** **

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

# **FORM 10-KSB**

 

**ý****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 THE FISCAL YEAR ENDED DECEMBER 31, 2004**

 

**000-25523**

## ***CommissionFile Number***

 

# **PRIMARY BUSINESS SYSTEMS INC**

(Name of Small Business Issuerin Its Charter)

 
| **NEVADA**                               | ** ** | **86-0857752**                       |
|------------------------------------------|------------|--------------------------------------|
| (State or Other Jurisdiction of          |       | (I.R.S. Employer Identification No.) |
| Incorporation)                           |       |                                 |
|                                     |       |                                 |
| **433 Kitty Hawk Dr. Suite  226**        | ** ** | ** **                           |
| **Universal City, TX 78148**             | ** ** | **(210) 658-4675**                   |
| (Address of Principal Executive Offices) |       | (Issuer’s Telephone Number,     |
|                                     |       | Including Area Code)                 |

 

## ***Securitiesregistered under Section 12(b) of the Act: NONE***

 

Securities registered underSection 12(g) of the Act:

# ** **

# **COMMON STOCK, PAR VALUE $0.001 PER SHARE**

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934, as amended (the “Exchange Act”) during the past 12 months (or for suchshorter 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 ý No o

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB. ý

 

The issuer’s revenues for the fiscal year endedDecember 31, 2004 were $3,339,019.

 

The number of shares of Common Stock of the issueroutstanding as of December 31, 2004 was 86,278,297.

 

The aggregate market value of the registrant’s commonstock held by non-affiliates, based upon the average of the bid and askedprices $.01 on March 28, 2005,  was $71,820.00based upon 7,182,043 shares held by non affiliates.

 

# **DOCUMENTSINCORPORATED BY REFERENCE:**

## *** ***

## ***NONE***

 

 

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Tableof Contents

 
|     | Forward-Looking Statements                                                             |   |
|----------|----------------------------------------------------------------------------------------|--------|
|     |                                                                                   |   |
|     | Part  I                                                                                |   |
|     |                                                                                   |   |
| Item  1  | Description  of Business                                                               |   |
| Item  2  | Description  of Property                                                               |   |
| Item  3  | Legal  Proceedings                                                                     |   |
| Item  4  | Submission  of Matters to a Vote of Security Holders                                   |   |
|     |                                                                                   |   |
|     | Part II                                                                                |   |
|     |                                                                                   |   |
| Item  5  | Market  for Registrant’s Common Equity and Related Stockholder Matters            |   |
| Item 6   | Management’s Discussion and Analysis or Plan of  Operation                        |   |
| Item  7  | Financial  Statements                                                                  |   |
| Item  8  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosures |   |
| Item 8a  | Controls and  Procedures                                                               |   |
|     |                                                                                   |   |
|     | Part III                                                                               |   |
|     |                                                                                   |   |
| Item  9  | Directors,  Executive Officers, of the Registrant:                                     |   |
| Item 10  | Executive Compensation                                                                 |   |
| Item 11  | Security Ownership of Certain Beneficial Owners  and Management                        |   |
| Item 12  | Certain Relationships and Related Transaction                                          |   |
| Item 13  | Exhibits and Reports on Form 8-K                                                       |   |
| Items 14 | Principal Accounting Fees and Services                                                 |   |
|     |                                                                                   |   |
|     | Part IV                                                                                |   |
|     |                                                                                   |   |
| Item 14  | Exhibits, Financial Statement Schedules and Reports  on Form 8-K                       |   |

 

2

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### **Cautionary Note Regarding** Forward-Looking Statements

 

In connection with the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995 (the “Reform Act”), PrimaryBusiness Systems, Inc. (“Primary”) is hereby providing cautionary statementsidentifying important factors that could cause our actual results to differmaterially from those projected in forward-looking statements (as such term isdefined in the Reform Act) made by or on behalf of Primary  herein, in other filings made by Primary withthe Securities and Exchange Commission, in press releases or other writings, ororally, whether in presentations, in response to questions or otherwise. Anystatements that express, or involve discussions as to, expectations, beliefs,plans, objectives, assumptions or future events or performance (often, but notalways, through the use of words or phrases such as “will result,” “areexpected to,” “anticipated,” “plans,” “intends,” “will continue,” “estimated,”and “projection”) are not historical facts and may be forward-looking and,accordingly, such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause the actual results orperformance of Primary to be materially different from any future results orperformance expressed or implied by such forward-looking statements. Such knownand unknown risks, uncertainties and other factors include, but are not limitedto, the following:

 
|   |   | (i)     |   | volatility of costs of  workers’ compensation insurance coverage and profits generated from the  workers’ composition component of Primary’s service offering under its loss  sensitive workers’ compensation programs;                 |
|--------|--------|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (ii)    |   | volatility of state  unemployment taxes;                                                                                                                                                                                                                    |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (iii)   |   | the uncertainties relating  to the collateralization requirements related to as well as availability and  renewal of Primary’s medical benefit plans, general insurance and workers’  compensation insurance programs for the worksite employees; |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (iv)    |   | uncertainties as to the  amount the company will pay to subsidize the costs of medical benefit plans;                                                                                                                                                       |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (v)     |   | possible adverse application  of certain federal and state laws and the possible enactment of unfavorable  laws or regulation;                                                                                                                              |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (vi)    |   | litigation and other claims  against the Company and its clients including the impact of such claims on  the cost, availability and retention of Primary’s insurance coverage  programs;                                                               |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (vii)   |   | impact of competition from  existing and new businesses offering human resources outsourcing services;                                                                                                                                                      |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (viii)  |   | risks associated with  expansion into additional markets where Primary does not have a presence or  significant market penetration;                                                                                                                         |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (ix)    |   | risks associated with  Primary’s dependence on key vendors and the ability to obtain or renew  benefit contracts and general insurance policies at rates and with retention  amounts acceptable to Primary;                                            |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (x)     |   | an unfavorable determination  by the Internal Revenue Service or Department of Labor regarding the status  of Primary as an “employer”;                                                                                                           |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (xi)    |   | the possibility of client  attrition due to Primary’s decision to increase the price of its services,  including medical benefits;                                                                                                                     |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (xii)   |   | risks associated with  geographic market concentration;                                                                                                                                                                                                     |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (xiii)  |   | the financial condition of  clients;                                                                                                                                                                                                                        |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (xiv)   |   | the effect of economic  conditions in the United States generally on Primary’s business;                                                                                                                                                               |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (xv)    |   | the failure to properly  manage growth and successfully integrate acquired companies and operations;                                                                                                                                                        |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (xvi)   |   | risks associated with  providing new service offerings to clients;                                                                                                                                                                                          |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (xvii)  |   | the ability to secure  outside financing at rates acceptable to Primary;                                                                                                                                                                                    |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (xviii) |   | risks associated with third  party claims related to the acts, errors or omissions of the worksite  employees; and                                                                                                                                          |
|   |   |    |   |                                                                                                                                                                                                                                                        |
|   |   | (xix)   |   | other factors which are  described in further detail in this Annual Report on Form 10-KSB and in other  filings by Primary with the Securities and Exchange Commission.                                                                                     |

 

Primary cautions that the factors described abovecould cause actual results or outcomes to differ materially from thoseexpressed in any forward-looking statements made by or on behalf of  Primary. Any forward-looking statement speaksonly as of the date on which such statement is made, and Primary undertakes noobligation to update any forward-looking statement or statements to reflectevents or circumstances after the date on which such statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time totime, and it is not possible for management to predict all of such factors.Further, management cannot assess the impact of each such factor on thebusiness or the extent to which any factor, or combination of factors, maycause actual results to differ materially from those contained in anyforward-looking statements

 

3

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#### **Part1**

### ** **

### **Item1**.Description of Business

 

Primary Business Systems Inc. (“Primary”) is a holdingcompany with wholly owned subsidiaries operating in the Professional EmployerOrganization industry and the Temporary Staffing Services Industry and operatesthrough it’s subsidiaries, Primary Business Systems LLC, Concord StaffingServices and Primary HR Services and as economies of scale can be realizedcombine the individual entities in each sector.

 

Primary Business LLC (Primary LLC) and Primary HRServices LLC (Primary HR) are regional Professional Employer Organizations(PEO) committed providing human capital management solutions.  We offer our clients, which are typicallysmall to medium-sized business with between five and fifty employees, a broadrange of product and services that provide a complete solution for the clients’human resources outsourcing needs. Primary LLC and Primary HR’s products and services include benefitsadministration, payroll administration, governmental compliance, risk-management, unemployment administration, and health, welfare and retirementbenefits.

 

Concord Staffing Service is a regional temporarystaffing services company helping business meet their staffing needs whileminimizing there employee acquirement cost. We offer qualified screened employees to our clients that meet theiremployment needs on temporary biases. Concord provides all payrolladministration, unemployment administration and assignment administration ofthe temporary staff.

* *

*Our History:*

 

We were incorporated in the state of Nevada inNovember 1996 under the name Anonymous Data Inc.  In July 2001, Anonymous Data Inc. completed a reverse merger with ShareCom, Inc. andthe name was changed to ShareCom Inc.  InMay 2002 ShareCom, Inc. sold all sold all of its assets, selected liabilitiesand business operations to USAlert, Inc., an Illinois corporation and became a “shellcorporation”.  Pine Services Inc.,  purchased 58% of the outstanding shares ofShareCom Inc., from its former president Brad Nordling.

 

In September 2002, the members of Primary BusinessSystems LLC (a privately held Texas Limited Liability Company) entered into anagreement to purchase the 58% holdings of ShareCom from Pine Services Inc.

 

In November 2002, ShareCom Inc., acquired 100% of themembers’ interests of Primary Business Systems LLC, thereby making PrimaryBusiness Systems LLC a wholly owned subsidiary of ShareCom Inc.  As a result of this transaction, the formermembers of Primary Business Systems LLC became the majority shareholders ofShareCom and replaced the management of ShareCom.

 

In March 2003 ShareCom Inc., changed its name toPrimary Business Systems Inc.  Inaddition, in March 2003, Primary acquired 100% of the outstanding stock of AHJRInc., thereby making AHJR Inc. a wholly owned subsidiary of Primary.   In June 2003, AHJR Inc. acquired the assetsof a temporary staffing services company and began doing business under thetradename  Concord Staffing Services.

 

In June 2004 Primary Business Systems Inc establishedPrimary HR Services LLC a Deleware Limited Liability Company operating inMississippi, thereby making Primary HR Services LLC a wholy owned subsidIary ofPrimary.

#### *** ***

#### ***Events***

 

We recently enterd into a settlement agreement withserveral parties which will, if consumated, have the effect of unwinding thetransactions with Pine Services Inc, and result in the Company ceasing to beengaged in the PEO and Staffing Businesses.

 

The Settlement Agreement will, if consummated, resultin a change of control of Primary Business Systems Inc and a distribution ofthe significant business assets of the Company to Patrick Matthews and hisfamily (the “Mathews Family”).  Ineffect, the terms and conditions of the Settlement Agreement will “unwind” thetransactions entered into by Priamry Business Systems Inc and a former majorityshareholder, Pine Services, Inc. consummated with the Matthews Family in November2002.  Prior to these transaction, asdescribed above Priamry Business Systems Inc had no significant operations.

