**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**


**___________________________**




**FORM
      10-KSB**






( mark
      one )





þ
            Annual
                Report Pursuant to Section 13 or 15(d) of Securities Exchange Act
                of 1934.
              For the fiscal year ended **December
                31, 2005**




o
            Transition
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934
              For
                the transition period from _______ to
                _______




**Commission
      File No. 33-49797**




**ETOTALSOURCE,
      INC.**


(Name
      of
      Small Business Issuer in Its Charter)




**Colorado**
            **84-1066959**(State
                or Other Jurisdiction of Incorporation
              or
                Organization)
            (I.R.S.
                Employer Identification No.)**1510
                Poole Boulevard, Yuba City, CA**
            **95993**(Address
                of Principal Executive Offices)
            (Zip
                Code)**(****530)
                751-9615**(Issuer’s
                Telephone Number, Including Area
                Code)





Securities
      registered pursuant to Section 12(b) of the Exchange Act:





Common
                Stock
            Name
                of each exchange on which registered**No
                par value**
            **N/A**





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





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
      12
      months, (or for such shorter period that the registrant was required to file
      such reports), and (2) has been subject to such filing requirements for the
      past
      90 days. Yes x  No
o





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o
      No x





Issuer’s
      revenues for fiscal year ended December 31, 2005: **$54,715**





Aggregate
      market value of the voting and non-voting common equity held by non-affiliates
      computed by reference to the price at which the common equity was sold, or
      the
      average bid and asked price of such common equity of the registrant as of **December
      31, 2005.**





Number
      of
      authorized outstanding shares of the registrant’s common stock, no par value, as
      of 12/31/05: **46,710,821.**




Transitional
      Small Business Disclosure Format: **No.**










**ETOTALSOURCE,
        INC.**
 **FISCAL
        YEAR 200** **5
        FORM 10-KSB**
 
 **TABLE
        OF CONTENTS**
  
 PART
                I
              
              
              1Item
                1.Description
                Of Business.
              
              
              1Item
                2.Description
                Of Property.
              
              
              8Item
                3.Legal
                Proceedings.
              
              
              8Item
                4.Submission
                Of Matters To A Vote Of Security Holders.
              
              
              8PART
                II
              
              
              9Item
                5.Market
                For Registrant's Common Equity And Related Stockholder Matters.
              
              
              9Item
                6.Management's
                Discussion And Analysis Or Plan Of Operations.
              
              
              12Item
                7.Financial
                Statements And Supplementary Data.
              
              
              16Item
                8.Changes
                In And Disagreements With Accountant’s On Accounting And Financial
                Disclosure.
              
              
              16Item
                8a.Controls
                And Procedures.
              
              
              16Item
                8b.Other
                Information.
              
              
              17PART
                III
              
              
              18Item
                9.Directors,
                Executive Officers, Promoters And Control Persons.
              
              
              18Item
                10.Executive
                Compensation.
              
              
              20Item
                11.Security
                Ownership Of Certain Beneficial Owners And Management.
              
              
              21Item
                12.Certain
                Relationships And Related Transactions.
              
              
              22Item
                13.Exhibits
                And Reports On Form 8-K.
              
              
              22Item
                14.Principal
                Accountant Fees And Services
              
              
              24
 Exhibit
        31.1  Section
        302 Certification by Chief Executive Officer
 Exhibit
        31.2  Section
        302 Certification by Chief Financial Officer
 Exhibit
        32.1  Section
        906 Certification by Chief Executive Officer
 Exhibit
        32.2  Section
        906 Certification by Chief Financial Officer
  Consolidated
        Financial Statements


i




**PART
      I**




**Item
      1.**  **Description
      Of Business.**




The
      Company or “ ETLS ”
was
      incorporated in Colorado on September 16, 1987 as Premium Enterprises, Inc.
      (“ Premium ”)
      On
      December 20, 2002, Premium entered into a Plan and Agreement of Reorganization
      with eTotalSource, Inc., a California corporation (“ eTotalSource ”)
      and
      its shareholders whereby Premium acquired 91% of the issued and outstanding
      common stock of eTotalSource in exchange for 15,540,001 shares of common stock
      of Premium. The contract was completed December 31, 2002. On June 17, 2003,
      shareholders voted to amend the Articles to change the name of Premium
      Enterprises, Inc. to eTotalSource, Inc.






**History.**




For
      a
      period of time in 1988-1994, Premium operated three fast lube locations, at
      various times in Arizona and Colorado as “Grease Monkey” franchises. The
      locations were unprofitable, two were sold, and the last franchise closed in
      1994.




Premium
      then attempted to enter the automobile and truck tire recycling business in
      1994. It formed a limited partnership, of which it owned 62.5%, and commenced
      limited tire recycling operations. The equipment proved to be inadequate and
      Premium ran out of capital and ceased all operations in 1996. Premium wrote-off
      all of its investment in equipment and licenses for tire recycling in 1996
      and
      became dormant.






**Business.**


The
        sole
        business of the Company is that of eTotalSource.
  **General.**
  The
        Company is a developer and supplier of proprietary multimedia software
        technology, and a publisher of multimedia training content. Its clients have
        included: U.S. Department of Defense, Boeing, Steven Spielberg Online Film
        School, Pacific Bell/SBC, Grant School District, California State University,
        Logistics Management Institute, First American Title Company, and other
        corporate entities. The Company's clients work with ETLS to develop, produce,
        market, and distribute multimedia development software. ETLS is also marketing
        educational training programs it has produced utilizing its proprietary
        software.
  eTotalSource
        was founded in February 2000 with the express goal of designing a better
        interface for information and education multimedia delivery. Approximately
        one
        year after inception, the beta Presenta Pro TM platform
        was completed. Presenta Pro TM features
        back-end development of multi-panel time synchronized presentations and course
        work, as well as testing, feedback and performance monitoring. Clients are
        utilizing Presenta Pro TM as
        a
        platform for distance learning and computer-based training. Presenta
        Pro TM is
        delivered via the Internet, intranet, or CD/DVD ROM. Presenta Pro TM simplifies
        the production and delivery of multimedia presentations and content while
        at the
        same time improving the quality and effectiveness of the presentations. Presenta
        Pro TM is
        designed with cost saving features and it offers post-production
        opportunities.
  Presenta
        Pro TM features
        include:
  ·
              Multi-panel
                  time synchronized presentation;
 ·
              Quick
                  content and program development;
 ·
              Rich
                  video and content experience;
 ·
              Still
                  images;
 ·
              Graphics;
 ·
              Flash;
 ·
              Links
                  to Website;
   1
 ·
              Live
                  Cams;
 ·
              Test
                  and quizzes to tract performance;
 ·
              Users
                  progress can be tracked;
 ·
              Diagrams;
 ·
              Simple
                  server requirements;
 ·
              Reduces
                  training and learning curve time;
                  and
 ·
              Easy
                  to implement and use.
  **Business
            Model.**
  **STRATEGY:** The
            Company employs a dual strategy to meet market demands and opportunities
            that
            includes both software licensing and publishing.
  **SOFTWARE
            LICENSING:** The
            Company is licensing Presenta Pro TM software
            via distribution partners and an internal sales and marketing team. The
            marketing team will be directing its sales effort in targeting the education,
            corporate and government markets. The cost of the product ranges from
            $5,500 to
            $15,000, and the Company is aggressively positioning the software package
            for a
            volume intensive market. The nearest competitor (in quality or functionality),
            Virage, prices its product at substantially higher prices. The Company
            believes
            that its aggressive pricing policy appeals to governments, schools and
            corporate
            clients.
  **PUBLISHING:** The
            Company publishes and produces original content and postproduction services,
            and
            participates in the sales and distribution of the final published
            product.
  ETLS
            shares in the revenue derived from program sales. The Company carefully
            chooses
            its content, identifying unique subjects and niches offering more probable
            sales. The Company believes that these topics/markets are generally underserved
            and in need of the program packages that are produced by ETLS. Examples
            of
            finished products currently being marketed include:
  ·
                  Anger
                      Management Facilitator Training and
                      Certification;
 ·
                  Domestic
                      Violence Facilitator Training and
                      Certification;
 ·
                  School
                      Maintenance, Cleaning Training and
                      Certification;
 ·
                  Emergency
                      Disaster Preparedness - Terrorist Awareness;
                      and
 ·
                  Mandated
                      School Internet Acceptable Use
                      Policy.
  Management
            believes that the production, postproduction and publishing also create
            an
            avenue for added revenues and potential profits. For example, if the
            U.S.
            Department of Defense provides for their employees over 100,000 finished
            packages of one topic area, produced and distributed by ETLS, then the
            Company
            estimates that the resulting gross profit margin for ETLS would be over
            84%.
   **Intellectual
            Property Differentiation.**
  ETLS
            currently has five patents pending:
  ·
                  Multiple
                      screen operating environment, framework and tools for transacting
                      e-commerce;
 
 ·
                  System
                      and method for pre-loading still imagery data in an interactive
                      multimedia
                      presentation, which provides an image pre-loading system that
                      maximizes
                      available network bandwidth;
 
 ·
                  System
                      and method for dynamically managing web content using a browser
                      independent framework, which provides an interactive system
                      for enabling
                      dynamic updating of web content to “live”
                      websites;
 
 ·
                  System
                      and method for providing an interactive multimedia presentation
                      environment with low bandwidth capable sessions, which provides
                      an
                      integrated presentation environment consisting of multi-screen
                      clinic
                      logically defined within a browser application;
                      and
 
 ·
                  Presenta
                      ProTM production and delivery system, which provides a multi-screen
                      environment for presenting multimedia presentations with video,
                      images,
                      flash images and text all integrating with the
                      video.
 
 2
 ETLS’
            technological differentiation is based on high quality and low cost software.
            We
            believe that Presenta Pro TM is
            easier to use and considerably more flexible than eTotalSource’s closest
            competitor. We believe that Presenta Pro TM is
            priced to be affordable, cost-effective, and training-efficient. Presenta
            Pro’s TM ease of
            implementation and quality it a viable choice for authoring software
            and
            distance learning tools.
 
