherwise issuedany shares of capital stock or any other securities.

 

(d)    The Company has not amended its articles ofincorporation, bylaws or other charter or organizational documents, nor has iteffected or been a party to any merger, recapitalization, reclassification ofshares, stock split, reverse stock split, reorganization or similartransaction.

 

(e)    The Company has not formed any subsidiary orcontributed any funds or other assets to any subsidiary.

 

(f)     The Company has not purchased or otherwiseacquired any assets, nor has it leased any assets from any other person, exceptin the ordinary course of business consistent with past practice.

 

(g)    The Company has not sold or otherwisetransferred any assets to any other person, except in the ordinary course ofbusiness consistent with past practice and at a price equal to the fair marketvalue of the assets transferred.

 

(h)    There has not been any loss, damage ordestruction to any of the properties or assets of the Company (whether or notcovered by insurance).

 

(i)     The Company has not leased any assets toany other person except in the ordinary course of business consistent with pastpractice and at a rental rate equal to the fair rental value of the leasedassets.

 

(j)     The Company has not mortgaged, pledged,hypothecated or otherwise encumbered any assets, except in the ordinary courseof business consistent with past practice.

 

(k)    The Company has not made any loan or advanceto any other person, except for advances that have been made to customers inthe ordinary course of business consistent with past practice and that havebeen properly reflected as “accounts receivables.”

 

(l)     The Company has not paid any bonus to, orincreased the amount of the salary, fringe benefits or other compensation orremuneration payable to, any of the directors, officers or employees of theCompany.

 

(m)   The Company has not changed its methods ofaccounting or its accounting practices in any respect.

 

(n)    The Company has not agreed or committed(orally or in writing) to do any of the things described in clauses (b)through (m) of this Section 3.7.

 

3.8*  Absence of UndisclosedLiabilities.*  To its knowledge,the Company has no debt, liability or other obligation of any nature (whetherdue or to become due and whether absolute, accrued, contingent or otherwise)that is not reflected or reserved against in the December 31, 2001 BalanceSheet, except for obligations incurred since December 31, 2001 in theordinary course of business

 

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consistent with past practice, or asotherwise disclosed in this Agreement, its Exhibits, or otherwise to thePurchaser.

 

3.9*  Contracts.*  The Company has delivered to Purchasercomplete and correct copies of all of the contracts and other instrumentsincluding all amendments thereto. All of such contracts and other instrumentsare valid and in full force and effect, and are enforceable in accordance withtheir terms. There is no existing default by any person under any of saidcontracts or other instruments, and there exists no condition or set ofcircumstances which, with notice or lapse of time or both, would constitutesuch a default.

 

3.10*  Title to Personal Property.*  The Company has good, valid and marketabletitle to all of its personal property (both tangible and intangible) andinterests therein, including without limitation all of the personal propertyreflected in the December 31, 2001 Balance Sheet. All of such personalproperty and interests therein are owned free and clear of any liens, pledges,security interests, claims, equities, options, charges, encumbrances orrestrictions.

 

3.11*  Compliance With Laws; Licensesand Permits.*  The Company, toits knowledge, is not in violation of, nor has it failed to conduct itsbusiness in full compliance with, any applicable federal, state, local orforeign laws, regulations, rules, treaties, rulings, orders, directives or decrees,except as disclosed in Exhibit B of this Agreement. The Company hasdelivered to Purchaser complete and correct copies of all of the licenses,permits, authorizations and franchises to which the Company is subject and allsaid licenses, permits, authorizations and franchises are valid and in fullforce and effect. Said licenses, permits, authorizations and franchisesconstitute all of the licenses, permits, authorizations and franchisesnecessary to permit the Company to conduct its business in the manner in whichit is now being conducted, and the Company is not in violation or breach of anyof the terms, requirements or conditions of any of said licenses, permits,authorizations or franchises.

 

3.12*  Environmental ComplianceMatters.*  To the knowledge ofthe Company, without conducting any study or independent investigation:

 

(a)    There is no soil or ground watercontamination by any “Hazardous Material” for which the Company may be liable.“Hazardous Material” shall mean any flammables, asbestos, explosives,radioactive materials, hazardous wastes, toxic substances or related materials,including, without limitation, any substances defined as or included in thedefinition of “hazardous substances,” “hazardous wastes,” “hazardousmaterials,” or “toxic substances” under any applicable federal, state or locallaws, rules, regulations or orders which have been designated as potentiallydangerous to public health and/or safety when present in the environment.

 

(b)    There are no underground storage tanks,asbestos containing materials or PCBs on any property owned, leased, operatedor occupied by the Company or relating to the business of the Company.

