UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



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



For the quarterly period ended June 30, 2013





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



For the transition period from ____________
to ______________



Commission file number: 333-139117



EPAZZ, Inc.

(Exact name of registrant as specified in
its charter)



Description: Description: C:\Client Files\Epazz\Perm File\Epazz logo_05.jpg

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



309 W. Washington St. Suite 1225

Chicago, IL 60606

(Address of principal executive offices)



(312) 955-8161

(Registrant's telephone number)



Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.

Yes [X] No [   ]



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).

Yes [X] No [   ]



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



|Large accelerated filer [   ] | Accelerated filer [   ]      
|----------------------------- | -----------------------------
|Non-accelerated filer [   ]   | Smaller reporting company [X]



Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act.

Yes [   ] No [X]



The number of shares of the issuer’s Class A common stock
outstanding as of August 16, 2013, was 3,389,700,915 shares, par value $0.01 per share.
















EPAZZ, INC.



FORM 10-Q

Quarterly Period Ended June 30, 2013



INDEX



|                                                  | Page                                                                                                  
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------
|                                                  |                                                                                                       
|SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS |                                                                                                       
|PART I. FINANCIAL INFORMATION                     |                                                                                                       
|Item 1.                                           | Financial Statements                                                                                  
|                                                  | Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012                                  
|                                                  | Statements of Operations for the Three and Six Months ended
    June     30, 2013 and 2012 (Unaudited)
|                                                  | Statements of Cash Flows for the Six Months ended June 30, 2013 and 2012 (Unaudited)                  
|                                                  | Notes to the Condensed Consolidated Financial Statements (Unaudited)                                  
|Item 2.                                           | Management’s Discussion and Analysis of Financial Condition and Results of Operations                 
|Item 3.                                           | Quantitative and Qualitative Disclosures About Market Risk                                            
|Item 4.                                           | Controls and Procedures                                                                               
|                                                  |                                                                                                       
|PART II. OTHER INFORMATION                        |                                                                                                       
|Item 1.                                           | Legal Proceedings                                                                                     
|Item 1A.                                          | Risk Factors                                                                                          
|Item 2.                                           | Unregistered Sales of Equity Securities and Use of Proceeds                                           
|Item 3.                                           | Defaults Upon Senior Securities                                                                       
|Item 4.                                           | Mine Safety Disclosures                                                                               
|Item 5.                                           | Other Information                                                                                     
|Item 6.                                           | Exhibits                                                                                              
|                                                  |                                                                                                       
|SIGNATURES                                        | 39                                                                                                    





1







PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



EPAZZ, INC.

CONDENSED CONSOLIDATED
BALANCE SHEETS



|                                                                                                                                                         |  | June 30,    |            |   | December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | - | ------------ | -
|                                                                                                                                                         |  | 2013        |            |   | 2012         |  
|                                                                                                                                                         |  | (Unaudited) |            |   |              |  
|Assets                                                                                                                                                   |  |             |            |   |              |  
|Current assets:                                                                                                                                          |  |             |            |   |              |  
|Cash                                                                                                                                                     |  | $           | 47,187     |   |              | $
|Accounts receivable, net                                                                                                                                 |  |             | 75,494     |   |              |  
|Other current assets                                                                                                                                     |  |             | 32,455     |   |              |  
|Total current assets                                                                                                                                     |  |             | 155,136    |   |              |  
|                                                                                                                                                         |  |             |            |   |              |  
|Property and equipment, net                                                                                                                              |  |             | 141,157    |   |              |  
|Intangible assets, net                                                                                                                                   |  |             | 733,826    |   |              |  
|Goodwill                                                                                                                                                 |  |             | 255,460    |   |              |  
|                                                                                                                                                         |  |             |            |   |              |  
|Total assets                                                                                                                                             |  | $           | 1,285,579  |   |              | $
|                                                                                                                                                         |  |             |            |   |              |  
|                                                                                                                                                         |  |             |            |   |              |  
|Liabilities and Stockholders' Equity (Deficit)                                                                                                           |  |             |            |   |              |  
|Current liabilities:                                                                                                                                     |  |             |            |   |              |  
|Dividends payable                                                                                                                                        |  | $           | 18,000     |   |              | $
|Accounts payable and accrued expenses                                                                                                                    |  |             | 164,739    |   |              |  
|Accrued expenses, related parties                                                                                                                        |  |             | 28,502     |   |              |  
|Deferred revenue                                                                                                                                         |  |             | 189,338    |   |              |  
|Lines of credit                                                                                                                                          |  |             | 74,937     |   |              |  
|Current maturities of capital lease obligations payable                                                                                                  |  |             | 25,247     |   |              |  
|Current maturities of notes payable, related parties                                                                                                     |  |             | 7,868      |   |              |  
|Convertible debts, net of discounts of $35,534 and $101,192, respectively                                                                                |  |             | 87,766     |   |              |  
|Current maturities of long term debts                                                                                                                    |  |             | 312,864    |   |              |  
|Total current liabilities                                                                                                                                |  |             | 909,261    |   |              |  
|                                                                                                                                                         |  |             |            |   |              |  
|Capital lease obligations payable, net of current maturities                                                                                             |  |             | 8,160      |   |              |  
|Notes payable, related parties                                                                                                                           |  |             | 100,000    |   |              |  
|Convertible debts, net of discounts of $10,922 and $37,876, respectively                                                                                 |  |             | 35,527     |   |              |  
|Long term debts, net of current maturities                                                                                                               |  |             | 916,860    |   |              |  
|Total liabilities                                                                                                                                        |  |             | 1,969,808  |   |              |  
|                                                                                                                                                         |  |             |            |   |              |  
|Stockholders' equity (deficit):                                                                                                                          |  |             |            |   |              |  
|Convertible preferred stock, Series A, $0.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding                                   |  |             | –          |   |              |  
|Convertible preferred stock, Series B, $0.0001 par value, 1,000 shares authorized, 1,000 shares issued and outstanding                                   |  |             | –          |   |              |  
|Common stock, Class A, $0.0001 par value, 6,000,000,000 shares authorized, 2,482,976,187 and 1,177,789,125 shares issued and outstanding, respectively   |  |             | 248,297    |   |              |  
|Convertible common stock, Class B, $0.0001 par value, 60,000,000 shares authorized, 10,500,000 and 5,500,000 shares issued and outstanding, respectively |  |             | 1,050      |   |              |  
|Additional paid in capital                                                                                                                               |  |             | 6,065,329  |   |              |  
|Stockholders' receivable, consisting of 20,000,000 shares                                                                                                |  |             | (800,000   | ) |              |  
|Accumulated deficit                                                                                                                                      |  |             | (6,198,905 | ) |              |  
|Total stockholders' equity (deficit)                                                                                                                     |  |             | (684,229   | ) |              |  
|                                                                                                                                                         |  |             |            |   |              |  
|Total liabilities and stockholders' equity (deficit)                                                                                                     |  | $           | 1,285,579  |   |              | $



See accompanying notes to financial statements.





2







EPAZZ, INC.

CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                                   |  | For the Three Months |               |   | For the Six Months |  
|---------------------------------------------------------------------------------- |  | -------------------- | ------------- | - | ------------------ | -
|                                                                                   |  | Ended June 30,       |               |   | Ended June 30,     |  
|                                                                                   |  | 2013                 |               |   | 2012               |  
|                                                                                   |  |                      |               |   |                    |  
|Revenue                                                                            |  | $                    | 279,119       |   |                    | $
|                                                                                   |  |                      |               |   |                    |  
|Expenses:                                                                          |  |                      |               |   |                    |  
|General and administrative                                                         |  |                      | 166,403       |   |                    |  
|Salaries and wages                                                                 |  |                      | 1,555,081     |   |                    |  
|Depreciation and amortization                                                      |  |                      | 67,385        |   |                    |  
|Bad debts (recoveries)                                                             |  |                      | 45            |   |                    |  
|Total operating expenses                                                           |  |                      | 1,788,914     |   |                    |  
|                                                                                   |  |                      |               |   |                    |  
|Net operating loss                                                                 |  |                      | (1,509,795    | ) |                    |  
|                                                                                   |  |                      |               |   |                    |  
|Other income (expense):                                                            |  |                      |               |   |                    |  
|Loss on convertible debt modification, related party                               |  |                      | (14,240       | ) |                    |  
|Interest income                                                                    |  |                      | –             |   |                    |  
|Interest expense                                                                   |  |                      | (143,543      | ) |                    |  
|Total other income (expense)                                                       |  |                      | (157,783      | ) |                    |  
|                                                                                   |  |                      |               |   |                    |  
|Net loss                                                                           |  | $                    | (1,667,578    | ) |                    | $
|                                                                                   |  |                      |               |   |                    |  
|                                                                                   |  |                      |               |   |                    |  
|Weighted average number of common shares outstanding -
    basic and fully diluted |  |                      | 2,045,979,796 |   |                    |  
|                                                                                   |  |                      |               |   |                    |  
|Net loss per share - basic and fully diluted                                       |  | $                    | (0.00         | ) |                    | $



See accompanying notes to financial statements.





3







EPAZZ, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                            |  | For the Six Months |           
|--------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                            |  | Ended June 30,     |           
|                                                                            |  | 2013               |           
|                                                                            |  |                    |           
|Cash flows from operating activities                                        |  |                    |           
|Net loss                                                                    |  | $                  | (2,066,149
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                    |           
|Bad debts (recoveries)                                                      |  |                    | (8,740    
|Depreciation and amortization                                               |  |                    | 56,837    
|Amortization of intangible assets                                           |  |                    | 87,324    
|Amortization of deferred financing costs                                    |  |                    | 19,905    
|Amortization of discounts on convertible notes payable                      |  |                    | 128,612   
|Loss on convertible debt modification, related party                        |  |                    | 96,032    
|Stock based compensation issued for services, related parties               |  |                    | 1,522,000 
|Decrease (increase) in assets:                                              |  |                    |           
|Accounts receivable                                                         |  |                    | (29,759   
|Other current assets                                                        |  |                    | 1,743     
|Increase (decrease) in liabilities:                                         |  |                    |           
|Accounts payable and accrued expenses                                       |  |                    | 38,748    
|Accrued expenses, related parties                                           |  |                    | 10,536    
|Deferred revenues                                                           |  |                    | (30,252   
|Net cash provided by (used in) operating activities                         |  |                    | (173,163  
|                                                                            |  |                    |           
|Cash flows from investing activities                                        |  |                    |           
|Proceeds from the sale of equipment                                         |  |                    | –         
|Purchase of equipment                                                       |  |                    | (1,697    
|Acquisition of subsidiaries                                                 |  |                    | –         
|Net cash used in investing activities                                       |  |                    | (1,697    
|                                                                            |  |                    |           
|Cash flows from financing activities                                        |  |                    |           
|Payments on capital lease obligations payable                               |  |                    | (9,713    
|Proceeds from notes payable, related parties                                |  |                    | 203,950   
|Repayment of notes payable, related parties                                 |  |                    | (119,167  
|Proceeds from convertible debts                                             |  |                    | 30,000    
|Repayment of convertible debts                                              |  |                    | (27,500   
|Proceeds from long term debts                                               |  |                    | 271,095   
|Repayment of long term debts                                                |  |                    | (172,719  
|Net cash provided by financing activities                                   |  |                    | 175,946   
|                                                                            |  |                    |           
|Net increase (decrease) in cash                                             |  |                    | 1,086     
|Cash - beginning                                                            |  |                    | 46,101    
|Cash - ending                                                               |  | $                  | 47,187    
|                                                                            |  |                    |           
|Supplemental disclosures:                                                   |  |                    |           
|Interest paid                                                               |  | $                  | 106,869   
|Income taxes paid                                                           |  | $                  | –         
|                                                                            |  |                    |           
|Non-cash investing and financing activities:                                |  |                    |           
|Acquisition of subsidiary in exchange for debt                              |  | $                  | –         
|Acquisition of leased assets for debt                                       |  | $                  | –         
|Value of shares issued for conversion of debt                               |  | $                  | 120,160   
|Value of shares issued for conversion of debt, related parties              |  | $                  | 100,239   
|Discount on beneficial conversion feature of convertible debt               |  | $                  | 33,000    
|Deferred financing costs                                                    |  | $                  | 32,076    
|Dividends payable declared                                                  |  | $                  | 18,000    



See accompanying
notes to financial statements.





4







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1 – Basis of Presentation and Consolidation



The interim condensed consolidated financial
statements of Epazz, Inc. (“Epazz” or the “Company”), an Illinois corporation, included herein, presented
in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate
to not make the information presented misleading.



These statements reflect all adjustments,
which in the opinion of management, are necessary for fair presentation of the information contained therein. Except as otherwise
disclosed, all such adjustments are of a normal recurring nature. It is suggested that these interim condensed financial statements
be read in conjunction with the financial statements of the Company for the year ended December 31, 2012 and notes thereto included
in the Company's 10-K annual report. The Company follows the same accounting policies in the preparation of interim reports.



Principles of Consolidation

The accompanying condensed consolidated
financial statements include the accounts of the following entities, all of which are under common control and ownership:



|                                       |  | State of      |  |                 |  | Abbreviated
|-------------------------------------- |  | ------------- |  | --------------- |  | -----------
|Name of Entity(2)                      |  | Incorporation |  | Relationship(1) |  | Reference  
|Epazz, Inc.                            |  | Illinois      |  | Parent          |  | Epazz      
|IntelliSys, Inc.                       |  | Wisconsin     |  | Subsidiary      |  | IntelliSys 
|Professional Resource Management, Inc. |  | Illinois      |  | Subsidiary      |  | PRMI       
|Desk Flex, Inc.                        |  | Illinois      |  | Subsidiary      |  | DFI        
|K9 Bytes, Inc.                         |  | Illinois      |  | Subsidiary      |  | K9 Bytes   
|MS Health, Inc.                        |  | Illinois      |  | Subsidiary      |  | MS Health  
|Cooling Technology Solutions, Inc.     |  | Illinois      |  | Subsidiary      |  | CTS        

(1)All subsidiaries are wholly-owned
subsidiaries of Epazz, Inc.

(2)All entities are in the form
of Corporations.



The condensed consolidated financial statements
herein contain the operations of the wholly-owned subsidiaries listed above. All significant inter-company transactions have been
eliminated in the preparation of these financial statements. The parent company, Epazz and subsidiaries, IntelliSys, PRMI, DFI,
K9 Bytes, MS Health and CTS will be collectively referred to herein as the “Company”, or “Epazz”. The Company's
headquarters are located in Chicago, Illinois and substantially all of its customers are within the United States.