  **Technology.**
  The
            Presenta Pro TM ,
            production and delivery system is modular and was designed to allow rapid
            addition of functionality. The platform provides high quality streaming
            of video
            and audio, and was designed for delivery over the Internet, intranet,
            compact
            disk (“ CD ”)
            or
            digital video disk (“ DVD ”).
            The
            Presenta Pro TM system
            has been created using the Delphi development system. The server portion
            of
            Presenta Pro TM is a
            custom control that connects to a Microsoft SQL server. The data is distributed
            to the viewing client via a custom control that connects to the server
            via
            Extensible Markup Language (“ XML ”).
            The
            backend is scalable and transportable. The production client uses all
            custom
            code written in Delphi connecting to the SQL server via Transmission
            Control
            Protocol/Internet Protocol (“ TCP/IP ”).
            The
            end-user client can be run on any Windows based personal computer and
            requires
            minimum system resources. There are several modules to the end-user client
            that
            allow the producer to export video to either a CD/DVD format or stand
            alone
            website. We believe that ETLS’ technology and user interface are advanced in
            their simplicity of use and ability to deliver multiple platforms and
            media
            simultaneously.
  eTotalSource
            has no plans for any research and development in the next 12 months.
   **Employees.**
  As
            of
            December 31, 2005, we had three full-time employees, all of which were
            executive
            personnel. No employees are presently represented by any labor unions.
            We
            believe our relations with our employees to be good, however additional
            employees will need to be recruited to meet our growth projections. ETLS
            has no
            expectation or anticipation of significant changes in number of employees
            in the
            next 12 months. It may add full-or part-time employees of an unknown
            number in
            the next 12 months if its business expands.
   **Risk
            Factors Related to the Company’s Business.**
   ***ETLS
            Lost Money For The Year Ended December 31, 2005 And Losses May Continue
            In The
            Future***
  For
            the
            12 months ended December 31, 2005 and 2004, we incurred a net loss of
            $1,284,661 **** and
            $2,372,675, respectively. For the year ended December 31, 2003, we incurred
            a
            net loss of $1,966,575. We anticipate that we will in all likelihood
            have to
            rely on external financing for all of our capital requirements. Future
            losses
            are likely to continue unless we successfully implement our business
            plan. Our
            ability to continue as a going concern will be dependent upon our ability
            to
            raise additional debt and/or equity capital from third party sources,
            but no
            such negotiations are currently taking place. If we incur any problems
            in
            raising such additional capital, we will experience significant liquidity
            and
            cash flow problems. If we are not successful in reaching and maintaining
            profitable operations, we may not be able to attract sufficient capital
            to
            continue our operations. Our inability to obtain adequate financing will
            result
            in the need to curtail business operations and will likely result in
            a lower
            stock price.
   ***There
            Is Substantial Doubt About Our Ability To Continue As A Going Concern
            Due To
            Insufficient Revenues To Cover Our Operating Costs, Which Means That
            We May Not
            Be Able To Continue Operations Unless We Obtain Additional
            Funding***
  Our
            independent auditors added a going concern qualification to their report
            issued
            in connection with their audit of our December 31, 2005, December 31,
            2004,
            December 31, 2003 and 2002 financial statements. The auditors noted in
            their
            report that ETLS incurred significant recurring losses, and as of December
            31,
            2005 had a substantial liquidity shortage, including default conditions
            on
            certain notes payable and judgments payable to creditors. As a consequence,
            the
            auditors noted that ETLS required significant additional financing to
            satisfy
            outstanding obligations and continue operations, and the auditors opined
            that
            unless ETLS obtained suitable significant additional financing, there
            is
            substantial doubt about ETLS' ability to continue as a going concern.
  3
 The
            accompanying financial statements have been presented assuming that ETLS
            will
            continue as a going concern, which contemplates the realization of assets
            and
            the satisfaction of liabilities in the normal course of business. The
            Company
            has incurred significant operating losses since inception and as of December
            31,
            2005 had a net working capital deficit of approximately $2,723,000, a
            stockholders’ deficit of $3,400,078, notes payable totaling $707,000 were in
            default with related accrued interest in arrears of $97,740 and legal
            judgments
            against the Company of $204,788 had been adjudicated.
  Management
            anticipates that ETLS will incur net losses for the immediate future,
            and expect
            ETLS' operating expenses to increase significantly, and, as a result,
            ETLS will
            need to generate monthly revenue if it is to continue as a going concern.
            To the
            extent that we do not generate revenue at anticipated rates from contracts
            with
            the government and others, that we do not obtain additional funding,
            that our
            stock price does not increase, that we are unable to adjust operating
            expense
            levels accordingly, we may not have the ability to continue on as a going
            concern. Our financial statements which accompany this prospectus do
            not include
            any adjustments that might result from the outcome of this uncertainty.
   ***We
            Have Negative Working Capital***
  We
            had
            negative working capital of approximately $2,723,000 and **** $2,498,000 **** at
            December 31, 2005 and December 31, 2004, respectively, and continue to
            need cash
            for operations. We have relied on significant external financing to fund
            our
            operations. As of December 31, 2005, we had $118,958 of cash on hand
            and total
            current assets were $120,181, and our total current liabilities were
            $2,843,242.
            We will need to raise additional capital to fund our anticipated operating
            expenses and future expansion. Among other things, external financing
            will be
            required to cover our operating costs. Unless we obtain profitable operations,
            it is unlikely that we will be able to secure additional financing from
            external
            sources. If we are unable to secure additional financing, we believe
            that we
            have sufficient funds to continue operations for approximately one
            month. **** We
            estimate that we will require $2,000,000 to fund our anticipated operating
            expenses for the next 12 months. The sale of our common stock to raise
            capital
            may cause dilution to our existing shareholders. Our inability to obtain
            adequate financing will result in the need to curtail business operations.
            Any
            of these events would be materially harmful to our business and may result
            in a
            lower stock price. Our inability to obtain adequate financing will result
            in the
            need to curtail business operations and you could lose your entire investment.
            Our financial statements do not include any adjustments that might result
            from
            the outcome of this uncertainty.
   ***We
            Need Additional Capital To Be Successful, Which Will Potentially Dilute
            The
            Value Of Our Shareholders’ Shares***
  We
            need
            substantial capital to execute our business plan. To finance our operations
            to
            date, we have relied on private offerings, exercises of warrants, and
            loans. As
            of December 31, 2005, we have issued a total of 46,710,821 shares of
            common
            stock, of which an aggregate of 11,731,908 shares were issued in exchange
            for
            cash to finance our operations and the remainder were issued in exchange
            for
            services rendered to ETLS. We will issue up to an additional 234,088,500
            shares
            if all of the outstanding debentures are converted and all options and
            warrants
            exercised. The terms on which we obtain additional financing, including
            the
            exercise of outstanding warrants, may dilute the existing shareholders’
investment, or otherwise adversely affect their position. It is also
            possible
            that we will be unable to obtain the additional funding we need as and
            when we
            need it. If we are unable to obtain additional funding as and when needed,
            we
            will be forced to curtail or cease our operations.
   ***All
            Of Our Assets Are Securing Our Obligations To Cornell Capital
            Partners***
  Pursuant
            to the terms contained in that certain Amended and Restated Security
            Agreement,
            dated November 2, 2005, by and between ETLS and Cornell Capital Partners,
            LP
            (“ Cornell ”),
            all
            of our obligations under said Agreement, the November 2005 Debentures
            described
            in other parts of this Report, the related Investor Registration Rights
            Agreement, the related Irrevocable Transfer Agent Instructions, and the
            related
            Escrow Agreement are secured by substantially all of our assets as of
            such date
            or thereafter acquired by us. Accordingly, if we are unable to satisfy
            any of
            our obligations under the foregoing agreements, our assets may be foreclosed
            upon and our business may be shut down.
   4
 ***Our
            Success Is Based On Increasing Demand For Our
            Products***
  We
            depend
            on the continued demand for our products and on favorable general economic
            conditions. We cannot assure you that our business strategy will be successful
            or that we will successfully address these risks or difficulties. If
            we should
            fail to adequately address any of these risks or difficulties, we could
            be
            forced to curtail or cease our business operations.
   ***We
            Rely On Our Senior Management And Will Be Harmed If Any Or All Of Them
            Leave***
  Our
            success is dependent on the efforts, experience and relationships of
            Terry
            Eilers, our Chief Executive Officer and Chairman, Virgil Baker, our Chief
            Financial Officer and a director, and Michael Sullinger, our Chief Operating
            Officer and a director, and other essential staff. If any of these individuals
            become unable to continue in their role, our business or prospects could
            be
            adversely affected. Although we have entered into employment agreements
            with
            each of our executive officers, we cannot assure you that such individuals
            will
            continue in their present capacity for any particular period of
            time.
   ***Fluctuations
            In Our Operating Results May Adversely Affect Our Stock Price And Purchasers
            Of
            Our Shares Of Common Stock May Lose All Or A Portion Of Their
            Investment***
  Historically,
            there has been volatility in the market price for our common stock. Our
            quarterly operating results, the number of shareholders desiring to sell
            their
            share, changes in general conditions in the economy, the financial markets
            or
            the healthcare industry, or other developments affecting us or our competitors,
            could cause the market price of our common stock to fluctuate substantially.
            We
            expect to experience significant fluctuations in our future quarterly
            operating
            results due to a variety of factors.
  Accordingly,
            in one or more future quarters, our operating results may fall below
            the
            expectations of securities analysts and investors. In this event, the
            market
            price of our common stock would likely be materially adversely affected.
            If the
            selling shareholders all elect to sell their shares of our common stock
            at the
            same time, the market price of our shares may decrease. It is possible
            that the
            selling shareholders will offer all of the shares for sale. Further,
            because it
            is possible that a significant number of shares could be sold at the
            same time,
            the sales, or the possibility thereof, may have a depressive effect on
            the
            market price of our common stock.
   ***Our
            Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
            Significantly***
  Our
            common stock is currently traded on the Over-the-Counter Bulletin Board
            and Pink
            Sheets. Historically, there has been a limited public market for our
            common
            stock and there can be no assurance that an active trading market for
            our common
            stock will develop. This could adversely affect our shareholders’ ability to
            sell our common stock in short time periods, or possibly at all. Our
            common
            stock is thinly traded compared to larger, more widely known companies
            in our
            industry. Thinly traded common stock can be more volatile than common
            stock
            traded in an active public market. The average daily trading volume of
            our
            common stock for the 52-week period commencing on March 14, 2005 and
            ending on
            March 10, 2006 was 105,324 shares. The high and low trading price of
            our common
            stock for that same 52-week period was $0.052 and $0.006, respectively.
            Our
            common stock has experienced, and is likely to experience in the future,
            significant price and volume fluctuations, which could adversely affect
            the
            market price of our common stock without regard to our operating performance.
            In
            addition, we believe that factors such as quarterly fluctuations in our
            financial results and changes in the overall economy or the condition
            of the
            financial markets, could cause the price of our common stock to fluctuate
            substantially.
  5
  ***Our
            Common Stock Is Deemed To Be*** ***“Penny
            Stock,” Which May Make It More Difficult For Investors To Sell Their Shares Due
            To Suitability Requirements***
  Our
            common stock is deemed to be “penny stock” as that term is defined in Rule
            3a51-1 promulgated under the Securities Exchange Act of 1934, as amended.
            Penny
            stocks are stock:
  ·
                  with
                      a price of less than $5.00 per
                      share;
  ·
                  that
                      are not traded on a “recognized” national
                      exchange;
  ·
                  whose
                      prices are not quoted on the NASDAQ automated quotation system
                      (NASDAQ-listed stock must still have a price of not less than
                      $5.00 per
                      share); or
  ·
                  stock
                      in issuers with net tangible assets less than $2,000,000 (if
                      the issuer
                      has been in continuous operation for at least three years)
                      or $5,000,000
                      (if in continuous operation for less than three years), or
                      with average
                      revenues of less than $6,000,000 for the last three
                      years.
  Broker-dealers
            dealing in penny stocks are required to provide potential investors with
            a
            document disclosing the risks of penny stocks. Moreover, broker-dealers
            are
            required to determine whether an investment in a penny stock is a suitable
            investment for a prospective investor. These requirements may reduce
            the
            potential market for our common stock by reducing the number of potential
            investors. This may make it more difficult for investors in our common
            stock to
            sell shares to third parties or to otherwise dispose of them. This could
            cause
            our stock price to decline.
  Shareholders
            should be aware that, according to United States Securities and Exchange
            Commission (the “ SEC ”
or
            the
“ Commission ”),
            the
            market for penny stocks has suffered in recent years from patterns of
            fraud and
            abuse. Such patterns include (i) control of the market for the security
            by one
            or a few broker-dealers that are often related to the promoter or issuer;
            (ii)
            manipulation of prices through prearranged matching of purchases and
            sales and
            false and misleading press releases; (iii) “boiler room” practices involving
            high-pressure sales tactics and unrealistic price projections by inexperienced
            sales persons; (iv) excessive and undisclosed bid-ask differentials and
            markups
            by selling broker-dealers; and (v) the wholesale dumping of the same
            securities
            by promoters and broker-dealers after prices have been manipulated to
            a desired
            consequent investor losses. ETLS' management is aware of the abuses that
            have
            occurred historically in the penny stock market. Although ETLS does not
            expect
            to be in a position to dictate the behavior of the market or of broker-dealers
            who participate in the market, management will strive within the confines
            of
            practical limitations to prevent the described patterns from being established
            with respect to ETLS' securities.
 
 
 ***Existing
            Shareholders Will Experience Significant Dilution From The Conversion
            Of The
            November 2005 Debentures***
 
 Cornell
            may convert the November 2005 Debentures into shares of ETLS’ common stock, at a
            conversion price which is at a 20% discount to the market price. The
            subsequent
            sale of such shares by Cornell could cause significant downward pressure
            on the
            price of ETLS’ common stock. This is especially the case if the shares being
            placed into the market exceed the market’s demand for the shares of ETLS’ common
            stock. As the stock price of ETLS’ common stock declines, Cornell will be
            entitled to receive an increasing number of shares under the convertible
            debentures. The sale of such increasing number of shares by Cornell could
            cause
            further downward pressure on the stock price to the detriment and dilution
            of
            existing investors, as well as investors in this offering.
  Further,
            there is no maximum number of shares ETLS might be required to issue
            under
            securities with market-price based conversion or exercise prices, such
            as
            securities issued in connection with the November 2005 Debentures, except
            for
            the 4.99% limitation on Cornell’s ownership interest in ETLS at any one time.
            However, Cornell may acquire and sell a number of shares that far exceeds
            this
            limit, through the continual purchase and sale of shares.
  6
 As
            a
            result, our net income per share could decrease in future periods, and
            the
            market price of our common stock could decline. In addition, the lower
            our stock
            price, the more shares of common stock we will have to issue upon conversion
            of
            the November 2005 Debentures. If our stock price is lower, then our existing
            stockholders would experience greater dilution.
  ***The
            Sale Of Material Amounts Of Common Stock Under The Company’s Currently Effective
            Registration Statement Could Encourage Short Sales By Third
            Parties***
 
 In
            many
            circumstances the provisions contained in convertible debentures for
            companies
            that are traded on the Over-the-Counter Bulletin Board has the potential
            to
            cause a significant downward pressure on the price of common stock. This
            is
            especially the case if the shares being placed into the market exceed
            the
            market’s ability to take up the increased stock or if ETLS has not performed
            in
            such a manner to show that the debt raised will be used to grow the Company.
            Such an event could place further downward pressure on the price of common
            stock.
  The
            outstanding November 2005 Debentures are convertible at a 20% discount
            to the
            market price of our common stock. As a result, the opportunity exists
            for short
            sellers and others to contribute to the future decline of ETLS’ stock price.
            Persons engaging in short sales first sell shares that they do not own,
            and
            thereafter, purchase shares to cover their previous sales. To the extent
            the
            stock price declines between the time the person sells the shares and
            subsequently purchases the shares, the person engaging in short-sales
            will
            profit from the transaction, and the greater the decline in the stock,
            the
            greater the profit to the person engaging in such short-sales. Because
            the
            November 2005 Debentures are convertible at a discount to market, it
            is possible
            that the debentures could be converted if the market price of our common
            stock
            declines, thus, supplying any short sellers with the opportunity to cover
            their
            short positions. By contrast, a person owning a long position in a stock,
            such
            as an investor purchasing shares in this offering, first purchases the
            shares at
            the then market price, if the stock price declines while the person owns
            the
            shares, then upon the sale of such shares the person maintaining the
            long
            position will incur a loss, and the greater the decline in the stock
            price, the
            greater the loss which is incurred by the person owning a long position
            in the
            stock.
  If
            there
            are significant short-sales of our stock, the price decline that would
            result
            from this activity will cause our share price to decline more so which
            in-turn
            may cause long holders of our stock to sell their shares thereby contributing
            to
            sales of stock in the market. If there is an imbalance on the sell side
            of the
            market for our stock the price will decline. It is not possible to predict
            if
            the circumstances whereby short-sales could materialize or to what our
            share
            price could drop. In some companies that have been subjected to short-sales,
            their stock price has dropped to near zero. We cannot provide any assurances
            that this situation will not happen to us.
   ***Sale
            Of Shares Eligible For Future Sale Could Adversely Affect The Market
            Price***
  All
            of
            the approximate 8,117,946 shares of common stock which are currently
            held,
            directly or indirectly, by management have been issued in reliance on
            private
            placement exemptions under the Securities Act of 1933, as amended (the
            “ 1933
            Act ”).
            Such
            shares will not be available for sale in the open market without separate
            registration except in reliance upon Rule 144 under the 1933 Act. In
            general,
            under Rule 144 a person (or persons whose shares are aggregated), who
            has
            beneficially owned shares acquired in a non-public transaction, for at
            least one
            year, including persons who may be deemed affiliates of ETLS would be
            entitled
            to sell within any 3-month period a number of shares that does not exceed
            the
            greater of 1% of the then outstanding shares of common stock, or the
            average
            weekly reported trading volume during the four calendar weeks preceding
            such
            sale, provided that current public information is then available. If
            a
            substantial number of the shares owned by these stockholders were sold
            under
            Rule 144 or a registered offering, the market price of the common stock
            could be
            adversely affected.
  ***ETLS'
            Competition is Better Capitalized and Has Greater Marketing Capabilities
            Which
            Could Adversely Affect ETLS' Ability to Compete in the
            Marketplace***
 
 ETLS
            is
            in competition with other services and products developed and marketed
            by much
            larger corporations, which are better capitalized and have far greater
            marketing
            capabilities than ETLS. ETLS expects to be at a disadvantage when competing
            with
            many firms that have substantially greater financial and management resources
            and capabilities than ETLS. As a result of these disadvantages, ETLS
            may not be
            able to effectively complete in the markets in which its products and
            services
            are sold, which would, in turn, affect its ability to continue to
            operate.
  7
 **Item
            2.**  **Description
            Of Property.**
  On
            June
            9, 2003, ETLS sold its building and land to a non-affiliate noteholder
            for
            $1,050,000. Effective with the sale of its building and land on June
            9, 2003,
            ETLS began leasing its corporate offices in Yuba City, California on
            a month to
            month basis with no expiration date. Monthly payments under the lease
            are
            approximately $2,500. Such premises are adequate to serve the Company’s current
            staffing level. The offices consist of approximately 1,700 square feet.
  **Item
            3.**  **Legal
            Proceedings.**
  We
            are
            not currently a party to any material litigation, nor are we aware of
            any
            potential material litigation, other than as set forth below.
  ETLS
            has
            defended an action and has reached a settlement for $50,000 with Alchemy
            Communications in connection with a breach of contract claim involving
            co-location of ETLS' servers with Alchemy. $83,000 has been accrued as
            a
            judgment payable as of December 31, 2002. ETLS intends to pay $50,000
            as soon as
            sufficient funds are available to do so, and in March of 2003, ETLS issued
            30,000 shares of its common stock in partial satisfaction of the settlement.
            No
            action has been taken by Alchemy to enforce the terms of the settlement
            and ETLS
            does not anticipate any action will be taken by Alchemy to enforce the
            settlement, provided that the balance of funds owed is paid within a
            reasonable
            period of time.
  In
            1997,
            Premium Enterprises, Inc. was sued by Tusco, Inc. for an alleged breach
            of the
            company’s lease with Tusco. Tusco prevailed in its suit and obtained a judgment
            against Premium for $75,000. No action has been taken by Tusco to enforce
            the
            judgment against Premium or ETLS, its successor, and ETLS does not anticipate
            any action will be taken by Tusco to enforce the judgment. Nonetheless,
            ETLS has
            recorded a liability for the full amount of the judgment.
  In
            1996,
            Premium Enterprises, Inc. was sued by Ally Capital Corporation for an
            alleged
            breach of contract claim. Ally prevailed in its suit and obtained a judgment
            against Premium for $47,000. No action has been taken by Ally to enforce
            the
            judgment against Premium or ETLS, its successor, and ETLS does not anticipate
            any action will be taken by Ally to enforce the judgment as Ally is no
            longer in
            business according to Colorado Secretary of State’s office. Nonetheless, ETLS
            has recorded a liability for the full amount of the judgment.
  **Item
            4.**  **Submission
            Of Matters To A Vote Of Security Holders.**
  None.
   8
   **PART
            II**
  **Item
            5. Market For Registrant's Common Equity And Related Stockholder
            Matters.**
  The
            Company's common stock trades on the Over-the-Counter Bulletin Board
            under the
            symbol “ETLS.OB.” The range of high, low and close trade quotations for the
            Company's common stock by fiscal quarter within the last two fiscal years,
            as
            reported by the National Quotation Bureau Incorporated, was as
            follows:
  **2004**
                  