 

(c)    The Company has not exposed its employees orothers to Hazardous Materials in violation of applicable laws.

 

(d)    No Hazardous Material is present in thesurface water or groundwater of any Company facility and no likelihood existsthat any Hazardous Material present on or in any other land, groundwater orsurface water will come to be present in the surface water or groundwater ofany Company facility. The Company has provided to Purchaser all siteassessments, if any, of properties relating to the business of the Companyavailable to or conducted by the Company.

 

(e)    The Company has not received any notice thatan action, proceeding, liability or claim exists or is threatened against theCompany with respect to the transfers or releases of Hazardous Materials by theCompany.

 

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(f)     There are no (i) enforcement, cleanup,removal or other governmental or regulatory actions instituted, completed orthreatened against the Company pursuant to any applicable federal, state orlocal laws, ordinances or regulations relating to any Hazardous Material,(ii) claims made or threatened by any third party against the Company withrespect to or because of its property relating to damage, contribution, costrecovery compensation, loss or injury resulting from any Hazardous Material, or(iii) conditions on any of the properties of the Company that could causesuch properties or any part thereof to be subject to any restrictions on theownership, occupancy, transferability or use of any of such properties underany Hazardous Material law.

 

3.13*  Export Administration Act andForeign Corrupt Practices Act.* To its knowledge, the Company is and has always been in full compliancewith the Export Administration Act of 1976 and the regulations promulgatedthereunder (“EAA”), as well as the Foreign Corrupt Practices Act (“FCPA”). TheCompany has duly and timely submitted all reports required to be submittedunder the EAA. The Company is not subject to any pending inquiry, investigationor audit by any agency responsible for enforcing or administering the EAA orthe FCPA. Neither the Company nor any of its employees or agents has made anypayment of, or any promise to pay, any money or anything of value: (i) toany foreign official for the purpose of influencing any act or decision of suchforeign official to use his influence with a foreign government orinstrumentality thereof to affect or influence any act or decision of suchgovernment or instrumentality, in order to assist the Company in obtaining orretaining business; (ii) to any foreign political party or officialthereof or any candidate for foreign political office for the purpose ofinfluencing any act or decision of such party, official or candidate in its orhis official capacity, or inducing such party, official or candidate to use itsor his influence with a foreign government or instrumentality thereof to affector influence any act or decision of such government or instrumentality, inorder to assist the Company in obtaining or retaining business; or(iii) to any other person while knowing or having reason to know that allor a portion of such money or thing of value would be used for any of thepurposes specified in clauses (i) and (ii) of this Section 3.16.

 

3.14*  Title to Company Stock.*  The Shareholder has good, valid andmarketable title to the 20,000,000 shares of Company Stock, and can convey goodtitle to the Company Stock to the Purchaser free and clear of any liens,claims, encumbrances or security interests, subject to Section 6.4 of thisAgreement.

 

3.15*  Litigation.*  To the Company’s knowledge, except asdisclosed in Exhibit B to this Agreement, there is no action, suit,proceeding, dispute, litigation, claim, complaint or investigation by or beforeany court, tribunal, governmental body, governmental agency or arbitratorpending or, to the Company’s knowledge, threatened against or with respect tothe Company which (i) if adversely determined would have an adverse effecton the business, condition, assets, operations or prospects of the Company, or(ii) challenges or would challenge any of the actions required to be takenby the Company under this Agreement. To the Company’s knowledge, there existsno basis for any such action, suit, proceeding, dispute, litigation, claim,complaint or investigation.

 

3.16*  Waiver of Right to PurchaseShares.*  The Company hasvalidly waived any right, if any, that it would have under the Company’sArticles of Incorporation to purchase the shares of Company Stock beingpurchased by Purchaser pursuant to this Agreement.

 

3.17*  Non-Contravention.*  Neither (a) the execution and deliveryof this Agreement, nor (b) the performance of this Agreement will:(i) contravene or result in a violation of any of the provisions of thearticles of incorporation, bylaws or other charter or organizational documentsof the Company; (ii) contravene or result in a violation of any resolutionadopted by the shareholders or directors of the Company; (iii) result in aviolation or breach of, or give any person the right to declare (whether withor without notice or lapse of time) a default under or to terminate, anyagreement or other instrument to which the Company or the Shareholders are aparty or by which the Company or any of its assets or the Shareholders arebound; (iv) give any person the right to accelerate the maturity of any

 

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indebtedness or other obligation of theCompany; (v) result in the loss of any license or other contractual rightof the Company; (vi) result in the loss of, or in a violation of any ofthe terms, provisions or conditions of, any governmental license, permit,authorization or franchise of the Company; (vii) result in the creation orimposition of any lien, charge, encumbrance or restriction on any of the assetsof the Company or on the Company’s Stock; (viii) result in the reassessmentor revaluation of any property of the Company or by any taxing authority orother governmental authority; (ix) result in the imposition of, or subjectthe Company or Purchaser to any liability for, any conveyance or transfer taxor any similar tax; or (x) result in a violation of any law, rule,regulation, treaty, ruling, directive, order, arbitration award, judgment ordecree to which the Company or any of its assets or any of the Company’s’ Stockis subject.