 

In November 2002, as reportedby Primary Business Systems Inc, the Company, Pine Services and the MatthewsFamily consummated a series of transactions (i) which resulted in the MatthewsFamily selling their family owned business, Primary Business LCC (“Primary LLC”)to the Company in a stock exchange; (ii) resulted in the Company changing itsname from Sharecom, Inc. to its current name; and (iii) whereby Primary LLCacquired from Pine Services a majority (approximately 59.7%) of thenoutstanding common stock of the Company in exchange for a note from the PrimaryLLC in the principal amount of $550,000.   Further, members of the Matthews Family then became the officers anddirectors of Primary Business Systems Inc.

 

As previously reported byPrimary Business Systems Inc, on or about December 23, 2003, Primary LLC fileda lawsuit in 285th District Court, Bexar County, Texas against PineServices, Inc. and Frank Custable, Jr. alleging, among other claims, common lawfraud, violation of the Texas Securities Act, violation of the Texas DeceptiveTrades and Practices Act and fraudulent inducement in connection with anAdvisory Agreement between the company and the named persons. The defendantswere served with this lawsuit but failed to appear in the case or file ananswer. On February 6, 2004, upon motion of Primary Business Systems Inc, theCourt entered a default judgment against the defendants in the amount ofapproximately $4,700,000.00 in actual and punitive damages.  On April 20, 2004, the Court upheld the entryof the default judgement.

 

In addition, Suburban Capital,a company controlled by Custable had brought suit against the Company claiminga breach of an advisory Agreement entered into between Suburban Capital andPrimary Business Systems Inc.

 

4

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Further, Pine had brought suitagainst Primary LLC alleging a breach of the purchase agreement and the$550,000 note

 

Under the terms of SettlementAgreement, the following transactions will occur:

 

1.             The Matthews Family will surrender all of their sharesof Primary Business Systems Inc to Primary Business Systems Inc or PineServices Inc, with Pine Services Inc receiving shares equal to 59% of theoutstanding shares of Primary Business Systems Inc and the outstanding notewill be forgiven;

 

2.             The Matthews Family will receive all of the capital stockof the three subsidiaries of Primary Business Systems Inc, namely, PrimaryLLC., Primary HR Services LLC and AHJR, Inc. and Primary Business Systems Inc.will no longer have any interest in such companies.

 

3.             The Matthews Family will receive an aggregate of$250,000 from Custable and Pine, payable in installments, of which $50,000 hasbeen paid to date; and

 

4.             All members of the Mathews Family will resign asofficers and directors of Primary Business Systems Inc and new officers anddirectors will be appointed by Pine Services Inc as the majority shareholder

 

5.             The Matthews Family will forgive all debt, in the amountof approximately $593,000 owed to it by Primary Business Systems Inc.

 

The Settlement Agreement is subject to numerousclosing conditions including, the filing, if required under SEC rules,  of a Preliminary Information Statement andDefinitive Information Statement with the SEC in accordance with SEC rules andregulations, distribution of the Definitive Information Statement to theCompany’s shareholders, approval of the Board of Directors and majorityshareholders of Primary Business Systems Inc and exchange of mutual releases bythe parties.  There can be no assurancethat the transaction will be completed as described or at all.

 

The Matthews Family has agreed to vote its shares in favorof the Settlement Agreement and expects to deliver its written consent to theCompany within the next few days.  TheCompany expects to file a Preliminary Information Statement with the SEC within  15 days, approximately.

 

*Our Business Lines.*

 

The discussion below describe the busineses of  Primary Business Systems Inc (Primary) andits subsidairies useing the fiscal year ended December 31, 2004. As a result ofthe Settlement Agrement described above, Primary will be removing itselffrom  these busiensses, assuming theSettlement Agreement and the trasnactions described therein  are completed

 

The subsiduaries of Primary operate in the PEOindustry and the temporary staffing services industry.   All revenues derived to date have beenthrough the operating subsiduaries.

 

Our existing PEO (also know as Professional EmployerOrganization) subsidiaries, Primary Business Systems LLC and Primary HRServices LLC are regional Human Resources Outsourcing providers, Primary LLC islicensed as a Staff Leasing Services Company in Texas and Primary HR providessimular services but is not required to be licensed in Mississippi.  Serives through both entities include but arenot limited to  providing human capitalmanagement solutions.  We offer ourclients, which are typically small to medium-sized business with between fiveand fifty employees, a broad range of product and services that provide acomplete solution for the clients’ human resources outsourcing needs.  As of December 31, 2004, we served more than100 clients, with approximately 1100 active worksite employees.  Primary LLC’s products and services includebenefits administration, payroll administration, governmental compliance, riskmanagement, unemployment administration, and health, welfare and retirement benefits.

 

### **Products and Services**

 

Primary LLC provides a broad range of products andservices to its clients. These products and services are primarily offered tothe company’s clients on a “bundled” or all inclusive basis. Health, welfareand retirement programs may be elected to be offered to worksite employees atthe option of each client. Primary provides these products and services to itsclients through the following core activities:

 

*Retain the Best Employees.*    Primary LLC and Primary HRassists its clients in retaining the best employees for their businesses byproviding: 

 
| •     health benefits (medical, dental and vision) |   | •     employee assistance programs      |
|------------------------------------------------------------------------|--------|-------------------------------------------------------------|
| •     retirement plans – 401(k)s              |   | •     employee retention best practices |

 

5

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| •     welfare benefits (voluntary life insurance,  AD&D, short-term and long-term disability) |   | •     employee discounts•    reward and recognition programs |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|

 

*Manage the Paperwork.*  Primary  and Primry HR assists its clients in managingemployment related paperwork by providing the following services: 

 
| •     401(k) plan administration                                            |   | •     Form W-2 preparation                                                            |
|-------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|
| •     Section 125, FMLA and COBRA administration                            |   | •     unemployment claims administration                                              |
| •     time and attendance systems                                           |   | •     benefits annual enrollment administration                                       |
| •     payroll processing, employment related tax filings and administration |   | •     benefits claims processing (health, disability and workers’  compensation) |

 

*Protect our clients’ business.*  Primary LLC and Primary HRassists its clients in protecting their businesses by providing: 

 
| •    HR  policies forms and best practices       |   | •     employee exit interview guidelines and forms |
|----------------------------------------------------------------------|--------|------------------------------------------------------------------------|
| •     regulatory compliance and guidance         |   | •     workers’ compensation insurance         |
| •     wage and hour guidance                     |   | •     workplace safety guidance                    |
| •     employee hiring and termination guidelines |   |                                                                   |

 

*Insuring our clients business*.  Primary LLC and Primary HRassists its clients in insuring their business by bringing in our alliance withinsurance providers.

 
| •     General Liability Insurance Procurement |   | •    Assist  in audit processes                                    |
|-------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|
| •     Commercial Auto Liability Procurement   |   | •     Assist in determining levels of insurance                    |
| •     Property & Equipment Procurement    |   | •     Assist in shopping the market for the best price to coverage |
| •     Other Commercial insurance needs        |   |                                                                                   |

 

*Client Selection and Retention Strategy.*

 

As part of its current client selection strategy,Primary LLC and Primary HR offers its services to businesses within specificindustry classification codes. All prospective clients are also evaluatedindividually on the basis of total predicted profitability. This analysis takesinto account workers’ compensation risk and claims history, unemployment claimshistory, payroll adequacy, and credit status. With respect to potential clientsoperating in certain industries believed to present a level of risk exceedingindustry norms, more rigorous approval requirements must be met before agreeingto provide services to the client. This process may include an on-siteinspection and review of workers’ compensation and unemployment claimsexperience for the last three years. In addition, under the terms of workers’compensation agreement, prospective clients operating in certain industries orwith historically high workers’ compensation insurance claims experience mustalso be approved by the insurance carrier before Primary LLC or Primary HRenters into a contract to provide services.

 

Primary LLC and Primary HR maintains a client reviewprogram that includes a detailed profitability and risk analysis of all itsclients. Based on the results of these analyses, we may modify our pricing, orif necessary, terminate certain clients that we believe would otherwise bedetrimental or not contribute to its long-term profitability.

 

Primary LLC’s client retention rate for 2004 was84.05% Primary LLC uses the NAPEO standard for measuring client retention,which is computed by dividing the number of clients at the end of the period bythe sum of the number of clients at the beginning of the period plus the numberof clients added during the period. The client retention rate is affected by anumber of factors including the natural instability of the small tomedium-sized business market and clients that were terminated by Primary LLCfor reasons that include unacceptable risk and low profitability to PrimaryLLC. (Note Primary HR did not have prior year clients to compair to forretention purposes.)

* *

*Client Services Agreement*.    All clients are required toenter into the Client Services Agreement. The Client Services Agreementprovides for an initial one-year term, subject to termination by Primary LLC/Primary HR or the client at any time upon 30 days prior written notice. Afterthe initial term the contract may be renewed, terminated or continued on amonth-to-month basis. Following the initial term, most contracts are renewedfor new one year term. Based on the results of a financial review, Primary LLCmay require the owners of client companies to personally guarantee the client’sobligations under the Client Services Agreement.

 

Primary LLC and Primary HR retains the ability toterminate the Client Services Agreement as well as their co-employmentrelationship with the worksite employees immediately upon non-payment by aclient. Primary LLC and Primary HR manages its credit risk through the periodicnature of payroll, client credit checks, owner guarantees,  client selection process and their right toterminate the Client Services Agreement and the co-employment relationship withthe worksite employees.

 

6

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Employment-related liabilities are generally allocatedbetween Primary LLC/ Primary HR and the client pursuant to the Client ServicesAgreement, with Primary LLC / Primary HR assuming responsibility for worksiteemployee payroll obligations and for compliance with certain employment-relatedgovernmental regulations. On the other hand, the client remains responsible forcompliance with the employment-related governmental regulations that are moreclosely related to the daily supervision, direction and control of worksiteemployees. In some cases, employment-related liabilities are shared betweenPrimary LLC / Primary HR and the client. The following table summarizes thegeneral division of responsibilities for employment related regulatorycompliance under the Client Services Agreement: 

 
| **PBS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **CLIENT**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Primary LLC / Primary HR  Responsibilities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | ** ** | **Client Responsibilities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| •    All  rules and regulations governing the reporting, collection and payment of  federal and state payroll taxes on wages, including: (i) federal income tax  withholding provisions of the Internal Revenue Code; (ii) state and/or local  income tax withholding provisions; (iii) FICA; (iv) FUTA; and (v) applicable  state unemployment tax provisions, including managing claims•    Applicable workers’ compensation laws  that cover: (i) procuring workers’ compensation insurance; (ii) completing  and filing all required reports; (iii) claims processing•    COBRA (Consolidated Omnibus Budget  Reconciliation Act of 1986) continuation coverage for employees covered under  health plans sponsored by the Company•    Laws governing the garnishment of wages,  including Title III of the Consumer Credit Protection Act•   All rules and regulations governing  administration, procurement and payment of all Company sponsored employee  benefit plans elected by the client or worksite employee•    Fair Labor Standards Act and the Family  and Medical Leave Act of 1993* |       | •    Worksite  and employee safety under the Occupational Safety and Health Act (“OSHA”) and  related or similar Federal, state or local regulations•    Government contracting requirements as  regulated by, including, but not limited to: (i) Executive Order 11246; (ii)  Vocational Rehabilitation Act of 1973; (iii) Vietnam Era Veteran’s  Readjustment Assistance Act of 1974; (iv) Walsh-Healy Public Contracts Act;  (v) Davis-Bacon Act; (vi) the Service Contract Act of 1965; and (vii) any and  all similar, related or like Federal, state or local laws, regulations,  ordinances and statutes•    Professional licensing and liability•    Internal Revenue Code Sections 414(m),  (n) and (o) relating to client maintained benefit plans•    Laws affecting the assignment and ownership  of intellectual property rights including, but not limited to, inventions,  whether patentable or not, any patents resulting therefrom, copyrights and  trade secrets•    Worker Adjustment and Retraining  Notification Act•    Laws affecting the maintenance, storage  and disposal of hazardous materials•    Title VII (Civil Rights Act of 1964, as  amended), Immigration Reform and Control Act, the Americans with Disabilities  Act, the Age Discrimination in Employment Act, Older Workers Benefit  Protection Act (including provisions hereunder relating to client’s premises)•    All other federal, state, county or local  laws, regulations, ordinances and statutes which regulate employees’ wage and  hour matters, prohibit discrimination in the workplace or govern the  employer/employee relationship•    Fair Labor Standards Act and the Family  and Medical Leave Act of 1993* |

 

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* Primary LLC/ Primary HR andthe client are each responsible for certain provisions under the terms of eachAct.