These statements reflect all adjustments,
consisting of normal recurring adjustments, which in the opinion of management are necessary for fair presentation of the information
contained therein.



Segment Reporting

FASB ASC 280-10-50 requires annual and
interim reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic
areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities
from which it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief
operating decision maker in deciding how to allocate resources. All of the Company’s software products are considered operating
segments, and will be aggregated into one reportable segment given the similarities in economic characteristics among the operations
represented by the common nature of the products, customers and methods of distribution.



Reclassifications

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



Use of Estimates

The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.





5







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Fair Value of Financial Instruments

Under FASB ASC 820-10-05, the Financial
Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The
adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying
amounts of cash, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate
fair value primarily due to the short term nature of the instruments. The Company had debt instruments that required fair value
measurement on a recurring basis.



Intangible Assets

Intangible assets are amortized using the
straight-line method over their estimated period of benefit of five to fifteen years. We evaluate the recoverability of intangible
assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate
that impairment exists. All of our intangible assets are subject to amortization. No material impairments of intangible assets
have been identified during any of the periods presented. Amortization expense on intangible assets totaled $87,324 and $68,124
for the six months ended June 30, 2013 and 2012, respectively.



Goodwill

The Company evaluates the carrying value
of goodwill during the fourth quarter of each year and between annual evaluations if events occur or circumstances change that
would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include,
but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition,
or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company compares the fair
value of the reporting unit to which the goodwill is assigned to the reporting unit's carrying amount, including goodwill. The
fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market
approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds its fair value, then the
amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of
reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value
of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess
of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of
goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. The Company's
evaluation of goodwill completed during the year resulted in no impairment losses.



Beneficial Conversion Features

From time to time, the Company may issue
convertible notes that may contain an imbedded beneficial conversion feature. A beneficial conversion feature exists on the date
a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess
of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the
fair value of warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded
as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense
over the life of the note using the effective interest method.



Basic and Diluted Net Earnings per Share

Basic net earnings (loss) per common share
is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of common shares outstanding
during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be
issued upon exercise of common stock options. In periods where losses are reported, the weighted-average number of common shares
outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. There were no outstanding potential
common stock equivalents for the periods presented. As such, basic and diluted earnings per share resulted in the same figure for
the three and six months ending June 30, 2013 and 2012.



Stock-Based
Compensation

The Company adopted FASB guidance on stock
based compensation on January 1, 2006. Under FASB ASC 718-10-30-2, all share-based payments to employees, including grants of employee
stock options, are to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Common stock issued for services and compensation was $1,522,000 and $-0- for the six months ended June 30, 2013 and 2012, respectively.



Revenue Recognition

The Company designs and sells various software
programs to business enterprises, hospitals and Government and post-secondary institutions. Prior to shipment, each software product
is tested extensively to meet Company specifications. The software is shipped fully functional via electronic delivery, but some
installation and setup is required. No other entities sell the same or largely interchangeable software.





6







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Installation is a standard process, outlined
in the owner's manual, consisting principally of setup, calibrating, and testing the software. A purchaser of the software could
complete the process using the information in the owner's manual, although it would probably take significantly longer than it
would take the Company’s technicians to perform the tasks. Although other vendors do not install the Company’s software,
they do provide largely interchangeable installation services for a fee. Historically, the Company has never sold the software
without installation. Most installations are performed by the Company within 7 to 24 days of shipment and are included in the overall
sales price of the software. In addition, the customer must pay for support contracts and training packages, depending on their
desired level of service. The Company is the only manufacturer of the software and it only sells software on a standalone basis
directly to the end user.



The sales price of the arrangement consists
of the software, installation, and training and support services, which the customer is obligated to pay in full upon delivery
of the software. In addition, there are no general rights of return involved in these arrangements. Therefore, the software is
accounted for as a separate unit of accounting.



The Company does not have vendor-specific
objective evidence of selling price for the software because it does not sell the software separately (without installation services
and support contracts). In addition, third-party evidence of selling price does not exist as no vendor separately sells the same
or largely interchangeable software. Therefore, the Company uses its best estimate of selling price when allocating such arrangement
consideration.



In estimating its selling price for the
software, the Company considers the cost to produce the software, profit margin for similar arrangements, customer demand, effect
of competitors on the Company’s software, and other market constraints. When applying the relative selling price method,
the Company uses its best estimate of selling price for the software, and third-party evidence of selling price for the installation.
Accordingly, without considering whether any portion of the amount allocable to the software is contingent upon delivery of the
other items, the Company allocates the selling price to the software, support, and installation.



The Company doesn’t currently provide
product warranties, but if it does in the future it will provide for specific product lines and accrue for estimated future warranty
costs in the period in which the revenue is recognized.



Recent Accounting Pronouncements

In July 2013, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11: Presentation of an Unrecognized Tax Benefit When
a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The new guidance requires that
unrecognized tax benefits be presented on a net basis with the deferred tax assets for such carryforwards. This new guidance is
effective for fiscal years and interim periods within those years beginning after December 15, 2013. We do not expect the adoption
of the new provisions to have a material impact on our financial condition or results of operations.



In February 2013, FASB issued ASU No. 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve
the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially
excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive
income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive
income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in
the financial statements under U.S. GAAP. The new amendments will require an organization to:

| | - | Present (either on the face of the statement where net income is presented or in the notes) the
effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but
only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting
period; and                                                                                                                         
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification
items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting
period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially
transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.

The amendments apply to all public and
private companies that report items of other comprehensive income. Public companies are required to comply with these amendments
for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15,
2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 did not have a material impact on our
financial position or results of operations.





7







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



In January 2013, the FASB issued ASU No.
2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarifies
which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11.
The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed
unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope
of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while
still giving financial statement users sufficient information to analyze the most significant presentation differences between
financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in
this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 did not have
a material impact on our financial position or results of operations.



Note 2 – Going Concern



As shown in the accompanying condensed
consolidated financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit
of $(6,198,905), and as of June 30, 2013, the Company’s current liabilities exceeded its current assets by $754,125 and its
total liabilities exceeded its total assets by $684,229. These factors raise substantial doubt about the Company’s ability
to continue as a going concern.



The financial statements do not include
any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going
concern. These financial statements also do not include any adjustments relating to the recoverability and classification of recorded
asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as
a going concern.



Note 3 – Subsidiary Formation



Subsidiary Formation – Cooling
Technology Solutions, Inc., March 4, 2013

On March 4, 2013, the Board of Directors
of Epazz, Inc. (the “Company”), consisting solely of Shaun Passley, the Company’s majority shareholder, approved
the formation of a new wholly-owned subsidiary of the Company named Cooling Technology Solutions, Inc. The Company plans to file
a non-provisional patent application for its Project Flex product in the name of Cooling Technology Solutions, Inc., however, as
of the date of this filing there has been no activity and, as such, there are no revenues or expenses.



Note 4 – Asset Purchase Acquisitions



Asset Purchase Acquisition – MS
Health, Inc., March 28, 2012

On March 28, 2012, we, through a newly-formed
wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), closed on an Asset Purchase Agreement (“APA”)
with MS Health Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the APA, we purchased all of MSHSC’s
assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and
software in consideration for an aggregate of $500,000, of which $39,200 was paid in cash at the closing, $360,800 was financed
using a small business loan and $100,000 was paid by way of a Promissory Note (the “MSHSC Note”). The terms of the
MSHSC Note include interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or
interest for two (2) years and equal payments of principal and interest commencing in year 3, no prepayment penalty, and full payment
of all amounts due after five (5) years. The MSHSC Note is secured by a security interest over the assets of MS Health. We did
not purchase and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC. The acquisition was financed in
part with a $360,800 Small Business Administration (“SBA”) loan, bearing interest at fixed and variable rates. The
initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of
the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate
over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly.
The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex,
Inc., MS Health and the Company, and secured by the assets of MS Health and the Company.





8







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



MSHSC developed and sells CHMCi, an enterprise
wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services. With
CMHCi, an organization will realize the benefits of increased efficiency, accountability, and productivity. CMHCi offers server-based,
internet, and secure cloud computing enabling the user to access information as required. By maintaining a complete electronic
client record, including data collection and reporting across multiple programs, locations, episodes of care, and service providers,
CMHCi helps eliminate redundant record keeping. The scheduler component tracks client, staff, and group appointments. Easy to use,
it interfaces seamlessly with service authorization tracking, service history, and billing. The integrated financial reporting
component provides the basis for an efficient and comprehensive accounting system, including electronic claims and remittance,
third party insurance, and client, municipality, and grantor billing.



In connection with the Asset Purchase,
the shareholders of MSHSC and the Company (through MS Health) entered into a Covenant Not to Compete; Consulting Agreement, Non-Competition
and Consulting Agreement, pursuant to which the shareholders of MSHSC agreed to provide consulting services to the Company for
a period of six months following closing. Pursuant to the agreement, the shareholders of MSHSC agreed not to compete against the
Company for two years from the closing of the acquisition.



This acquisition
was accounted for as a business combination under the purchase method of accounting, given that substantially all of the Company’s
assets and ongoing operations were acquired. The purchase resulted in $114,627 of goodwill. According to the purchase method of
accounting, the Company recognized the identifiable assets acquired and liabilities assumed as follows:





|                                                         |  | March 28, |        
|-------------------------------------------------------- |  | --------- | -------
|                                                         |  | 2012      |        
|Consideration:                                           |  |           |        
|Cash paid at closing                                     |  | $         | 39,200 
|Small business loan(1)                                   |  |           | 360,800
|Seller financed note payable(2)(3)                       |  |           | 124,697
|Fair value of total consideration exchanged              |  | $         | 524,697
|                                                         |  |           |        
|Fair value of identifiable assets acquired assumed:      |  |           |        
|Other current assets                                     |  | $         | 7,367  
|Equipment                                                |  |           | 2,703  
|Contracts                                                |  |           | 258,000
|Technology-based intangible assets                       |  |           | 124,000
|Non-compete agreement                                    |  |           | 18,000 
|Total fair value of assets assumed                       |  |           | 410,070
|Consideration paid in excess of fair value (Goodwill)(4) |  | $         | 114,627

(1)
Consideration included partial proceeds obtained from a $360,800 Small Business Association (“SBA”) loan, bearing
interest at fixed and variable rates. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime
Rate in effect on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan
terms then transition to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term,
calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of
$3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the
assets of MS Health and the Company.

(2)
Consideration included an unsecured $100,000 seller financed note payable (“MSHSC Note”), bearing interest at 6%
per annum, a ten (10) year amortization, a right of offset, no payments of either principal or interest for two (2) years and
equal payments of principal and interest commencing in year 3, no prepayment penalty, and full payment of all amounts due
after five (5) years. The MSHSC Note is secured by a security interest over the assets of MS Health. We did not purchase and
MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC.

(3)
The fair value of the seller financed note in excess of the $100,000 principal balance attributable to the deferred payment
terms will be amortized to interest expense over the deferred financing period.

(4)
The consideration paid in excess of the net fair value of assets acquired and liabilities assumed has been recognized as
goodwill.



9







EPAZZ, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)



Management believes the product line of
MS Health, customer base and other assets acquired will enable the Company to enhance their business model and strengthen its future
cash flows to fund operations and take advantage of additional growth opportunities.



The unaudited supplemental pro forma results
of operations of the combined entities had the dates of the acquisitions been January 1, 2013 or January 1, 2012 are as follows:



|                                                      |  | Combined Pro Forma:                                                                                              |              
|----------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- | -------------
|                                                      |  | For the six months ended
                                                                               June 30, |              
|                                                      |  | 2013                                                                                                             |              
|Revenue:                                              |  | $                                                                                                                | 487,129      
|                                                      |  |                                                                                                                  |              
|Expenses:                                             |  |                                                                                                                  |              
|Operating expenses                                    |  |                                                                                                                  | 2,194,288    
|                                                      |  |                                                                                                                  |              
|Net operating income (loss)                           |  |                                                                                                                  | (1,707,159   
|                                                      |  |                                                                                                                  |              
|Other income (expense)                                |  |                                                                                                                  | (358,990     
|                                                      |  |                                                                                                                  |              
|Net income (loss)                                     |  | $                                                                                                                | (2,066,149   
|                                                      |  |                                                                                                                  |              
|Weighted average number of common shares              |  |                                                                                                                  |              
|Outstanding – basic and fully diluted                 |  |                                                                                                                  | 1,283,603,738
|                                                      |  |                                                                                                                  |              
|Net income (loss) per share – basic and fully diluted |  | $                                                                                                                | (0.00        



Note 5 – Fair Value of Financial
Instruments



Under FASB ASC 820-10-5, fair value is
defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value
hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under
GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required
for items measured at fair value.



The Company does not have any financial
instruments that must be measured under the new fair value standard. The Company’s financial assets and liabilities are measured
using inputs from the three levels of the fair value hierarchy. The three levels are as follows:



Level 1 - Inputs are unadjusted
quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement
date.



Level 2 - Inputs include quoted
prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield
curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means
(market corroborated inputs).



Level 3 - Unobservable inputs
that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.





10







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The following schedule summarizes the valuation
of financial instruments at fair value on a non-recurring basis in the balance sheets as of June 30, 2013 and December 31, 2012:



|                                              |  | Fair Value Measurements at June 30, 2013 |       
|--------------------------------------------- |  | ---------------------------------------- | ------
|                                              |  | Level 1                                  |       
|Assets                                        |  |                                          |       
|Cash                                          |  | $                                        | 47,187
|Intangible assets                             |  |                                          | –     
|Goodwill                                      |  |                                          | –     
|Total assets                                  |  |                                          | 47,187
|Liabilities                                   |  |                                          |       
|Lines of credit                               |  |                                          | –     
|Capital leases                                |  |                                          | –     
|Long term debts, including current maturities |  |                                          | –     
|Notes payable, related parties                |  |                                          | –     
|Convertible debts, net of discount of $46,456 |  |                                          | –     
|Total Liabilities                             |  |                                          | –     
|                                              |  | $                                        | 47,187



|                                               |  | Fair Value Measurements at December 31, 2012 |       
|---------------------------------------------- |  | -------------------------------------------- | ------
|                                               |  | Level 1                                      |       
|Assets                                         |  |                                              |       
|Cash                                           |  | $                                            | 46,101
|Intangible assets                              |  |                                              | –     
|Goodwill                                       |  |                                              | –     
|Total assets                                   |  |                                              | 46,101
|Liabilities                                    |  |                                              |       
|Lines of credit                                |  |                                              | –     
|Capital leases                                 |  |                                              | –     
|Long term debts, including current maturities  |  |                                              | –     
|Notes payable, related parties                 |  |                                              | –     
|Convertible debts, net of discount of $139,068 |  |                                              | –     
|Total Liabilities                              |  |                                              | –     
|                                               |  | $                                            | 46,101



There were no transfers of financial assets
or liabilities between Level 1 and Level 2 inputs for the six months ended June 30, 2013 and the year ended December 31, 2012.