 

3.18*  Approvals.*  No authorization, consent or approval of, orregistration or filing with, any governmental authority or any other person isrequired to be obtained or made by the Company or the Shareholders inconnection with the execution, delivery or performance of this Agreement,including the sale to Purchaser of the shares of Company Stock being purchasedby Purchaser hereunder.

 

3.19*  Brokers.*  The Company has not agreed to pay anybrokerage fees, finder’s fees or other fees or commissions with respect to thetransactions contemplated by this Agreement, and, to the Company’s knowledge,no person is entitled, or intends to claim that it is entitled, to receive anysuch fees or commissions in connection with such transaction.

 

3.20*  Full Disclosure.*  Neither this Agreement (including theexhibits hereto) nor any statement, certificate or other document delivered toPurchaser by or on behalf of the Company or the Shareholder contains any untruestatement of a material fact or omits to state a material fact necessary tomake the representations and other statements contained herein and therein notmisleading.

 

3.21*  Non-Distributive Intent.*  The shares of Purchaser Stock being acquiredby the Shareholder pursuant to this Agreement are not being acquired by theShareholder with a view to the public distribution of them.

 

3.22.*  Representations True onClosing Date.*  Therepresentations and warranties of the Company and the Shareholder set forth inthis Agreement are true and correct on the date hereof, and will be true andcorrect on the Closing Date as though such representations and warranties weremade as of the Closing Date.

 

**Section 4. *REPRESENTATIONS AND WARRANTIES OF PURCHASER***

 

Purchaser represents andwarrants to the Company and the Shareholder as follows:

 

4.1*  Non-Distributive Intent.*  The shares of Company Stock being purchasedby Purchaser pursuant to this Agreement are not being acquired by Purchaserwith a view to the public distribution of them.

 

4.2*  Litigation.*  There is no action, suit, proceeding,dispute, litigation, claim, complaint or investigation by or before any court,tribunal, governmental body or arbitrator pending or, to the best ofPurchaser’s knowledge, threatened against Purchaser which challenges or wouldchallenge any of the actions required to be taken by Purchaser under thisAgreement.

 

4.3*  Non-Contravention.*  Neither the execution and delivery of thisAgreement nor the performance hereunder (i) will result in any violationor breach of any agreement or other instrument to which Purchaser is a party orby which Purchaser is bound, or (ii) will result in a violation of anylaw, rule, regulation, treaty, ruling, directive, order, arbitration award,judgment or decree to which Purchaser is subject.

 

4.4*  Authorization; Binding Natureof Agreement.*  Purchaser hasall necessary power and authority to enter into and perform its obligationsunder this Agreement. The execution, delivery and

 

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performance of this Agreement on behalf ofPurchaser have been duly authorized by all necessary action on the part ofPurchaser. Assuming that this Agreement is a valid and binding obligation ofeach of the other parties hereto, this Agreement is a valid and bindingobligation of Purchaser.

 

4.5*  Approvals.*  No authorization, consent or approval of, orregistration or filing with, any governmental authority or any other person isrequired to be obtained or made by Purchaser in connection with the execution,delivery or performance of this Agreement.

 

4.6*  Brokers.*  Purchaser has not agreed to pay anybrokerage fees, finder’s fees or other fees or commissions with respect to thetransactions contemplated by this Agreement, and, to Purchaser’ knowledge, noperson is entitled, or intends to claim that it is entitled, to receive anysuch fees or commissions in connection with such transactions.

 

4.7*  Full Disclosure.*  Neither this Agreement nor any informationsupplied by the Purchaser to the Company contains any untrue statement of amaterial fact or omits to state a material fact necessary to make therepresentations and other statements contained herein and therein notmisleading.

 

4.8*  Representations True onClosing Date.*  Therepresentations and warranties of Purchaser set forth in this Agreement aretrue and correct on the date hereof, and will be true and correct on theClosing Date as though such representations and warranties were made as of theClosing Date.