 

7

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### **Sales and Marketing**

 

Primary LLC and Primary HR markets their servicesthrough a direct sales force.  In orderto exercise more control over the client selection process, we use a directsales force rather than selling through agents. Primary LLC and Primary HRplans to expand their regional coverage and add sales offices in majormetropolitan areas over the next few years as it accomplishes its expansionprogram. Primary LLC and Primary HR’s sales associates are compensated by a combinationof salary and commission which, for top producers, will generate totalcompensation in the moderate six figure range.

 

Primary LLC and Primary HR generate sales leads fromvarious sources as well as from direct sales efforts and inquiries. Each salesassociate visits his or her clients periodically in order to maintain anongoing relationship and to seek new business referrals. Primary LLC andPrimary HR also generate sales leads from referral relationship partners and aninformation database of small businesses.

### ** **

### **Vendor Relationships**

 

Primary LLC and Primary HR provide benefits to itsworksite employees under arrangements with a number of vendors. The maintenanceof insurance plans including workers’ compensation plans and health benefitplans that cover worksite employees is a significant part of Primary LLC andPrimary HR’s business. If Primary LLC and Primary HR were required to obtainreplacement contracts, such replacement could cause a significant disruption tobusiness and possible dissatisfaction with the Primary LLC and Primary HR’sservice offering leading to a decrease in client retention and an adverseeffect on future results of operations or financial condition.

### ** **

### **Workers’ CompensationPlans**

 

Beginning in 2000, Texas Mutual Insurance Company(Texas Mutual) was the provider of workers’ compensation insurance for worksiteemployees based in Texas. The Texas Mutual program was a guaranteed costinsurance arrangement that expired on November 17, 2001. The agreementwith  Texas Mutual was renewed  each of the subsuquent years up to andincluding November 2004 for an additional one-year term. The Company has noworkers’ compensation liability with respect to claims by Texas based employeesthat arose in each of the policy  yearsfor amounts in excess of those paid to Texas Mutual.

 

Primary HR Serivces began operations in 2004 andsecured worker’s compensation through the risk pool in Mississippi, the policyis a guarenteed cost policy and poses no liablilty to Primary HR other than thepremiums for coverage.

### ** **

### **Information Technology**

 

Primary Business Systems LLC has invested and iscontinuing to invest capital resources in the development and enhancement ofits information and technology infrastructure, including computer hardware andsoftware and telephony. This investment is intended to better serve Primary LLC’sclient base, achieve a high level of client satisfaction and to allow PrimaryLLC to improve efficiencies in its operations.

 

These computer systems provide Primary LLC with thecapability to promptly and accurately deliver payroll and related services andgenerate comprehensive management reports. Primary LLC’s information systemsmanage all data relating to worksite employee enrollment, payroll processing,benefits administration, management information and other requirements of thePrimary LLC’s operations. The current systems have high-volume payrollprocessing capabilities that allow the Primary LLC to produce and deliverweekly payrolls to its clients, each customized to the needs of such clients.

 

Primary LLC processes payroll for all of its worksite employees using SummitFinancial payroll processing application. The Summit system enables the PrimaryLLC to effectively manage its existing operations and maintain appropriatecontrols.

 

Primary LLC is developing and deploying PBS HRCentral, an online client and employee portal. PBS HR Central allows clients toinput their payroll data directly into the Company’s payroll applications viathe Internet. Clients can regularly add or delete employees, view reports, andchange payroll information. PBS HR Central provides real time access to PrimaryLLC’s entire suite of human resource products and services. PBS HR Central isfully integrated with the company’s human resource management systems andpayroll engines. This full integration results in improved client satisfaction,as well as improved operating margins. Summits software provides thefoundation, enabling a robust, client configurable portal, while Primary LLC’scustom developed software provides additional ease of use and servicecapabilities.

 

PBS HR Central allows the Company to service itsclients 24 hours a day with increased accuracy and efficiency. PBS HR Centralis updated regularly to increase its functionality. PBS HR Central is intendedto serve as a human resource information portal for clients providing a varietyof payroll and human resource tools, templates and information.

 

The combination of the Summit systems for access andfunctionality and the PBS HR Central online capabilities creates a comprehensivesolution capable of growing and adapting to the evolving needs of clients.

 

8

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### **Competition**

 

The PEO industry is highly fragmented.   We consider our primary competition to bePEOs, insurance agents, and fee-for-service providers, such as payrollprocessors and human resource consultants. The market for human resource consulting services isexpected to become increasingly competitive as larger companies, some of whichhave greater financial resources than Primary LLC and which have nottraditionally operated in this industry, enter the market. There are numerouscompanies operating in the PEO segment which compete with Primary LLC,including several larger publicly held entities such as Gevity HR, Inc., ADP,ADP and and Administaff Inc.

 

The key competitive factors in the human resourceconsulting industry are breadth and quality of services, price, reputation,financial stability, and choice, quality and cost of benefits. Primary LLCseeks to compete through its ability to provide a full-service human resourcesolutions to its clients through its advanced information technology solutions.The PEO industry consists of approximately 800 companies, most of which serve asingle market or region. Primary LLC believes that there are several PEOs withannual revenues that exceed $500 million, four of which are publicly tradedcompanies.  Management believes, based onindustry sources, that the largest PEO, in terms of revenue, is Administaff,Inc., with revenue in excess of  $900million.  Primary LLC considers itscompetition to be all of these large national and regional PEO providers, aswell as the traditional form of employment of employees.

 

Primary LLC believes that some smaller PEOs areexiting the PEO industry due to increased collateral required by providers ofworkers’ compensation and health benefits insurance. In addition, an increasein costs and a lack of available workers’ compensation and health benefitsinsurance programs is impacting these PEOs providing excellent opportunitiesfor consolidations in the PEO market place Primary expects to exploit.

### ** **

### **Industry Regulation**

 

Numerous federal and state laws and regulationsrelating to employment matters benefit plans and employment taxes affect theoperations of PEO’s. By entering into a co-employer relationship with its clients,the Primary LLC and Primary HR assume certain obligations and responsibilitiesas an employer under these laws. Because many of these federal and state lawswere enacted before the development of non-traditional employmentrelationships, such as PEOs, temporary employment and other employment-relatedoutsourcing arrangements, many of these laws do not specifically address theobligations and responsibilities of non-traditional employers. In addition, thedefinition of “employer” under these laws is not uniform.

 

Some governmental agencies that regulate employmenthave developed rules that specifically address issues raised by therelationship among PEOs, clients and worksite employees. Such regulations arerelatively new and, therefore, their interpretation and application of theseregulations by administrative agencies and Federal and state courts are limitedor non-existent. The development of additional regulations and interpretationof existing regulations can be expected to evolve over time. In addition, fromtime to time, states have considered, and may in the future consider, imposingcertain taxes on gross revenues or service fees of the Company and itscompetitors.

 

Primary LLC and Primary HR believe that theiroperations are currently in compliance in all material respects with applicableFederal and state statutes and regulations.

### ** **

### **Employee Benefit Plans**

 

Effective June 1, 2001 the Primary LLC began to offera 401(k) retirement plan, designed to be a “multiple employer” plan under theInternal Revenue Code of 1986, as amended (the “Code”) Section 413©. This plandesign enables owners of clients and highly compensated worksite employees, aswell as highly compensated internal employees of PBS, to participate.Generally, employee benefit plans are subject to provisions of both the Codeand the Employee Retirement Income Security Act (“ERISA”).  In order to qualify for favorable taxtreatment under the Code, the plans must be established and maintained by anemployer for the exclusive benefit of its employees.  In addition to the employer/employeethreshold, pension and profit-sharing plans, including plans that offer CODAs(a profit-sharing plan with a cash or deferred arrangement, or CODA, under CodeSection 401(k) under Code Section 401(k) and matching contributions under CodeSection 401(m), must satisfy certain other requirements under the Code.  These other requirements are generallydesigned to prevent discrimination in favor of highly compensated employees tothe detriment of non-highly compensated employees with respect to both theavailability of, and the benefits, rights and features offered in qualifiedemployee benefit plans.

 

Employee pension and welfare benefit plans are alsogoverned by ERISA.  ERISA defines “employer”as “any person acting directly as an employer, or indirectly in the interest ofan employer, in relation to an employee benefit plan.”  ERISA defines the term “employee” as “anyindividual employed by an employer.”  Adefinitive judicial interpretation of “employer” in the context of a PEOarrangement has not been established, although the Internal Revenue Servicereleased Rev. Proc. 2002-21 on April 24, 2002, to help clarify the ability ofPEOs to maintain multiple employer 401(k) plans.

 

9

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#### **IRS Issuance of Rev. Proc.2002-21**

 

In April 2002, the IRS issued Rev. Proc. 2002-21.  While Rev. Proc. 2002-21 is intended todescribe the steps that may be taken to ensure the qualified status of definedcontribution retirement plans maintained by PEOs for the benefit of worksiteemployees, there remain uncertainties regarding the operation andinterpretation of that revenue procedure.  Under Rev. Proc. 2002-21, if a PEO operates amultiple employer retirement plan in accordance with IRS Code Section 413©, theIRS will not disqualify the retirement plan solely on the grounds that the planviolates or has violated the exclusive benefit rule.

### ** **

### **Federal Employment Taxes**

 

As an employer, Primary LLC and Primary HR assumeresponsibility and liability for the payment of Federal and state employmenttaxes with respect to wages and salaries paid to worksite employees. There areessentially three types of Federal employment tax obligations:(i) withholdingof income tax governed by Code Section 3401, et seq.; (ii) obligations underthe Federal Income Contributions Act (“FICA”), governed by Code Section 3101,et seq.; and (iii) obligations under the Federal Unemployment Tax Act (“FUTA”),governed by Code Section 3101, et seq. Under these Code sections, employershave the obligation to withhold and remit the employer portion and, whereapplicable, the employee portion of these taxes.