Level 2 liabilities consist of various
debt arrangements, and Level 3 assets consist of intangible assets and goodwill. No fair value adjustment was necessary during
the six months ended June 30, 2013 and the year ended December 31, 2012.



Note 6 – Property and Equipment



Property and Equipment consists of the
following at June 30, 2013 and December 31, 2012, respectively:



|                                               |  | June 30, |          |   | December 31, |  
|---------------------------------------------- |  | -------- | -------- | - | ------------ | -
|                                               |  | 2013     |          |   | 2012         |  
|Furniture and fixtures                         |  | $        | 2,187    |   |              | $
|Computers and equipment                        |  |          | 319,972  |   |              |  
|Software                                       |  |          | 67,986   |   |              |  
|Assets held under capital leases               |  |          | 134,800  |   |              |  
|                                               |  |          | 525,945  |   |              |  
|Less accumulated depreciation and amortization |  |          | (383,788 | ) |              |  
|                                               |  | $        | 141,157  |   |              | $



Depreciation expense totaled $56,837 and
$54,517 for the six months ended June 30, 2013 and 2012, respectively.





11







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 7 – Intangible Assets



Intangible assets consisted of the following at June 30, 2013
and December 31, 2012, respectively:



|                                                |  | Useful   |  |  | June 30, |         |           | December 31, |  
|----------------------------------------------- |  | -------- |  |  | -------- | ------- | --------- | ------------ | -
|Description                                     |  | Life     |  |  | 2013     |         |           | 2012         |  
|Technology-based intangible assets - PRMI       |  | 15 Years |  |  | $        | 480,720 |           |              | $
|Technology-based intangible assets - IntelliSys |  | 5 Years  |  |  |          | 200,000 |           |              |  
|Technology-based intangible assets - K9 Bytes   |  | 5 Years  |  |  |          | 42,000  |           |              |  
|Technology-based intangible assets – MS Health  |  | 5 Years  |  |  |          | 124,000 |           |              |  
|Contracts – MS Health                           |  | 6 Years  |  |  |          | 258,000 |           |              |  
|Trade name - K9 Bytes                           |  | 5 Years  |  |  |          | 22,000  |           |              |  
|Other intangible assets – MS Health             |  | 2 Years  |  |  |          | 18,000  |           |              |  
|Other intangible assets - K9 Bytes              |  | 2 Years  |  |  |          | 26,000  |           |              |  
|Total intangible assets                         |  |          |  |  |          |         | 1,170,720 |              |  
|Less: accumulated amortization                  |  |          |  |  |          |         | (436,894  | )            |  
|Intangible assets, net                          |  |          |  |  |          | $       | 733,826   |              |  



Amortization expense on intangible assets
totaled $87,324 and $68,124 for the six months ended June 30, 2013 and 2012, respectively.



Note 8 – Lines of Credit



Lines of credit consisted of the following
at June 30, 2013 and December 31, 2012, respectively:



|                                                                                                                                                                                                                                                               |  | June 30, |         |   | December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------- | - | ------------ | -
|                                                                                                                                                                                                                                                               |  | 2013     |         |   | 2012         |  
|Line of credit of $50,000 from PNC bank, originating on February 16, 2012. The outstanding balance on the line of credit bears interest at an introductory rate of 4.25% for the first year, subject to renewal thereafter. Payments of $739 are due monthly.  |  | $        | 49,947  |   |              | $
|                                                                                                                                                                                                                                                               |  |          |         |   |              |  
|Line of credit of $20,000 from US Bank, originating on June 8, 2012. The outstanding balance on the line of credit bears interest at 9.75%, maturing on June 5, 2019. Payments of $500 are due monthly.                                                        |  |          | 19,673  |   |              |  
|                                                                                                                                                                                                                                                               |  |          |         |   |              |  
|Line of credit of $40,000 from Dell Business Credit available for the purchase of Dell products, such as computer and software equipment. The outstanding balance on the line of credit bears interest at a rate of 26.99%. Variable payments are due monthly. |  |          | 5,317   |   |              |  
|                                                                                                                                                                                                                                                               |  |          |         |   |              |  
|Total line of credit                                                                                                                                                                                                                                           |  |          | 74,937  |   |              |  
|Less: current portion                                                                                                                                                                                                                                          |  |          | (74,937 | ) |              |  
|Line of credit, less current portion                                                                                                                                                                                                                           |  | $        | –       |   |              | $



Note 9 – Capital Lease Obligations
Payable



The Company leases certain equipment under
agreements that are classified as capital leases as follows:



Lease #1 - Commenced on March 12, 2010
with monthly lease payments of $2,455 and two months paid in advance, and the remaining payments paid over the following 43 months.



Lease #2  - Commenced on March 16,
2010 with monthly lease payments of $2,258 over the following 36 months. The lease was terminated on April 16, 2013 and the equipment
was purchased pursuant to the mutual release and final payment of $5,500.



Lease #3 - Commenced on January 12,
2012 with monthly lease payments of $480 over the next 48 months, and a bargain purchase price of $1 at the end of the lease.





12







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The cost
of equipment under capital leases is included in the Balance Sheets as property and equipment and was $134,800 and $134,800 at
June 30, 2013 and December 31, 2012, respectively. Accumulated amortization of the leased equipment at June 30, 2013 and December
31, 2012 was $120,691 and $108,090, respectively. Amortization of assets under capital leases is included in depreciation and
amortization expense.



The future minimum lease payments required
under the capital leases and the present value of the net minimum lease payments as of June 30, 2013, are as follows:



|Twelve Months                                         |   |         |       
|----------------------------------------------------- | - | ------- | ------
|Ending                                                |   |         |       
|June 30,                                              |   | Amount  |       
|2014                                                  |   | $       | 28,183
|2015                                                  |   |         | 5,757 
|2016                                                  |   |         | 3,311 
|Total minimum payments                                | $ | 37,251  |       
|Less: amount representing interest                    |   | (3,844  | )     
|Present value of net minimum lease payments           |   | 33,407  |       
|Less: Current maturities of capital lease obligations |   | (25,247 | )     
|Long-term capital lease obligations                   | $ | 8,160   |       



Note 10 – Notes Payable, Related Parties



Notes payable, related parties consist
of the following at June 30, 2013 and December 31, 2012, respectively:



|                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | June 30, |        |  | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | ------ |  | ------------ | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | 2013     |        |  | 2012         |  
|On various dates the Company’s CEO advanced and repaid funds to the Company at a 15% interest rate, due on demand. A total of $117,950 was advanced and repaid by the CEO during the six months ended June 30, 2013, and total proceeds and repayments were $349,560 and $411,073, respectively during the year ended December 31, 2012.                                                                                             |  | $        | –      |  |              | $
|                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |          |        |  |              |  
|Originated June 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on June 12, 2015. In addition, a loan origination fee of $2,000 was issued as consideration for the loan on June 12, 2013, and is being amortized on a straight line basis over the life of the loan.    |  |          | 10,000 |  |              |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |          |        |  |              |  
|Originated May 16, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 1, 2015. In addition, a loan origination fee of $2,000 was issued as consideration for the loan on May 16, 2013, and is being amortized on a straight line basis over the life of the loan.      |  |          | 14,000 |  |              |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |          |        |  |              |  
|Originated April 12, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 12, 2015. In addition, a loan origination fee of $7,000 was issued as consideration for the loan on April 12, 2013, and is being amortized on a straight line basis over the life of the loan. |  |          | 57,000 |  |              |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |          |        |  |              |  
|Originated April 1, 2013, unsecured promissory note payable owed to Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s CEO. The note carries a 10% interest rate, matures on April 1, 2015. In addition, a loan origination fee of $3,000 was issued as consideration for the loan on April 1, 2013, and is being amortized on a straight line basis over the life of the loan.    |  |          | 19,000 |  |              |  





13







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

|                                                                                                                                                                                                                                                                                                                                                                                         |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | - |  | - | ------- | -
|Originated October 9, 2012, unsecured promissory note payable owed to an immediate family member of the Company’s CEO carries a 15% interest rate, matures on July 15, 2013. In addition, a loan origination fee, consisting of 1,088,957 shares of Series A Common Stock with a fair market value of $6,630 was issued as consideration for the loan on October 9, 2012.                |  |   | 13,000  |   |  |   | 13,000  |  
|                                                                                                                                                                                                                                                                                                                                                                                         |  |   |         |   |  |   |         |  
|Originated October 9, 2012, unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matures on July 15, 2013. In addition, a loan origination fee, consisting of 144,928 shares of Series A Common Stock with a fair market value of $884 was issued as consideration for the loan on October 9, 2012. |  |   | 2,000   |   |  |   | 2,000   |  
|                                                                                                                                                                                                                                                                                                                                                                                         |  |   |         |   |  |   |         |  
|Unsecured promissory note payable owed to a Company owned by an immediate family member of the Company’s CEO carries a 15% interest rate, matured on July 31, 2007. Currently in default.                                                                                                                                                                                                |  |   | 5,868   |   |  |   | 7,085   |  
|                                                                                                                                                                                                                                                                                                                                                                                         |  |   |         |   |  |   |         |  
|Total notes payable, related parties                                                                                                                                                                                                                                                                                                                                                     |  |   | 107,868 |   |  |   | 22,085  |  
|Less: current portion                                                                                                                                                                                                                                                                                                                                                                    |  |   | (7,868  | ) |  |   | (22,085 | )
|Notes payable, related parties, less current portion                                                                                                                                                                                                                                                                                                                                     |  | $ | 100,000 |   |  | $ | –       |  



The Company recorded interest expense on
notes payable to related parties in the amounts of $3,320 and $26,144 during the six months ended June 30, 2013 and 2012, respectively.



Note 11 – Convertible Debts



Convertible debts consist of the following
at June 30, 2013 and December 31, 2012, respectively:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | June 30, |         |  | December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------- |  | ------------ | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | 2013     |         |  | 2012         |  
|Unsecured $33,000 convertible promissory note, including an Original Issue Discount (“OID”) of $3,000, carries a 12% interest rate (“First JMJ Note”), matures on June 11, 2014. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.0018 per share, whichever is less, but not less than $0.00009 per share. The note was subsequently repaid in full on August 12, 2013 & thus the 12% interest was not assessed per the terms of the note. The debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | $        | 33,000  |  |              | $
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |          |         |  |              |  
|Unsecured $440,849 convertible promissory note due to a related party, carries a 10% interest rate (“Star Convertible Note”), matures on July 2, 2017. The principal and unpaid interest is convertible into shares of common stock at the discretion of the note holder at a price equal to 75% of the average closing price of the Company’s common stock over the five (5) consecutive trading days immediately preceding the date of conversion, or the fixed price of $0.005 per share, whichever is greater. The note carries a fourteen percent (14%) interest rate in the event of default, and the debt holder is limited to owning 9.99% of the Company’s issued and outstanding shares. This note was subsequently amended on March 5, 2013 to change the conversion price to, "equal to the greater of, (a) 50% of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The modification resulted in a loss on debt modification of $81,792. The note holder converted $250,000 of outstanding principal into 50,000,000 shares pursuant to debt conversion on September 15, 2012, $46,000 into 50,000,000 shares pursuant to debt conversion on March 14, 2013 and $40,000 into another 50,000,000 shares pursuant to debt conversion on April 10, 2013. |  |          | 140,849 |  |              |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |          |         |  |              |  
|Unsecured $56,900 convertible promissory note, including an Original Issue Discount (“OID”) of $4,400 and legal fees of $2,500, carries an 8% interest rate (“First Tonaquint Note”), matures on May 31, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the average of the two lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted $5,000 of outstanding principal into 4,504,505 shares pursuant to debt conversion on March 12, 2013, $10,000 of principal into 15,151,515 shares on April 2, 2013 and another $10,000 of principal into 15,873,016 shares on April 24, 2013.                                                                                                                                                                                                                                                                                     |  |          | 31,900  |  |              |  





14







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |   |         |   |  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- | - |  | - | -------- | -
|Unsecured $16,500 convertible promissory note carries an 8% interest rate (“Sixth Asher Note”), matures on September 14, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to forty-one percent (41%) of the average of the three lowest trading bid prices of the Company’s common stock for the ninety (90) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder converted a total of $16,500 of principal and $660 of interest into a total of 40,857,143 shares in full settlement of the outstanding debt on June 24, 2013.                                                  |  |   | –       |   |  |   | 16,500   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |   |         |   |  |   |          |  
|Unsecured $27,500 convertible promissory note carries an 8% interest rate (“Fifth Asher Note”), matures on July 18, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to forty-one percent (41%) of the average of the three lowest trading bid prices of the Company’s common stock for the ninety (90) trading days prior to the conversion date, or $0.00005 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The promissory note, consisting of $27,500 of principal and $21,716 of accrued interest and financing costs, was repaid in full with cash on April 15, 2013.                                                                        |  |   | –       |   |  |   | 27,500   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |   |         |   |  |   |          |  
|Unsecured $32,500 convertible promissory note carries an 8% interest rate (“Fourth Asher Note”), matured on April 26, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the five lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder subsequently converted a total of $32,500 of principal and $1,300 of interest into a total of 24,461,538 shares in settlement of the outstanding debt on March 4, 2013 and March 6, 2013.                            |  |   | –       |   |  |   | 32,500   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |   |         |   |  |   |          |  
|Unsecured $42,500 convertible promissory note carries an 8% interest rate (“Third Asher Note”), matured on March 29, 2013. The principal is convertible into shares of common stock at the discretion of the note holder at a price equal to fifty-nine percent (59%) of the average of the three lowest trading bid prices of the Company’s common stock for the ten (10) trading days prior to the conversion date, or $0.00009 per share, whichever is greater. The note carries a twenty two percent (22%) interest rate in the event of default, and the debt holder is limited to owning 4.99% of the Company’s issued and outstanding shares. The note holder subsequently converted a total of $42,500 of principal and $1,700 of interest into a total of 23,573,529 shares of common stock in settlement of the outstanding debt between January 3, 2013 and February 26, 2013. |  |   | –       |   |  |   | 42,500   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |   |         |   |  |   |          |  
|Total convertible debts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |   | 169,749 |   |  |   | 366,749  |  
|Less: unamortized discount on beneficial conversion feature                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |   | (46,456 | ) |  |   | (139,068 | )
|Convertible debts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |   | 123,293 |   |  |   | 227,681  |  
|Less: current maturities of convertible debts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |   | (87,766 | ) |  |   | (74,708  | )
|Long term convertible debts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | $ | 35,527  |   |  | $ | 152,973  |  



The Company recognized interest expense
in the amount of $30,867 and $2,916 for the six months ended June 30, 2013 and 2012, respectively, related to convertible debts.