 

**Section 5. *COVENANTS OF THE COMPANY AND THE SHAREHOLDER***

 

Between the date of thisAgreement and the Closing Date:

 

5.1*  Conduct of Business.*  The Company shall carry on its business inthe same manner as such business has been conducted prior to the date of thisAgreement. Without limiting the generality of the foregoing, the Company shallnot do, and shall ensure that none of its subsidiaries is permitted to do, anyof the following without the prior written consent of Purchaser:

 

(a)    declare, set aside or pay any dividend ormake any other distribution in respect of any shares of capital stock, orrepurchase, redeem or otherwise reacquire any shares of capital stock or othersecurities;

 

(b)    sell or otherwise issue any shares ofcapital stock or any other securities;

 

(c)    amend its articles of incorporation, bylawsor other charter or organizational documents, or effect or become a party toany merger, recapitalization, reclassification of shares, stock split, reversestock split, reorganization or similar transaction;

 

(d)    form any new subsidiary or acquire anyequity interest or other interest in any other entity;

 

(e)    purchase or otherwise acquire any assets, orlease any assets from any other person, except in the ordinary course ofbusiness consistent with past practice;

 

(f)     sell or otherwise transfer any assets toany other person, except in the ordinary course of business consistent withpast practice and at a price equal to the fair market value of the assetstransferred;

 

(g)    lease any assets to any other person, exceptin the ordinary course of business consistent with past practice and at rentalrate equal to the fair value of the assets leased;

 

(h)    mortgage, pledge, hypothecate or otherwiseencumber any assets, except in the ordinary course of business consistent withpast practice;

 

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(i)     make any loan or advance to any otherperson, except for advances that are made to customers in the ordinary courseof business consistent with past practice and that are properly reflected as“accounts receivables”;

 

(j)     pay any bonus to, or increase the amount ofthe salary, fringe benefits or other compensation or remuneration payable to,any of the directors, officers or employees of the Company;

 

(k)    take any action that would result in aviolation or breach of, or a default under, any contract or other instrument towhich the Company is a party or by which the Company or any of its assets isbound;

 

(l)     change its methods of accounting oraccounting practices in any respect;

 

(m)   take any action that would cause any of theCompany’s representations and warranties set forth in this Agreement to becomeuntrue or incorrect; or

 

(n)    agree or commit (orally or in writing) to doany of the things described in clauses (a) through (m) of thisSection 5.1.

 

5.2*  Access.*  The Company shall provide Purchaser andPurchaser’s employees, attorneys, accountants and other representatives fulland complete access to all properties and records of the Company, and shallarrange for its certified public accountants to make available to Purchasercopies of all working papers relating to the Existing Financial Statements.

 

5.3*  Obligation to UpdateDisclosure.*  The Companyshall promptly disclose to Purchaser in writing any facts or circumstancesarising after the date hereof that would have been required to be disclosed tothe Purchaser pursuant to this Agreement if such facts or circumstances hadexisted as of the date hereof.

 

5.4* *Intentionally LeftBlank.

 

5.5*  Cooperation.*  The Company shall cooperate fully with thePurchaser for the purpose of attempting to ensure the consummation of thetransactions contemplated hereby.

 

5.6*  Conditions.*  In addition to its other obligationshereunder, the Company shall use its best efforts to cause the conditions setforth in Sections 7.1 through 7.3 to be satisfied on a timely basis. TheCompany shall promptly inform Purchaser if the Company believes or has anyreason to believe that any of the conditions set forth in Section 7 mightnot be satisfied in a timely manner on or before the Closing Date.

 

5.7*  Fiscal Year.*  The Company agrees to change its fiscal yearending from June 30 to December 31 as soon as practicable after theClosing Date.

 

**Section 6. *COVENANTS OF PURCHASER***

 

6.1*  General.*  Between the date of this Agreement and theClosing Date: (a) Purchaser shall use its best efforts to cause theconditions set forth in Sections 8.1 and 8.3 to be satisfied on a timely basis,and (b) Purchaser shall promptly inform the Company if Purchaser believesor has any reason to believe that any of the conditions set forth inSection 8 might not be satisfied on a timely basis on or before theClosing Date.

 

6.2*  Board of Directors.*  The Purchaser agrees that it will not causethe members of the Board of Directors of the Company to change without theprior written consent of the majority of the members of the Company’s Board ofDirectors at any time from the Closing through December 31, 2004.Accordingly, during said period ending December 31, 2004, the Purchasercovenants to vote its shares of Company Stock to elect the members of theCompany’s Board of Directors that are nominated by the management of theCompany. Furthermore, the Company will have the right to designate two

 

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members to the Purchaser’s Board of Directorsto serve until the next annual meeting of the shareholders of the Purchaser.The Purchaser further agrees to cause two Company designees to be nominated forre-election to the Purchaser’s Board of Directors at least throughDecember 31, 2004.