 

Among other employment tax issues related to whetherPEOs are employers of worksite employees are issues under the Code provisionsapplicable to Federal employment taxes. The issue arises as to whether a PEO isresponsible for payment of employment taxes on wages and salaries paid to suchworksite employees. Code Section 3401(d)(1), which applies to Federal incometax withholding requirements, contains an exception to the general common lawtest applied to determine whether an entity is an “employer” for purposes ofFederal income tax withholding. The courts have extended this common lawemployer exception to apply for both FICA and FUTA tax purposes. Code Section3401(d)(1) states that if the person for whom services are rendered does nothave control of the payment of wages, the “employer” for this purpose is theperson having control of the payment of wages. The Treasury Regulations issuedunder Code Section 3401(d)(1) state that a third party can be deemed to be theemployer of workers under this Section for income tax withholding purposeswhere the person for whom services are rendered does not have legal control ofthe payment of wages. Although several courts have examined Code section3401(d)(1) with regard to PEOs its ultimate scope has not been delineated.Moreover, the IRS has to date relied extensively on the common law test ofemployment in determining liability for failure to comply with Federal incometax withholding requirements. Accordingly, while Primary LLC believes that it can assume thewithholding obligations for worksite employees, if Primary LLC fails to meetthese obligations, the client may be held jointly and severally liable. Whilethis interpretive issue has not, to Primary LLC’s knowledge, discouragedclients from utilizing Primary LLC’s services, there can be no assurance that adefinitive adverse resolution of this issue would not do so in the future.

### ** **

### **State Regulation**

 

While many states do not explicitly regulate PEOs, 22states including the state where Primary LLC has offices (Texas) have passedlaws that have licensing, registration or other compliance requirements forPEOs and several states are considering such regulation. Such laws vary fromstate to state but generally provide for monitoring the fiscal responsibilityof PEOs. Primary LLC holds licenses, is registered or otherwise compliant inthe state it provides services. Whether or not a state has licensing,registration or other compliance requirement, Primary LLC faces a number ofother state and local regulations that could impact its operations.

** **

**The Temporary Staffing Services (Staffing) sector**: In March 2003 Primary Business Systems Incacquired 100% of the shares of AHJR Inc., a Texas corporation established in1992.   The purpose of this purchase wasto provide a platform for the temorary staffing operations for the Company. InMarch  we acquired, through AHJR,   the customers and certain assets of a  temporary staffing services company locatedin Texas.  AHJR operates under thetradename Concord Staffing Services.

### ** **

### **Products and Services**

 

Concord Staffing Services serves businesses in Texasby providing qualified temporary employees that meet the needs of the customer.Customer’s needs vary some need seasonal staff, others short term employees tofinish a project an others use the services of Concord to determine thecompatibility of employees before making the final decision to place them onstaff permanently.   While these aren’tall the reasons a company will use the services of Concord it is clear thatConcord provides a valuable service to businesses in its market.   Concord screens and qualifies applicantsprior to scheduling them for assignment.

 

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### **Sales and Marketing:**

 

Concord sales staff and staff placement managers determinethe needs of prospective customers and locate qualified individuals forassignment.  Currently referrals fromsatisfied customers provide new customers for CSS; however this spring thecompany expects to hire additional direct sales personnel to facilitate growth.

### ** **

### **Competition:**

 

The temporary staffing services industry is highlyfragmented and competitors range from household names of public companies toniche market suppliers like Concord. The  focus in the business overthe last 12 months has been on establishing a platform in the temporarystaffing services industry that will provide opportunities to acquire otherregional service providers.  We havesought to establish best practices and secure funding that will allow thecompany to grow, at the time of this writing funding has not been securedhowever we are in discussions with sources that have indicated a desire toprovide funding and hope to have this issue resolved by the end of the firstquarter.  Failure to secure funding willhave a negative effect on the growth of Concord and ultimately Primary.

 

Concord’s customer base is made up of mostly largecorporations (over 200 employees) who need temporary help usualy with seasonaladjustmnets in their business.  Inaddition to the larger coprorations we also seak to service small and mediumsize business (from 10 to 500) with expansion and seasonal needs.

 

Concord management believes Concord is in compliancewith the various state and federal regulations that govern employmnet andtemporary staffing service providers.

 

**ITEM 2****.    PROPERTIES**

 

We lease space for our two offices.  Our  corporate office and PEO operations are at 43Kitty Hawk Dr. Suite 226, Universal City, TX 78148.  We lease approximately 1780 sq ft of thesecond floor in a two story masonry office building. The lease began in July2002 and continues through January 2005, the cost of the lease is $51,400 paidin monthly installments of $1,715.  Thelease includes all utilities.  The spacehas been built out to meet the needs of the company and it is the opinion ofmanagement that it will continue to meet the needs of the company through theterm of the lease.

 

Concord Staffing Services’ operations are housed inapproximately 1,014 sq. ft., leased space at 830 N.E. Loop 410, San Antonio,TX.  The term of the lease began June2003 and continues through May 2006. Monthly lease payments from June 2003through May 2004 are $1,003.86, totalling $12,046.32for the period. From June2004 through May 2005, monthly lease payments will be $1,054.56 and totaling$12,654.72 for the period.  From June2005 through May 2006, monthly lease payments will be $1,105.26, totaling$13,263.12 for such period.  The leasecovers all utilities.  However, there isa provision for operations and maintenance pursuant to which the landlordassesses a prorata share of 2.50% of all increases in operations andmaintenance of the property.  For 2003,we were billed $587.99 to satisfy this provision.

 

Each entity owns all furniture, fixtures, computers,servers and equipment necessary to the operations of the business.  Management believes that all property isadequately covered under various insurance policies.

#### ** **

#### **Employees**

 

As of December 31, 2004, Primary LLC employed twelvefull time employees,  three in sales, twoin payroll, one in accounting two in loss controll two in customer support andtwo in management.  Primary HR Serviceshas two employees one in sales one in management.  Concord sterfing has two employess both incustomer service. All employees are trained in customer service and all areresponsible for serving our customers. Management believes relations with emploees are good. The employees arenot represented by any barganing group. The combined companies also provided paychecks to 1706 worksiteemployees and approximately 22 temporary employees on client assignments. We believe our relationship with its employees is satisfactory

 

**ITEM 3****.    LEGAL PROCEEDINGS**

 

In the matter styled Suburban Capital Corporation v.Primary Business Systems, L.L.C., et al., Cause No. 03-CV-4194, United StatesDistrict Court for the Northern District of Illinois, Easter Division

 

On or about June 12, 2003, the Company was served witha suit commenced in the circuit court of Cook County, Illinois by SuburbanCapital Corporation (“Suburban”).  Anattorney who worked with the Company, Ed Wells, is also named as a defendant inthe suit.  The Company removed thelawsuit to the United States District Court for the Northern District ofIllinois, Eastern Division on or about June 20, 2003.  In summary, the suit seeks damages for theCompany’s alleged failure to make full payment to Suburban for consulting workallegedly performed by Suburban for the benefit of the Company and for allegedbreach of an Advisory Agreement and a Stock Purchase Agreement pursuant towhich Pine Services, Inc., a company related to Suburban, sold a controllinginterest in the publicly-held Sharecom, Inc. to Rick Matthews.  The Company contends that Suburban breachedthe Advisory Agreement by not providing the services required by theAgreement.  The Company also alleges thatSuburban made material misrepresentations to the Company.  On February 4, 2004, this suit was dismissedby the Court’s order for failure to comply with a Court order regardingdiscovery.  The case subsequently wasreinstated.  The

 

11

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parties to this suit have executed a global settlementagreement relating to the disputes between and among them and the Companyexpects this suit to be dismissed.

 

In the matter styled Pine Services, Inc. v. PrimaryBusiness Systems, L.L.C., Cause No. 03C-7832, United States District Court forthe Northern District of Illinois, Easter Division

 

On or about December 3, 2003, Primary BusinessSystems, L.L.C. (“PBS LLC”), a wholly owned subsidiary of the Company, wasserved with a suit commenced in the United States District Court for theNorthern District of Illinois, Eastern Division by Pine Services, Inc.  In summary, the suit claims that PBS LLC owesPine Services, Inc. certain amounts for the sale of its majority interest inSharecom, Inc.  The parties to this suithave executed a global settlement agreement relating to the dispute betweenthem and the Company expects this suit to be dismissed.

 

In the matter styled Primary Business Systems, L.L.C.v. Frank Custable, Jr. and Pine Services, Inc., Cause No. 2003-CI-19857, in the285th Judicial District Court, Bexar County, Texas

 

On or about December 23, 2003, the Company filed alawsuit in 285th District Court, Bexar County, Texas against Pine Services,Inc. and Frank Custable, Jr. alleging, among other claims, common law fraud,violation of the Texas Securities Act, violation of the Texas Deceptive Tradesand Practices Act and fraudulent inducement in connection with the AdvisoryAgreement referred to above.  Thedefendants were served with this lawsuit but failed to appear in the case orfile an answer.  On February 6, 2004,upon motion of the Company, the Court entered a default judgment against thedefendants in the amount of approximately $4,700,000.00 in actual and punitivedamages.  The defendants have filed amotion for new trial.  The parties tothis suit have executed a global settlement agreement relating to the disputesbetween and among them and the Company expects this suit to be dismissed.  See the discussion above under “Events”.

 

In the matter styled Primary Business Systems, L.L.C.v. Suburban Capital Corporation, Cause No. 2004-CV-02171, in the 37th JudicialDistrict Court, Bexar County, Texas

 

On February 12, 2004, the Company filed a lawsuit inthe 37th District Court, Bexar County, Texas against Suburban CapitalCorporation alleging, among other claims, common law fraud and violation of theTexas Deceptive Trades and Practices Act in connection with the AdvisoryAgreement. The parties to this suit have executed a global settlement agreementrelating to the dispute between them and the Company expects this suit to bedismissed. See the discussion above under “Events”

 

In the matter AMS Staff Leasing, LTD. v. PrimaryBusiness Systems, L.L.C., Primary Business Systems, Inc., and Patrick DeyMatthews, Cause No. 04-07448-M, in the 298th Judicial District Court, DallasCounty, Texas

 

On August 2, 2004, AMS Staff Leasing, LTD. filed alawsuit in the 298th District Court, Dallas County, against Primary BusinessSystems, L.L.C., Patrick Dey Matthews and the Company alleging, among otherclaims, breach of fiduciary duty, breach of contract and conversion.  On September 13, 2004, Primary BusinessSystems, L.L.C., Patrick Dey Matthews and the Company filed a motion totransfer venue and answer.  Limiteddiscovery has occurred in the case.  TheCompany intends to vigorously defend itself against this lawsuit and pursue anyand all remedies it may have against AMS Staff Leasing, LTD.

 

In the matter styled Laredo CAL-TEX v. PrimaryBusiness Systems, L.L.C., Cause No. 2004-CV F 001296 D3 in the 341st JudicialDistrict Court, Webb County, Texas.