                  **High**
                  
                  **Low**January
                      1 to March 31, 2004
                  
                  $
                  0.195
                  
                  $
                  0.120April
                      1 to June 30, 2004
                  
                  $
                  0.200
                  
                  $
                  0.070July
                      1 to September 30, 2004
                  
                  $
                  0.120
                  
                  $
                  0.045October
                      1 to December 31, 2004
                  
                  $
                  0.095
                  
                  $
                  0.046**2005**
                  
                  
                  **High**
                  
                  
                  **Low**January
                      1 to March 31, 2005
                  
                  $
                  0.045
                  
                  $
                  0.014April
                      1 to June 30, 2005
                  
                  $
                  0.052
                  
                  $
                  0.015July
                      1 to September 1, 2005
                  
                  $
                  0.040
                  
                  $
                  0.015October
                      1 to December 31, 2005
                  
                  $
                  0.040
                  
                  $
                  0.018**2005**
                  
                  
                  **High**
                  
                  
                  **Low**January
                      1 to March 10, 2006
                  
                  $
                  0.020
                  
                  $
                  0.006
 _______________________
  The
            above
            quotations reflect inter-dealer prices, without retail mark-up, mark-down,
            or
            commission and may not necessarily represent actual transactions.
  ***Number
            Of Holders.***
  As
            of
            December 31, 2005 there were 341 record holders of the Company's Common
            Stock.
  ***Dividends.***
  We
            have
            not paid any dividends on our common stock and do not anticipate paying
            any cash
            dividends in the foreseeable future. We intend to retain any earnings
            to finance
            the growth of the business. We cannot assure you that we will ever pay
            cash
            dividends. Whether we pay any cash dividends in the future will depend
            on the
            financial condition, results of operations and other factors that the
            Board of
            Directors will consider.
   ***Recent
            Sales Of Unregistered Shares.***
  During
            the last three years, ETLS issued the following unregistered
            securities:
  On
            November 2, 2005, the Company issued to Cornell the secured convertible
            debentures in the principal amount of $1,000,000 (“ November
            2005 Debentures ”).
            The
            November 2005 Debentures were issued to consolidate the 2004 Debentures,
            in the
            original principal amount of $350,000, and the August 2005 Debenture,
            in the
            original principal amount of $100,000, plus accrued and unpaid interest
            on the
            2004 Debentures and the August 2005 Debenture, and to reflect additional
            funding
            in the amount of $530,130. The November 2005 Debentures are secured by
            substantially all of the Company’s assets, have a three-year term and accrue
            interest at 12% per annum. **** Cornell
            is entitled, at its option, to convert, and sell all or any part of the
            principal amount of the November 2005 Debentures, plus accrued interest
            thereon,
            into shares of the Company’s common stock at the price per share equal to the
            lesser of (a) $0.024 or (b) an amount equal to 80% of the lowest
            closing bid price of the Company’s common stock for the five trading days
            immediately preceding the conversion date (which price may be adjusted
            pursuant
            to certain other terms of the November 2005 Debentures). The November
            2005
            Debentures have been fully subscribed.
  9
 On
            August
            24, 2005, the Company issued to Cornell secured convertible debentures
            in the
            principal amount of $100,000 (the “ August
            2005 Debenture ”).
            Any
            part of the principal amount of the August 2005 Debenture, plus accrued
            interest
            thereon, is convertible at any time up to maturity, at Cornell’s option, into
            shares of the Company’s common stock at a conversion price equal to $0.02. The
            August 2005 Debenture was secured by substantially all of the Company’s assets,
            had a one-year term and accrued interest at 12% per annum. **** In
            the
            event the August 2005 Debenture would have been redeemed, then eTotalSource
            would issue to Cornell a warrant to purchase 5,000,000 shares at an exercise
            price of $0.02 or as subsequently adjusted under the terms of the warrant.
            The
            August 2005 Debenture was consolidated into the November 2005 Debentures.
            The
            August 2005 Securities Purchase Agreement, along with the related Security
            Agreement, related Secured Convertible Debentures, and related Escrow
            Agreement
            were mutually terminated by the Company and Cornell pursuant to the termination
            agreement executed by Cornell and the Company on November 2, 2005 (the
            “ November
            Termination Agreement ”).
  On
            April
            20, 2005, we entered into a standby equity distribution agreement (the
            “ 2005
            SEDA ”)
            with
            Cornell. Pursuant to the 2005 SEDA, we could have, at our discretion,
            periodically sold to Cornell shares of our common stock for a total purchase
            price of up to $10,000,000. For each share of common stock purchased
            under the
            2005 SEDA, Cornell would have paid ETLS 98% of the lowest volume weighted
            average price of our common stock on the Over-the-Counter Bulletin Board
            or
            other principal market on which our common stock is traded for the five
            trading
            days immediately following the notice date. Further, Cornell would have
            retained
            a fee of 5% of each advance under the 2005 SEDA. In connection with the
            2005
            SEDA, Cornell received a one-time commitment fee in the form of 3,833,334
            restricted shares of our common stock. In light of the limitations contained
            in
            the 2005 SEDA, we would have had to submit a $200,000 advance request
            approximately every 10 trading days for 23 months in order to attain
            the full
            $10,000,000 available under the 2005 SEDA. At a recent stock price of
            $0.012, we
            would have had to issue 17,006,803 shares of common stock to Cornell
            to draw
            down the maximum advance amount of $200,000.  The
            2005
            SEDA, along with the related Investor Registration Rights Agreement,
            related
            Placement Agent Agreement, related Irrevocable Transfer Agent Instructions,
            and
            related Escrow Agreement, all of which were dated as of April 20, 2005,
            were
            terminated by ETLS and Cornell pursuant to the November Termination
            Agreement.
  eTotalSource
            engaged Newbridge Securities Corporation (“ Newbridge ”),
            an
            unaffiliated registered broker-related deal, to advise ETLS in connection
            with
            the 2004 SEDA. In connection therewith, Newbridge was paid a one-time
            fee of
            $10,000 by the issuance of 166,666 restricted shares of ETLS’ common stock
            issued on October 8, 2004.
  Also
            on
            April 20, 2005, we issued a secured convertible debenture to Cornell
            in the
            principal amount of $350,000 (the “ 2005
            Secured Convertible Debenture ”),
            plus
            accrued interest. **** The
            2005
            Secured Convertible Debenture accrued interest at the rate of 5% per
            year. At
            ETLS’ option, the entire principal amount and all accrued interest can be
            either: (i) paid to the holder of the 2005 Secured Convertible Debenture on
            the second-year anniversary thereof or (ii) converted into shares of
            eTotalSource common stock. The 2005 Secured Convertible Debenture was
            convertible into shares of our common stock as a price per share that
            is equal
            to $0.112. The 2005 Secured Convertible Debenture was convertible at
            the
            holder’s option. The 2005 Secured Convertible Debenture had a term of two years
            and was secured by all of our assets. At ETLS’ option, the 2005 Secured
            Convertible Debenture could have been paid in cash or converted into
            shares of
            our common stock unless converted earlier by the holder. Except after
            an event
            of default, as set forth in the secured 2005 Secured Convertible Debenture,
            the
            holder was not entitled to convert such debenture for a number of shares
            of our
            common stock in excess of that number of shares which, upon giving effect
            to
            such conversion, would cause the aggregate number of shares of common
            stock
            beneficially held by such holder and its affiliated to exceed 4.99% of
            our
            outstanding shares of common stock. As described below, Cornell purchased
            a 2004
            Secured Convertible Debenture in the principal amount of $175,000 from
            ETLS on
            October 12, 2004, and a second 2004 Secured Convertible Debenture in
            the
            principal amount of $175,000 from ETLS on or about December 2, 2004 pursuant
            to
            the 2004 Secured Convertible Debenture. These two 2004 Secured Convertible
            Debentures were mutually terminated by ETLS and Cornell pursuant to that
            certain
            termination agreement executed by the parties on April 20, 2005 (the
            “ April
            Termination Agreement ”);
            however, the principal amounts and accrued interest outstanding under
            the 2004
            Secured Convertible Debentures are now subject to the terms and conditions
            contained in the 2005 Secured Convertible Debentures (i.e., the 2004
            Secured
            Convertible Debentures were refinanced as the 2005 Secured Convertible
            Debenture). The April 2005 Securities Purchase Agreement, along with
            the related
            Security Agreement, related Secured Convertible Debentures, and related
            Escrow
            Agreement, all of which were dated as of April 20, 2005, were mutually
            terminated by ETLS and Cornell pursuant to the November Termination Agreement.
            On November 2, 2005, the Company consolidated the 2005 Secured Convertible
            Debentures (which included the 2004 Secured Convertible Debentures) and
            the
            August 2005 Debenture, plus accrued and unpaid interest on the 2004 Debentures
            and the August 2005 Debenture, as well as additional funding in the amount
            of
            $530,130, under the terms of the November 2005 Debentures.
  10
 On
            October 12, 2004, we issued a secured convertible debenture to Cornell
            in the
            principal amount of $175,000, and on or about December 2, 2004, we issued
            a
            second secured convertible debenture to Cornell in the principal amount
            of
            $175,000 (collectively, the “ 2004
            Secured Convertible Debentures ”).
            The
            2004 Secured Convertible Debentures were mutually terminated by ETLS
            and Cornell
            pursuant to the April Termination Agreement; however, the principal amounts
            and
            accrued interest outstanding under the 2004 Secured Convertible Debentures
            are
            now subject to the terms and conditions contained in the 2005 Secured
            Convertible Debenture (i.e., the 2004 Secured Convertible Debentures
            were
            refinanced as the 2005 Secured Convertible Debenture). The 2004 Secured
            Convertible Debentures accrued interest at the rate of 5% per year. At
            ETLS’
option, the entire principal amount and all accrued interest could have
            been
            either: (i) paid to the holder of the 2004 Secured Convertible Debenture on
            the third-year anniversary thereof or (ii) converted into shares of ETLS
            common
            stock. The 2004 Secured Convertible Debentures were convertible into
            shares of
            our common stock as a price per share that is equal to the lesser of:
            (i) an
            amount equal to 120% of the closing bid price as listed on a principal
            market,
            as quoted by Bloomberg, L.P., on October 12, 2004, or (ii) an amount
            equal to
            80% of the lowest closing bid price of our common stock, as quoted by
            Bloomberg,
            L.P., for the five trading days immediately preceding the conversion
            date. The
            2004 Secured Convertible Debentures were convertible at the holder’s option. The
            2004 Secured Convertible Debentures had terms of two years and were secured
            by
            substantially all of our assets. At ETLS’ option, the 2004 Secured Convertible
            Debentures could have been paid in cash or converted into shares of the
            Company’s common stock unless converted earlier by the holder. Except after an
            event of default, as set forth in the 2004 Secured Convertible Debentures,
            the
            holders were not entitled to convert such debentures for a number of
            shares of
            the Company’s common stock in excess of that number of shares which, upon giving
            effect to such conversion, would cause the aggregate number of shares
            of common
            stock beneficially held by such holder and its affiliated to exceed 4.99%
            of our
            outstanding shares of common stock.
  On
            October 6, 2004, we entered into a standby equity distribution agreement
            (the
“ 2004
            SEDA ”)
            with
            Cornell. Pursuant to the 2004 SEDA, we could have, at our discretion,
            periodically sold to Cornell shares of our common stock for a total purchase
            price of up to $10,000,000. For each share of common stock purchased
            under the
            2004 SEDA, Cornell would have paid ETLS 98% of the lowest volume weighted
            average price of our common stock on the Over-the-Counter Bulletin Board
            or
            other principal market on which our common stock was traded for the five
            trading
            days immediately following the notice date. Further, Cornell would have
            retained
            a fee of 5% of each advance under the 2004 SEDA. In connection with the
            2004
            SEDA, Cornell received a one-time commitment fee in the form of 3,833,334
            restricted shares of our common stock issued on October 22, 2004. The
            2004 SEDA,
            along with the related Investor Registration Rights Agreement, related
            Placement
            Agent Agreement, related Irrevocable Transfer Agent Instructions, and
            related
            Escrow Agreement, each dated October 6, 2004, were mutually terminated
            by and
            the Company and Cornell on April 20, 2005 pursuant to the April Termination
            Agreement. However, the 3,833,334 shares of common stock issued as a
            one-time
            commitment in connection with the 2004 SEDA were not been cancelled and
            retained
            registration rights to be registered in the Company’s next Registration
            Statement. These shares were registered in the Company’s currently effective
            Registration Statement
  On
            September 30, 2004, each of the following persons was issued 400,000
            restricted
            shares of common stock in exchange for services provided to ETLS: Michael
            Sullinger, Chief Operating Officer, Virgil Baker, Chief Financial Officer,
            and
            A. Richard Barber, a director of the Company. The effective price per
            share
            issued was $0.05.
  In
            July
            of 2004, ETLS issued 100,000 restricted shares of common stock to an
            unrelated
            individual for $9,000 of services accrued for in the second
            quarter.
  Also
            in
            July of 2004, ETLS issued 1,400,000 shares of restricted common stock
            to a
            former contract consultant in settlement of a contract. The fair value
            of the
            shares was accrued for in the second quarter based on the quoted price
            of the
            stock on the date of settlement, a total of $126,000.
  11
 Also
            in
            July of 2004, ETLS issued 2,000,000 shares of restricted common stock
            to an
            unrelated company for sales and marketing services completed and accepted
            in the
            third quarter. The shares will be recorded at their fair value, $300,000,
            based
            on the quoted price of the stock at the date of the contract.
  Effective
            December 19, 2003, ETLS entered into a private placement agreement for
            the sale
            of up to 12,000,000 shares of its common stock pursuant to Regulation
            S of the
            1933 Act commencing in January of 2004. The purchaser had until the sooner
            of
            April 30, 2004 or until 12,000,000 shares are sold to deliver one or
            more
            purchase notices to ETLS. The agreement provided for a variable purchase
            price
            based on a percentage of the five-day average closing price on the date
            of a
            purchase with a floor price of $0.08 cents net to ETLS. Based on the
            foregoing
            private placement, ETLS sold a total of 8,125,000 shares resulting in
            net
            proceeds to ETLS of $530,000. The purchaser represented to ETLS that
            it intended
            to acquire the shares for its own account with no then present intention
            of
            dividing its interest with others or reselling or otherwise disposing
            of all or
            any portion of the shares. The shares were offered in a private transaction,
            not
            part of a distribution of shares.
  Except
            as
            otherwise indicated above, ETLS believes that all of the above transactions
            were
            transactions not involving any public offering within the meaning of
            Section
            4(2) of the 1933 Act, since (a) each of the transactions involved the
            offering
            of such securities to a substantially limited number of persons; (b)
            each person
            took the securities as an investment for his/her/its own account and
            not with a
            view to distribution; (c) each person had access to information equivalent
            to
            that which would be included in a registration statement on the applicable
            form
            under the 1933 Act; (d) each person had knowledge and experience in business
            and
            financial matters to understand the merits and risk of the investment;
            therefore
            no registration statement needed to be in effect prior to such
            issuances.
 