 

6.3*  Restrictions on Dividends.*  The Purchaser covenants not to cause theCompany to declare and pay any dividends to the Purchaser without the priorconsent of the majority of the members of the Company’s Board of Directorsduring the period from the Closing through December 31, 2004.

 

6.4*  Replacement Letter of Credit.*  The Company and certain individuals haveposted letters of credit and cash reserves in the amount of approximately$1,700,000 (collectively, the “Reserves”) as security for the Company’sworkman’s compensation insurance policy with American Zurich Insurance Company.Mark J. Richardson (“Richardson”) has a first priority perfected securityinterest in the 20,000,000 shares of Company Stock being conveyed to thePurchaser pursuant to this Agreement. The Purchaser covenants to replace orarrange to have those letters of credit and cash reserves replaced by a newletter of credit in the amount of $1,700,000 for the benefit of American ZurichInsurance Company and the Company (the “Replacement Letter of Credit”) in formand content satisfactory to American Zurich Insurance Company and its agent,Cedar Hill Company, preferably on or before March 1, 2002, but in no eventlater than March 1, 2003. In the event that the Replacement Letter ofCredit is not posted by March 31, 2002, the Purchaser will be obligated toissue to the Shareholder an additional 10,000,000 warrants to purchase10,000,000 shares of the Purchaser’s common stock at an exercise price of$.0001 per share, exercisable for a period of five years from the date ofissuance, with customary anti-dilution covenants in the event of a stock split,stock dividend or similar transaction by the Purchaser.  Furthermore, Richardson will maintain hisfirst perfected security interest in the Company Stock (the “Lien”), and thePurchaser will acquire the Company Stock subject to the Lien, until the earlierto occur of (a) the posting of the Replacement Letter of Credit, or(b) the release (the “Release”) of all funds comprising the Reserveswithout any liability to the individuals who contributed funds to the Reserves.The Lien secures the Purchaser’s covenant to the Company to obtain theReplacement Letter of Credit, provided, that the Purchaser’s covenant willterminate upon a Release.

 

6.5*  Registration Rights.*  In the event that the Purchaser files aregistration statement for any other selling security holders underSection 5 of the Securities Act of 1933, as amended (other than onForm S-8), at any time after the Closing, then the Shareholder will havethe right to have up to 10% of its Purchaser Stock registered on thatregistration statement for resale in accordance with applicable prospectusdelivery requirements. These registration rights are assignable to anytransferee of the Purchaser Stock.

 

**Section 7. *CONDITIONS TO OBLIGATION OF PURCHASER TO CLOSE***

 

The obligation of Purchaser toconsummate the transactions that are to be consummated at the Closing issubject to the satisfaction, on or before the Closing Date, of the followingconditions (any of which may be waived by Purchaser in whole or in part):

 

7.1*  Representations andWarranties.*  Each of therepresentations and warranties of the Company and the Shareholder set forth inthis Agreement shall have been true and correct in all material respects on thedate of this Agreement, and shall be true and correct in all material respectson the Closing Date as though such representations and warranties were made asof the Closing Date.

 

7.2*  Performance.*  The Company shall have delivered toPurchaser all certificates evidencing the shares of Company Stock, and the Companyand the Shareholder shall have duly complied with and performed, in allmaterial respects, all other agreements, covenants and obligations required bythis Agreement to be complied with or performed by it on or before the ClosingDate.

 

7.3*  Proceedings and Documents.*  All corporate and other proceedings of theCompany relating to the transactions contemplated by this Agreement, and allinstruments and other documents incident to

 

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such transactions, shall be reasonablysatisfactory in form and substance to Purchaser, and Purchaser shall havereceived copies of such instruments and other documents (including certifiedcopies of corporate resolutions and “good standing” certificates) as it mayreasonably request.

 

**Section 8. *CONDITIONS TO OBLIGATIONS OF COMPANY AND SHAREHOLDER TO CLOSE***

 

The obligations of the Companyand the Shareholder to consummate the transactions that are to be consummatedat the Closing are subject to the satisfaction, on or before the Closing Date,of the following conditions (any of which may be waived by the Company or theShareholder in whole or in part):

 

8.1*  Representations andWarranties.*  Therepresentations and warranties of Purchaser set forth in this Agreement shallhave been true and correct in all material respects on the date of thisAgreement, and shall be true and correct in all material respects on theClosing Date as though such representations and warranties were made as of theClosing Date.