 

On or about September 13, 2004, Primary BusinessSystems L.L.C. (“PBS LLC”), a wholly owned subsidiary of the Company, wasserved with a suit filed in the 341st Judicial District Court, Webb County,Texas, by Laredo Cal-Tex, Inc., alleging breach of contract.  On September 30, 2004, PBS LLC filed a motionto transfer venue and answer.  Limiteddiscovery has occurred in the case.  PBSLLC intends to vigorously defend itself against this lawsuit and pursue any andall remedies it may have against Laredo Cal-Tex, Inc.

 

As a commercial enterprise and employer and withrespect to its employment-related businesses in particular, we are engaged inlitigation from time to time during the ordinary course of business inconnection with employment-relations issues, workers’ compensation and othermatters.  Generally, we are entitled toindemnification or repayment from our PEO clients for claims brought by worksite employees related to theiremployment.  However, there can be noassurance that the client employer will have funds or insurance in amounts tocover any damages or awards, and as co-employer,  we may be subject to liability.

 

We are  engagedin no other litigation, the effect of which would be anticipated to have amaterial adverse impact on our  financialconditions or results of operations.

 

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**ITEM 4****.    SUBMISSION OF MATTERS TO A VOTE OFSECURITY-HOLDERS**

 

No matters were submitted to shareholders during theforuth quarter of fiscal 2004

### ** **

### **PartII**

** **

**ITEM 5****.    MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

 

*Market Information.*    Ourcommon stock, par value $0.001 per share, is traded on the OTC Bulletin Boardof the National Association of Securities Dealers, Inc. under the symbol “PYBS.OB”

 
| **Fiscal Year Ended December 31, 2004** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------|------------|----------|------------|---------|------------|
| First Quarter                           |       | $        | .34        |    | $          | .04 |   |
| Second Quarter                          |       | $        | .11        |    | $          | .03 |   |
| Third Quarter                           |       | $        | .06        |    | $          | .03 |   |
| Fourth Quarter                          |       | $        | .05        |    | $          | .01 |   |
|                                    |       |     |       |    |       |   |   |
|                                    |       |     |       |    |       |   |   |
| **Fiscal Year Ended December 31, 2003** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter                           |       | $        | 1.01       |    | $          | 0.05 |   |
| Second Quarter                          |       | $        | 1.01       |    | $          | 0.10 |   |
| Third Quarter                           |       | $        | 0.30       |    | $          | 0.10 |   |
| Fourth Quarter                          |       | $        | 0.15       |    | $          | .010 |   |
|                                    |       |     |       |    |       |   |   |
| **Fiscal Year Ended December 31, 2002** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter                           |       | $        | 0.01       |    | $          | 0.01 |   |
| Second Quarter                          |       | $        | 0.02       |    | $          | 0.01 |   |
| Third Quarter                           |       | $        | 0.00       |    | $          | 0.00 |   |
| Fourth Quarter                          |       | $        | *2.50      |    | $          | 0.31 |   |
|                                         |            |          |            |         |            |  |  |  |  |  |  |

 

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***Close price adjusted for dividends and splits.**

 

*Dividends.*    The Company did not pay any cash dividendsduring the fiscal year ended December 31, 2004 and does not expect to paydividends in the foreseeable future.

 

We are authorized to issue 750,000,000 shares ofcommon stock, of which 86,278,297 shares were issued and outstanding as ofMarch 3, 2004 The number of stockholders of record for the Common Stock as ofMarch 3, 2004 is 183.  This number doesnot include beneficial owners of the common stock whose shares are held in thenames of various dealers, clearing agencies, banks, brokers and otherfiduciaries.

 

Stock Purchases

 

We have not undertakenany stock purchases of our securities in the last fiscal quarter or the currentfiscal quarter as of the date of this Report. Additionally, we have not issuedany securities in the most recent fiscal quarter or in the current fiscalquarter.

 

Our registrar andtransfer agent is Registrar and Transfer Corp. 10 Commerce Drive, Cranford, New Jersey 07016.  The telephone number of Registrar andTransfer is 800-866-1340.

 

Recent Sales of EquitySecurities.

#### ** **

#### **We did not sell anyunregistered securities during the fiscal year ended December 31, 2004**

 

Securities Authorized for Issuanceunder Equity Compensation

EQUITY COMPENSATION PLANINFORMATION

 
| ** **                        | ** ** | **Number of securities remaining  available for future issuance  Under equity compensation plans** | ** ** | **Number of Securities to be  Be issued upon exercise  Of outstanding options,  Warrants and rights** | ** ** | **Weighted average Exercise  price of outstanding  options, warrants  and rights** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
|                              |       |                                                                                               |       |                                                                                                  |       |                                                                               |       |
| Equity Compensation Plans         |       |                                                                                               |       |                                                                                                  |       |                                                                               |       |
| Approved by Security Holders      |       | 0                                                                                                  |       | not applicable                                                                                        |       | 3,000,000                                                                          |       |
|                              |       |                                                                                               |       |                                                                                                  |       |                                                                               |       |
| Equity Compensation Plans         |       |                                                                                               |       |                                                                                                  |       |                                                                               |       |
| Not approved by security  holders |       | 0                                                                                                  |       | 0                                                                                                     |       | 0                                                                                  |       |

 

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Primary has only one equity compensation plan whichplan was approved by shareholders on September 21, 2004 and provides for thereserve of up to 3,000,000 shares for options. No options have been awarded to date.

##### *** ***

##### ***RISKFACTORS***

 

You should carefully consider the risks describedbelow with respect to our operations, businesses and financial condition.  The risks and uncertainties described beloware not the only ones facing us.  Otherrisks and uncertainties that we have not predicted or assessed may alsoadversely affect us.  Some of theinformation in this filing contains forward-looking statements that involvesubstantial risks and uncertainties.  Youcan identify these statements by forward-looking words such as “may,” “will,” “expect,”“anticipate,” “believe,” “intend,” “estimate,” and “continue” or other similarwords.  You should read statements thatcontain these words carefully for the following reasons:

 

•                  the statements may discuss our futureexpectations;

•                  the statements may contain projections of ourfuture earnings or of our financial condition; and

•                  the statements may state other “forward-looking”information.

 

### **We Will Need To RaiseAdditional Funds. These Funds May Not Be Available When We Need Them.**

 

Based on our current plans and the funding notedabove, we believe that our cash on hand and cash generated from our operationswill be sufficient to fund our operations for at least the next 12 months.However, Primary may look to raise additional capital to operate the business,support expansion plans, develop new or enhanced services and products, respondto competitive pressures, acquire complementary businesses or technologies orrespond to unanticipated events. We can provide no assurances that additionalfinancing will be available when needed on favorable terms, or at all. If thesefunds are not available when we need them, we may need to change our businessstrategy or reduce our operations or investment activities. In addition, anyissuance of additional equity securities will dilute the ownership interest ofour existing stockholders and the issuance of additional debt securities mayincrease the perceived risk of investing in us. Primary periodically evaluatesits liquidity requirements, capital needs and availability of capital resourcesin view of its plans for expansion, anticipated levels of health benefit plansubsidies, collateralization requirements for insurance coverages, and otheroperating cash needs. Primary believes that its current cash balances and cashflow from operations will be sufficient to meet its requirements through 2004.

### ** **

### **We may acquireadditional companies, which may result in adverse effects on our earnings.**

 

We may at times become involved in discussions withpotential acquisition candidates. Any acquisition that we may consummate mayhave an adverse effect on our liquidity and earnings and may be dilutive to ourearnings. In the event that we consummate an acquisition or obtain additionalcapital through the sale of debt or equity to finance an acquisition, ourshareholders may experience dilution in their shareholders’ equity.  We have historically obtained growth throughacquisitions of other companies and businesses. Under Statements of Financial Accounting Standards No.141, BusinessCombinations (SFAS No.141) and No.  142Goodwill and Other intangible Assets implemented in June 2001, we are requiredto periodically review goodwill and indefinite life intangible assets forpossible impairment.  In the event thatwe are required to write down the value of any assets under thesepronouncements, it may materially and adversely affect our earnings. See themore detailed discussion appearing as part of our Management Discussion andAnalysis.

 

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**Our financial condition may be affected by increases in health care andworkers’ compensation insurance costs.**

 

Health care insurance premiumsand workers’ compensation insurance coverage comprise a significant part of ourPEO operating expenses. Accordingly, we use managed care procedures in anattempt to control these costs. Changes in health care and workers’compensation laws or regulations may result in an increase in our costs and wemay not be able to immediately incorporate such increases into the fees chargedto clients because of our existing contractual arrangements with clients. As aresult, any such increases in these costs could have a material adverse effecton our financial condition, results of operations and liquidity.

 

**Our financial condition may beaffected by risks associated with the health and workers’ compensation claimsexperience of our clients.**

 

Although we utilize only fullyinsured plans of health care and incur no direct risk of loss under thoseplans, the premiums that we pay for health care and workers’ compensationinsurance are directly affected by the claims experience of our clients. If theexperience of the clients is unfavorable, the premiums that are payable by uswill increase or coverage may become unavailable altogether. We may not be ableto pass such increases onto our clients, which may reduce our profit margin.Increasing health care and workers’ compensation premiums could also place usat a disadvantage in competing for new clients. In addition, periodic reassessmentsof workers’ compensation claims of prior periods may require an increase ordecrease to our reserves, and therefore may also affect our present and futurefinancial condition.

 

**Our financial condition may beaffected by increases in health insurance premiums, unemployment taxes andworkers’ compensation rates.**

 

Health insurance premiumsstate unemployment taxes and workers’ compensation rates are in part determinedby our claims experience and comprise a significant portion of our directcosts.  If we experience a large increasein claim activity, our unemployment taxes, health insurance premiums orworkers’ compensation insurance rates could increase.  Although we employ internal and external riskmanagement procedures in an attempt to manage our claims incidence, estimateclaims expenses and structure our benefits contracts to provide as much coststability as possible, we may not be able to prevent increases in claimactivity, accurately estimate our claims expenses or pass the cost of such increaseson to our clients.  Since our ability toincorporate such increases into service fees to our clients is constrained bycontractual arrangements with clients, a delay could result before suchincreases could be reflected in service fees. As a result, such increases couldhave a material adverse effect on our financial condition or results ofoperations.

 

**Significant growth throughacquisitions may adversely affect our management and operating systems.**

 

Our growth is makingsignificant demands on our management, operations and resources, includingworking capital. If we are not able to effectively manage our growth, ourbusiness and operations will be materially harmed. To manage growtheffectively, we will be required to continue to improve our operational,financial and managerial systems, procedures and controls, and hire and trainnew employees while managing our current operations and employees.Historically, our cash flow from operations has been insufficient to expandoperations.  Sufficient capital may notbe available in the future.

 

### **Ourbusiness may be adversely affected due to economic conditions in specificgeographic markets.**

 

All our revenues are derivedthrough our Texas operations. We attempt to diversify through differentindustry segments and by obtaining clients in different metropolitan markets. Whilewe  believe that our marketdiversification will eventually lessen this risk in addition to generatingsignificant revenue growth, we may not be able to duplicate in other marketsthe revenue growth and operating results necessary to offset economicconditions.