 **Item
            6.**  **Management's
            Discussion And Analysis Or Plan Of Operations.**
  ***Forward-Looking
            Statements and Associated Risks.*** *This
            Report contains forward-looking statements. Such forward-looking statements
            include statements regarding, among other things, (a) our projected sales
            and
            profitability, (b) our growth strategies, (c) anticipated trends in our
            industry, (d) our future financing plans, (e) our anticipated needs for
            working
            capital, (f) our lack of operational experience, and (g) the benefits
            related to
            ownership of our common stock. Forward-looking statements, which involve
            assumptions and describe our future plans, strategies, and expectations,
            are
            generally identifiable by use of the words* *“* *may,* *”* ** *“* *will,* *”* ** *“* *should,* *”* ** *“* *expect,* *”* ** *“* *anticipate,* *”* *
            60;* *“* *estimate,* *”* ** *“* *believe,* *”* ** *“* *intend,* *”* *or* *“* *project* *”* *or
            the negative of these words or other variations on these words or comparable
            terminology. This information may involve known and unknown risks,
            uncertainties, and other factors that may cause our actual results, performance,
            or achievements to be materially different from the future results, performance,
            or achievements expressed or implied by any forward-looking statements.
            These
            statements may be found under* *“* *Management* *’* *s
            Discussion and Analysis of Financial Condition and Results of
            Operations* *”* *and* *“* *Business,* *”* *as
            well as in this Report generally. Actual events or results may differ
            materially
            from those discussed in forward-looking statements as a result of various
            factors, including, without limitation, the risks outlined under* *“* *Risk
            Factors* *”* *and
            matters described in this Report generally. In light of these risks and
            uncertainties, there can be no assurance that the forward-looking statements
            contained in this report will in fact occur as projected.*
  ***Financial
            Condition And Changes In Financial Condition.***
   ***Changes
            in Financial Condition.***
  On
            December 30, 2002, Premium acquired 91% of the preferred and common stock
            of
            eTotalSource pursuant to an Agreement and Plan of Reorganization effective
            December 30, 2002, by issuing 15,540,011 shares of Premium common stock
            to
            eTotalSource shareholders.
  Immediately
            after the transaction, the eTotalSource shareholders owned approximately
            88.5%
            of Premium’s common stock. Coincident with the transaction, Premium changed its
            fiscal year from June 30 to December 31.
  The
            reorganization is recorded as a recapitalization effected by a reverse
            merger
            wherein Premium is treated as the acquiree for accounting purposes, even
            though
            it is the legal acquirer. The transaction has been accounted for as a
            purchase,
            and accordingly, since the transaction occurred December 31, 2002, the
            results
            of operations for the periods presented represent solely those of the
            accounting
            acquirer, eTotalSource. Since Premium was a non-operating shell with
            limited
            business activity, goodwill was not recorded.
  12
 On
            February 4, 2005, the Company’s shareholders approved an increase of authorized
            shares from 100 million shares to 300 millions shares. The measure was
            passed
            with **** 30,898,791
            shares voting in favor and 296,896 shares voting against, which was sufficient
            to carry out the proposal.
  ***Results
            Of Operations For The Fiscal Year Ended December 31,
            200*** ***5,
            Compared To Fiscal Year Ended***
  ***December
            31, 2004.***
  The
            Company had revenues from operations of $54,715 and $209,198 in the years
            ended
            December 31, 2005 and 2004, respectively, a decrease of $154,483 or 74%.
            The
            decrease in revenues was attributable to lower sales of the CD training
            programs
            and no post-production income or software sales.
  The
            Company incurred expenses incident to operations in the amount of $1,054,727
            in
            2005 and $2,390,905 in 2004, a decrease of $1,336,178 or 56%. The decrease
            was
            primarily due to a decrease in payroll expenses, and fees connected with
            the
            convertible debenture bonds. Payroll expenses for 2005 were $94,417 less
            than
            the comparable 2004 period, a 22% decrease. Stock issued for services
            were
            $1,339,205 less than the comparable 2004 period, a 96% decrease.
  Interest
            expense for 2005 was $285,746 as compared with $190,592 for the corresponding
            2004 period, an increase of $95,154 or 50%. The increase in interest
            expense is
            the result of additional imputed interest on the convertible debenture
            bonds.
  The
            Company had a net loss on operations of $1,284,661 in 2005 compared to
            a loss of
            $2,372,675 in 2004, a decrease of $1,088,014 or 46%. The loss per share
            was
            approximately $0.03 in 2005 and $0.06 in 2004.
  ***Liquidity
            & Capital Resources.***
  The
            Company had $118,958 in cash at year end and no other capital resources.
            The
            Company is dependent on its shareholders for loans for expenses, and
            has no
            capital availability. **** There
            can
            be no assurance that ETLS will be able to complete its business plan
            or fully
            exploit business opportunities that management may identify. Accordingly,
            ETLS
            will need to seek additional financing through loans, the sale and issuance
            of
            additional debt and/or equity securities, or other financing arrangements,
            including loans from our shareholders to cover expenses. ETLS presently
            has no
            additional sources of capital except contingently available through the
            November
            2005 Debentures described below. ETLS is unable to carry out any plan
            of
            business without funding. We cannot predict to what extent our current
            lack of
            liquidity and capital resources will impair the continuation of business
            or
            whether it will incur further operating losses. There is no assurance
            that we
            can continue as a going concern without substantial funding, for which
            there is
            no source.
  **The
            Standby Equity Distribution Agreement** **s.**
  On
            November 2, 2005, we terminated the 2005 SEDA, the 2005 Secured Convertible
            Debentures, the 2005 Securities Purchase Agreement, and all other financing
            agreements that we entered into with Cornell on April 20, 2005 by execution
            of
            the November Termination Agreement. All of the foregoing documents are
            described
            in detail above.
  **The
            November 2005 Debentures.**
  On
            November 2, 2005, the Company entered into a Securities Purchase Agreement
            with
            Cornell, pursuant to which we issued to Cornell secured convertible debentures
            in the principal amount of $1,000,000 (i.e., the November 2005 Debentures).
            Of
            this amount, $175,000 was previously funded on October 7, 2004, $175,000
            was
            previously funded on December 2, 2004, $100,000 was previously funded
            on August
            19, 2005, and $530,130 was funded on November 4, 2005. The November 2005
            Debentures were issued to consolidate these prior debentures and to reflect
            additional funding to the Company in the amount of $530,130.
  13
 The
            November 2005 Debentures are secured by substantially all of the Company’s
            assets, has a three-year term and accrues interest at 12% per annum. **** Cornell
            is entitled, at its option, to convert, and sell all or any part of the
            principal amount of the November 2005 Debenture, plus accrued interest
            thereon,
            into shares of the Company’s common stock, at a price per share equal to the
            lesser of (a) an amount equal to an amount equal to 120% of the closing bid
            price of the common stock as listed on a principal market as quoted by
            Bloomberg
            L.P., on the date hereof or (b) an amount equal to 80% of the lowest
            closing bid price of the common stock for the five trading days immediately
            preceding the conversion date which may be adjusted pursuant to the other
            terms
            of the November 2005 Debenture.  In
            the
            event the November 2005 Debentures are redeemed, then we will issue to
            Cornell a
            warrant to purchase 2,000,000 shares at an exercise price of $0.001 or
            as
            subsequently adjusted under the terms of the warrant.
   14
  ***Contractual
            Obligations and Commercial Commitments.***
  As
            of
            December 31, 2005, the following contractual obligations were
            outstanding:
  **Payments
                      Due by Period****Contractual
                      Obligations**
                  
                  **Less
                      than**
                    **1
                      year**
                  
                  **2-3
                      years**
                  
                  **4-5
                      years**
                  
                  **After**
                    **5
                      years**
                  
                  **Total**Judgments
                      payable
                  
                  $
                  204,788
                  
                  $
                  .00
                  
                  $
                  .00
                  
                  $
                  .00
                  
                  $
                  204,788Short
                      Term note payables
                  
                  
                  1,022,114
                  
                  
                  .00
                  
                  
                  .00
                  
                  
                  .00
                  
                  
                  1,022,114Convertible
                      debentures (net discounts - $303,452)
                  
                  
                  .00
                  
                  
                  696,548
                  
                  
                  
                  
                  
                  
                  
                  
                  696,548Other
                      current liabilities
                  
                  
                  1,616,340
                  
                  
                  .00
                  
                  
                  .00
                  
                  
                  .00
                  
                  
                  1,616,340Total
                      contractual cash obligations
                  
                  $
                  2,843,242
                  
                  $
                  696,548
                  
                  $
                  .00
                  
                  $
                  .00
                  
                  $
                  3,539,790
 
 In
            addition to the commitment listed in the table above, t he
            Company leases its corporate offices in Yuba City, California on a
            month-to-month basis with no expiration date. Monthly rentals under the
            lease
            are approximately $2,500 **.**
   ***Critical
            Accounting Policies And Estimates***
  ETLS
            recognizes revenue in accordance with Statement of Position No. 97-2
“Software
            Revenue Recognition” issued by the Accounting Standards Executive Committee of
            the American Institute of Certified Public Accountants. Revenues are
            recorded
            net of an allowance for estimated returns and collectibility at the time
            of
            billing.
  Product
            revenue is derived primarily from the sale of self-produced training
            multimedia
            and not related off-the-shelf software products. ETLS recognizes revenue
            from
            sales of these products at the time of shipment to customers. Service
            revenue is
            primarily derived from production of videos for others and is recognized
            upon
            customer acceptance.
  Deferred
            revenue includes payments received for product licenses covering future
            periods
            and advances on service contracts that have not yet be fulfilled.
  Significant
            estimates include evaluation of the company’s income tax net operating loss
            carry-forwards and valuation of non-monetary transactions in connection
            with
            issuances of common stock and common stock warrants and options.
  None
            of
            these policies had any material or substantial effect upon ETLS’
operations.
   ***Financial
            Condition***
  There
            is
            substantial doubt about the ability of ETLS to continue as a going concern
            as
            disclosed in the notes to the December 31, 2005 financial statements
            filed by
            ETLS in this Report. Further, the auditor’s report, which accompanied said
            financial statements, also contained a going concern paragraph which
            calls into
            question our ability to continue as a going concern. Those conditions
            continued
            through the end of fiscal year 2005 resulting in operating losses and
            liquidity
            shortages, including default conditions on certain notes payable and
            judgments
            payable to creditors. As of December 31, 2005, current liabilities exceed
            current assets by approximately $2,723,000.
  15
 Management
            continues to meet operating deficits primarily through short-term borrowings
            and
            is attempting to utilize other debt and non-dilutive equity financing
            alternatives to sustain operations. Whether such financing will be available
            as
            needed and the ultimate form of such financing is uncertain and the effects
            of
            this uncertainty could ultimately lead to bankruptcy.
  ***Going
            Concern Uncertainty***
  The
            Company has incurred significant losses from operations for the year
            ended
            December 31, 2005, and such losses are expected to continue. In addition,
            the
            Company has no working capital. The foregoing raises substantial doubt
            about the
            Company's ability to continue as a going concern. Management's plans
            include
            seeking additional capital and/or debt financing. There is no guarantee
            that
            additional capital and/or debt financing will be available when and to
            the
            extent required, or that if available, it will be on terms acceptable
            to the
            Company. The consolidated financial statements do not include any adjustments
            that might result from the outcome of this uncertainty. Our auditors
            have
            included a going- concern paragraph to their audit report.
  ***Net
            Operating Loss.***
  For
            federal income tax purposes, the Company has net operating loss carry
            forwards
            of approximately $5.3 **** million
            as of December 31, 2005. These carry forwards will expire at various
            dates from
            2020 through 2024. The use of such net operating loss carry forwards
            to be
            offset against future taxable income, if achieved, may be subject to
            specified
            annual limitations.
  ***Off-Balance
            Sheet Arrangements.***
  None.
  **Item
            7.**  **Financial
            Statements And Supplementary Data.**
  Attached
            hereto and filed as part of this Report are the Company’s consolidated financial
            statements for the fiscal year ended December 31, 2005.
  **Item
            8.**  **Changes
            In And Disagreements With Accountant’s On Accounting And Financial
            Disclosure.**
  None.
  **Item
            8a.**  **Controls
            And Procedures.**
  ***a.***  ***Evaluation
            Of Disclosure Controls And Procedures***
  ETLS’
            Principal Executive Officer and Principal Accounting Officer, after evaluating
            the effectiveness of eTotalSource’s disclosure controls and procedures (as
            defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
            Act of
            1934, as amended (the “ Exchange
            Act ”))
            as of
            the end of the period covered by this Report, have concluded that as
            of such
            date, ETLS disclosure controls and procedures were adequate and effective
            to
            ensure that material information relating to ETLS that is required to
            be
            disclosed by ETLS in reports that it files or submits under the Exchange
            Act, is
            recorded, processed, summarized and reported within the time periods
            specified
            in SEC rules and accumulated and communicated to ETLS’ management, including its
            Principal Executive Officer and Principal Accounting and Financial Officer,
            to
            allow timely decisions regarding required disclosure.
  ***b.***  ***Changes
            In Internal Controls Over Financial Reporting***
  In
            connection with the evaluation of ETLS’ internal controls during the Company’s
            last fiscal quarter, ETLS’ Principal Executive Officer and Principal Accounting
            Officer have determined that there are no changes to ETLS’ internal controls
            over financial reporting that have materially affected, or are reasonably
            likely
            to materially effect, the Company’s internal controls over financial reporting.
  16
 **Item
            8b. Other Information.**
  None.
   17
   **PART
            III**
  **Item
            9.**  **Directors,
            Executive Officers, Promoters And Control Persons.**
  The
            following persons are members of the Company’s Board of Directors (the
“ Board ”)
            and/or
            executive officers, in the capacities indicated, as of December 31,
            2005:
  **NAME**
                  **AGE**
                  **POSITION
                      HELD**
                  **TENURE**Terry
                      Eilers
                  58
                  President,
                      CEO, Director
                  Since
                      2002Virgil
                      Baker
                  53
                  CFO,
                      Director
                  Since
                      2002Michael
                      Sullinger
                  60
                  Secretary,
                      COO, Director
                  Since
                      2002A.
                      Richard Barber
                  65
                  Director
                  Since
                      2002J.
                      Cody Morrow
                  51
                  Director
                  Since
                      2002
 
 The
            directors named above will serve until the next annual meeting of the
            Company’s
            stockholders. Thereafter, directors will be elected for one-year terms
            at the
            annual stockholders’ meeting. Officers will hold their positions at the pleasure
            of the Board, absent any employment agreement, of which none currently
            exists or
            is contemplated.
 
 There
            is
            no arrangement or understanding between the directors and officers of
            eTotalSource and any other person pursuant to which any director or officer
            was
            or is to be selected as a director or officer.
 
 The
            directors of ETLS will devote such time to the Company’s affairs on an as needed
            basis, but less than 20 hours per month. As a result, the actual amount
            of time
            which they will devote to ETLS’ affairs is unknown and is likely to vary
            substantially from month-to-month.
 