 

8.2*  Performance.*  Purchaser shall have duly complied with andperformed, in all material respects, all agreements and obligations required bythis Agreement to be complied with or performed by Purchaser on or before theClosing Date.

 

8.3*  Proceedings and Documents.*  All proceedings of Purchaser relating to thetransactions contemplated by this Agreement and all instruments and otherdocuments incident to such transactions shall be reasonably satisfactory inform and substance to the Company, and the Company shall have received copiesof such instruments and other documents as it may reasonably request.

 

**Section 9. *TERMINATION OF AGREEMENT***

 

This Agreement and thetransactions contemplated hereby may be terminated and abandoned at any timebefore the Closing:

 

(a)    by the consent of the Company (which will bebinding on the Shareholders) and the Purchaser;

 

(b)    by the Company, if there has been a materialbreach by Purchaser of any of the representations, warranties, covenants orobligations of Purchaser set forth herein;

 

(c)    by Purchaser, if there has been a materialbreach by the Company of any of the representations, warranties, covenants orobligations of the Company set forth herein; or

 

(d)    if the Closing shall not have taken place by1:00 p.m. Pacific Standard Time on January 31, 2002 (or such latertime or date as the Company (which will be binding on the Shareholders) and thePurchaser may agree), (i) by Purchaser for any reason, unless the failureof the Closing to take place by such time is attributable to the failure ofPurchaser to perform its obligations hereunder, or (ii) by the Company forany reason, unless the failure of the Closing to take place by such time isattributable to the failure of the Company to perform its obligationshereunder.

 

**Section 10. *SURVIVAL OF REPRESENTATIONS AND WARRANTIES***

 

The representations andwarranties of each party hereto (including the representations and warrantiesof such party set forth in this Agreement and the representations andwarranties of such party set forth in the instruments and other documentsdelivered pursuant hereto or in connection herewith prior to or at the Closing(i) shall survive, and shall not be affected by, the Closing (or thetermination of this Agreement pursuant to Section 9), and (ii) shallnot be affected by any information furnished to, or any investigation made by,any other party hereto or any of such other party’s employees, attorneys,accountants or other representatives.

 

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**Section 11. *INDEMNIFICATION***

 

11.1*  Indemnification by Company.*  The Company shall hold harmless andindemnify Purchaser and each of Purchaser’s past, present and future directors,officers, shareholders, employees, attorneys, agents and other affiliates fromand against any damage, cost or loss that is directly or indirectly suffered orincurred at any time by Purchaser or any of such directors, officers,shareholders, employees, attorneys, agents or other affiliates and that arisesdirectly or indirectly out of or by virtue of, or is directly or indirectlyconnected with, the breach or inaccuracy of any of the representations andwarranties of the Company or the failure of the Company to perform any of itscovenants or obligations contained in this Agreement or in any instrument or otherdocument delivered hereunder or in connection herewith.

 

11.2*  Indemnification by Purchaser.*  Purchaser shall hold harmless and indemnifythe Company and each of the past, present and future directors, officers,shareholders, employees, attorneys, agents and other affiliates of the Companyfrom and against any damage, loss or cost that is directly or indirectlysuffered or incurred at any time by the Company or any of such directors,officers, shareholders, employees, attorneys, agents or other affiliates andthat arises directly or indirectly out of or by virtue of, or is directly orindirectly connected with, the breach or inaccuracy of any of therepresentations and warranties of Purchaser or the failure of Purchaser toperform any of its covenants or obligations contained in this Agreement or inany instrument or other document delivered hereunder or in connection herewith.

 

11.3*  Notice and Opportunity toDefend.*  If any legalproceeding is initiated, or any claim or demand is made, against any personwith respect to which such person (the “Indemnified Party”) may make a claimagainst any party hereto (the “Indemnifying Party”) pursuant to thisSection 11, then the Indemnified Party shall give prompt written notice ofsuch legal proceeding, claim or demand to the Indemnifying Party. TheIndemnifying Party shall, at its own expense and with its own counsel, defendor settle such legal proceedings, claim or demand; provided, however, that:(i) the Indemnifying Party shall keep the Indemnified Party informed ofall material developments and events relating to such legal proceeding, claimor demand; (ii) the Indemnified Party shall have the right to participate,at its own expense, in the defense of such legal proceeding, claim or demandand shall cooperate as reasonably requested by the Indemnifying Party in thedefense thereof; and (iii) the Indemnifying Party shall not settle suchlegal proceeding, claim or demand without the prior written consent of theIndemnified Party, which consent shall not be unreasonably withheld.