 

### **Unfavorableinterpretations of government laws may harm our PEO operations.**

 

Our PEO operations areaffected by many federal, state and local laws relating to labor, tax,insurance and employment matters and the provision of managed care services.Many of the laws related to the employment relationship were enacted before thedevelopment of alternative employment arrangements, such as those that weprovide, and do not specifically address the obligations and responsibilitiesof non-traditional employers. The unfavorable resolution of unsettledinterpretive issues concerning our relationship could have a material adverseeffect on our results of operations, financial condition and liquidity.Uncertainties arising under the Internal Revenue Code of 1986 include, but arenot limited to, the qualified tax status and favorable tax status of certainbenefit plans we and other alternative employers provide. In addition, new lawsand regulations may be enacted with respect to its activities, which may alsohave a material adverse effect on our business, financial condition, results ofoperations and liquidity.

 

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**If government regulationsregarding PEOs, temporary and permanent staffing are implemented, or if currentregulations are changed, our business could be harmed.**

 

Because many of the lawsrelated to the employment relationship were enacted prior to the development ofprofessional employer organizations and other staffing businesses, many ofthese laws do not specifically address the obligations and responsibilities ofnon-traditional employers. Our operations are affected by numerous federal,state and local laws and regulations relating to labor, tax, insurance andemployment matters.   By entering into anemployment relationship with employees who work at client locations, we assumeobligations and responsibilities of an employer under these laws. Uncertaintiesarising under the Internal Revenue Code of 1986, include, but are not limitedto, the qualified tax status and favorable tax status of certain benefit plansprovided by our company and other alternative employers. The unfavorableresolution of these unsettled issues could have a material adverse effect onresults of operations and financial condition. While many states do notexplicitly regulate PEOs, approximately one-half of the states have enactedlaws that have licensing; registration or certification requirements for PEOs,and several additional states are considering such laws. Such laws vary fromstate to state but generally provide for the monitoring of the fiscalresponsibility of PEOs and specify the employer responsibilities assumed byPEOs. Additionally, many states require licensure or registration of entitiesproviding temporary health care or nursing services as well as those offeringpermanent placement services. There can be no assurance that we will be able tocomply with any such regulations, which may be imposed upon us now or in thefuture, and our inability to comply with any such regulations could have amaterial adverse effect on our results of operations and financial condition.In addition, there can be no assurance that existing laws and regulations whichare not currently applicable to us will not be interpreted more broadly in thefuture to apply to our existing activities or that new laws and regulationswill not be enacted with respect to our activities. Either of these changescould have a material adverse effect on our business, financial condition,results of operations and liquidity.

 

### **Wemay not be able to obtain all of the licenses and certifications that we needto operate.**

 

State authorities extensivelyregulate the PEO, temporary medical staffing and permanent placement industryand some states require us to satisfy operating, licensing or certificationrequirements.  If we are unable to obtainor maintain all of the required licenses or certifications that we need, wecould experience material adverse effects to our results of operations,financial condition and liquidity.

 

**Health care or workers’compensation reform could impose unexpected burdens on our ability to conductour business.**

 

Regulation in the health careand workers’ compensation fields continues to evolve, and we cannot predictwhat additional government regulations affecting our business may be adopted inthe future. Changes in any of these laws or regulations may adversely impactthe demand for our services, require that we develop new or modified servicesto meet the demands of the marketplace, or require that we modify the fees thatwe charge for our services. Any such changes may adversely impact ourcompetitiveness and financial condition.

 

### **Ifwe lose our qualified status for certain tax purposes, our business would beadversely affected.**

 

The Internal Revenue Serviceestablished an Employee Leasing Market Segment Group for the purpose ofidentifying specific compliance issues prevalent in certain segments of the PEOindustry. One issue that arose in the course of these reviews is whether PEOsshould be considered the employers of worksite employees under Internal RevenueCode provisions applicable to employee benefit plans, which would permit PEOsto offer benefit plans that qualify for favorable tax treatment to worksiteemployees. If the IRS concludes that PEOs are not employers of worksiteemployees for purposes of the Internal Revenue Code, we would need to respondto the following adverse implications:

 

•                                          the tax-qualified status of our 401(k) plancould be revoked and our Cafeteria Plan may lose its favorable tax status;

•                                          worksite employees would not be able tocontinue to participate in such plans or in other employee benefit plans;

•                                          we may no longer be able to assume the clientcompany’s federal employment tax withholding obligations;

•                                          if such a conclusion were appliedretroactively, then employees’ vested account balances in the 401(k) plan wouldbecome taxable immediately, we would lose our tax deduction to the extentcontributions were not vested, the plan trust would become a taxable trust andpenalties, and additional taxes for prior periods could be assessed.

 

In such a circumstance, wewould face the risk of client dissatisfaction as well as potential litigation,and our financial condition; results of operations and liquidity could bematerially adversely affected.

 

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In April 2002, IRS issuedRev. Proc. 2002-21. While Rev. Proc. 2002-21 is intended to describe the stepsthat may be taken to insure the qualified status of defined contributionretirement plans maintained by PEOs for the benefit of worksite employees,there remain uncertainties regarding the operation and interpretation of thatrevenue procedure.  Under Rev. Proc.2002-21, if a PEO operates a multiple employer retirement plan in accordancewith IRS Code Section 413©, the IRS will not disqualify the retirementplan solely on the grounds that the plan violates or has violated the exclusivebenefit rule.  Primary LLC’s currentactive retirement savings plan is designed, and intended to be operated, inaccordance with IRS Code Section 413©.

 

**We are liable for the costs ofworksite employee payroll and benefits and bear the risk if such costs exceedthe fees payable to us by our clients.**

 

Under our standard clientservice agreement, we become a co-employer of worksite employees and assume theobligations to pay the salaries, wages and related benefit costs and payrolltaxes of such worksite employees. We assume these obligations as a principal,not merely as an agent, of the client company. If a client company does not pay us, or if the costs of benefitsprovided to worksite employees exceeds the fees paid by a client company, ourultimate liability for worksite employee payroll and benefits costs could havea material adverse effect on our financial condition or results ofoperations.  Our obligations includeresponsibility for

 

•                                          payment of the salaries and wages for workperformed by worksite employees, regardless of whether the client company makestimely payment to us of the associated service fee; and

•                                          periodic reassessments of workers’ compensationclaims of prior periods may require an increase or decrease to our reserves,and therefore may also affect our present and future financial conditions; and

•                                          providing benefits to worksite employees evenif the costs we incur to provide those benefits exceed the fees paid by theclient company.

 

**We bear the risk of nonpaymentfrom our clients and the possible effects of bankruptcy filings by clients.**

 

To the extent that any clientexperiences financial difficulty, or is otherwise unable to meet itsobligations as they become due, our financial condition and results ofoperations could be adversely affected. For work performed prior to thetermination of a client agreement, we may be obligated, as an employer, to paythe gross salaries and wages of the client’s worksite employees and the relatedemployment taxes and workers’ compensation costs, whether or not our client paysus on a timely basis, or at all. A significant increase in our uncollectedaccount receivables may have a material adverse effect on our earnings andfinancial condition.

 

To the extent that Primary LLCextends credit to its clients under its client service agreements, or is liablefor employee payroll and related expenses, and the client files for protectionunder the bankruptcy laws, Primary LLC may be unable to collect the funds owedto it from the client.  As a result,Primary LLC may be required to pay payroll and related expenses withoutreimbursement. In addition, although Primary LLC believes that its clientservice agreements should be terminable by it once a client enters bankruptcy,there is a risk that a bankruptcy court may not agree and would require PrimaryLLC to continue to perform services for such client, thereby increasing therisk that Primary LLC would be unable to collect funds from the client.  Therefore, the filing for bankruptcy by asignificant client, or a number of clients, may have a material adverse effectupon Primary LLC’s financial condition.

 

**We may be held liable for theactions of our clients and employees and therefore incur unforeseenliabilities.**

 

A number of legal issues withrespect to the co-employment arrangements among PEOs and temporary staffingfirms, their clients and worksite employees remain unresolved. These issuesinclude who bears the ultimate liability for violations of employment anddiscrimination laws. As a result of our status as a co-employer, we may beliable for violations of these or other laws despite contractual protections.While our client service agreements generally provide that the client is toindemnify us for any liability caused by the client’s failure to comply withits contractual obligations and the requirements imposed by law, we may not beable to collect on such a contractual indemnification claim and may then beresponsible for satisfying such liabilities. In addition, worksite employeesmay be deemed to be our agents, which could make us liable for their actions.

 

**We may be liable for the actionsof PEO worksite employees or clients and our insurance policies may not besufficient to cover such liabilities.**

 

Our PEO client servicesagreement establishes a contractual division of responsibilities between ourcompany and each client for various human resource matters, includingcompliance with and liability under various governmental laws and regulations.However, we may be subject to liability for violations of these or other laws despitethese contractual provisions, even if we do not participate in suchviolations.  Although such clientagreements generally provide that the client indemnify us for any liabilityattributable to the client’s failure to comply with its contractual obligationsand to the requirements imposed by law, we may not be able to collect on such acontractual indemnification claim, and thus may be responsible for satisfyingsuch liabilities. In addition, worksite employees may be deemed to be ouragents, subjecting us to liability for the actions of such worksite employees.As an employer, we, from time to time, may be subject in the ordinary course ofour business to a wide variety of employment-related claims such as claims forinjuries, wrongful death, harassment, discrimination, wage and hours 

 

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violationsand other matters. Although we carry $1 million of general liability insurance,with no deductible, and carry $1 million of employer  liability insurance, with no deductible, therecan be no assurance that any such insurance we carry will be sufficient tocover any judgments, settlements or costs relating to any present or futureclaims, suits or complaints. There also can be no assurance that sufficient insurancewill be available to us in the future and, if available, on satisfactory terms.If the insurance we carry is not sufficient to cover any judgments, settlementsor costs relating to any present or future claims, suits or complaints, thenour business and financial condition could be materially adversely affected.

 

**Our clients may be held liablefor employment taxes, which could discourage some companies from transactingbusiness with us.**

 

Pursuant to the PEO clientservice agreement, we assume responsibility and liability for the payment offederal employment taxes imposed under the Internal Revenue Code with respectto wages and salaries paid to our worksite employees as well as various statepayroll tax obligations.  While theclient service agreement provides that we have the sole legal responsibilityfor making these tax contributions, the Internal Revenue Service or applicablestate taxing authority could conclude that such liability cannot be completelytransferred to us. Accordingly, in the event that we fail to meet our taxwithholding and payment obligations, the client company may be held jointly andseverally liable.  There are essentiallythree types of federal employment tax obligations:

 

•                                          income tax withholding requirements;

•                                          obligations under the Federal IncomeContribution Act; and

•                                          obligations under the Federal and StatesUnemployment Tax Acts.

 

While this interpretive issuehas not, to our knowledge, discouraged clients from enrolling with us, it ispossible that a definitive adverse resolution of this issue would not do so inthe future.

 

### **Wemay not be fully covered by the insurance we procure.**

 

Although we carry liabilityinsurance, the insurance we purchase may not be sufficient to cover anyjudgments, settlements or costs relating to any present or future claims, suitsor complaints. In addition, sufficient insurance may not be available to us inthe future on satisfactory terms or at all. If the insurance we carry is notsufficient to cover any judgments, settlements or costs relating to any presentor future claims, suits or complaints, our business, financial condition,results of operations and liquidity could be materially adversely affected.