 **Terry
            Eilers, CEO and Chairman**
  Mr.
            Eilers has served as CEO and a Director of ETLS since its formation,
            and has
            served as its Chairman of the Board of Directors since 2000. From 1994
            to 2002,
            Mr. Eilers, along with Virgil Baker, devoted all of his time to the development
            of online training and the prototype software for Presenta ProTM. In 2000, Mr.
            Eilers, along with Virgil Baker, formed eTotalSource.com, Inc. and became
            the
            CEO and President. From 1987 to 1994, Mr. Eilers was founder of a seminar
            company and traveled all over the world giving seminars on Real Estate
            and
            motivational seminars. From 1984 to 1987, Mr. Eilers served as Vice
            President, Regional Manager and Regional Training Director for Lawyers
            Title
            Company. Mr. Eilers was involved in the creation, operation and sale
            of Sydney
            Cambric Publishing from 1983 to 1985, where he was in charge of implementing
            marketing and management systems, developing and supervising management
            training
            and conducting live seminars worldwide for many Fortune 500 companies.
            Over the
            past 30 years, Mr. Eilers management and computer sales programs have
            been
            utilized by major real estate entities, banks, savings and loans, insurance
            companies, sales and research organizations and publishing companies
            worldwide.
            Mr. Eilers is a frequent author, having written, and published through
            Crescent
            Publishing, Sydney Cambric Publishing and the Disney Corporation-Hyperion
            Publishing, 12 books concentrated in the real estate, business management
            and
            personal development fields. Some of the titles Mr. Eilers has written
            include:
            How to Sell Your Home Fast (Disney/Hyperion), How To Buy the Home You
            Want
            (Disney/Hyperion), The Title and Document Handbook (Sydney Cambric),
            Mortgage
            Lending Handbook (Sydney Cambric), Mastering Peak Performance (EMR Publishing),
            Real Estate Calculator Handbook (Sydney Cambric). Mr. Eilers earned his
            AA in
            the Administration of Justice from Sacramento City College in 1971 and
            from 1970
            to 1985 completed extensive course work at California State College,
            Sacramento,
            Yuba College, and Lincoln School of Law.
  **Virgil
            Baker, CFO and Director**
  Mr.
            Baker
            has served as CFO of ETLS since 2002 and has served as a director since
            2003.
            From 1996 to 2000, Mr. Baker, along with Terry Eilers, devoted all of
            his time
            to the development of online training and the prototype software for
            Presenta
            ProTM. In 2000, Mr. Baker, along with Terry Eilers, formed eTotalSource.com,
            Inc.
            and became the CFO. From 1993 to 1996, Mr. Baker was the CFO for AGRICO,
            a large
            agriculture corporation, where he designed and integrated the network
            programs
            for the accounting, cash flow and inventory systems on a nationwide basis.
            Mr.
            Baker earned a BA in Accounting from California State University in Chico
            in
            1992.
  18
 **Michael
            Sullinger, COO and Director**
  Mr.
            Sullinger has served as COO and a director of ETLS since 2003. Mr. Sullinger’s
            background is in development and management of partnerships and joint
            ventures.
            Since 1993, Mr. Sullinger has practiced law in Yuba City, California.
            Mr.
            Sullinger has served on the board of director of numerous government,
            business
            and philanthropic organizations. Mr. Sullinger earned his BA in Business
            from
            San Francisco State University in 1977, and earned his JD from California
            Northern School of Law in 1993.
  **J.
            Cody Morrow, Director**
  Mr.
            Morrow has served as a director of ETLS since 2003. Mr. Morrow is currently
            President of Morrow Marketing International, a position he has held since
            1995.
            Mr. Morrow has many years experience in opening foreign markets to new
            businesses. From 1989 to 1993, Mr. Morrow was President of Monarch Development
            Corporation, a Southern California-based real estate development company.
  **A.
            Richard Barber, Director**
  Mr.
            Barber has served as a director of ETLS since 2003. Since 1983, Mr. Barber
            has
            served as senior partner of A. Richard Barber & Associates, a literary
            agency and consultant to numerous major publishing companies. From 1969
            to 1983,
            Mr. Barber was the Director of Development for Network Enterprises, Inc.,
            where
            he supervised the creations and writing of television and film properties.
            Mr.
            Barber was a Director and Senior Editor of Public Relations for Viking
            Penguin,
            Inc. From 1971 to 1989, Mr. Barber was a lecturer in publishing at New
            York,
            Harvard and Radcliff Universities. Mr. Barber earned an M.A. and PhD
            from
            Columbia University in 1962-1963.
  ***Family
            Relationships.***
  To
            our
            knowledge, there are no family relationships between or among the directors
            and
            executive officers.
  ***Legal
            Proceedings.***
  None
            of
            the Company’s directors have been involved in legal proceedings.
  ***Committees;*** **Audit
            Committee Financial Expert.**
  Currently,
            ETLS does not have an executive, audit or any standing committees of
            the Board.
            The Company does not have an audit committee, nor an audit committee
            financial
            expert.
  ***Code
            Of Ethics***
  On
            November 16, 2004, ETLS’ Board adopted a written Code of Ethics designed to
            deter wrongdoing and promote honest and ethical conduct, full, fair and
            accurate
            disclosure, compliance with laws, prompt internal reporting and accountability
            to adherence to the Code of Ethics. This Code of Ethics was filed as
            an exhibit
            to the Company’s the Registration Statement on Form SB-2 filed on April 21, 2005
            (File No. 333-124220).
   ***Section
            16(A) Beneficial Ownership Reporting Compliance.***
  Section
            16(a) of the Exchange Act and the rules promulgated thereunder require
            ETLS’
officers and directors, and persons who beneficially own more than 10%
            of a
            registered class of ETLS’ equity securities, to file reports of ownership and
            changes in ownership with the Commission and to furnish the Company with
            copies
            thereof. Based on its reviews of the copies of the Section 16(a) forms
            received
            by it, or written representations from certain reporting persons, ETLS
            believes
            that, during the last fiscal year, all Section 16(a) filing requirements
            applicable to its officers, directors and greater than 10% beneficial
            owners
            were complied with and timely filed.
  19
 **Item
            10.**  **Executive
            Compensation.**
  The
            Company accrued or paid compensation to the executive officers as a group
            for
            services rendered to the Company in all capacities during the 2005 fiscal
            year
            as shown in the following table. No cash bonuses were or are to be paid
            to such
            persons for services rendered in the fiscal year ended December 31, 2005.
  **Annual
                      Compensation**
                  
                  **Awards****Name
                      and Principal Position(s)**
                  
                  **Year**
                  
                  **Salary**
                    **($)**
                  
                  **Bonus**
                    **($)**
                  
                  **Other
                      Annual Compensation**
                    **($)**
                  
                  **Restricted**
                    **Stock**
                    **Award(s)**
                    **($)**
                  
                  **Securities
                      Underlying Options/**
                    **SARS**
                    **(#s)**
                  
                  **All
                      Other Compensation**
                    **($)**Terry
                      Eilers, President, CEO
                  
                  
                  2003
                  
                  $
                  79,000
                  
                  
                  0
                  
                  
                  0
                  
                  0
                  
                  0
                  
                  
                  02004
                  
                  
                  0
                  
                  
                  0
                  
                  
                  0
                  
                  0
                  
                  0
                  
                  $
                  200,0002005
                  
                  $
                  25,000
                  
                  
                  0
                  
                  
                  0
                  
                  0
                  
                  0
                  
                  
                  0Michael
                      Sullinger, Secretary,
                    COO,
                      Legal Counsel
                  
                  
                  2003
                  
                  
                  0
                  
                  
                  0
                  
                  
                  0
                  
                  0
                  
                  0
                  
                  $
                  200,0002004
                  
                  $
                  46,000
                  
                  
                  0
                  
                  
                  0
                  
                  $20,000
                  
                  0
                  
                  
                  02005
                  
                  $
                  85,000
                  
                  
                  0
                  
                  
                  0
                  
                  0
                  
                  0
                  
                  
                  0Virgil
                      Banker, CFO
                  
                  
                  2003
                  
                  $
                  76,900
                  
                  
                  0
                  
                  
                  0
                  
                  0
                  
                  0
                  
                  
                  02004
                  
                  $
                  96,000
                  
                  
                  0
                  
                  
                  0
                  
                  $20,000
                  
                  0
                  
                  
                  02005
                  
                  $
                  30,000
                  
                  
                  0
                  
                  
                  0
                  
                  0
                  
                  0
                  
                  
                  0
 
 There
            are
            no compensatory plans or arrangements, with respect to any executive
            officer of
            the Company, which result or will result from the resignation, retirement
            or any
            other termination of such individual's employment with the Company or
            from a
            change in control of the Company or a change in the individual's
            responsibilities following a change in control.
   ***Director
            Compensation.***
  Except
            as
            noted below, directors received no cash compensation for their service
            to the
            Company as directors for the fiscal year ended December 31, 2005, but
            can be
            reimbursed for expenses actually incurred in connection with attending
            meetings
            of the Board.
  ***Employment
            Contracts.***
  Agreements
            were executed with the Chief Executive Officer, Terry Eilers, and the
            Chief
            Financial Officer, Virgil Baker, at the inception of ETLS (i.e., February
            7,
            2000), which expire December 31, 2006. Annual salary is $150,000 and
            $96,000
            respectively, and each accrues an annual non-accountable automobile allowance
            of
            $9,000. The agreements also provide for 10% royalties on license revenues
            of
            ETLS’ Presenta ProTM software and an annual bonus of incentive stock options
            (covering 200,000 shares each). In addition, under the employment agreement
            for
            Mr. Eilers, he is entitled to a 5% referral commission on certain sales.
            Unpaid
            salary and commissions can be paid with warrants to purchase common stock
            at
            $1.00 per share. During 2005 and 2004, CEO compensation expensed pursuant
            to
            these arrangements totaled $159,000 and $159,000, respectively, and CFO
            compensation totaled $93,000 and $105,000, respectively, (exclusive of
            the fair
            value of incentive stock options).
  An
            agreement was executed August 1, 2002 with the Chief Operating Officer,
            Michael
            Sullinger, which expires December 31, 2007. Annual salary is $120,000
            and a
            non-accountable automobile allowance of $9,000. The agreement also provides
            for
            a 10% royalty on the license revenues of ETLS’ Presenta ProTM software and an
            annual bonus of incentive stock options (covering 200,000 shares). Unpaid
            salary
            and commissions can be paid with warrants to purchase common stock at
            $1.00 per
            share. During 2005 and 2004, COO compensation expensed pursuant to these
            arrangements on a half-time basis totaled $69,000 and $69,000, respectively
            (exclusive of the fair value of incentive stock options).
  20
 The
            following table sets forth, for the fiscal year ended December 31, 2005
            certain
            information regarding the options/SARs granted to ETLS’ named executive
            officers.
  **OPTION/SAR
            GRANTS TABLE**
 
 **Name**
                  
                  **No.
                      of Securities Underlying Options/SARs Granted**
                    **(#)**
                  
                  **%
                      Total Options/SARs Granted to Employees in year
                      ended**
                    **December
                      31, 2004**
                    **(%)**
                  
                  **Exercise
                      or Base Price**
                    **($
                      per Share)**
                  
                  **Expiration
                      Date**Terry
                      Eilers
                  
                  
                  200,000
                  
                  
                  *
                  
                  $
                  0.50
                  
                  
                  12/15/2011Terry
                      Eilers
                  
                  
                  100,000
                  
                  
                  *
                  
                  $
                  0.50
                  
                  
                  12/12/2012Virgil
                      Baker
                  
                  
                  200,000
                  
                  
                  *
                  
                  $
                  0.50
                  
                  
                  12/15/2011Virgil
                      Baker
                  
                  
                  100,000
                  
                  
                  *
                  
                  $
                  0.50
                  
                  
                  12/12/2012Michael
                      Sullinger
                  
                  
                  200,000
                  
                  
                  *
                  
                  $
                  0.50
                  
                  
                  12/12/2012Richard
                      Barber
                  
                  
                  25,000
                  
                  
                  *
                  
                  $
                  0.50
                  
                  
                  12/15/2011Richard
                      Barber
                  
                  
                  25,000
                  
                  
                  *
                  
                  $
                  0.50
                  
                  
                  12/15/2012Morrow
                      Revocable Trust (beneficially J. Cody Morrow & Family)
                  
                  
                  200,000
                  
                  
                  *
                  
                  $
                  0.50
                  
                  
                  12/15/2011
 _____________
  *
            Were
            assumed by eTotalSource as part of reorganization
  The
            following table sets forth certain information regarding options exercised
            in
            the fiscal year ended December 31, 2005 by eTotalSource’s named executive
            officers.
  **Aggregated
            Options/SAR Exercises**
 **In
            Last Fiscal Year And**
 **Fiscal
            Year End Options/SAR Values**
 
 **Name**
                  **Shares**
                    **Acquired
                      on**
                    **Exercise
                      (#)**
                  **Value**
                    **Realized
                      ($)**
                  **Number
                      of Securities Underlying Unexercised**
                    **Options/SARs
                      at**
                    **Fiscal
                      Year End (#) Exercisable/ Unexercisable**
                  **Value
                      of Unexercised**
                    **In-the-Money**
                    **Options/SARs
                      at**
                    **Fiscal
                      Year End ® Exercisable/Unexercisable**None
                      for any officer or director
                  0
                  0
                  0
                  0
 
 The
            following table sets forth certain information regarding long-term incentive
            plan awards in the fiscal year ended December 31, 2005 by ETLS’ named executive
            officers.
 
 **Long-Term
            Incentive Plans - Awards in Last Fiscal Year**
 
 **Name**
                  **No.
                      of Shares, units or other rights (#)**
                  **Performance
                      or other period until maturation or payout**
                  **Estimated
                      future payouts under**
                    **non-stock
                      price-based plans****Threshold**
                    **($
                      or #)**
                  **Target**
                    **($
                      or #)**
                  **Maximum**
                    **($
                      or #)**None
                      for any officer or director
                  0
                  0
                  0
                  0
                  0
  **Item
            11. Security Ownership Of Certain Beneficial Owners And
            Management.**
  The
            Company has 46,710,821 shares of common stock issued and outstanding
            as of
            December 31, 2005. There are no shares of preferred stock issued and
            outstanding
            as of December 31, 2005. The table below sets forth certain information
            with
            respect to the common stock beneficially owned by (i) each Director,
            nominee and
            executive officer of the Company; (i) each person who owns beneficially
            more
            than 5% of the common stock; and (iii) all Directors, nominees and executive
            officers as a group.
  21
 **Title
                        of Class**
                    **Name
                        and Address of Beneficial Owner**
                    **Amount
                        of Beneficial Ownership**
                    **Percentage**
                      **of
                        Class (1)**Common
                    Terry
                        Eilers
                    6,372,039
                    13.64%1510
                        Poole BoulevardYuba
                        City, CA 95993Common
                    Virgil
                        Baker
                    1,277,363
                    2.7%1510
                        Poole BoulevardYuba
                        City, CA 95993Common
                    Michael
                        Sullinger
                    468,544
                    1.0%1510
                        Poole BoulevardYuba
                        City, CA 95993Common
                    A.
                        Richard Barber
                    948,352
                    2.0%1510
                        Poole BoulevardYuba
                        City, CA 95993Common
                    Morrow
                        Revocable Trust
                    150,000
                    0.0*%(beneficially
                        J. Cody Morrow & Family)12655
                        Rough & ReadyGrass
                        Valley, CA 95945ALL
                        DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (5 PERSONS NAMED
                        ABOVE)
                    9,216,298
                    19.7%Common
                    Cornell
                        Capital Partners, LP
                    3,366,226
                    7.2%101
                        Hudson Street, Suite 3700Jersey
                        City, NJ 07302Common
                    James
                        Boras
                    3,162,500
                    6.8%3501
                        Autumn Point LaneCarmichael,
                        CA 95608
 _____________
  (1)  Applicable
            percentage of ownership is based on 46,710,821 shares of common stock
            outstanding as of December 31, 2005 together with securities exercisable
            or
            convertible into shares of common stock within 60 days of December 31,
            2005 for
            each stockholder. Beneficial ownership is determined in accordance with
            the
            rules of the Commission and generally includes voting or investment power
            with
            respect to securities. Shares of common stock subject to securities exercisable
            or convertible into shares of common stock that are currently exercisable
            or
            exercisable within 60 days of December 31, 2005 are deemed to be
            beneficially owned by the person holding such options for the purpose
            of
            computing the percentage of ownership of such person, but are not treated
            as
            outstanding for the purpose of computing the percentage ownership of
            any other
            person.
  (2)  Unless
            otherwise indicated, the persons named in the table have sole voting
            and
            investment power with respect to all shares of common stock shown as
            beneficially owned by them.
  **Item
            12. Certain Relationships And Related Transactions.**
  During
            the last two years, ETLS has not entered into a transaction with a value
            in
            excess of $60,000 with a director, officer or beneficial owner of 5%
            or more of
            the Company’s common stock.
  No
            officer, director, or affiliate of ETLS has or proposes to have any direct
            or
            indirect material interest in any asset proposed to be acquired through
            security
            holdings, contracts, options, or otherwise.
  22
 **Item
            13. Exhibits And Reports On Form 8-K**
  The
            following documents are filed as part of this report:
  ***(a)***  ***Exhibits.***
   **DESIGNATION
                      OF EXHIBIT AS SET FORTH IN ITEM 601 OF REGULATION
                      S-B**
                  
                  **DESCRIPTION**
                  
                  **LOCATION**10.1
                  
                  Securities
                    Purchase Agreement, dated November 2, 2005 by and between eTotalSource,
                    Inc. and Cornell Capital Partners, L.P.
                  