 

11.4*  Indemnification Not A Waiver.*  A person’s right to indemnification pursuantto this Section 11 shall not be deemed to be such person’s exclusiveremedy in connection with or arising from the breach or inaccuracy of any ofthe representations and warranties of the Indemnifying Party or the failure ofthe Indemnifying Party to perform any of its covenants or obligations containedin this Agreement or in any instrument or other document delivered hereunder orin connection herewith. The exercise by any person of his right to demand andreceive such indemnification shall not be deemed to prejudice, or to operate asa waiver of, any remedy to which such person may be entitled at law or equity.

 

**Section 12. *MISCELLANEOUS***

 

12.1*  Further Assurances.*  Following the Closing, the Company shallfurnish to Purchaser such instruments and other documents as Purchaser mayreasonably request for the purpose of carrying out or evidencing thetransactions contemplated hereby.

 

12.2*  Fees and Expenses.*  Each party hereto shall pay all fees, costsand expenses that it incurs in connection with the negotiation and preparationof this Agreement and in carrying out the transactions contemplated hereby(including, without limitation, all fees and expenses of its counsel andaccountant).

 

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12.3*  Notices.*  Each notice or other communication hereundershall be in writing and shall be deemed to have been duly given on the earlierof (i) the date on which such notice or other communication is actuallyreceived by the intended recipient thereof, or (ii) the date five(5) days after the date such notice or other communication is mailed byregistered or certified mail (postage prepaid) to the intended recipient at thefollowing address (or at such other address as the intended recipient shallhave specified in a written notice given to the other parties hereto);

 
|   | ***If to the Company:***                                                                                                                                                                                                                            |
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|   | Joint  Employers Group, Inc. and Administrative Employers Group, Inc.12070 Telegraph Road, Suite 100Santa Fe Springs, California 90670Attention: Raymond Hotchkiss, PresidentTelephone: (562) 944-9900Facsimile: (562) 941-6116 |
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|   | ***If to Purchaser:***                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                |
|   | Zeros &  Ones, Inc.  11611 San Vicente Boulevard, Suite 615Los Angeles, California 90049Telephone: (310) 399-9901Facsimile: (310) 496-3006                                                                                  |

 

12.4*  Publicity.*  No press release, notice to any third partyor other publicity concerning the transactions contemplated by this Agreementshall be issued, given or otherwise disseminated without the prior approval ofeach of the parties hereto; provided, however, that such approval shall not beunreasonably withheld.

 

12.5*  Table of Contents andHeadings.*  The table ofcontents of this Agreement and the underlined headings contained herein are forconvenience only, shall not be deemed to be a part of this Agreement and shallnot be referred to in connection with the interpretation hereof.

 

12.6*  Counterparts.*  This Agreement may be executed in severalcounterparts, each of which shall constitute an original and all of which, whentaken together, shall constitute one agreement.

 

12.7*  Governing Law.*  This Agreement shall be construed inaccordance with, and governed in all respects by, the laws of the State ofCalifornia. The venue for any action hereunder shall be in the appropriateforum in the County of Los Angeles, State of California.

 

12.8*  Successors and Assigns.*  This Agreement shall be binding upon theparties hereto and their respective heirs, successors and assigns, if any, andshall inure to the benefit of the parties hereto and their respective heirs,successors and assigns, if any.

 

12.9*  Severability.*  In the event that any provision of thisAgreement, or the application of such provision to any person or set ofcircumstances, shall be determined to be invalid, unlawful or unenforceable toany extent at any time after the Closing Date, the remainder of this Agreement,and the application of such provision to persons or circumstances other thanthose as to which it is determined to be invalid, unlawful or unenforceable,shall not be affected and shall continue to be enforceable to the fullestextent permitted by law.

 

12.10*  Waiver.*  No failure or delay on the part of any partyhereto in the exercise of any power, right or privilege hereunder shall operateas a waiver thereof, nor shall any single or partial exercise of any suchpower, right or privilege preclude any other or further exercise thereof or ofany other power, right or privilege.

 

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12.11*  Entire Agreement.*  This Agreement sets forth the entireunderstanding of the parties hereto and supersedes all prior agreements andunderstandings among the parties relating to the subject matter hereof.

 

12.12*  Parties in Interest.*  Except for the provisions ofSection 12, none of the provisions of this Agreement or of any otherdocument relating hereto is intended to provide any rights or remedies to anyperson (including, without limitation, any employees or creditors of the Company)other than the parties hereto and their respective heirs, successors andassigns, if any.

 

12.13*  Variations of Pronouns.*  Whenever required by the context hereof, thesingular number shall include the plural, and vice versa; the masculine gendershall include the feminine and neuter genders; and the neuter gender shallinclude the masculine and feminine genders.