In addition, the Company recognized and
measured the embedded beneficial conversion feature present in the convertible debts by allocating a portion of the proceeds equal
to the intrinsic value of the feature to additional paid-in-capital. The intrinsic value of the feature was calculated on the commitment
date using the effective conversion price of the convertible debt. This intrinsic value is limited to the portion of the proceeds
allocated to the convertible debt.





15







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The aforementioned
accounting treatment resulted in a total debt discount equal to $33,000 and $277,323 during the six months ended June 30, 2013
and the year ended December 31, 2012, respectively. The discount is amortized on a straight line basis from the dates of issuance
until the earlier of the stated redemption date of the debts, as noted above or the actual settlement date.



The convertible notes, consisting of total
original face values of $440,849 from Star Financial, $206,500 from Asher Enterprises, $56,900 from Tonaquint Inc. and $33,000
from JMJ Financial, Inc., that created the beneficial conversion feature carry default provisions that place a “maximum share
amount” on the note holders that can be owned as a result of the conversions to common stock by the note holders is 9.99%
and 4.99%, respectively, of the issued and outstanding shares of Epazz.



During the six months ended June 30, 2013
and 2012, the Company recorded debt amortization expense in the amount of $128,612 and $14,978, respectively, attributed to the
aforementioned debt discount, including $3,411 of amortization on the $7,400 OID during the six months ended June 30, 2013.



During the six months ended June 30, 2013,
the Company issued a total of 224,421,246 shares pursuant to debt conversions in settlement of $206,160 of outstanding principal
and $3,660 of unpaid interest, including 100,000,000 shares pursuant to debt conversion in settlement of $86,000 of outstanding
principal owed to a related party (“Star Convertible Note”). The principal and interest was converted in accordance
with the conversion terms, therefore no gain or loss has been recognized.



During the year ended December 31, 2012,
the Company issued a total of 71,292,329 shares pursuant to debt conversions in settlement of $374,228 of outstanding principal
and $3,500 of unpaid interest, including 50,000,000 shares pursuant to debt conversion in settlement of $250,000 of outstanding
principal owed to a related party (“Star Convertible Note”). The principal and interest was converted in accordance
with the conversion terms, therefore no gain or loss has been recognized.



On May 27, 2011,
we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $50,000. The First Asher Note had a maturity date of February 28, 2012, and
was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price.
The “Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%).
“Market Price” means the average of the lowest five (5) Trading Prices for the Common Stock during the ten (10) Trading
Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean
$0.00009 per share. The shares of common stock issuable upon conversion of the First Asher Note were restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Asher Note was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.



The Company evaluated
the First Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.02603
below the market price on May 27, 2011 of $0.056 provided a value of $43,421 of which $-0- and $7,769 was amortized during the
six months ended June 30, 2013 and 2012, respectively.



On June 28, 2011,
we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $37,500. The Second Asher Note had a maturity date of March 30, 2012, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest five (5) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009
per share. The shares of common stock issuable upon conversion of the Second Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Second Asher Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.



The Company evaluated
the Second Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.01298
below the market price on June 28, 2011 of $0.035 provided a value of $22,108 of which $-0- and $7,209 was amortized during the
six months ended June 30, 2013 and 2012, respectively.





16







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On July 2, 2012,
we modified a previously outstanding non-convertible debt of $342,321, consisting of $296,103 of principal and $46,218 of accrued
interest in exchange for a Convertible Promissory Note with Star Financial Corporation (“Star”), a company owned by
our CEO’s family member, pursuant to which we issued to Star a 10% Convertible Promissory Note in the original principal
amount of $440,849. The modification resulted in a loss on debt modification of $98,528. The note was again modified on March 5,
2013, resulting in a loss on debt modification of $81,792. The Star Convertible Note has a maturity date of July 2, 2017, and is
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 50% multiplied by the Market Price (representing a discount rate of 50%). “Market
Price” means the average of the five (5) Closing Prices for the Common Stock during the five (5) Trading Day period ending
on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00075 per share.
The shares of common stock issuable upon conversion of the Star Convertible Note will be restricted securities as defined in Rule
144 promulgated under the Securities Act of 1933. The issuance of the Star Convertible Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.



The Company evaluated
the Star Convertible Note and determined that the shares issuable pursuant to the conversion option were determinate due to the
Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from
a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will
be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price
of $0.00141 below the market price on July 2, 2012 of $0.012 provided a value of $112,382 of which $24,176 and $-0- was amortized
during the six months ended June 30, 2013 and 2012, respectively.



On July 2, 2012,
we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $42,500. The Third Asher Note had a maturity date of March 29, 2013, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009
per share. The shares of common stock issuable upon conversion of the Third Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Third Asher Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.



The Company evaluated
the Third Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00551
below the market price on July 2, 2012 of $0.012 provided a value of $36,082 of which $11,760 and $-0- was amortized during the
six months ended June 30, 2013 and 2012, respectively.



On July 24, 2012,
we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $32,500. The Fourth Asher Note had a maturity date of April 26, 2013, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 59% multiplied by the Market Price (representing a discount rate of 41%). “Market
Price” means the average of the lowest five (5) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009
per share. The shares of common stock issuable upon conversion of the Fourth Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Fourth Asher Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.



The Company evaluated
the Fourth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00583
below the market price on July 24, 2012 of $0.0126 provided a value of $27,959 of which $11,751 and $-0- was amortized during the
six months ended June 30, 2013 and 2012, respectively.





17







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On September 10,
2012, we entered into a Securities Purchase Agreement with Tonaquint, Inc., pursuant to which we sold to Tonaquint an 8% Convertible
Promissory Note in the original principal amount of $56,900. The First Tonaquint Note has a maturity date of May 31, 2013, and
is convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 60% multiplied by the Market Price (representing a discount rate of 40%). “Market
Price” means the average of the lowest two (2) Trading Prices for the Common Stock during the ten (10) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00009
per share. The shares of common stock issuable upon conversion of the First Tonaquint Note will be restricted securities as defined
in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First Tonaquint Note was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.



The Company evaluated
the First Tonaquint Note and determined that the shares issuable pursuant to the conversion option were determinate due to the
Fixed Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from
a majority of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will
be available or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price
of $0.0047 below the market price on September 10, 2012 of $0.0033 provided a value of $56,900 of which $32,669 and $-0- was amortized
during the six months ended June 30, 2013 and 2012, respectively.



On October 16,
2012, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $27,500. The Fifth Asher Note had a maturity date of July 18, 2013, and was
convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price. The
“Variable Conversion Price” shall mean 41% multiplied by the Market Price (representing a discount rate of 59%). “Market
Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ninety (90) Trading Day period
ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price” shall mean $0.00005
per share. The shares of common stock issuable upon conversion of the Fifth Asher Note were restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933. The issuance of the Fifth Asher Note was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited and
sophisticated investor, familiar with our operations, and there was no solicitation.



The Company evaluated
the Fifth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00603
below the market price on October 16, 2012 of $0.008 provided a value of $27,500 of which $19,900 and $-0- was amortized during
the six months ended June 30, 2013 and 2012, respectively.



On December 12,
2012, we entered into a Securities Purchase Agreement with Asher Enterprises, Inc., pursuant to which we sold to Asher an 8% Convertible
Promissory Note in the original principal amount of $16,500. The Sixth Asher Note had a maturity date of September 14, 2013, and
was convertible into our common stock at the greater of (i) the Variable Conversion Price and (ii) the Fixed Conversion Price.
The “Variable Conversion Price” shall mean 41% multiplied by the Market Price (representing a discount rate of 59%).
“Market Price” means the average of the lowest three (3) Trading Prices for the Common Stock during the ninety (90)
Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion Price”
shall mean $0.00005 per share. The shares of common stock issuable upon conversion of the Sixth Asher Note were restricted securities
as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the Sixth Asher Note was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser was an accredited
and sophisticated investor, familiar with our operations, and there was no solicitation.



The Company evaluated
the Sixth Asher Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00518
below the market price on December 12, 2012 of $0.0064 provided a value of $16,500 of which $15,364 and $-0- was amortized during
the six months ended June 30, 2013 and 2012, respectively.





18







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On June 12, 2013,
we entered into a Securities Purchase Agreement with JMJ Financial, Inc., (“JMJ”) pursuant to which we sold to JMJ
a 12% Convertible Promissory Note in the original principal amount of $33,000. The First JMJ Note had a maturity date of June 11,
2014, and was convertible into our common stock at the lesser of (i) the Variable Conversion Price and (ii) the Fixed Conversion
Price, not less than $0.00009 per share. The “Variable Conversion Price” shall mean 60% multiplied by the Market Price
(representing a discount rate of 40%). “Market Price” means the lowest Trading Price for the Common Stock during the
twenty five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date. “Fixed Conversion
Price” shall mean $0.0018 per share. The shares of common stock issuable upon conversion of the First JMJ Note were restricted
securities as defined in Rule 144 promulgated under the Securities Act of 1933. The issuance of the First JMJ Note was exempt from
the registration requirements of the Securities Act of 1933 pursuant to Rule 506 of Regulation D promulgated thereunder. The purchaser
was an accredited and sophisticated investor, familiar with our operations, and there was no solicitation.



The Company evaluated
the First JMJ Note and determined that the shares issuable pursuant to the conversion option were determinate due to the Fixed
Conversion Price and, as such, does not constitute a derivative liability as the Company has obtained authorization from a majority
of shareholders such that should conversion occur at the Fixed Conversion Price the appropriate number of shares will be available
or issuable for settlement to occur. The beneficial conversion feature discount resulting from the conversion price of $0.00518
below the market price on June 12, 2013 of $0.0017 provided a value of $33,000 of which $9,581 and $-0- was amortized during the
six months ended June 30, 2013 and 2012, respectively.



Note 12 – Long Term Debts



Long term debts consist of the following
at June 30, 2013 and December 31, 2012, respectively:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | June 30, |        |  | December 31, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------ |  | ------------ | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | 2013     |        |  | 2012         |  
|On June 24, 2013, the Company received a loan of $15,000 from WebBank, c/o NewLogic Business Loans, Inc., (“NewLogic”) bearing an effective interest rate of 5.71%, consisting of 176 daily week day payments of $106, maturing on February 19, 2014. The loan is collateralized with MS Health’s receivables. The promissory note is also personally guaranteed by Shaun Passley, our Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                           |  | $        | 14,586 |  |              | $
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |          |        |  |              |  
|On June 11, 2013, the Company received a loan of $24,000, including $499 of loan origination costs, from Horizon Business Funding, LLC (“Horizon”) bearing an effective interest rate of 368.05%, consisting of 78 daily week day payments of $448, maturing on September 2, 2013. The loan is collateralized with the Epazz receivables. The promissory note is also personally guaranteed by Shaun Passley, our Chief Executive Officer.                                                                                                                                                                                                                                                                                                                |  |          | 21,878 |  |              |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |          |        |  |              |  
|On April 11, 2013, the Company received a loan of $70,000, including $1,650 of loan origination costs, from Small Business Financial Solutions, LLC (“SBFS”) bearing an effective interest rate of 95.6%, consisting of 240 daily week day payments of $394, maturing on March 13, 2014. The loan is collateralized with the Epazz receivables. The promissory note is also personally guaranteed by Shaun Passley, our Chief Executive Officer.                                                                                                                                                                                                                                                                                                          |  |          | 57,253 |  |              |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |          |        |  |              |  
|On May 1, 2013, the Company purchased licenses to develop data management software in the total amount of $51,250 from Igenti, Inc., bearing an effective interest rate of 11%, consisting of 36 monthly payments of $1,674, maturing on April 30, 2016. The loan is collateralized with the data management software. Igenti retained a total of $4,615 of financing fees and paid the remaining proceeds of $46,615 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.                                                                                                                      |  |          | 48,700 |  |              |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |          |        |  |              |  
|On February 22, 2013, the Company purchased licenses to develop data management software in the total amount of $102,500 from Igenti, Inc., of which $51,250 was financed pursuant to an equipment financing agreement with Baytree National Bank & Trust Company on March 7, 2013 bearing an effective interest rate of 11.48%, consisting of 36 monthly payments of $1,674. The loan is collateralized with the data management software. Igenti retained a total of $3,000 of financing fees and paid the remaining proceeds of $99,500 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized. |  |          | 45,944 |  |              |  