                  Incorporated
                    by reference to the Current Report on Form 8-K dated November
                    8, 2005
                    (File No. 000-49797).10.2
                  
                  Investor
                    Registration Rights Agreement, dated October 6, 2004, by and
                    between
                    eTotalSource, Inc. and Cornell Capital Partners, L.P.
                  
                  Incorporated
                    by reference to the Current Report on Form 8-K dated November
                    8, 2005
                    (File No. 000-49797).10.3
                  
                  Secured
                      Convertible Debenture
                  
                  Incorporated
                    by reference to the Current Report on Form 8-K dated November
                    8, 2005
                    (File No. 000-49797).10.4
                  
                  Amended
                    and Restated Security Agreement, dated November 2, 2005, by and
                    between
                    eTotalSource, Inc. and Cornell Capital Partners, L.P.
                  
                  Incorporated
                    by reference to the Current Report on Form 8-K dated November
                    8, 2005
                    (File No. 000-49797).10.5
                  
                  Warrant
                    issued to Cornell Capital Partners, L.P.
                  
                  Incorporated
                    by reference to the Current Report on Form 8-K dated November
                    8, 2005
                    (File No. 000-49797).10.6
                  
                  Escrow
                    Agreement (SEDA), dated November 2, 2005, by and among eTotalSource,
                    Inc.,
                    Cornell Capital Partners, L.P., and David Gonzalez, Esq.
                  
                  Incorporated
                    by reference to the Current Report on Form 8-K dated November
                    8, 2005
                    (File No. 000-49797).10.7
                  
                  Irrevocable
                    Transfer Agent Instructions, by and among eTotalSource, Inc.,
                    Cornell
                    Capital Partners, L.P., and Executive Registrar & Transfer,
                    Inc.
                  
                  Incorporated
                    by reference to the Current Report on Form 8-K dated November
                    8, 2005
                    (File No. 000-49797).
   23
   **DESIGNATION
                      OF EXHIBIT AS SET FORTH IN ITEM 601 OF REGULATION
                      S-B**
                  
                  **DESCRIPTION**
                  
                  **LOCATION**10.8
                  
                  Termination
                    Agreement, dated November 2, 2005, by and among eTotalSource,
                    Inc., and
                    Cornell Capital Partners, L.P.
                  
                  Incorporated
                    by reference to the Current Report on Form 8-K dated November
                    8, 2005
                    (File No. 000-49797).14.1
                  
                  Code
                    of Ethics
                  
                  Incorporated
                    by reference to the Registration Statement on Form SB-2 filed
                    on April 21,
                    2005 (File No. 333-124220).31.1
                  
                  Section
                    302 Certification of Terry L. Eilers
                  
                  Provided
                    Herewith31.2
                  
                  Section
                    302 Certification of Virgil D. Baker
                  
                  Provided
                    Herewith32.1
                  
                  Section
                    906 Certification of Terry L. Eilers
                  
                  Provided
                    Herewith32.2
                  
                  Section
                    906 Certification of Virgil D. Baker
                  
                  Provided
                    Herewith
 
 
 ***(b)***  ***Reports
            on Form 8-K***
  On
            November 4, 2005, we filed a Current Report on Form 8-K disclosing the
            entry
            into a Securities Purchase Agreement, dated November 2, 2005, pursuant
            to which
            we issued to Cornell secured convertible debentures in the principal
            amount of
            $1,000,000, and the termination of the Securities Purchase Agreement
            and related
            documents, dated August 24, 2005, and the Securities Purchase Agreement
            and
            related documents, dated October 4, 2004.
 
 **Item
            14. Principal Accountant Fees And Services**
  Gordon,
            Hughes & Banks, LLP (“ GHB ”),
            an
            independent registered public accounting firm, is the Company's principal
            auditing accounting firm.
  GHB
            billed the Company $30,610 for the following professional services: audit
            of the
            annual financial statement of the Company for the fiscal year ended December
            31,
            2005, review of the interim financial statements included in quarterly
            reports
            on Form 10-QSB for the periods ended March 31, 2005, June 30, 2005, and
            September 30, 2005 and review of the Registration Statements filed with
            the SEC.
            GHB billed the Company $18,000 for the 2004 audit.
  The
            Board
            acts as the audit committee and had no pre-approval policies and procedures
            in
            effect for the auditors' engagement for the audit year 2004 and
            2005.
 
 All
            audit
            work was performed by the auditors' full-time employees.
  24
   **SIGNATURES**
  In
            accordance with the requirements of the Exchange Act, as amended, the
            Registrant
            has caused this report to be signed on its behalf by the undersigned,
            thereunto
            duly authorized.
  **ETOTALSOURCE,
                      INC.**March
                      28, 2006
                    By:
                    */s/
                      Terry L. Eilers*Terry
                      L. Eilers, President, Principal Executive Officer, and
                      Director
 March
                      28, 2006
                    By:
                    */s/
                      Virgil D. Baker*Virgil
                      D. Baker, Chief Financial Officer, Principal Accounting and
                      Financial
                      Officer, and Director
  
 In
            accordance with the Exchange Act, this Report has been signed below by
            the
            following persons or on behalf of the Registrant and in the capacities
            on the
            dates indicated.
  March
                      28, 2006
                  By:/s/
                      Terry L. EilersTerry
                      L. Eilers, DirectorMarch
                      28, 2006
                  By:/s/
                      Virgil D. BakerVirgil
                      D. Baker, DirectorMarch
                      28, 2006
                  By:/s/
                      Michael SullingerMichael
                      Sullinger, DirectorMarch
                      28, 2006
                  By:/s/
                      Cody MorrowCody
                      Morrow, DirectorMarch
                      28, 2006
                  By:/s/
                      Richard BarberRichard
                      Barber, Director
 
  25
 **eTotalSource,
                        Inc****Consolidated
                        Financial Statements****Table
                        of Contents**PAGEConsolidated
                        Financial StatementsReport
                        of Independent Registered Public Accounting Firm
                    F-1Balance
                        Sheet
                    F-2Statements
                        of Operations
                    F-3Statement
                        of Stockholders' Equity (Deficit)
                    F-4Statements
                        of Cash Flows
                    F-5Notes
                        to Consolidated Financial Statements
                    F-6
 
 
  F-1
   **REPORT
              OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  
 To
              the
              Board of Directors
 eTotalSource,
              Inc.
 Yuba
              City, California
 
 We
              have
              audited the accompanying consolidated balance sheet of eTotalSource,
              Inc. as of December
              31, 2005 ,
              and the
              related consolidated statements of operations, stockholders’ equity (deficit)
              and cash flows for the years ended December
              31, 2005 and
              2004 .
              These
              financial statements are the responsibility of the Company’s management. Our
              responsibility is to express an opinion on these financial statements
              based on
              our audits.
  We
              conducted our audits in accordance with the standards of the Public
              Company
              Accounting Oversight Board (United States). Those standards require
              that we plan
              and perform the audit to obtain reasonable assurance about whether
              the financial
              statements are free of material misstatement. The Company is not required
              to
              have, nor were we engaged to perform, an audit of its internal control
              over
              financial reporting. Our audits included consideration of internal
              control over
              financial reporting as a basis for designing audit procedures that
              are
              appropriate in the circumstances, but not for the purpose of expressing
              an
              opinion on the effectiveness of the Company’s internal control over financial
              reporting. Accordingly, we express no such opinion. An audit includes
              examining,
              on a test basis, evidence supporting the amounts and disclosures in
              the
              financial statements. An audit also includes assessing the accounting
              principles
              used and significant estimates made by management, as well as evaluating
              the
              overall financial statement presentation. We believe that our audits
              provide a
              reasonable basis for our opinion.
  In
              our
              opinion, the consolidated financial statements referred to above present
              fairly,
              in all material respects, the financial position of eTotalSource, Inc.
              at December
              31, 2005 ,
              and the
              results of its operations and its cash flows for the years ended December
              31, 2005 and
              2004 ,
              in
              conformity with accounting principles generally accepted in the United
              States of
              America.
 
 The
              accompanying financial statements have been presented assuming that
              the Company
              will continue as a going concern, which contemplates the realization
              of assets
              and the satisfaction of liabilities in the normal course of business.
              As
              discussed in Note 1 to the financial statements, the Company has incurred
              significant recurring losses, and as of December
              31, 2005 has a
              substantial liquidity shortage, including default conditions on certain
              notes
              payable and judgments payable to creditors. As a consequence, the Company
              requires significant additional financing to satisfy outstanding obligations
              and
              continue operations. Unless the Company successfully obtains suitable
              significant additional financing, there is substantial doubt about
              the Company’s
              ability to continue as a going concern. Management’s plans in regard to these
              matters are also discussed in Note 1. The financial statements do not
              include
              any adjustments to reflect the possible future effect on the recoverability
              and
              classification of assets or the amounts and classification of liabilities
              that
              may result from the outcome of this uncertainty.
  
 
 Golden,
              Colorado
 March
              7,
              2006
  F-2
  
 **eTotalSource,
                        Inc.****Consolidated
                        Balance Sheet****December
                        31, 2005***Current
                        Assets*Cash
                    
                    $
                    118,958Other
                    
                    
                    1,223*Total
                        Current Assets*
                    
                    
                    120,181***Property
                        and Equipment***Furniture
                        and equipment
                    
                    
                    86,451Less
                        accumulated depreciation
                    
                    
                    (67,641
                    )18,810***Other
                        Assets***Deposits
                    
                    
                    721***Total
                        Assets***
                    
                    $
                    139,712**LIABILITIES
                        AND STOCKHOLDERS' EQUITY (DEFICIT)*****Current
                        Liabilities***Convertible
                        notes payable
                    
                    $
                    250,000Other
                        notes payable
                    
                    
                    772,114Judgments
                        payable
                    
                    
                    204,788Accounts
                        payable and other accrued liabilities (Including $84,158
                        owed to related
                        parties)
                    
                    
                    291,785Accrued
                        compensation payable
                    
                    
                    1,036,103Accrued
                        interest payable
                    
                    
                    265,952Deferred
                        revenue
                    
                    
                    22,500*Total
                        Current Liabilities*
                    
                    
                    2,843,242**Convertible
                        Notes Payable, less current
                        maturities********and $303,452
                        discount**
                    
                    
                    696,548**Total
                        Liabilities**
                    
                    
                    3,539,790**Commitments
                        and Contingencies*****Stockholders'
                        Equity (Deficit)***Common
                        stock; no par value; 300 million shares authorized,46,710,821
                        shares issued and outstanding
                    
                    
                    6,226,906Accumulated
                        (deficit)
                    
                    
                    (9,626,984
                    )*Total
                        Stockholders' Equity (Deficit)*
                    
                    
                    (3,400,078
                    )***Total
                        Liabilities and Stockholders' Equity
                        (Deficit)***
                    
                    $
                    139,712




See
      accompanying notes.


F-3





**eTotalSource,
                Inc.****Condensed
                Consolidated Statements of Operations****December
                31,****2005**
            
            **2004****Revenues**
            
            $
            54,715
            
            $
            209,198**General
                and Administrative Expenses**
            
            
            1,054,727
            
            
            2,390,905**Operating
                Income (Loss)**
            
            
            (1,000,012
            )
            
            (2,181,707
            )**Other
                Income (Expense)**Interest
                expense
            
            
            (285,746
            )
            
            (190,592
            )Gain
                (loss) on sale or retirement of asset
            
            
            (245
            )
            
            (1,845
            )Other
                income (expense), net
            
            
            1,342
            
            
            1,469**Total
                Other Income (Expense)**
            
            
            (284,649
            )
            
            (190,968
            )(Loss)
                before income tax
            
            
            (1,284,661
            )
            
            (2,372,675
            )Income
                tax
            
            
            -
            
            
            -**Net
                (Loss)**
            
            $
            (1,284,661
            )
            $
            (2,372,675
            )**Basic
                and Diluted (Loss) per Share**
            
            $
            (0.03
            )
            $
            (0.06
            )**Weighted
                Average Common Shares Outstanding**
            
            
            46,710,821
            
            
            37,897,170


See
      accompanying notes.


F-4





**eTotalSource,
                Inc.****Consolidated
                Statement of Stockholders' Equity (Deficit)****Common
                Stock**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **(Deficit)**
            
            **Total****December
                31, 2003**
            
            
            
            
            
            **29,549,207**
            
            **$**
            **3,656,884**
            
            **$**
            **(5,969,648**
            **)**
            **$**
            **(2,312,764**
            **)**Issued
                for services or in lieu of interest($.05
                to $.53 per share)
            
            
            
            
            
            13,644,505
            
            
            1,443,505
            
            
            -
            
            
            1,443,505Conversion
                of debt -Convertible
                notes ($.165 to $.20 per share)
            
            
            
            
            
            469,318
            
            
            87,500
            
            
            -
            
            
            87,500Other
                payables ($.075 to $.20 per share)
            
            
            
            
            
            1,766,495
            
            
            320,000
            
            
            -
            
            
            320,000Reorganization
                debt ($.167 to $.176 per share)
            
            
            
            
            
            583,505
            
            
            100,000
            
            
            -
            
            
            100,000Options
                and warrants -Services
                and interest
            
            
            
            
            
            -
            
            
            106,411
            
            
            -
            
            
            106,411Pre-reorganization
                shares issued (*1)
            
            697,791
            
            
            -
            
            
            -
            
            
            -Discounts
                - convertible debentures
            
            
            
            
            
            -
            
            
            70,000
            
            
            -
            
            
            70,000Net
                (loss)
            
            
            
            
            
            -
            
            
            -
            
            
            (2,372,675
            )
            
            (2,372,675
            )**December
                31, 2004**
            
            
            
            
            
            **46,710,821**
            
            
            **5,784,300**
            
            
            **(8,342,323**
            **)**
            
            **(2,558,023**
            **)**Options
                and warrants -Services
                and interest
            
            
            
            
            
            **-**
            
            
            97,685
            
            
            **-**
            
            
            97,685Discounts
                - convertible debentures
            
            
            
            
            
            **-**
            
            
            344,921
            
            
            **-**
            
            
            344,921Net
                (loss)
            
            
            
            
            
            **-**
            
            
            **-**
            
            
            (1,284,661
            )
            
            (1,284,661
            )**December
                31, 2005**
            
            
            
            
            
            **46,710,821**
            
            **$**
            **6,226,906**
            
            **$**
            **(9,626,984**
            **)**
            **$**
            **(3,400,078**
            **)**


See
      accompanying notes.