 

12.14*  “Person”.*  The term “person” as used herein shallinclude any individual, corporation, general partnership, limited partnership,joint venture, association, trust, organization, business entity, government(or political subdivision thereof) or governmental agency.

 

12.15*  Applicability of Certain Termsto Non-Corporate Entities.* When used herein with respect to any non-corporate entity: the terms“shares,” “stock” and “capital stock” shall be deemed to refer to equityinterests of any nature in such entity; the term “shareholder” shall be deemedto refer to any holder of any equity interest in such entity; and the terms“director” and “officer” shall be deemed to refer to any person who is involvedin the management of such entity or who performs functions for such entity thatare similar to the functions performed by officers or directors of acorporation.

 

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**IN WITNESSWHEREOF**, the parties hereto have caused this Agreement to beexecuted as of the date first above written.

 
| **COMPANY:**     | **JOINT EMPLOYERS GROUP, INC.,** a California  corporation          |
|------------------|---------------------------------------------------------------------|
|             |                                                                |
|             |                                                                | /s/   RAY HOTCHKISS |
|             | By:                                                                 | Ray Hotchkiss, President |
|             |                                                                |   |
|             | **ADMINISTRATIVE EMPLOYERS GROUP, INC.,** a California  corporation |
|             |                                                                |   |
|             |                                                                | /s/   RAY HOTCHKISS |
|             | By:                                                                 | Ray Hotchkiss, President |
|             |                                                                |   |
| **SHAREHOLDER:** | **JEG, LLC,**a California  limited liability company                |
|             |                                                                |   |
|             |                                                                | /s/   RAY HOTCHKISS |
|             | By:                                                                 | Ray Hotchkiss, President |
|             |                                                                |   |
| **PURCHASER:**   | **ZEROS & ONES, INC.**                                          |
|             |                                                                |   |
|             |                                                                | /s/   ROBERT HOLTZ |
|             | By:                                                                 | Robert Holtz, Chief Executive Officer |

 

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**EXHIBITA**

 

**Listof Shareholders**

 
| **Name**                                         |   | **Number of Shares** |   |
|--------------------------------------------------|--------|----------------------|--------|
| JEG  LLC, a Californialimited  liability company |   | 20,000,000(1         | )      |
|                                             |   |                 |   |
| Linda  Tolman                                    |   | 107,500(2            | )      |

 

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(1)                                  Pledged to Mark J.Richardson to secure the Company’s obligations to him until the ReplacementLetter of Credit is posted.

 

(2)                                  May be redeemedprior to Closing in connection with a possible settlement of the Company’slawsuit with Linda Tolman as disclosed in Exhibit B of this Agreement.

 

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**EXHIBITB**

 

**EXCEPTIONSTO ABSENCES OF CHANGES**

 

*The Company has filed a lawsuitagainst Linda Tolman, the owner of approximately 0.4% of the outstanding commonstock of the Company. A copy of the lawsuit and a full explanation have beenprovided to the Purchaser prior to the execution of this Agreement. TheAgreement contemplates that her stock may be redeemed by the Company and thecase settled before the Closing, although there is no assurance that such asettlement will be achieved. She presently owns 107,500 shares of the CommonStock of each Company.

 

*The Company has recentlydiscovered its possible failure to comply with all filing requirements of theEmployee Retirement Income Security Act of 1974, as amended (“ERISA”) fortaxable years prior to 2001, and comparable state and local laws, rules andregulations for the same periods, which may result in monetary penalties to theCompany.

 

*The Company does not currentlyhave an insurance policy covering sexual harassment and similar claims byemployees against its clients.

 

*See updated information in theExecutive Summary for the Company, a copy of which is attached to thisExhibit B and has been provided to the Purchaser.

 

*The Company issued $50,000 (andmay issue up to an additional $200,000) of 12% convertible promissory notes inOctober 2001, copies of which have been provided to the Purchaser. As acondition of the Closing the Shareholders will cause the noteholders to agreeto accept the equivalent amount of the Purchaser’s Common Stock rather than theCompany’s Common Stock in the event of a conversion of the notes into equity,and will provide all the shares of the Purchaser’s Common Stock to thenoteholders that are necessary to accommodate any such conversion.

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized. 

 
| *Date: April 15,  2002* |   |                                                                                                        | *By:   /s/ ROBERT J. HOLTZ* |   |
|-------------------------|--------|-------------------------------------------------------------------------------------------------------------|----------------------------------|--------|
|                    |   | *Robert J. Holtz   Chairman of the Board,**Chief Executive Officer, Chief**Financial Officer and President* |

 

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