19





EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |         |  |  |  |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- |  |  |  | ------- | 
|On February 22, 2013, the Company purchased licenses to develop data management software in the total amount of $102,500 from Igenti, Inc., of which $51,250 was financed with an equipment finance loan from Summit Funding Group, Inc. equipment with a three year loan term consisting of monthly loan payments of $1,828, with $2,078 paid at signing. The loan is collateralized with the data management software. Igenti retained a total of $3,000 of financing fees and paid the remaining proceeds of $99,500 to the Company for future payment to Sveltoz Solutions for the development of the data management software. Given the nature and status of the software development, no equipment costs have been capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  | 47,602  |  |  |  | –       | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |         |  |  |  |         | 
|On August 10, 2012, the Company purchased $13,870 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 31.55%, along with monthly principal and interest payments of $585. The loan is collateralized with the purchased equipment. Matures on August 9, 2015.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  | 11,963  |  |  |  | 13,448  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |         |  |  |  |         | 
|On April 1, 2012, the Company purchased $129,747 of equipment with a three year equipment finance loan. The loan bears interest at an effective interest rate of 8.3%, along with monthly principal and interest payments of $4,078. The loan is collateralized with the purchased equipment. Matures on April 1, 2015.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |  | 98,396  |  |  |  | 104,129 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |         |  |  |  |         | 
|Consideration for the MS Health acquisition included partial proceeds obtained from a $360,800 Small Business Association (“SBA”) loan, bearing interest at fixed and variable rates. The initial interest rate is 5.5% per year for three (3) years, consisting of the Prime Rate in effect on the first business day of the month in which the SBA loan application was received, plus 2.25%. The loan terms then transition to a variable interest rate over the remaining seven (7) years of the ten (10) year maturity term, calculated at 2.25% above the Prime Rate, as adjusted quarterly. The Company must pay principal and interest payments of $3,916 monthly. The SBA Loan is guaranteed by PRMI, K9 Bytes, Desk Flex, Inc., MS Health and the Company, and secured by the assets of MS Health and the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  | 327,591 |  |  |  | 343,060 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |         |  |  |  |         | 
|Consideration for the MS Health acquisition included an unsecured $100,000 seller financed note payable (“MSHSC Note”), bearing interest at 6% per annum, a ten (10) year amortization, a right of offset, no payments of either principal or interest for two (2) years and equal payments of principal and interest commencing in year three (3), no prepayment penalty, and full payment of all amounts due after five (5) years. Pursuant to an amendment to a consulting agreement with the seller on March 23, 2012, the Company agreed to begin to repay principal of $1,000 per month, and had repaid a total of $6,000 during the year ended December 31, 2012. The MSHSC Note is secured by a security interest over the assets of MS Health. We did not purchase and MSHSC agreed to retain and be responsible for any and all liabilities of MSHSC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  | 94,000  |  |  |  | 94,000  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |         |  |  |  |         | 
|On Deck Capital Loan – DeskFlex, Inc.:   On November 7, 2011, DeskFlex entered into a four month $20,000 note payable agreement with On Deck Capital. Payments of $183 were originally due daily on the loan. Origination fees of $500 were added to the initial loan, agreed to pay additional fees of $387 per month in servicing fees during the term of the loan and to repay the loan via daily payments of $183. The total payments due on the loan equate to an annual interest rate of 18%.   On February 15, 2012, we amended this loan agreement to increase the loan balance to $35,400, consisting of additional proceeds of $19,200, a rolled over loan balance of $10,050, an origination fee of $750 and interest amount of $5,400 to be paid over the restarted four month term of the loan via daily payments of $274.   On July 23, 2012, we amended this loan agreement again to increase the remaining unpaid loan balance to $35,400 again, consisting of additional proceeds of $23,883, a rolled over loan balance of $5,367, an origination fee of $750 and interest amount of $5,400 to be paid over the restarted four month term of the loan via daily payments of $274.   On October 30, 2012, we amended this loan agreement again to increase the remaining unpaid loan balance to $41,300, consisting of additional proceeds of $18,085, a rolled over loan balance of $16,040, an origination fee of $875 and interest amount of $6,300 to be paid over the restarted four month term of the loan via daily payments of $320.   On February 8, 2013, we again amended this loan agreement again to increase the remaining unpaid loan balance to $41,300, consisting of additional proceeds of $17,541, a rolled over loan balance of $16,584, an origination fee of $875 and interest amount of $6,300 to be paid over the restarted four month term of the loan via daily payments of $320.   The proceeds of all refinancing loans were received with substantially the same terms as the original debt. |  |  | 12,806  |  |  |  | 28,173  | 





20







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |         |  |  |  |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- |  |  |  | ------- | 
|On Deck Capital Loan – Epazz, Inc.:   On January 3, 2012, Epazz entered into a nine month $55,800 note payable agreement with On Deck Capital. Payments of $289 were originally due daily on the loan. Proceeds of $43,875 were received on the loan, origination fees of $1,125 were added to the initial loan, along with interest of $10,800. The total payments due on the loan equate to an annual interest rate of 18%.   On May 25, 2012, we amended this loan agreement to increase the loan balance to $63,000, consisting of additional proceeds of $25,043, a rolled over loan balance of $24,957 and interest of $13,000 to be paid over the restarted nine month term of the loan via daily payments of $326.   On September 10, 2012, we again amended this loan agreement to increase the loan balance to $76,800, consisting of additional proceeds of $22,613, a rolled over loan balance of $35,887, an origination fee of $1,500 and interest of $16,800 to be paid over the revised twelve month term of the loan via daily payments of $299.   The proceeds of all refinancing loans were received with substantially the same terms as the original debt. |  |  | –       |  |  |  | 54,088  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |         |  |  |  |         | 
|On March 20, 2012, DeskFlex entered into a $25,000 three year promissory note bearing interest at 11%. The promissory note is payable in monthly installments of $843 per month, maturing on March 20, 2015 (the “Maturity Date”).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | 15,358  |  |  |  | 19,483  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |         |  |  |  |         | 
|Pursuant to an asset purchase agreement entered into on October 26, 2011, the Company granted K9 Bytes, Inc., a Florida corporation, a subordinated secured $30,750 promissory note carrying a 6% interest rate, payable in monthly installments of $333 per month starting in November 2011 and ending on October 26, 2014, at which time the then remaining balance of the promissory note ($23,017, assuming no additional payments other than those scheduled) is due. The promissory note is secured by a secondary lien on all of the assets of Epazz’s subsidiary, K9 Bytes, Inc., an Illinois corporation formed to house the purchased assets. The promissory note is also personally guaranteed by Shaun Passley, our Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  | 4,400   |  |  |  | 6,234   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |         |  |  |  |         | 
|Unsecured $50,000 promissory note originated on September 15, 2010 between Intellisys and Paul Prahl, payable in monthly installments of $970 carries a 6% interest rate, maturing on September 18, 2015. The Company also agreed to provide Mr. Prahl earn-out rights, which provide that he will receive up to a maximum of $13,350 per year for the three calendar years following the Closing (with the first such calendar year beginning on January 1, 2011), based on the revenues generated by IntelliSys during such applicable year, whereas $6,675 is earned if revenues are between $350,000 and $380,000, $10,012 is earned if revenues are between $380,000 and $395,000, or $13,350 is earned if revenues are greater than $395,000 during each relevant year.                                                                                                                                                                                                                                                                                                                                                                                                   |  |  | 9,846   |  |  |  | 10,520  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |         |  |  |  |         | 
|Unsecured term loan between Epazz and Bank of America, originating on June 15, 2011 bearing interest at 9.5% matures on June 17, 2016. Payments of $1,559 are due monthly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  | 66,917  |  |  |  | 68,436  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |         |  |  |  |         | 
|Unsecured promissory note between Epazz and Newtek Finance for $185,000 originating on September 30, 2010 bearing interest at 6% matures on September 30, 2020. Payments of $2,054 are due monthly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |  | 145,377 |  |  |  | 153,377 | 





21







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |           |   |  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | --------- | - |  | - | --------- | -
|The Company raised funds paid pursuant to an asset purchase agreement with K9 Bytes, Inc., a Florida corporation, on October 26, 2011, through a $235,000 Small Business Association (“SBA”) loan from a third party lender (the “Third Party Lender” and the “SBA Loan”). The SBA Loan has a term of ten (10) years; maturing on October 26, 2021, bearing interest at the prime rate plus 2.75% per annum, adjusted quarterly; is payable in monthly installments (beginning in December 2011) of $2,609 per month; is guaranteed by the Company and personally guaranteed by Shaun Passley, the Company’s Chief Executive Officer; and is secured by all of the assets of K9 Bytes, Inc., the Illinois corporation and wholly-owned subsidiary formed to house the acquired assets and the Company, 100% of the outstanding capital of the K9 subsidiary, and a life insurance policy on Mr. Passley’s life in the amount of $235,000. A total of approximately $10,000 of the amount borrowed under the SBA Loan was used to pay closing fees in connection with the loan, $169,250 was used to pay K9 Bytes the cash amount due pursuant to the terms of the Purchase Contract and the remainder of such loan amount was made available for working capital for the Company and the wholly-owned subsidiary, K9 Bytes, Inc. |  |   | 207,107   |   |  |   | 216,214   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |   |           |   |  |   |           |  
|Total long term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |   | 1,229,724 |   |  |   | 1,111,162 |  
|Less: current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |   | (312,864  | ) |  |   | (218,699  | )
|Long term debt, less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $ | 916,860   |   |  | $ | 892,463   |  



The Company recorded interest expense on
long term debts, credit lines and capital leases in the amount of $100,160 and $65,040 for the six months ended June 30, 2013 and
2012, respectively.



Note 13 – Changes in Stockholder’s
Equity (Deficit)



On May 17, 2013, the Board of Directors,
consisting solely of Shaun Passley, the Company’s majority shareholder, amended the Article of Incorporation to change the
par value and number of authorized shares of each class of common and series of preferred stock, in addition to the modification
of the attributes and dividends. The disclosures herein reflect these modifications and the changes to the par value have been
retroactively reflected throughout.



Convertible
Preferred Stock, Series A

The Company has 1,000 authorized shares
of $0.0001 par value Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock
accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar
year in which the Company has generated revenue over $2 million, and an additional 24% of the Company’s net income beginning
on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are
payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series A Preferred Stock includes
a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series A Preferred Stock is convertible,
at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into
60% of the total number of then issued and outstanding shares of Class A Common Stock. The Series A Preferred Stock has limited
voting rights, relating solely to matters which adversely affect the rights of the Series A Preferred Stock holders. The Company
shall reserve and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient
to effect the conversions.



Convertible
Preferred Stock, Series B

The Company has 1,000 authorized shares
of $0.0001 par value Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series B Preferred Stock
accrues dividends equal to 1.5% of the Company’s revenues per quarter, beginning on January 1st of any calendar
year in which the Company has generated revenue over $1 million, and an additional 6% of the Company’s net income beginning
on January 1st of any calendar year in which the Company has generated net income over $2 million. The dividends are
payable at the discretion of the Company, provided that any unpaid dividends accrue until paid. The Series B Preferred Stock includes
a liquidation preference equal to $0.0001 per share, plus any accrued and unpaid dividends. The Series B Preferred Stock is convertible,
at the option of the holder into shares of the Company’s Class A Common Stock, with five business days’ notice into
10% of the total number of then issued and outstanding shares of Class A Common Stock, provided that no conversion will take place
until all holders of the Series B Preferred Stock consent to such conversion. The Series B Preferred Stock has limited voting rights,
relating solely to matters which adversely affect the rights of the Series B Preferred Stock holders. The Company shall reserve
and keep available out of its authorized but unissued shares of Class A Common Stock such number of shares sufficient to effect
the conversions.





22







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Declaration of Dividends

On January 1, 2013, the Company declared
and accrued estimated dividends of $18,000 on its Convertible Series B Preferred Stock pursuant to the recognition of revenues
in excess of $1 million during the year ended December 31, 2012 based on 1.5% of the estimated 2013 annual revenues. Dividends
equal to 1.5% of the Company’s revenues per quarter during the year ending December 31, 2013 will accrue quarterly and can
be paid in cash or in shares of Class A Common Stock, the exact amounts of which are yet undetermined.



Beneficial Conversion Feature

On June 12, 2013, the Company entered into
a convertible promissory note with JMJ Financial Note. The beneficial conversion feature discount resulting from the conversion
price that was $0.00518 below the market price of $0.0017 on the June 12, 2013 origination date resulted in a debt discount value
of $33,000 that was recognized as additional paid in capital and is being amortized on a straight line basis over the life of the
loan.



Common Stock,
Class A

The Company has 6 billion authorized shares
of $0.0001 par value Class A Common Stock.



Debt Conversions into Class A Common
Stock

On January 3, 2013, the Company issued
4,000,000 shares of Class A Common Stock pursuant to the conversion of $12,000 of convertible debt, which consisted entirely of
principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On February 19, 2013, the Company issued
8,823,529 shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of
principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On February 26, 2013, the Company issued
10,750,000 shares of Class A Common Stock pursuant to the conversion of $17,200 of convertible debt, consisting of $15,500 of principal
and $1,700 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or
loss has been recognized.



On March 4, 2013, the Company issued 10,000,000
shares of Class A Common Stock pursuant to the conversion of $15,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On March 6, 2013, the Company issued 14,461,538
shares of Class A Common Stock pursuant to the conversion of $18,800 of convertible debt, consisting of $17,500 of principal and
$1,300 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.



On March 12, 2013, the Company issued 4,504,505
shares of Class A Common Stock pursuant to the conversion of $5,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On March 14, 2013, the Company issued 50,000,000
shares of Class A Common Stock pursuant to the conversion of $46,000 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On April 2, 2013, the Company issued 15,151,515
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On April 10, 2013, the Company issued 50,000,000
shares of Class A Common Stock pursuant to the conversion of $40,000 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On May 27, 2013, the Company modified a
related party debt and issued 14,239,500 shares of Class A Common Stock in settlement of $14,239 of related party debt owed to
Vivienne Passley, which consisted of $13,000 of principal and $1,239 of accrued and unpaid interest. The total fair value of the
common stock was $28,479 based on the closing price of the Company’s common stock on the date of grant, resulting in the
recognition of a $14,240 loss on debt settlement.





23







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On April
24, 2013, the Company issued 15,873,016 shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt,
which consisted entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.



On June 24, 2013, the Company issued 40,857,143
shares of Class A Common Stock pursuant to the conversion of $17,160 of convertible debt, consisting of $16,500 of principal and
$660 of accrued and unpaid interest. The note was converted in accordance with the conversion terms; therefore no gain or loss
has been recognized.



Loss on Convertible Debt Modification
to Related Party

On March 5, 2013, we amended a convertible
promissory note with Star Financial Corporation, which then carried a balance of $190,849, to revise the conversion terms from
a $0.005 floor and 75% discount to market to conversion terms consisting of, "equal to the greater of, (a) 50% of the Market
Price, or (b) the fixed conversion price of $0.00075 per share". The Company compared the fair value of the debt immediately
preceding the modification to the fair value after the modification to determine the loss on modification of $81,792. This value
was determined using the value of the shares assuming the note was converted pursuant to the respective conversion terms on the
date of modification. The total value of the shares after modification was $272,641, compared to the $190,849 value preceding the
modification, resulting in a loss on modification of $81,792.



Shares of Class A Common Stock Issued
for Services to Related Parties

On March 5, 2013, the Company issued 12,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on an acquisition loan that
originated on September 30, 2010. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.



On March 5, 2013, the Company issued 12,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing a personal guaranty on two acquisition loans
that originated on October 26, 2011. The total fair value of the common stock was $25,000 based on the closing price of the Company’s
common stock on the date of grant.



On March 5, 2013, the Company issued 200,000,000
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The shares
will be vested once the Company reports revenue of $10 million in a calendar year. The total fair value of the common stock was
$400,000 based on the closing price of the Company’s common stock on the date of grant, which is presented as a deduction
against additional paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied.



On March 20, 2013, the Company issued 35,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing collateral on acquisition loans that originated
on September 30, 2010 and October 26, 2011. The total fair value of the common stock was $35,500 based on the closing price of
the Company’s common stock on the date of grant.