F-5





**eTotalSource,
                    Inc.****Consolidated
                    Statements of Cash Flows****December
                    31,****2005**
                
                **2004****Cash
                    Flows From (Used in) Operating Activities:**Net
                    (loss)
                
                $
                (1,284,661
                )
                $
                (2,372,675
                )Depreciation
                    and amortization
                
                
                122,314
                
                
                26,938Gain
                    (loss) on sale or retirement of assets
                
                
                245
                
                
                1,745Stock
                    issued for services and in lieu of interest
                
                
                -
                
                
                1,443,505Stock
                    options and warrant expense
                
                
                97,685
                
                
                106,411Impairment
                    of patents and trademarks
                
                
                20,873
                
                
                -Changes
                    in assets and liabilities:Decrease
                    (increase) in accounts receivable
                
                
                -
                
                
                414Decrease
                    (increase) in other current assets
                
                
                74
                
                
                (1,296
                )Decrease
                    (increase) in deposits
                
                
                441
                
                
                196Increase
                    (decrease) in payables, credit cards and accrued
                    liabilities
                
                
                394,138
                
                
                222,604Increase
                    (decrease) in deferred revenue
                
                
                (45,000
                )
                
                (45,000
                )Net
                    Cash (Used in) Operating Activities
                
                
                (693,891
                )
                
                (617,158
                )**Cash
                    Flows From (Used in) Investing Activities:**Net
                    proceeds from sale of fixed assets
                
                
                -
                
                
                1,000Purchase
                    of equipment
                
                
                -
                
                
                (9,077
                )Net
                    Cash (Used in) Investing Activities
                
                
                -
                
                
                (8,077
                )**Cash
                    Flows From (Used in) Financing Activities:**Proceeds
                    from convertible debentures
                
                
                650,000
                
                
                350,000Proceeds
                    from notes payable
                
                
                125,000
                
                
                -Net
                    Cash From Financing Activities
                
                
                775,000
                
                
                350,000Increase
                    (Decrease) in Cash and Cash Equivalents
                
                
                81,109
                
                
                (275,235
                )Cash
                    and Cash Equivalents - Beginning of Period
                
                
                37,849
                
                
                313,084Cash
                    and Cash Equivalents - End of Period
                
                $
                118,958
                
                $
                37,849**Supplemental
                    Disclosures:**Interest
                    paid
                
                $
                78,718
                
                $
                109,535Income
                    taxes paid
                
                
                1,600
                
                
                1,600Non-cash
                    investing and financing transactions:Discount
                    on convertible debentures
                
                
                344,921
                
                
                70,000Conversion
                    of accrued interest payable to principal
                
                
                15,114
                
                
                -Conversion
                    of accounts payable and accrued expenses to equity
                
                
                -
                
                
                427,500Conversion
                    of debt to equity
                
                
                -
                
                
                80,000








See
      accompanying notes.




F-6


**NOTE
      1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




*Description
      of Business*


eTotalSource,
      Inc., (the “Company” - formerly named Premium Enterprises, Inc. (“PMN”), was
      incorporated in Colorado on September 16, 1987. The principal activities of
      the
      Company are developing and publishing proprietary multimedia software technology
      and training media. The Company’s primary customers are corporations,
      governmental organizations and agencies. The Company is based in Yuba City,
      California.





*Reorganization
      in 2002*


On
      December 30, 2002, PMN acquired 91% of the preferred and common stock of
      eTotalSource, Inc. (“eTS” - incorporated in California on February 7, 2000),
      pursuant to an Agreement and Plan of Reorganization effective December 30,
      2002,
      by issuing 15,540,011 shares of PMN common stock to eTS shareholders.
      Immediately after the transaction, the eTS shareholders owned approximately
      88.5% of the Company’s common stock. During 2004, the Company issued 697,791
      shares of previously reserved common stock to acquire the remaining eTS stock
      and 583,505 shares to settle pre-reorganization accounts payable of PMN totaling
      $100,000.





*Going
      Concern Uncertainty*


The
      accompanying financial statements have been presented assuming that the Company
      will continue as a going concern, which contemplates the realization of assets
      and the satisfaction of liabilities in the normal course of business. The
      Company has incurred significant operating losses since inception and as of
      December 31, 2005 had a net working capital deficit of approximately $2,723,000,
      a stockholders’ deficit of $3,400,078, notes payable totaling $707,000 were in
      default with related accrued interest in arrears of $97,740 and judgments
      against the Company of $204,788 had been adjudicated. Management’s plans to
      address these matters include the issuance of debt and equity securities and
      increasing revenue. Unless the Company successfully obtains suitable significant
      additional financing and attains profitable operations, there is substantial
      doubt about the Company’s ability to continue as a going concern. The financial
      statements do not include any adjustments to reflect the possible future effect
      on the recoverability and classification of assets or the amounts and
      classification of liabilities that may result from the outcome of this
      uncertainty.





*Use
      of Estimates*


The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect certain reported amounts and disclosures. Accordingly, actual results
      could differ from those estimates. **




F-7
 eTotalSource,
            Inc.
 Notes
            to Consolidated Financial Statements


*Principles
      of Consolidation*


The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiary after the elimination of inter-company balances and
      transactions.





*Revenue
      Recognition*


The
      Company recognizes revenue in accordance with Statement of Position No.97-2
      “Software Revenue Recognition” issued by the Accounting Standards Executive
      Committee of the AICPA. Revenues are recorded net of an allowance for estimated
      returns and collectibility at the time of billing.





Product
      revenue is derived primarily from the sale of self-produced training multimedia
      and related off-the-shelf software products. The Company recognizes revenue
      from
      sales of these products at the time of shipment to customers. Service revenue
      is
      primarily derived from production of videos for others and is recognized upon
      customer acceptance.





Deferred
      revenue includes payments received for product licenses covering future periods
      and advances on service contracts that have not yet been fulfilled.





*Software
      and Development Costs*


The
      Company capitalizes purchased software that is ready for use and development
      costs of marketable software incurred from the time of technological feasibility
      until the software is ready for use. Research and development costs and other
      computer software maintenance costs are expensed as incurred. As of December
      31,
      2005, the Company has not capitalized any software development
      costs.





*Furniture
      and Equipment*


Furniture
      and equipment are recorded at cost. Maintenance and repairs are charged to
      operations when incurred. When property and equipment are sold or otherwise
      disposed of, the asset account and related accumulated depreciation account
      are
      relieved, and any gain or loss is included in operations. The cost of property
      is depreciated using the straight-line method over estimated useful lives
      ranging from five to seven years. Depreciation charged to operations was $12,281
      in 2005 and $17,435 in 2004.





F-8
 eTotalSource,
            Inc.
 Notes
            to Consolidated Financial Statements


*Patents
      and Trademarks*


Patents
      and trademarks represent the legal and application costs of multimedia
      technology used in operations and are amortized using the straight-line method
      over an estimated useful life of ten years. A loss on impairment in the amount
      of $20,873 was recognized in 2005 as the Company fully impaired the unamortized
      cost of its patent applications and trademarks.





*Comprehensive
      Income*


For
      the
      periods presented, the Company had no items of comprehensive income or loss,
      and
      accordingly, comprehensive income is the same as the net loss
      reported.





*Segment
      Reporting*


In
      June
      1997, Statement of Financial Accounting Standards (“SFAS”) 131, "Disclosure
      about Segments of an Enterprise and Related Information," was issued. Operating
      segments, as defined in the pronouncement, are components of an enterprise
      about
      which separate financial information is available and that are evaluated
      regularly by management in deciding how to allocate resources and assess
      performance. As of December 31, 2005 and 2004, the Company had one operating
      segment, publishing proprietary multimedia software technology and training
      media.





*Income
      Taxes*


Deferred
      income taxes are based on temporary differences between the financial statement
      and tax basis of assets and liabilities existing at each balance sheet date
      using enacted tax rates for years during which taxes are expected to be paid
      or
      recovered.




*Cash
      Equivalents*


For
      the
      purpose of reporting cash flows, the Company considers as cash equivalents
      all
      highly liquid investments with a maturity of three months or less at the time
      of
      purchase.





*Asset
      Impairment*


If
      facts
      and circumstances suggest that a long-lived asset may be impaired, the carrying
      value is reviewed. If this review indicates that the value of the asset will
      not
      be recoverable, as determined based on projected undiscounted cash flows related
      to the asset over its remaining life, then the carrying value of the asset
      is
      reduced to its estimated fair value.





F-9
 eTotalSource,
          Inc. Notes
            to Consolidated Financial Statements


*Earnings
      (Loss) Per Share*


Basic
      earnings per share are computed using the weighted average number of shares
      outstanding during each period. Diluted earnings per share is computed on the
      basis of the average number of common shares outstanding and the dilutive effect
      of convertible notes payable, stock options and warrants using the “treasury
      stock” method. Basic and diluted earnings per share are the same during the
      periods presented since the Company had net losses and the inclusion of stock
      options and warrants would be anti-dilutive.





*Stock-Based
      Compensation*


The
      Company accounts for stock-based compensation using Accounting Principles
      Board’s Opinion No. 25 (“APB 25”). Under APB 25, compensation expense is
      recognized for stock options with an exercise price that is less than the market
      price on the grant date of the option. For stock options with exercise prices
      at
      or above the market value of the stock on the grant date, the Company has
      adopted the Financial Accounting Standards Board (“FASB”) disclosure-only
      provisions of Statement of Accounting Standards No. 123 *Accounting
      for Stock-Based Compensation* (“SFAS
      123”). The Company has adopted the disclosure-only provisions of SFAS 123 for
      stock options granted to the employees and directors. There were no options
      granted in 2005 or 2004.




*Beneficial
      Conversion Feature of Debt*


In
      accordance with Emerging Issues Task Force No. 98-5, Accounting for Convertible
      Securities with Beneficial Conversion Features or Contingently Adjustable
      Conversion Ratios, and No. 00-27, Application of Issue No. 98-5 to Certain
      Convertible Instruments, the Company recognizes the value of conversion rights
      attached to convertible debt. These rights give the debt holder the ability
      to
      convert his debt into common stock at a price per share that is less than the
      trading price to the public on the day the loan is made to the Company. The
      beneficial value is calculated based on the market price of the stock at the
      commitment date in excess of the conversion rate of the debt and related
      accruing interest and is recorded as a discount to the related debt and an
      addition to additional paid in capital. The discount is amortized as interest
      expense over the remaining outstanding period of related debt.





*Recent
      Accounting Pronouncements*


In
      November 2004, the Financial Accounting Standards Board(“FASB”) issued Statement
      No. 151, *Inventory
      Costs an amendment of ARB No. 43, Chapter* 4,
      which
      revised ARB No.43, relating to inventory costs. This revision is to clarify
      the
      accounting for abnormal amounts of idle facility expense, freight, handling
      costs and wasted material (spoilage). This Statement requires that these items
      be recognized as a current period charge regardless of whether they meet the
      criterion specified in ARB 43. In addition, this Statement requires the
      allocation of fixed production overheads to the costs of conversion be based
      on
      normal capacity of the production facilities. This Statement is effective for
      financial statements for fiscal years beginning after June 15, 2005. Earlier
      application is permitted for inventory costs incurred during fiscal years
      beginning after the date this Statement is issued. Management believes this
      Statement will have no impact on the financial statements of the Company once
      adopted.





F-10
 **eTotalSource,
          Inc.** Notes
            to Consolidated Financial Statements


In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      123 (revised 2005), *Share-Based
      Payment* ,
      (“SFAS
      No. 123(R)”) which amends FASB Statement Nos. 123 and 95. SFAS No. 123(R)
      requires all companies to measure compensation cost for all share-based
      payments, including employee stock options, at fair value and is effective
      for
      public companies that file as small business issuers for interim or annual
      periods beginning after December 15, 2005. The Company will adopt this standard
      effective January 1, 2006 and will elect the modified prospective application
      transition method. Under the modified prospective application transition method,
      awards that are granted, modified, repurchased, or cancelled after the date
      of
      adoption should be measured and accounted for in accordance with the provisions
      of SFAS No. 123(R). Awards granted prior to the effective date should continue
      to be accounted for in accordance with the provisions of SFAS No. 123 with
      the
      exception that compensation expense related to unvested options must be
      recognized in the income statement based on the fair value of the options on
      the
      date of grant. SFAS No. 123(R) also requires the benefits of tax deductions
      in
      excess of recognized compensation cost to be reported as a financing cash flow,
      rather than as an operating cash flow as required under current literature.
      This
      requirement will reduce net operating cash flows and increase net financing
      cash
      flows in periods after adoption. In the event any options are issued in 2006,
      the Company expects adoption of the standard to reduce fiscal 2006 net income.





In
      December 2004, the FASB issued Statement No. 153, *Exchanges
      of Nonmonetary Assets* *an
      amendment of APB Opinion No. 29* .
       This Statement addresses the measurement of exchanges of nonmonetary
      assets.  The guidance in APB Opinion No. 29, *Accounting
      for Nonmonetary Transactions* ,
      is
      based on the principle that exchanges of nonmonetary assets should be measured
      based on the fair value of the assets exchanged.  The guidance in that
      Opinion, however, included certain exceptions to that principle.  This
      Statement amends Opinion No. 29 to eliminate the exception for nonmonetary
      exchanges of similar productive assets and replaces it with a general exception
      for exchanges of nonmonetary assets that do not have commercial substance. 
A nonmonetary exchange has commercial substance if the future cash flows of
      the
      entity are expected to change significantly as a result of the exchange.
 This Statement is effective for financial statements for fiscal years
      beginning after June 15, 2005. Earlier application is permitted for nonmonetary
      asset exchanges incurred during fiscal years beginning after the date of this
      Statement is issued.  Management believes this Statement will have no
      impact on the financial statements of the Company once adopted.





F-11
 **eTotalSource,
          Inc.** Notes
            to Consolidated Financial Statements


In
      March
      2005, the FASB issued Interpretation No. 47 (“FIN 47”), *Accounting
      for Conditional Asset Retirement Obligations* ,
      which
      clarifies that an entity is required to recognize a liability for the fair
      value
      of a conditional asset retirement obligation when incurred if the liability’s
      fair value can be reasonably estimated. A conditional asset retirement
      obligation is defined as a legal obligation to perform asset retirement activity
      in which the timing and (or) method of settlement are conditional on a future
      event that may or may not be within the control of the entity. FIN 47 is
      effective no later than the end of fiscal years ending after December 15, 2005.
      Adoption of FIN 47 by the Company will not result in a change to current
      practice.