 

**If we were not able to renew allof the insurance plans, which cover worksite employees, our business would beadversely impacted.**

 

The maintenance of health andworkers’ compensation insurance plans that cover worksite employees is asignificant part of our business.  If wewere unable to secure such renewal contracts, our business would be adverselyaffected.  The current health andworkers’ compensation contracts are provided by vendors with whom we have anestablished relationship and on terms that we believe to be favorable.**** While we believethat renewal contracts could be secured on competitive terms without causingsignificant disruption to our business, there can be no assurance in thisregard.

 

### **Ourbusiness will suffer if our services are not competitive.**

 

Each of the payroll, temporaryemployee placement and the professional employer industries are characterizedby vigorous competition. Since we compete with numerous entities that havegreater resources than us in each of our business lines, our business willsuffer if we are not competitive with respect to each of the services we provide.We believe that our major competitors with respect to payroll and tax servicesare Automatic Data Processing, Inc., Ceridian Corp. and Paychex, Inc. Our majorcompetitors with respect to temporary staffing resources are Manpower andTempSource.  Our major competitors withrespect to professional employer services are ADP Total Source, Gevity HR andAdministaff, Inc. These companies may have greater financial and marketingresources than we. We also compete with manual payroll systems and computerizedpayroll services provided by banks, and smaller independent companies.

 

### **Ifwe cannot obtain sufficient levels of temporary employees, our business may beaffected.**

 

Our subsiairy AHJR is atemporary employment agency, which depends on a pool of qualified temporaryemployees willing to accept assignments for our clients. Its business ismaterially dependent upon the continued availability of such qualified medicaltemporary personnel. Our inability to secure temporary medical personnel wouldhave a material adverse effect on our business.

 

**Our client agreements areterminable and if a significant number of clients do not renew their contracts,our business may suffer.**

 

Our standard PEO clientagreement provides for successive one-year terms, subject to termination by usor by the 

 

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clientupon 30 days’ written notice prior to the expiration of the then-currentone-year term. A significant number of terminations by clients could have amaterial adverse effect on our financial condition, results of operations andliquidity.

 

**If we are unable to renew orreplace client companies, our financial condition and results of operationswill be adversely affected.**

 

Our standard PEO clientservice agreement is subject to non-renewal on 30 days notice by either us orthe client. Accordingly, the nature of the client service agreement makes usvulnerable to potential cancellations by existing clients, which couldmaterially and adversely affect our financial condition and results ofoperations.  In addition, our results ofoperations are dependent in part upon our ability to retain or replace ourclient companies upon the termination or cancellation of the client serviceagreement.  Clients may determine tocancel their relationship with us for numerous reasons, including economicfactors.  It is possible that the numberof contract cancellations will increase in the future.

 

**Since we have not paid dividendson our common stock, you cannot expect dividend income from an investment inour common stock.**

 

We have not paid any dividendson our common stock since our inception and do not contemplate or anticipatepaying any dividends on our common stock in the foreseeable future. Futurepotential lenders may prohibit us from paying dividends without its priorconsent. Therefore, holders of our common stock may not receive any dividendson their investment in us. Earnings, if any, will be retained and used tofinance the development and expansion of our business.

 

**We have outstanding shares ofrestricted stock, which if sold in the open market, may adversely affect itsstock price.**

 

Of the 86,278,297 sharesoutstanding as of March 3, 2005, the Company has outstanding 80,998,153shares, which may be deemed “restricted stock.” These restricted shares include the 79,096,254 shares owned bymanagement.  Possible or actual sales ofthe Company’s common stock by its present shareholders under Rule 144 orregistration statements may have a depressing effect on the price of thePrimary’s common stock in the open market.

 

**There Are Risks Associated WithOur Stock Trading On The NASD OTC Bulletin Board Rather Than A NationalExchange.**

 

There are significantconsequences associated with our stock trading on the NASD OTC Bulletin Boardrather than a national exchange. The effects of not being able to list oursecurities on a national exchange include:

 

•                  Limited release of the market prices of oursecurities;

•                  Limited news coverage of us;

•                  Limited interest by investors in oursecurities;

•                  Volatility of our stock price due to lowtrading volume;

•                  Increased difficulty in selling our securitiesin certain states due to **“blue sky” restrictions;and**

•                  Limited ability to issue additional securitiesor to secure additional financing.

 

### **IfOur Common Stock Is Subject To Penny Stock Rules, You May Have Greater**Difficulty Selling Your Shares.

 

The Securities Enforcement andPenny Stock Reform Act of 1990 applies to stocks characterized as “pennystocks,” and requires additional disclosure relating to the market for pennystocks in connection with trades in any stock defined as a penny stock. TheSecurities and Exchange Commission has adopted regulations that generallydefine a penny stock to be any equity security that has a market price of lessthan $5.00 per share, subject to certain exceptions.

 

The exceptions includeexchange-listed equity securities and any equity security issued by an issuerthat has

 

•                  net tangible assets of at least $2,000,000, ifthe issuer has been in continuous operation for at least three years;

•                  net tangible assets of at least $5,000,000, ifthe issuer has been in continuous operation for less than three years; or

•                  average annual revenue of at least $6,000,000for the last three years.

 

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Unless an exception isavailable, the regulations require the delivery, prior to any transactioninvolving a penny stock, of a disclosure schedule explaining the pennystock market and the associated risks.

 

If our financial conditiondoes not meet the above tests, then trading in the common stock will be coveredby Rules 15g-1 through 15g-6 and 15g-9 promulgated under the SecuritiesExchange Act. Under those rules, broker-dealers who recommend such securitiesto persons other than their established customers and institutional accreditedinvestors must make a special written suitability determination for thepurchaser and must have received the purchaser’s written agreement to atransaction prior to sale. These regulations would likely limit the ability ofbroker-dealers to trade in our common stock and thus would make it moredifficult for purchasers of common stock to sell their securities in thesecondary market. The market liquidity for the common stock could be severelyaffected.

 

##### ***ITEM 6.***

 

**MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussioncontains forward-looking statements. The Company’s actual results could differmaterially from those discussed in such forward-looking statements. Factorsthat could cause or contribute to such differences include those discussedbelow and elsewhere in this Form 10-K. See “Cautionary Note RegardingForward-Looking Statements” beginning on page 1. The following discussionshould be read in conjunction with the Company’s Consolidated FinancialStatements and Notes thereto included elsewhere in this filing. Historicalresults are not necessarily indicative of trends in operating results for anyfuture period.

 

### **Overview**

 

Primary Business Systems Inc. (“Primary”) is a holdingcompany with wholly owned subsidiaries operating in the Professional EmployerOrganization industry and the Temporary Staffing Services Industry and operatesthrough its subsidiaries, Primary Business Systems LLC, Concord Staffing Servicesand Primary HR Services LLC and as economies of scale can be realized combinethe individual entities in each sector.

 

Primary LLC is a regionalProfessional Employer Organization (PEO) committed providing human capitolmanagement solutions.  We offer ourclients, which are typically small to medium-sized business with between fiveand fifty employees, a broad range of product and services that provide acomplete solution for the clients’ human resources outsourcing needs.  Primary LLC’s products and services includebenefits administration, payroll administration, governmental compliance, riskmanagement, unemployment administration, and health, welfare and retirementbenefits.

 

Primary HR Services LLC is aregional Human Resources Outsourcing compnay focused on providing bothProfessional Employer Organization services and staffing services.  Primary HR did not have any revenues for thefical year ending December 31, 2004.

 

Concord Staffing Service is aregional temporary staffing services company helping business meet theirstaffing needs while minimizing there employee acquirement cost.  We offer qualified screened employees to ourclients that meet their employment needs on temporary biases. Concord providesall payroll administration, unemployment administration and assignmentadministration of the temporary staff.

 

***Revenues.***   Revenues consist of service fees charged by Primary LLC and Concord tocover the costs of certain employment-related taxes, workers’ compensationinsurance coverage and administrative and field services provided to theirclients. The service fee charged is invoiced along with each periodic payrolldelivered to the client. The client’s portion of health plan costs is chargedseparately and is not included in the service fee. Service revenues arerecognized in the period in which the worksite employee works. Under thisaccrual method of accounting, service fees relating to worksite employees withearned but unpaid wages at the end of each period are recognized as unbilledrevenues and the related payroll costs for such wages are accrued as aliability during the period in which the worksite employee earns wages.Subsequent to the end of each period, such wages are paid and the relatedservice fees are billed.

 

***Cost of Services****.*    Cost of services includes all direct costsassociated with revenue generating activities as well as employee benefitcosts, workers’ compensation insurance and state unemployment taxes.

 

Employee benefit costs arecomprised primarily of medical benefit costs, but also include costs of otheremployee benefits such as dental, disability and group life insurance. Benefitclaims incurred by worksite employees under the benefit plans are expensed asincurred according to the terms of each contract.

 

In certain instances, PrimaryLLC opts to make a contribution toward the cost of the worksite employees’medical 

 

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benefit costs. In most smallgroup health markets, medical benefit plan rates vary based on the medicalparticipants’ demographics. In order to offer a competitively priced businesssolution, Primary LLC may offer reduced medical benefit plan rates to worksiteemployees with positive risk characteristics. The addition of these selectedworksite employees offsets potential adverse selection and helps to stabilizethe overall medical benefit plan risk to Primary LLC.

 

Primary LLC offers its medicalbenefit plans through partnerships with premier health care companies. Thesecompanies have extensive provider networks and strong reputations in themarkets in which Primary LLC operates.

 

All of Primary LLC’s healthcare providers offer preferred provider organization (“PPO”) coverage.

 

Primary LLC’s workers’compensation program from January 1, 2002 through December 31, 2003was with Texas Mutual Insurance Company. The Company’s workers’ compensation program is a guaranteed cost programwhere the company has no liability beyond the premiums of the policy. Thecurrent policy term expires in November 2004.

 

State unemployment tax ratesvary from state to state and are based upon the employer’s claims history.Primary LLC aggressively manages its state unemployment tax exposure bycontesting unwarranted claims.

 

***Operating Expenses****.*   Operating expenses consist primarily of salaries, wages and commissionsassociated with the Primary’s internal employees, and general andadministrative expenses. Sales and marketing commissions and client referralfees are expensed as incurred. Primary expects that future revenue growth will result in increased operatingleverage, as Primary’s fixed operating expenses are leveraged over a largerrevenue base.

 

***Income Taxes.***   Primary records income tax expense using the asset and liability methodof accounting for deferred income taxes. Primary’s effective tax rate for 2004was 0%.

 

***Profitability.***   Profitability is largely dependent upon Primary’s success in generatingrevenues for its services and managing the costs that are within its control.Revenues and costs of service primarily relate to workers’ compensationcoverage, health benefit plans and state unemployment taxes. Primary seeks tomanage these costs through the use of: (i) workers’ compensation arrangementswith carriers who efficiently manage claims administration, internal riskassessment and client risk management programs; (ii) appropriately designedhealth benefit plans that encourage worksite employee participation, and, (iii)aggressive management of its state unemployment tax exposure.