On March 20, 2013, the Company issued 60,000,000
shares of Class A Common Stock to Craig Passley, a related party, for providing corporate secretary services from 2012 to 2021.
The total fair value of the common stock was $60,000 based on the closing price of the Company’s common stock on the date
of grant, which is presented as a deduction against additional paid in capital in the equity section of the balance sheet until
the terms of the vesting periods are satisfied. A total of $6,000 was expensed related to the vested services for the year ended
December 31, 2012.



On May 16, 2013, the Company issued 710,526,316
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The total
fair value of the common stock was $1,350,000 based on the closing price of the Company’s common stock on the date of grant.



On May 24, 2013, the Company issued 35,500,000
shares of Class A Common Stock to Fay Passley, a related party, for providing collateral on acquisition loans that originated on
September 30, 2010 and October 26, 2011. The total fair value of the common stock was $71,000 based on the closing price of the
Company’s common stock on the date of grant.



Convertible
Common Stock, Class B

The Company has 60,000,000 authorized shares
of $0.0001 par value Convertible Class B Common Stock, convertible at the option of the holder into shares of the Company’s
Class A Common Stock on a 1:1 basis. The Convertible Class B Common Stock carries preferential voting rights of 2,000 votes to
each Class A Common Stock vote (2,000:1). The Company shall reserve and keep available out of its authorized but unissued shares
of Class A Common Stock such number of shares sufficient to effect the conversions.



On Mary 16, 2013, the Company issued 5,000,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing product development services.
The total fair value of the common stock was $9,500 based on the closing price of the Company’s common stock on the date
of grant.





24







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 14 – Subsequent Events



Debt Conversions into Class A Common
Stock

On July 9, 2013, the Company issued 80,000,000
shares of Class A Common Stock pursuant to the conversion of $26,400 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On July 10, 2013, the Company issued 22,222,222
shares of Class A Common Stock pursuant to the conversion of $8,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On July 30, 2013, the Company issued 15,476,190
shares of Class A Common Stock pursuant to the conversion of $13,000 of convertible debt, which consisted entirely of principal.
The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



On August 7, 2013, the Company issued 40,000,000
shares of Class A Common Stock pursuant to the conversion of $32,000 of convertible debt owed to a related party, which consisted
entirely of principal. The note was converted in accordance with the conversion terms; therefore no gain or loss has been recognized.



Shares of Class A Common Stock Issued
for Services to Related Parties

On July 5, 2013, the Company issued 25,000,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing human resource services. The total fair value
of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant.



On July 8, 2013, the Company issued 710,526,316
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services, of which
200,000,000 shares vested immediately and the remaining 510,526,316 shares will be vested once the Company reports revenue of $10
million in a calendar year. The total fair value of the common stock was $497,368 based on the closing price of the Company’s
common stock on the date of grant, of which $140,000 is being expensed and $357,368 is presented as a deduction against additional
paid in capital in the equity section of the balance sheet until the terms of the vesting periods are satisfied.



Shares of Class A Common Stock Issued
as Loan Origination Fees to Related Parties

On July 19, 2013, the Company issued 2,500,000
shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination fee. The total fair value of the common
stock was $4,250 based on the closing price of the Company’s common stock on the date of grant.



On July 31, 2013, the Company issued 3,000,000
shares of Class A Common Stock to Star Financial Corporation, a related party, as a loan origination fee. The total fair value
of the common stock was $4,200 based on the closing price of the Company’s common stock on the date of grant.



On August 2, 2013, the Company issued 3,000,000
shares of Class A Common Stock to Star Financial Corporation, a related party, as a loan origination fee. The total fair value
of the common stock was $5,100 based on the closing price of the Company’s common stock on the date of grant.



On August 12, 2013, the Company issued
5,000,000 shares of Class A Common Stock to Vivienne Passley, a related party, as a loan origination fee. The total fair value
of the common stock was $7,000 based on the closing price of the Company’s common stock on the date of grant.



Debt Financing, Related Party

On July 31, 2013, the Company received
an unsecured loan of $27,000 from Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s
CEO. The note carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $5,000 and 3,000,000
shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the
life of the loan.



On August 2, 2013, the Company received
an unsecured loan of $27,000 from Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s
CEO. The note carries a 15% interest rate, matures on January 17, 2014. In addition, a loan origination fee of $5,000 and 3,000,000
shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the
life of the loan.





25







EPAZZ, INC.

NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



On August
7, 2013, the Company received an unsecured loan of $24,000 from Star Financial Corporation, Inc., a corporation owned by an immediate
family member of the Company’s CEO. The note carries a 15% interest rate, matures on January 20, 2014. In addition, a loan
origination fee of $4,000 and 2,500,000 shares of Class A Common Stock was issued as consideration for the loan, and is being
amortized on a straight line basis over the life of the loan.



On August 12, 2013, the Company received
an unsecured loan of $51,000 from Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s
CEO. The note carries a 15% interest rate, matures on February 15, 2014. In addition, a loan origination fee of $6,000 and 5,000,000
shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the
life of the loan.



Debt Repayments

On August 12, 2013, the Company repaid
$33,333 in complete satisfaction of the First JMJ note, consisting of $33,000 of principal and $333 of accrued and unpaid interest.





Amendment to Employment Agreement

On August 16, 2013, the Company amended
Shaun Passley’s employment agreement to increase the cash portion of his compensation from $30,000 per year to $100,000 in
the initial year of the agreement only. All other terms remain in effect, and the shares of stock awarded as a bonus as previously
disclosed were granted in addition to the stock based compensation outlined in the original agreement.































26







ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS
OF OPERATIONS



ALL STATEMENTS
IN THIS DISCUSSION THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS. STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT OTHERWISE
INCLUDE THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES", "INTENDS", "PROJECTS",
"ESTIMATES", "PLANS", "MAY INCREASE", "MAY FLUCTUATE" AND SIMILAR EXPRESSIONS OR FUTURE
OR CONDITIONAL VERBS SUCH AS "SHOULD", "WOULD", "MAY" AND "COULD" ARE GENERALLY FORWARD-LOOKING
IN NATURE AND NOT HISTORICAL FACTS. THESE FORWARD-LOOKING STATEMENTS WERE BASED ON VARIOUS FACTORS AND WERE DERIVED UTILIZING NUMEROUS
IMPORTANT ASSUMPTIONS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE THE INFORMATION CONCERNING OUR FUTURE FINANCIAL PERFORMANCE, BUSINESS STRATEGY,
PROJECTED PLANS AND OBJECTIVES. THESE FACTORS INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH BELOW UNDER THE HEADING "RISK FACTORS."
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE
RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. MOST OF THESE FACTORS ARE DIFFICULT TO PREDICT ACCURATELY AND ARE GENERALLY
BEYOND OUR CONTROL. WE ARE UNDER NO OBLIGATION TO PUBLICLY UPDATE ANY OF THE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS, EXCEPT AS PROVIDED BY LAW. READERS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-Q, UNLESS ANOTHER DATE IS STATED, ARE TO
JUNE 30, 2013. AS USED HEREIN, THE “COMPANY,” “EPAZZ,” “WE,” “US,” “OUR”
AND WORDS OF SIMILAR MEANING REFER TO EPAZZ, INC., AND INCLUDE EPAZZ’S WHOLLY OWNED SUBSIDIARIES, DESK FLEX, INC., AN ILLINOIS
CORPORATION (“DFI”), PROFESSIONAL RESOURCE MANAGEMENT, INC., AN ILLINOIS CORPORATION, INTELLISYS, INC., A WISCONSIN
CORPORATION ("INTELLISYS"), K9 BYTES, INC., AN ILLINOIS CORPORATION (“K9 BYTES”), MS HEALTH, INC., AN ILLINOIS
CORPORATION (“MS HEALTH”) ANDCOOLING TECHNOLOGY SOLUTIONS, INC.,AN ILLINOIS CORPORATION
(“CST”), UNLESS OTHERWISE STATED, OR THE CONTEXT SUGGESTS OTHERWISE.



BUSINESS OVERVIEW



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



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



On, or about June 18, 2008, the Company
acquired Desk Flex, Inc., an Illinois corporation (“DFI”), and Professional Resource Management, Inc., an Illinois
corporation (“PRMI”).



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



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





27







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



Autohire Software



Effective February 1, 2010, the Company
entered into a Software Product Asset Purchase Agreement (the “Software Rights Agreement”) with Igenti, Inc., a Florida
corporation (“Igenti”) to acquire the rights to Igenti’s AutoHire software, domain names, permits, customers,
contracts, know-how, equipment, software programs, receivables and the intellectual property of Igenti associated therewith (the
“AutoHire Software”). The AutoHire system provides a tool to power career centers, post job ads to sites and job boards,
and to collect resumes online. The online processes supported by the system provide the mechanism to comply with the record keeping
requirements of Title VII of the Civil Rights Act of 1964, which apply to organizations employing fifteen (15) or more persons.



IntelliSys, Inc.



On or about September 2, 2010, the Company
entered into a Stock Purchase Agreement (the “IntelliSys Purchase Agreement”) with IntelliSys, Inc., a Wisconsin corporation
(“IntelliSys”) and Paul Prahl, an individual and the sole stockholder of IntelliSys. Pursuant to the IntelliSys Purchase
Agreement, the Company purchased 100% of the outstanding shares of IntelliSys. The IntelliSys Purchase Agreement closed on March
31, 2011 (“Closing”). As a result of the Closing, IntelliSys became a wholly-owned subsidiary of the Company. IntelliSys
developed the IPMC Software (“IPMC”)(Integrated Plant Management Control) which is a software system design for water
and wastewater facility management. IPMC is the technology-based strategy for optimizing operations by automatically collecting,
managing, organizing and disseminating information for the operations, management, laboratory, maintenance, and engineering functions.



K9 Bytes, Inc.



On October 26, 2011, we, through a newly-formed
wholly-owned Illinois subsidiary, K9 Bytes, Inc. (“K9 Sub”), entered into an Asset Purchase Contract and Receipt Agreement
with K9 Bytes, Inc., a Florida corporation (“K9 Bytes” and the “Purchase Contract”). Pursuant to the Purchase
Contract, we purchased all of K9 Bytes assets, including all of its intellectual property, its business trade name, website (k9bytessoftware.com),
furniture, fixtures, equipment and inventory, accounts receivable and goodwill.



MS Health, Inc.



On March 8, 2012, we, through a newly-formed
wholly-owned Illinois subsidiary, MS Health, Inc. (“MS Health”), entered into an Asset Purchase Agreement with MS Health
Software Corporation, a New Jersey corporation (“MSHSC”). Pursuant to the Purchase Agreement, we purchased all of MSHSC’s
assets, including all of its intellectual property, its business trademarks and copyrights, furniture, fixtures, equipment and
software.



MSHSC developed and sells CHMCi, an enterprise
wide solution that includes tools to effectively provide, manage, bill, and track behavioral healthcare and social services. With
CMHCi, an organization will realize the benefits of increased efficiency, accountability, and productivity. CMHCi offers server-based,
internet, and secure cloud computing enabling the user to access information as required. By maintaining a complete electronic
client record, including data collection and reporting across multiple programs, locations, episodes of care, and service providers,
CMHCi helps eliminate redundant record keeping. The scheduler component tracks client, staff, and group appointments. Easy to use,
it interfaces seamlessly with service authorization tracking, service history, and billing. The integrated financial reporting
component provides the basis for an efficient and comprehensive accounting system, including electronic claims and remittance,
third party insurance, and client, municipality, and grantor billing.



In connection with the Asset Purchase,
the shareholders of MSHSC and the Company (through MS Health) entered into a Covenant Not to Compete; Consulting Agreement, Non-Competition
and Consulting Agreement, pursuant to which the shareholders of MSHSC agreed to provide consulting services to the Company for
a period of six months following closing. Pursuant to the agreement, the shareholders of MSHSC agreed not to compete against the
Company for two years from the closing of the acquisition.



Cooling Technology Solutions, Inc.



On March 4, 2013, we formed a new wholly-owned
subsidiary of the Company named Cooling Technology Solutions, Inc. The Company plans to file a non-provisional patent application
for its Project Flex product in the name of Cooling Technology Solutions, Inc.to develop a dorm room
sized refrigerator that has yet to be developed, however, as of the date of this filing there has been no activity and,
as such, there are no revenues or expenses.





28







PLAN OF OPERATION



During the next twelve months, we plan
to further develop our BoxesOS software, and hope to expand our customer base for our Desk/Flex, Agent Power, AutoHire, IntelliSys,
K9 Bytes and MS Health software packages, and look for additional acquisitions that are in line with our business plan. In addition,
we intend to develop a newly formed wholly-owned subsidiary, named Cooling Technology Solutions, Inc. to develop our Project Flex
product, a dorm room sized refrigerator that has yet to be developed, and continue to pursue growth through acquisitions. We believe
we can satisfy our cash requirements for the next three months with our current cash on hand and revenues generated from our operations.
As such, continuing operations and completion of our plan of operation are contingent on finding additional sources of capital.
We cannot assure investors that adequate revenues will be generated. In the absence of our projected revenues, we may be unable
to proceed with our plan of operations. Even without significant revenues or additional funding within the next several months,
we still anticipate being able to continue with our present activities, but we may require financing to potentially achieve our
goals of growing our operations and increasing our revenues.



RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 2013, AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2012:



|                              |  | For the Three Months Ended |            |   |            |  
|----------------------------- |  | -------------------------- | ---------- | - | ---------- | -
|                              |  | June 30,                   |            |   | Increase / |  
|                              |  | 2013                       |            |   | 2012       |  
|Revenues                      |  | $                          | 279,119    |   |            | $
|                              |  |                            |            |   |            |  
|General and Administrative    |  |                            | 166,403    |   |            |  
|Salaries and Wages            |  |                            | 1,555,081  |   |            |  
|Depreciation and Amortization |  |                            | 67,385     |   |            |  
|Bad Debts (Recoveries)        |  |                            | 45         |   |            |  
|                              |  |                            |            |   |            |  
|Total Operating Expenses      |  |                            | 1,788,914  |   |            |  
|                              |  |                            |            |   |            |  
|Net Operating Loss            |  |                            | (1,509,795 | ) |            |  
|                              |  |                            |            |   |            |  
|Total Other Income (Expense)  |  |                            | (157,783   | ) |            |  
|                              |  |                            |            |   |            |  
|Net Loss                      |  | $                          | (1,667,578 | ) |            | $



Revenues:



For the three months ended June 30, 2013
we had revenue of $279,119 compared to revenue of $432,890 for the three months ended June 30, 2012, a decrease of $153,771, or
36% from the comparative period. The decrease in revenues was evenly distributed across our subsidiaries.