In
      May
      2005, the FASB issued Statement of Financial Accounting Standards No. 154, *Accounting
      Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB
      Statement No. 3* ,
      which
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This Statement requires retrospective application to
      prior
      periods’ financial statements of changes in accounting principle, unless it is
      impracticable to determine the period-specific effects or the cumulative effect
      of change. When it is impracticable to determine the period-specific effects
      of
      an accounting change on one or more individual prior periods presented, this
      Statement requires that the new accounting principle be applied to the balances
      of assets and liabilities as of the beginning of the earliest period for which
      retrospective application is practicable and that a corresponding adjustment
      be
      made to the opening balance of retained earnings for that period rather than
      being reported in the income statement. The Company adopted the provisions
      of
      this effective January 1, 2006.








**NOTE
      2. NOTES PAYABLE**





Note
                payable to a trust; interest at 15% payable monthly through December
                18,
                2003 when principal and unpaid interest are due. The note is in
                default.
            
            $
            172,000Note
                payable to a trust; interest at 10% and principal due January 17,
                2003,
                extended to December 17, 2003 (with interest increased to 18% and
                due
                monthly beginning February 17, 2003). The note is in default.
            
            
            110,000Note
                payable to a trust; interest at 15% payable monthly through December
                18,
                2003 when principal and unpaid interest are due. The note is in
                default.
            
            
            40,000Promissory
                notes payable; interest at 6% payable monthly, due in 2001, unsecured.
                Principal and accrued interest ($36,701 at December 31, 2005) are
                convertible to common stock at $.50 per share. Warrants also issued
                to two
                note holders to purchase 37,500 shares of common stock for five years
                at
                $.50 per share. The notes are in default.
            
            
            150,000


F-12
 **eTotalSource,
            Inc.** Notes
              to Consolidated Financial Statements


Promissory
                note payable; principal and accrued interest at 8% payable in 2002,
                extended to May 15, 2003, unsecured. Principal and accrued interest
                ($18,868 at December 31, 2005) convertible to Company common stock
                at $.50
                per share. Warrants also issued to the note holder to purchase 55,248
                shares of common stock for five years at $.50 per share. The note
                is in
                default.
            
            
            100,000Note
                payable to an unrelated trust; stated interest rate of 10% due June
                2003,
                extended to June 2004. As consideration for forbearance, the note
                holder
                received 50,000 shares of common stock in 2004, valued at $.525 per
                share
                ($26,250). In October 2004, the note was extended to April 2005.
                In
                December 2005, the note was extended to June 2006. Accrued unpaid
                interest
                of $2,483 was added to the principal in 2005. *
            
            
            52,483Note
                payable to an unrelated trust; principal and interest at 10% due
                monthly.
                This note is a revolving credit obligation and eTotalSource can repay
                and
                borrow up to the amount of the note. In October 2004, the note was
                extended to April 2005. In December 2005, the note was extended to
                June
                2006. Accrued unpaid interest of $12,631 was added to the principal
                in
                2005. *
            
            
            262,631Convertible
                debentures payable to an unrelated company, principal and interest
                at 12%,
                payable November 1, 2008, secured by 225,000,000 shares of common
                stock
                and 7 million warrants. Principal and accrued interest ($19,667 at
                December 31, 2005) convertible to common stock ata
                conversion price equal to the lower of (i) $.024 price per share
                of common
                stock or (ii) 80% of the lowest closing bid price of our common stock,
                as
                quoted by Bloomberg, L.P., for the five trading days immediately
                preceding
                the conversion date. At the due date the Company has the option to
                repay
                the debt or issue common stock. In connection with this transaction,
                the
                Company recorded a discount of $320,734, for the relative value of
                the
                warrants; as of December 31, 2005, the debt is stated net of the
                unamortized discount of $303,452. On February 28, 2006, the holder
                converted $10,000 into 2,083,333 shares of common stock.
            
            
            696,548Note
                payable to a director; principal and interest at 9.2%, due December
                4,
                2002, extended to May 1, 2003, unsecured. The note is in
                default.
            
            
            10,000Note
                payable to an unrelated company; principal and interest at 10%, due
                August
                1, 2005. The note is in default.
            
            
            25,000Note
                payable to an unrelated company; principal and interest at 12%, due
                August
                1, 2005. The note is in default.
            
            
            100,000Total
            
            
            1,718,662Less:
                current maturities
            
            
            1,022,114Long-term
                maturities
            
            $
            696,548*
                In connection with the extension of the maturity date of these notes
                to
                June 2006, the Company is obligated to issue 2,000,000 shares of
                its
                common stock to the note-holder of both notes. The Company has accrued
                this liability based on the fair market value of its common stock
                as of
                the date of the extension agreement and recorded the related interest
                expense in the accompanying financial statements.





F-13
 **eTotalSource,
          Inc.** Notes
            to Consolidated Financial Statements


**NOTE
      3. INCOME TAXES**


The
      provision (benefit) for income taxes consists of the following:


2005
              
              2004Current
                  expense (benefit)
              
              $
              (376,000
              )
              $
              (225,000
              )Deferred
                  expense
              
              
              -
              
              
              -Valuation
                  allowance
              
              
              376,000
              
              
              225,000Income
                  tax expense (benefit)
              
              $
              -
              
              $
              -







A
      reconciliation of income tax computed at the U.S. statutory rate to the
      effective income tax rate is as follows:




2005
            
            2004Income
                tax (benefit) expense at statutory rate
            
            $
            (437,000
            )
            $
            (807,000
            )Permanent
                tax differences:Expenses
                paid with options
            
            
            33,000
            
            
            473,000Accrued
                officers compensation
            
            
            76,000
            
            
            150,000Deferred
                revenue
            
            
            (15,000
            )
            
            (15,000
            )State
                taxes
            
            
            (33,000
            )
            
            (26,000
            )Valuation
                allowance
            
            
            376,000
            
            
            225,000Income
                tax expense
            
            $
            -
            
            $
            -





The
      components of deferred income taxes at December 31, 2005 are as
      follows:




Net
                operating loss carryovers
            
            $
            1,789,000Other
            
            
            61,000Total
                deferred tax asset
            
            
            1,850,000Valuation
                allowance
            
            
            (1,850,000
            )Total
                net deferred tax
            
            $
            -





SFAS
      109
      requires that all deferred tax balances be determined using the tax rates and
      limitations expected to be in effect when the taxes will actually be paid or
      recovered. Consequently, the income tax provision will increase or decrease
      in
      the period in which a change in tax rate or limitation is enacted. As of
      December 31, 2005, the Company had total deferred tax assets of $1,850,000.
      The
      Company recorded a valuation allowance in the full amount of $1,850,000 at
      December 31, 2005, against the amount by which deferred tax assets exceed
      deferred tax liabilities. The valuation reserve at December 31, 2005 has been
      provided due to the uncertainty of the amount of future taxable income. The
      Company provides a valuation allowance in the full amount of its deferred tax
      assets because under the criteria of SFAS No. 109, the Company does not have
      a
      basis to conclude that it is more likely than not that it will realize the
      deferred tax assets.




F-14
 **eTotalSource,
          Inc.** Notes
            to Consolidated Financial Statements


The
      Company has accumulated net operating loss carry-forwards of approximately
      $5,261,000. To the extent not used, the net operating loss carry-forwards expire
      in varying amounts beginning in 2020. As of December 31, 2005, all identified
      deferred tax assets are reduced by a valuation allowance. Therefore, any
      additional operating loss carry-forwards not recognized would not result in
      a
      benefit in the provision for income taxes due to the uncertainty of future
      realization of those additional loss carry-forwards.








**NOTE
      4. STOCKHOLDERS’ EQUITY**





*Convertible
      Notes Payable*


During
      2004, notes payable and accrued interest totaling $87,500 were converted to
      469,318 shares of common stock ($.165 - $.20 per share) as follows:





Notes
                Payable
            
            Accrued
                Interest
            
            Total
            
            Conversion
                Price$
            50,000
            
            $
            7,500
            
            $
            57,500
            
            $
            .2030,000
            
            
            -
            
            
            30,000
            
            
            .165





In
      addition, during 2004, accounts payable and accrued liabilities totaling
      $420,000 were converted into 2,350,000 shares of common stock at conversion
      prices of $.075 to $.20 per share.





*Stock
      Issued for Services and Interest*


During
      2004, the Company issued 13,369,505 shares of common stock for services,
      expensed at the fair value of the stock based on contemporaneous stock market
      quotes at $.05 - $.17 per share (a total of $1,391,105).





F-15
 **eTotalSource,
          Inc.** Notes
            to Consolidated Financial Statements


During
      2004, the Company issued 275,000 shares of common stock to note holders as
      compensation for additional interest. The Company has expensed the fair value
      of
      the stock based on contemporaneous stock market quotes at $.09 - $.53 per share
      (a total of $52,400).





During
      2004, the Company issued 697,791 shares of common stock previously reserved
      in
      connection with the December 30, 2002 reorganization.





*Stock
      Options and Warrants Issued for Services and in Lieu of
      Interest*


In
      2005
      and 2004, the Company recorded expenses for options and warrants to purchase
      common stock issued to consultants and lenders totaling $97,685 and **** $106,411,
      respectively. Valuations of the transactions are based on the estimated fair
      value of the options or warrants on the grant date using the Black-Scholes
      pricing model. Consulting expense is recognized over the term of the option
      or
      warrant period. Interest expense is recognized over the related term of the
      related obligation on a straight-line basis.





**NOTE
      5. STOCK OPTIONS AND WARRANTS**




*Stock
      Option Plan*




Effective
      December 3, 2001, the Company adopted the *eTotalSource,
      Inc. 2001 Stock Option Plan* (the
“Plan”). A total of 1.8 million shares of Company common stock were reserved for
      exercise of stock options under the Plan. The Plan, administered by the
      Company’s board of directors, provides for the grant of incentive stock options
      to employees and directors at fair market value and non-statutory stock options
      to consultants and others. No option can be for a term of more than ten years
      from the date of grant. The option price is at the discretion of the board;
      provided however, for incentive stock options it shall not be less than fair
      market value on the date of grant (110% for certain options becoming exercisable
      that exceed $100,000), and for non-statutory options not less than 85% of fair
      market value on the date of grant. All options issued by the Company to date
      have exercise prices which were equal to the estimated fair market value of
      the
      Company’s common stock at the date of grant.


A
      summary
      of stock options outstanding and exercisable as of December 31, 2005
      follows:




**Options
                Outstanding**
            **Options
                Outstanding**
            **Options
                Exercisable**
            **Options
                Exercisable****Range
                of**
              **Exercise**
              **Prices**
            **Number**
              **Outstanding**
            **Weighted**
              **Average**
              **Remaining
                Life**
            **Number**
              **Exercisable**
            **Weighted
                Average**
              **Exercise
                Price**$0.50
            1,262,500
            6.4
                years
            1,262,500
            $0.50




Information
      concerning all stock option activity is summarized in the following
      table:




**Option
                Shares**
            
            **Option
                Prices Per Share**Outstanding,
                December 31, 2002
            
            
            1,560,700
            
            $
            0.50Granted
            
            
            --
            
            
            --Forfeited
            
            
            (48,200
            )
            $
            0.50Exercised
            
            
            --
            
            
            --Outstanding,
                December 31, 2003
            
            
            1,512,500
            
            $
            0.50Granted
            
            
            --
            
            
            --Forfeited
            
            
            (250,000
            )
            $
            0.50Exercised
            
            
            --
            
            
            --Outstanding,
                December 31, 2004
            
            
            1,262,500
            
            $
            0.50Granted
            
            
            --
            
            
            --Forfeited
            
            
            --
            
            
            --Exercised
            
            
            --
            
            
            --Outstanding,
                December 31, 2005
            
            
            1,262,500
            
            $
            0.50





There
      were no options granted under the Plan in 2004 or 2005.





*Stock
      Options and Warrants Issued to Others*





eTotalSource
      also has outstanding options and warrants that it has issued to consultants
      and
      lenders to purchase a total of 7,982,500 shares of common stock of eTotalSource
      at prices ranging from $.001 to $.50 per share: 40,000 expire in 2006, 817,500
      expire in 2007, 7,000,000 expire in 2010 and 125,000 expire in 2011. As of
      December 31, 2005, the weighted average expected life of all such compensatory
      options and warrants was 4.4 years.







**NOTE
      6. FAIR VALUE OF FINANCIAL INSTRUMENTS**




The
      carrying amounts for cash, accounts payable and accrued liabilities approximate
      fair value because of their short-term maturities. The fair value of notes
      and
      judgments payable approximates fair value because of the market rate of interest
      on the debt.







**NOTE
      7. FINANCIAL INSTRUMENTS AND CONCENTRATIONS**







*Financial
      Instruments*


Financial
      instruments, which potentially subject the Company to significant concentrations
      of credit risk, consist principally of cash.





F-16
 **eTotalSource,
          Inc.** Notes
            to Consolidated Financial Statements


The
      Company maintains its cash deposits in one bank. Its bank accounts are
      guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000. The
      amount on deposit in the financial institution did not exceed the $100,000
      FDIC
      insured limit at December 31, 2005. Management believes that the financial
      institution is financially sound.








*Significant
      Customers*


Revenue
      from customers in excess of ten-percent of total Company revenue
      follows:




**Customer**
            
            **2005**
            
            **2004**A
            
            
            0
            %
            
            46
            %B
            
            
            0
            %
            
            11
            %




**NOTE
      8. COMMITMENTS AND CONTINGENCIES**




*Executive
      Employment Contracts*




The
      Company has employment agreements with its three executive
      officers:




1.
            Agreements
                were executed with the Chief Executive Officer and the Chief Financial
                Officer at the inception of the Company (February 7, 2000) which
                expire
                December 31, 2006. Annual salary is $150,000 and $96,000, respectively,
                and each accrues a non-accountable automobile allowance of $9,000.
                The
                agreements also provide for an annual bonus of incentive stock options
                (covering 200,000 shares each). In addition, the CEO is entitled
                to a 5%
                referral commission on certain sales. Unpaid salary and commissions
                can be
                paid with warrants to purchase common stock at $1 per share. During
                both
                2005 and 2004, CEO compensation expensed pursuant to these arrangements
                totaled $159,000, and CFO compensation totaled $93,000 and $105,000
                during
                2005 and 2004, respectively (exclusive of the fair value and of incentive
                stock options). Both officers have elected to forego the 2005 and
                2004
                annual bonus of incentive stock options.






F-17
 **eTotalSource,
          Inc.** Notes
            to Consolidated Financial Statements




2.
            An
                agreement was executed August 1, 2000 with the Chief Operating Officer
                which expires December 31, 2007. Annual salary is $120,000 and a
                non-accountable automobile allowance of $9,000. The agreement also
                provides for an annual bonus of incentive stock options (covering
                200,000
                shares). Unpaid salary and commissions can be paid with warrants
                to
                purchase common stock at $1 per share. During 2005 and 2004, COO
                compensation expensed pursuant to these arrangements was accrued
                on a
                “half-time” basis and totaled $69,000 and $69,000, respectively (exclusive
                of the fair value of incentive stock options). The officer has elected
                to
                forego the 2005 and 2004 annual bonus of incentive stock
                options.




**NOTE
      9. EVENTS SUBSEQUENT TO DECEMBER 31, 2005 (Unaudited)**




On
      February 14, 2006, the Company’s Form SB-2 registration statement was declared
      effective by the Securities and Exchange Commission.





Also,
      on
      February 28, 2006, a debenture holder converted $10,000 of convertible
      debentures into 2,083,333 shares of common stock.





F-18