General and Administrative:



General and administrative expenses decreased
by $25,728, or 13% to $166,403 for the three months ended June 30, 2013 compared to general and administrative expense of $192,131
for the three months ended June 30, 2012. The decrease in general and administrative expense is due primarily to decreased professional
fees as a result of not having to pay for the preparation of restatements for the year ended December 31, 2011 and acquisition
costs during the three months ending June 30, 2013 that were necessary during the three months ending June 30, 2012.



Salaries and Wages:



Salaries and wages increased by $1,487,384
or 2,197% to $1,555,081 for the three months ended June 30, 2013 compared to salaries and wages of $67,697 for the three months
ended June 30, 2012. The increase in salaries and wages is due primarily to the increase in stock based compensation of $1,430,500
pursuant to the issuance of a total of 746,026,316 shares of Class A Common Stock and 5,000,000 shares of Convertible Class B Common
Stock granted amongst Shaun Passley, CEO and Fay Passley, in addition to increased cash compensation to our officers and employees.
No shares were issued for services during the three months ending June 30, 2012.





29







Depreciation and Amortization:



We had depreciation and amortization expense
of $67,385 for the three months ended June 30, 2013 as compared to $75,167 for the three months ended June 30, 2012, a decrease
of $7,782, or 10% from the comparative period. This decrease is principally due to certain assets reaching the end of their depreciable
life cycle. We anticipate the replacement of these assets as resources become available.



Bad Debts (Recoveries):



We had bad debts expense of $45 for the
three months ended June 30, 2013 as compared to bad debts (recoveries) of $(42,847) for the three months ended June 30, 2012, a
decrease in bad debts (recoveries) of $42,892, or 100% from the comparative period. This decrease is due to changes in our allowance
for doubtful accounts. We provide an allowance for doubtful accounts of all accounts receivable aging greater than 30 days old.



Net Operating Loss:



Total operating expenses for the three
months ended June 30, 2013 were $1,788,914, compared to $292,148 for the three months ended June 30, 2012, an increase of $1,496,766
or 512% from the comparative period. We had net operating losses of $1,509,795 for the three months ended June 30, 2013 compared
to net operating income of $140,742 for the three months ended June 30, 2012, an increase in operating loss of $1,650,537, or 1,173%
from the comparative period. The increase in operating loss was primarily due the increase in stock based compensation to related
parties and decreased revenues.



Other Income (Expense):



Loss on debt
conversions related to a modification of a related party debt was $14,240 for the three months ended June 30, 2013 compared to
$-0- for the three months ended June 30, 2012, an increase of $14,240 from the comparative period. The current period loss
on debt modification was due to the settlement of a promissory note with Vivienne Passley, which at the time of modification carried
a balance of $14,239, including accrued interest of $1,239. We amended the promissory note to satisfy repayment with 14,239,500
shares of common stock valued at $28,479 based on the closing price of the common stock on the grant date. The Company compared
the fair value of the debt immediately preceding the modification to the fair value after the modification to determine the loss
on modification of $14,240.



Interest expense was $143,543 for the three
months ended June 30, 2013 compared to $42,854 for the three months ended June 30, 2012, an increase of $100,689 or 235% from the
comparative period. Interest expense increased due to increased borrowings to finance our acquisitions, as well as an increase
of $54,461 of finance costs related to the amortized discount on beneficial conversion features and another $20,645 in excess of
the carrying value of Asher Note 5 paid to satisfy the convertible note with Asher Enterprises over the $-0- of amortized discounts
and finance costs recognized during the three months ended June 30, 2012.



Net Loss:



We had a net loss of $1,667,578 for the
three months ended June 30, 2013 compared to net income of $97,921 for the three months ended June 30, 2012, an increased net loss
of $1,765,499, or 1,803%, from the comparative period. The increased net loss was primarily due to increased stock based compensation
and a loss on convertible debt modification issued to related parties in the combined amount of $1,444,740, additional debt servicing
costs and the recognition of associated amortization costs on debt discounts related to beneficial conversion features, along with
our decreased revenues.





30







RESULTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 2013, AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2012:



|                              |  | For the Six Months Ended |            |   |            |  
|----------------------------- |  | ------------------------ | ---------- | - | ---------- | -
|                              |  | June 30,                 |            |   | Increase / |  
|                              |  | 2013                     |            |   | 2012       |  
|Revenues                      |  | $                        | 487,129    |   |            | $
|                              |  |                          |            |   |            |  
|General and Administrative    |  |                          | 287,634    |   |            |  
|Salaries and Wages            |  |                          | 1,771,234  |   |            |  
|Depreciation and Amortization |  |                          | 144,160    |   |            |  
|Bad Debts (Recoveries)        |  |                          | (8,740     | ) |            |  
|                              |  |                          |            |   |            |  
|Total Operating Expenses      |  |                          | 2,194,288  |   |            |  
|                              |  |                          |            |   |            |  
|Net Operating Loss            |  |                          | (1,707,159 | ) |            |  
|                              |  |                          |            |   |            |  
|Total Other Income (Expense)  |  |                          | (358,990   | ) |            |  
|                              |  |                          |            |   |            |  
|Net Loss                      |  | $                        | (2,066,149 | ) |            | $



Revenues:



For the six months ended June 30, 2013
we had revenue of $487,129 compared to revenue of $547,367 for the six months ended June 30, 2012, a decrease of $60,238, or 11%
from the comparative period. The decrease in revenues was evenly distributed across our subsidiaries.



General and Administrative:



General and administrative expenses decreased
by $35,247, or 13% to $287,634 for the six months ended June 30, 2013 compared to general and administrative expense of $322,881
for the six months ended June 30, 2012. The decrease in general and administrative expense is due primarily to decreased professional
fees as a result of not having to pay for the preparation of restatements for the year ended December 31, 2011 and acquisition
costs during the six months ending June 30, 2013 that were necessary during the six months ending June 30, 2012.



Salaries and Wages:



Salaries and
wages increased by $1,610,022, or 999% to $1,771,234 for the six months ended June 30, 2013 compared to salaries and wages of $161,212
for the six months ended June 30, 2012. The increase in salaries and wages is due primarily to the increase in stock based compensation
of $1,512,500 pursuant to the issuance of a total of 812,526,316 shares of Class A Common Stock granted amongst Shaun Passley,
CEO, Craig Passley, Corporate Secretary and Vivienne Passley, and 5,000,000 shares of Convertible Class B Common Stock valued at
$9,500 granted to Shaun Passley, CEO, in addition to increased cash compensation related to additional personnel on hand pursuant
to our K9 Bytes subsidiary that was acquired on March 28, 2012. Another 254,000,000 shares valued at a total of $454,000 were issued
that have not vested, and are presented as a deduction against additional paid in capital in the equity section of the balance
sheet until the terms of the vesting periods are satisfied.No shares were issued for services during
the six months ending June 30, 2012.



Depreciation and Amortization:



We had depreciation and amortization expense
of $144,160 for the six months ended June 30, 2013 as compared to $122,641 for the six months ended June 30, 2012, an increase
of $21,519, or 18% from the comparative period. This increase is due to having a greater depreciable asset base as a result of
our acquisition of K9 Bytes on March 28, 2012.



Bad Debts (Recoveries):



We had bad debts (recoveries) of $8,785
for the six months ended June 30, 2013 as compared to bad debts (recoveries) of $(35,072) for the six months ended June 30, 2012,
a decrease in bad debts (recoveries) of $26,332, or 75% from the comparative period. This decrease is due to changes in our allowance
for doubtful accounts. We provide an allowance for doubtful accounts of all accounts receivable aging greater than 30 days old.





31







Net Operating Loss:



Total operating expenses for the six months
ended June 30, 2013 were $2,194,288, compared to $571,662 for the six months ended June 30, 2012, an increase of $1,622,626, or
284% from the comparative period. We had net operating losses of $1,707,159 for the six months ended June 30, 2013 compared to
$24,295 for the six months ended June 30, 2012, an increase in operating loss of $1,682,864, or 6,927%, from the comparative period.
The increase in operating loss was primarily due the increase in stock based compensation to related parties and decreased revenues.



Other Income (Expense):



Loss on convertible
debt modification, related party was $96,032 for the six months ended June 30, 2013 compared to $-0- for the six months ended June
30, 2012, an increase of $96,032 or 100% from the comparative period. The current period loss on debt modification was due
to an amended convertible promissory note with Star Financial Corporation, which at the time of modification carried a balance
of $190,849, and the settlement of a promissory note with Vivienne Passley, which at the time of modification carried a balance
of $14,239, including accrued interest of $1,239. We amended the Star Financial convertible promissory note to revise the conversion
terms from a $0.005 floor and 75% discount to market to conversion terms consisting of, "equal to the greater of, (a) 50%
of the Market Price, or (b) the fixed conversion price of $0.00075 per share". The Company compared the fair value of the
debt immediately preceding the modification to the fair value after the modification to determine the loss on modification of $81,792.
We also amended the Vivienne Passley promissory note to satisfy repayment with 14,239,500 shares of common stock valued at $28,479
based on the closing price of the common stock on the grant date. The Company compared the fair value of the debt immediately preceding
the modification to the fair value after the modification to determine the loss on modification of $14,240.



Interest expense was $262,958 for the six
months ended June 30, 2013 compared to $83,929 for the six months ended June 30, 2012, an increase of $179,029, or 213% from the
comparative period. Interest expense increased due to increased borrowings to finance our acquisitions, as well as an increase
of $113,634 of finance costs related to the amortized discount on beneficial conversion features over the $14,978 of amortized
discounts recognized during the six months ended June 30, 2012, in addition to another $20,645 in excess of the carrying value
of Asher Note 5 paid to satisfy the convertible note with Asher Enterprises during the six months ended June 30, 2013 that was
not present in the comparative six months ended June 30, 2012.



Net Loss:



We had a net loss of $2,066,149 for the
six months ended June 30, 2013 compared to $108,186 for the six months ended June 30, 2012, an increased net loss of $1,957,963,
or 1,810%, from the comparative period. The increased net loss was primarily due to increased stock based compensation, losses
on convertible debt modification issued to related parties and increased debt servicing costs in the combined amount of $1,618,032,
and the recognition of an additional $113,634 of associated amortization costs on debt discounts related to beneficial conversion
features and decreased revenues of $60,238 during the six months ended June 30, 2013, compared to the six months ended June 30,
2012.



LIQUIDITY AND CAPITAL RESOURCES



The following table summarizes total assets,
accumulated deficit, stockholders’ equity (deficit) and working capital at June 30, 2013 compared to December 31, 2012.



|                               |  | June 30, |            |   | December 31, |  
|------------------------------ |  | -------- | ---------- | - | ------------ | -
|                               |  | 2013     |            |   | 2012         |  
|Total Assets                   |  | $        | 1,285,579  |   |              | $
|                               |  |          |            |   |              |  
|Total Liabilities              |  | $        | 1,969,808  |   |              | $
|                               |  |          |            |   |              |  
|Accumulated (Deficit)          |  | $        | (6,198,905 | ) |              | $
|                               |  |          |            |   |              |  
|Stockholders’ Equity (Deficit) |  | $        | (684,229   | ) |              | $
|                               |  |          |            |   |              |  
|Working Capital (Deficit)      |  | $        | (754,125   | ) |              | $



We had total current assets of $155,136
as of June 30, 2013, consisting of cash of $47,187, net accounts receivable of $75,494, and other current assets of $32,455.



We had non-current assets of $1,130,443
as of June 30, 2013, consisting of $141,157 of property and equipment, net, including accumulated depreciation and amortization
of $383,788, intangible assets of $733,826, net, including $436,894 of accumulated amortization and goodwill of $255,460 related
to the purchase of our subsidiaries.





32







We had total current liabilities of $909,261
as of June 30, 2013, consisting of $18,000 of dividends payable in stock or cash at the election of management, $193,241 of accounts
payable and accrued expenses, $189,338 of deferred revenues, current portion of outstanding balances on lines of credit of $74,937,
current portion of capitalized leases in the amount of $25,247, current maturities of notes payable, related parties of $7,868,
current maturities on convertible debentures of $87,766, net of discounts of $35,534, and current maturities on long term debts
in the amount of $312,864.



We had negative working capital of $754,125
and a total accumulated deficit of $6,198,905 as of June 30, 2013.



We had total liabilities of $1,969,808
as of June 30, 2013, which included total current liabilities of $909,261, long-term portion of capitalized leases of $8,160, long
term portion of notes payable, related parties of $100,000, long-term convertible debentures of $35,527, net of discounts of $10,922
and long-term debts of $916,860, net of current portion.



We had net cash used in operating activities
of $173,163 for the six months ended June 30, 2013, which was primarily due to our net loss of $164,179 after adjustments for non-cash
operating expenses, an increase of $29,759 in accounts receivable, a decrease of $1,743 of other current assets, and an increase
of $49,284 in accounts payable and accrued expenses, and a decrease of $30,252 in deferred revenues.



We had $1,697 of net cash used in investing
activities for the six months ended June 30, 2013, which consisted of $1,697 of cash paid for the purchase of equipment.



We had $175,946 of net cash provided in
financing activities during the six months ended June 30, 2013, which represented proceeds from notes payable and convertible debts
of $505,045, repayments on long term debts of $319,386 and principal payments on capital leases of $9,713.



Declaration of Dividends



On January 1, 2013, the Company declared
and accrued estimated dividends of $18,000 on its Convertible Series B Preferred Stock pursuant to the recognition of revenues
in excess of $1 million during the year ended December 31, 2012 based on 1.5% of the estimated 2013 annual revenues. Dividends
equal to 1.5% of the Company’s revenues per quarter during the year ending December 31, 2013 will accrue quarterly and can
be paid in cash or in shares of Class A Common Stock, the exact amounts of which are yet undetermined.



Recent Financing Activities



Second quarter of 2013:



On various dates the Company’s CEO
advanced and repaid funds to the Company at a 15% interest rate, due on demand. A total of $76,350 was advanced and repaid by the
CEO during the six months ended June 30, 2013.



On various dates between April 1, 2013
and June 12, 2013, related parties advanced net proceeds of $86,000 in exchange for unsecured promissory notes bearing interest
at 10% and additional loan origination costs of $14,000.



On April 5, 2013, the Company received
a loan of $70,000 from Small Business Financial Solutions, LLC (“SBFS”), of which $34,664 was paid to OnDeck Financial
in settlement of total outstanding loans owed by Epazz, Inc. and Desk Flex, Inc., and origination and processing fees of $1,650
were retained by SBFS, and the remaining $33,686 was used to pay off the Fourth Asher Note and the Fifth Asher Note. The promissory
note calls for 240 daily payments of $394, resulting in total repayments of $94,500, secured by any and all amounts owing to Epazz
now, or in the future, from any merchant processor(s) for charges made by customers via any payment card devices, and all other
assets of the Company.



On May 1, 2013, the Company purchased licenses
to develop data management software in the total amount of $51,250 from Igenti, Inc., bearing an effective interest rate of 11%,
consisting of 36 monthly payments of $1,674, maturing on April 30, 2016. The loan is collateralized with the data management software.
Igenti retained a total of $4,615 of financing fees and paid the remaining proceeds of $46,615 to the Company for future payment
to Sveltoz Solutions for the development of the data management software.



On June 12, 2013, we received net proceeds
of $30,000 in exchange for an unsecured $33,000 convertible promissory note, including an Original Issue Discount (“OID”)
of $3,000, carrying a 12% interest rate (“First JMJ Note”), matures on June 11, 2014. The principal was convertible
into shares of common stock at the discretion of the note holder at a price equal to sixty percent (60%) of the lowest trading
price of the Company’s common stock for the twenty five (25) trading days prior to the conversion date, or $0.0018 per share,
whichever is less than, but not below $0.00009 per share. The note was subsequently repaid in full on August 12, 2013 & thus
the 12% interest was not assessed per the terms of the note. The debt holder was limited to owning 4.99% of the Company’s
issued and outstanding shares.





33







On June 24, 2013, the Company received
a loan of $15,000 from WebBank, c/o NewLogic Business Loans, Inc., (“NewLogic”) bearing an effective interest rate
of 5.71%, consisting of 176 daily week day payments of $106, maturing on February 19, 2014. The loan is collateralized with MS
Health’s receivables. The promissory note is also personally guaranteed by Shaun Passley, our Chief Executive Officer.



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



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



Third quarter of 2013:



On July 31, 2013, the Company received
an unsecured loan of $27,000 from Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s
CEO. The note carries a 15% interest rate, matures on January 15, 2014. In addition, a loan origination fee of $5,000 and 3,000,000
shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the
life of the loan.



On August 2, 2013, the Company received
an unsecured loan of $27,000 from Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s
CEO. The note carries a 15% interest rate, matures on January 17, 2014. In addition, a loan origination fee of $5,000 and 3,000,000
shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the
life of the loan.



On August 7, 2013, the Company received
an unsecured loan of $24,000 from Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s
CEO. The note carries a 15% interest rate, matures on January 20, 2014. In addition, a loan origination fee of $4,000 and 2,500,000
shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the
life of the loan.



On August 12, 2013, the Company received
an unsecured loan of $51,000 from Star Financial Corporation, Inc., a corporation owned by an immediate family member of the Company’s
CEO. The note carries a 15% interest rate, matures on February 15, 2014. In addition, a loan origination fee of $6,000 and 5,000,000
shares of Class A Common Stock was issued as consideration for the loan, and is being amortized on a straight line basis over the
life of the loan.



Recent Debt Conversions



Second quarter of 2013:



During the three months ended June 30,
2013, we issued a total of 136,121,174 shares of common stock pursuant to debt conversions of a total of $89,500 of principal and
$1,899 of accrued interest, and a loss on conversion of $14,240, during the six months ended June 30, 2013, of which, 50,000,000
shares of common stock were issued in conversion of $40,000 of outstanding principal on a related party note owed to Star Financial
Corporation and another 14,239,500 shares valued at $28,479 were issued in settlement of $14,239 of outstanding principal and interest
on a debt owed to Vivienne Passley, resulting in a loss on debt modification of $14,240 during the three months ended June 30,
2013.



Third quarter of 2013:



On various dates between July 9, 2013 and
August 7, 2013, we issued a total of 157,698,412 shares of common stock pursuant to debt conversions of a total of $79,400 of principal,
of which, 120,000,000 shares of common stock were issued in conversion of $58,400 of outstanding principal on a related party note
owed to Star Financial Corporation.





34







A total of $57,349 of convertible debentures
remain outstanding as of the date of this filing, and are convertible at various hypothetical prices discounted to market as depicted
in the table below:



|                                                              |  |                                                                                                                                                                                                                                                  |  |           |        |         | Potential issuable shares at
                                                                                various conversion pricesbelow the most recent
                                                                                market price of $0.0014 per share
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | ------ | ------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                              |  | Conversion                                                                                                                                                                                                                                       |  | Principal |        | 100%    |                                                                                                                                                                                                                                                                              
|Lender / Origination                                          |  | Terms                                                                                                                                                                                                                                            |  | Borrowed  |        | $0.0014 |                                                                                                                                                                                                                                                                              
|                                                              |  |                                                                                                                                                                                                                                                  |  |           |        |         |                                                                                                                                                                                                                                                                              
|Star Financial
  (Related Party)
  July 2, 2012               |  | As amended on March 5, 2013, convertible into the greater of (a) 50% of the average of the closing market price over the 5 days prior to the conversion request, and (b) the fixed conversion price of $0.00075 per share. Interest rate of 10%. |  | $         | 46,449 |         | 33,177,857                                                                                                                                                                                                                                                                   
|                                                              |  |                                                                                                                                                                                                                                                  |  |           |        |         |                                                                                                                                                                                                                                                                              
|Tonaquint, Inc.
  (First Tonaquint Note)
  September 10, 2012 |  | Convertible into 60% of the average of the two lowest trading prices over the 10 days prior to the conversion request, or $0.00009, whichever is greater. Interest rate of 8% with a 22% default rate.                                           |  | $         | 10,900 |         | 7,785,714                                                                                                                                                                                                                                                                    
|                                                              |  |                                                                                                                                                                                                                                                  |  |           |        |         |                                                                                                                                                                                                                                                                              
|                                                              |  |                                                                                                                                                                                                                                                  |  | $         | 57,349 |         | 40,963,571                                                                                                                                                                                                                                                                   



Recent Shares of Common Stock
Issued for Services



Second quarter of 2013:



To conserve on the Company's capital requirements,
the Company has issued shares in lieu of cash payments to related parties, and the Company expects to continue this practice. In
the three months ended June 30, 2013, the Company granted a total of 746,026,316 shares of Class A Common Stock, and 500,000,000
shares of Convertible Class B Common Stock valued at $9,500 in lieu of cash payments to employees and related parties. No shares
were issued for services during the three months ending June 30, 2012.



Third quarter of 2013:



On July 5, 2013, the Company issued 25,000,000
shares of Class A Common Stock to Vivienne Passley, a related party, for providing human resource services. The total fair value
of the common stock was $15,000 based on the closing price of the Company’s common stock on the date of grant.



On July 8, 2013, the Company issued 710,526,316
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services. The total
fair value of the common stock was $497,368 based on the closing price of the Company’s common stock on the date of grant,
consisting of 200,000,000 shares valued at $140,000 that vest immediately and 510,526,316 shares valued at $357,368 issued tothe
Company’s CEO in consideration for providing product development services that will vest once the Company reports revenue
of $10 million in a calendar year. The unvested shares are presented as a deduction against additional paid in capital in the equity
section of the balance sheet until the terms of the vesting periods are satisfied.



The Company is not now in a position to
determine an approximate number of shares that the Company may issue for the preceding purpose in the remainder of 2013.





35







ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK



Pursuant to Item 305(e) of Regulation S-K
(§ 229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting
company,” as defined by Rule 229.10(f)(1).



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



We carried out an evaluation, under the
supervision and with the participation of our management, including our principal executive officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(c) and 15d – 15(e)). Based upon that
evaluation, our principal executive officer concluded that, as of the end of the period covered in this report, our disclosure
controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated
to our management, including our principal executive officer, as appropriate to allow timely decisions regarding required disclosure.



Inherent Limitations of Internal Controls



Our Principal Executive Officer does not
expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls
and procedures were designed to provide reasonable assurance of achieving their objectives, a control system, no matter how well
conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions.



Changes in Internal Control over Financial Reporting



There were no changes in our internal control
over financial reporting, other than those stated above, during our most recent quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.



















36







PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



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





ITEM 1A. RISK FACTORS



As a smaller reporting company, we are
not required to provide the information required by this Item.





ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS



The following sales of equity securities
by the Company occurred during the three month period ended June 30, 2013:



Debt Conversion Issuances

On April 2, 2013, the Company issued 15,151,515
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt, which consisted entirely of principal.



On April 10, 2013, the Company issued 50,000,000
shares of Class A Common Stock pursuant to the conversion of $40,000 of convertible debt owed to a related party, which consisted
entirely of principal.



On May 27, 2013, the Company modified a
related party debt and issued 14,239,500 shares of Class A Common Stock in settlement of $14,239 of related party debt owed to
Vivienne Passley, which consisted of $13,000 of principal and $1,239 of accrued and unpaid interest.



On April 24, 2013, the Company issued 15,873,016
shares of Class A Common Stock pursuant to the conversion of $10,000 of convertible debt, which consisted entirely of principal.



On June 24, 2013, the Company issued 40,857,143
shares of Class A Common Stock pursuant to the conversion of $17,160 of convertible debt, consisting of $16,500 of principal and
$660 of accrued and unpaid interest.



The Company claims an exemption from registration
afforded by Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”), for the above conversions, as the
securities were exchanged by the Company with its existing security holders exclusively in transactions where no commission or
other remuneration was paid or given directly or indirectly for soliciting such exchange and Section 4(2) of the Act for the issuances
as the issuances did not involve a public offering, the recipients took the securities for investment and not resale, the Company
took appropriate measures to restrict transfer, and the recipients are (a) “accredited investors”; or (b) have access
to similar documentation and information as would be required in a Registration Statement under.



Shares Issued for Services

On Mary 16, 2013, the Company issued 5,000,000
shares of Convertible Class B Common Stock to the Company’s CEO in consideration for providing product development services.



On May 16, 2013, the Company issued 710,526,316
shares of Class A Common Stock to the Company’s CEO in consideration for providing product development services.



On May 24, 2013, the Company issued 35,500,000
shares of Class A Common Stock to Fay Passley, a related party, for providing collateral on acquisition loans that originated on
September 30, 2010 and October 26, 2011.



The foregoing securities issued for services
were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES.



None.



ITEM 4. MINE SAFETY DISCLOSURES.



Not applicable.





37







ITEM 5. OTHER INFORMATION





Amendment to Employment Agreement

On August 16, 2013, the Company amended
Shaun Passley’s employment agreement to increase the cash portion of his compensation from $30,000 per year to $100,000 in
the initial year of the agreement only. All other terms remain in effect, and the shares of stock awarded as a bonus as previously
disclosed were granted in addition to the stock based compensation outlined in the original agreement.





Item 6. Exhibits



|         |                                                                                                                                                                                    |                                                                                                | Incorporated by reference
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | -------------------------
|Exhibit  | Exhibit Description                                                                                                                                                                | Filed
                                                                                herewith | Form                     
|3.1      | Articles of Incorporation                                                                                                                                                          |                                                                                                | SB-2                     
|3.2      | Articles of Amendment                                                                                                                                                              |                                                                                                | SB-2                     
|3.3      | Articles of Amendment                                                                                                                                                              |                                                                                                | SB-2                     
|3.4      | Articles of Amendment                                                                                                                                                              |                                                                                                | SB-2                     
|3.5      | Statement of Change of Registered Agent                                                                                                                                            |                                                                                                | SB-2                     
|3.6      | Articles of Amendment                                                                                                                                                              |                                                                                                | SB-2                     
|3.7      | Amended and Restated By-Laws                                                                                                                                                       |                                                                                                | SB-2                     
|3.8      | Articles of Amendment                                                                                                                                                              |                                                                                                | 10-Q                     
|3.9      | Articles of Amendment                                                                                                                                                              |                                                                                                | 10-K                     
|4.1      | Form of Stock Certificate                                                                                                                                                          |                                                                                                | SB-2                     
|10.1     | Promissory Note with Star Financial Corporation, April 1, 2013                                                                                                                     | X                                                                                              |                          
|10.2     | Promissory Note with Star Financial Corporation, April 12, 2013                                                                                                                    | X                                                                                              |                          
|10.3     | Promissory Note with Star Financial Corporation, May 16, 2013                                                                                                                      | X                                                                                              |                          
|10.4     | Promissory Note with Star Financial Corporation, June 12, 2013                                                                                                                     | X                                                                                              |                          
|10.5     | First JMJ Financial Convertible Promissory Note, June 12, 2013                                                                                                                     | X                                                                                              |                          
|10.6     | Software Finance Agreement with CIT Finance, LLC, May 1, 2013                                                                                                                      | X                                                                                              |                          
|10.7     | Loan and Security Agreement with Small Business Financial Solutions, LLC, April 5, 2013                                                                                            | X                                                                                              |                          
|10.8     | Merchant Agreement with Horizon Business Funding, LLC, June 11, 2013                                                                                                               | X                                                                                              |                          
|10.9     | Business Loan Agreement with WebBank, June 19, 2013                                                                                                                                | X                                                                                              |                          
|10.10    | First Amendment to Executive Employment Agreement, August 16, 2013                                                                                                                 | X                                                                                              |                          
|21.1     | Subsidiaries                                                                                                                                                                       | X                                                                                              |                          
|31.1     | Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X                                                                                              |                          
|32.1     | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                            | X                                                                                              |                          
|99.1     | Temporary Hardship Exemption                                                                                                                                                       |                                                                                                |                          
|101.INS* | XBRL Instance Document                                                                                                                                                             |                                                                                                |                          
|101.SCH* | XBRL Schema Document                                                                                                                                                               |                                                                                                |                          
|101.CAL* | XBRL Calculation Linkbase Document                                                                                                                                                 |                                                                                                |                          
|101.DEF* | XBRL Definition Linkbase Document                                                                                                                                                  |                                                                                                |                          
|101.LAB* | XBRL Labels Linkbase Document                                                                                                                                                      |                                                                                                |                          
|101.PRE* | XBRL Presentation Linkbase Document                                                                                                                                                |                                                                                                |                          



* To be furnished by amendment per Temporary
Hardship Exemption under Regulation S-T.





38







SIGNATURES



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

|                       |                                                                                                                                       
|---------------------- | --------------------------------------------------------------------------------------------------------------------------------------
|                       | EPAZZ, INC.                                                                                                                           
|                       |                                                                                                                                       
|DATED: August 19, 2013 | By: /s/ Shaun Passley                                                                                                                 
|                       | Shaun Passley                                                                                                                         
|                       | Chief Executive Officer (Principal Executive Officer), President, Chief Financial Officer (Principal Accounting Officer), and Director











































39