 

### **Off-balanceSheet Arrangements**

 

Primary does not currentlyhave any off-balance sheet arrangements.

 

### **CriticalAccounting Policies**

 

The accounting policiesdescribed below are those that Primary considers critical in preparing itsfinancial statements. These policies include significant estimates made bymanagement using information available at the time the estimates are made.However, as described below, these estimates could change materially ifdifferent information or assumptions were used. The descriptions below aresummarized and have been simplified for clarity. A more detailed description ofthe significant accounting policies used by Primary in preparing its financialstatements is included in Note 1 of Notes to the Consolidated FinancialStatements and in Item 1 of this Form 10-K.

 

***RevenueRecognition****.*    Thegross billings that Primary LLC charges its clients under its Customer ServicesAgreement include each worksite employee’s gross wages, a service fee and, tothe extent elected by the clients, health and welfare benefit plan costs.Primary LLC’s service fee, which is computed as a percentage of gross wages, isintended to yield a profit to Primary LLC and cover the cost of certainemployment-related taxes, workers’ compensation insurance coverage, andadministrative and field services provided by Primary to the client, includingpayroll administration, record keeping, and safety, human resources, andregulatory compliance consultation. The component of the service fee related toadministration varies according to the size of the client, the amount andfrequency of payroll payments and the method of delivery of such payments. Thecomponent of the service fee related to workers’ compensation and unemploymentinsurance is based, in part, on the client’s historical claims experience. Allcharges by Primary LLC are invoiced along with each periodic payroll deliveredto the client.

 

Primary reports revenues fromservice fees in accordance with Emerging Issues Task Force (“EITF”) No. 99-19, *Reporting Revenue Gross as a Principal versus Net as an Agent*.The Company reports as revenues, on a gross basis, the total amount billed toclients for service fees, health and welfare benefit plan fees, workers’compensation and unemployment insurance fees. Primary reports revenues on agross basis for these fees because Primary Business Systems LLC is the primaryobligor and deemed to be the principal in

 

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these transactions under EITFNo. 99-19. Primary now reports revenues on a net basis for the amount billed toclients for worksite employee salaries, wages and certain payroll-related taxesless amounts paid to worksite employees and taxing authorities for thesesalaries, wages and taxes. Primary accounts for its revenues using the accrualmethod of accounting. Under the accrual method of accounting, Primaryrecognizes its revenues in the period in which the worksite employee performswork. Primary accrues revenues and unbilled receivables for service feesrelating to work performed by worksite employees but unpaid at the end of eachperiod. In addition, the related costs of services are accrued as a liabilityfor the same period. Subsequent to the end of each period, such costs are paidand the related PEO service fees are billed.

 

### **Resultsof Operations**

 

The following table presentsconsolidated results of Primary’s operations for the years endedDecember 31, 2004 and 2003, expressed as a percentage of revenues:

 
| **Year Ended**                    | ** ** | **December 31,   2001  2004** | ** ** | **December 31,  2002  2003** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| Revenues                          |       | 100.0                              | %          | 100.0                             | %          |
| Cost of Services                  |       | 61.62                              |       | 71.01                             |       |
| Gross Profit                      |       | 38.38                              |       | 28.99                             |       |
| Operating Expenses:               |       |                               |       |                              |       |
| General and administrative        |       | 18.84                              |       | 22.65                             |       |
| Salaries, wages and commissions   |       | 21.61                              |       | 15.75                             |       |
| Consulting Services               |       | .0                                 |       | 2.79                              |       |
| Total operating costs             |       | 40.45                              |       | 41.19                             |       |
| Operating (loss) income           |       | (2.07                              | )          | (12.21                            | )          |
| Other income                      |       | 0.0                                |       | .71                               |       |
| Interest expense                  |       | 0.0                                |       | 0.0                               |       |
| Other non-operating expense       |       | 0.0                                |       | 0.0                               |       |
| (Loss) income before income taxes |       | (2.07                              | )          | (11.50                            | )          |
| Income tax (benefit) provision    |       | 0                                  |       | 0                                 |       |
| Net income (loss)                 |       | (2.07                              | )          | (11.50                            | )          |

 

#### **ConsolidatedYear Ended December 31, 2004 Compared to Year Ended December 31, 2003**

 

For the year endedDecember 31, 2004, revenues increased $654,623, or 24.39%  from 2003, totaling $3,339,019 in 2004compared to $2,684,396, for 2003. Revenue change was primarily due to PrimaryLLC’s marketing strategy and ability to provide complete human resourceservices to our clients and lower risk associated with those clients.

 

Cost of services whichincludes the cost of Primary LLC’s medical benefit plans, workers’ compensationinsurance, state unemployment taxes and other costs were $2,057,354, or 61.62%of revenues for 2004, compared to $1,906,307, or 71.1% for 2003, representingan increase of $151,047 or 7.92%.

 

Benefit expenses were $ 81,868for 2004, compared to $ 105,699 for 2003. Decreases in the number of coveredworksite employees are largely responsible for decreases in benefitexpenses.  .

 

Workers’ compensation costswere $508,426 for 2003, as compared to $391,328 for 2001, representing anincrease of $117,098. Net change in Workers’ compensation costs was due to theaddition of worksite employees due to increases in the number of customers.

 

State unemployment taxes were$89,381 for 2004, compared to $50,652 for 2003. This increase was the result ofan increase of the number of covered employees.

 

Gross profit was $1,281,665 or38.38% for 2004, compared to $778,089, or 28.98% for 2003, representing anincrease of $503,576, or 64.72%. Gross profit margin increased primarily due toincreasing the number of clients, selelcting clients with lower risk and anincreased fee as a result of our emphasis on HR services.

 

Total Operating expenses were$1,350,775 or 40.45% for 2003, compared to $1,105,829 or 43.96% for 2003,representing an increase of $244,946.

 

Salaries, wages andcommissions were $ 721,725 or 18.84 % for 2004 compared to $422,807 or 15.75%for 2003, representing an increase of $298,918. Consolidated payroll cost increased are due largly to increases in thenumber of staff for Primary LLC and the addtion of Primary HR.

 

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General and Administrativeexpenses were $629,050 or  18.84% for2003, compared to $608,022 or 22.65% in 2002, representing an increase of$21,028. This increase represents expenses primarly related to legal andaccounting fees.

 

Net loss was $69,110 for 2004,compared to a net loss of $308,770 for 2003, representing a decrease in lossesof $239,660.  As the volume of ouroperating companies increase we expect to continue this trend.

 

##### ***Liquidity and Capital Resources***

 

Primary had $ 185,484 in cashand cash equivalents and restricted certificates of deposit atDecember 31, 2003. Primary is required to collateralize its obligationsunder its workers compensation coverage. The Company uses its cash as well ascertificates of deposits to collateralize these obligations as more fullydescribed below.

 

At November 18, 2003,Primary had deposited $96,097, as collateral with the Company’s workers’compensation plans upon renewal of its plan for 2003/2004. Primary’s workers’compensation programs for the 2001 through November 2003 program years aresubject to no further collateral adjustments.

 

The Company had no long-termdebt as of December 31, 2004.

 

The charges to clients byPrimary LLC derived from salaries, wages and payroll taxes is managed from acash flow perspective so that a matching exists between the time that the fundsare received from a client to the time that the funds are paid to the worksiteemployees and to the appropriate tax jurisdictions. As a co-employer, and underthe terms of the Client Services Agreement, Primary LLC is obligated to makecertain wage, tax and regulatory payments. Because of this, the objective ofPrimary LLC is to minimize the credit risk associated with remitting thepayroll and associated taxes before receiving from the client the service feescharged by Primary LLC.

 

Primary LLC’s primaryshort-term capital requirements relate to the payment of accrued payroll andpayroll taxes of its internal and worksite employees, accounts payable forcapital expenditures and the payment of accrued workers’ compensation expenseand health benefit plan premiums.

 

We expect to spend significantamounts to expand domestic sales and operations through mergers andacquisitions. As a result, we will need to generate significant additionalrevenue to achieve profitability based on such planned expenditures andexpansion. Even if we do achieve profitability, we may not be able to sustainor increase profitability on a quarterly or annual basis. If we do not achieveand maintain profitability, the market price for our common stock may furtherdecline.

 

If we do not receiveadditional capital when and in the amounts needed in the near future, our abilityto continue as a going concern is in substantial doubt.

 

Obtaining future financing maybe costly and will likely be dilutive to existing stockholders. If we are notable to obtain financing when and in the amounts needed, and on terms that areacceptable, our operations, financial condition and prospects could bematerially and adversely affected, and we could be forced to curtail ouroperations or sell part or all of our assets.

 

##### ***MATERIAL COMMITTEMENTS FOR CAPITAL EXPENDITURES***

 

Neither the Board norManagement have made any committments for capital expenditures.

 

##### ***Inflation***

 

Primary believes thatinflation in salaries and wages of worksite employees has a positive impact onits results of operations as its service fee is proportional to such changes insalaries and wages.

 

**ITEM7.    FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

Theinformation required by this Item 8 is contained below AT PAGES F25-42. See“Index to Consolidated Financial Statements and Financial Statement Schedule”beginning on Page (F1)    .

 

**ITEM8.   CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING  AND FINANCIALDISCLOSURE**

 

On February19, 2004, wedismissed Sellers & Andersen, LLC from its position as our  independent accountants.  Sellers & Andersen served as the independentauditors for the fiscal years ended December 31, 2002 and 2001.

 

Theaudit reports of Sellers & Andersen, LLC for the fiscal years endedDecember 31, 2002 and 2001 did not not contain an adverse opinion,disclaimer of opinion or modification of the opinion; however, the reports foreach year did include an opinion regarding PBS’s ability to continue as a goingconcern.

 

OurBoard of Directors participated in and approved the decision to changeindependent accountants.   The new 

 

23

----

 

accountants,as disclosed below, have been retained to audit ourf inancial statements forthe fiscal year ended December 31, 2003.

 

Duringthe two most recent fiscal years ended December 31, 2003 and through thedate of dismissal (February 19, 2004), there have been no disagreementsbetween us and Sellers & Andersen, LLC on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure, which disagreements if not resolved to the satisfaction of Sellers& Andersen, LLC would have caused them to make reference thereto in theirreport on the financial statements.

 

Duringthe two most recent fiscal years ended December 31, 2003 and through thedate of dismissal (February 19, 2004), there have been no reportableevents (as defined in Regulation S-B Item 304 (a) (1)(iv)).

 

Werequested that Sellers & Andersen furnish us with a letter addressed to theSEC stating whether or not it agrees with the above statements.  A copy of such letter was filed as an Exhibitto our Current Report on Form 8-K/A, dated the 26th  day of February 2004.

 

#### **Newindependent accountants**

 

On February 19, 2004, weengaged Madsen & Associates, Inc., CPA’s, to audit  our financial statements for the period endedDecember 31, 2003.  During the twomost recent  fiscal  years as well as during the period to itsappointment on February 19, 2004  wehad not consulted with Madsen  &Associates, CPA, Inc. regarding (i) the application of accounting principles toa specified transaction, either completed or proposed, or the type of auditopinion that might be  rendered on ourfinancial statements, and no written report or oral advice  was provided to us concluding there was animportant factor to be  considered by us,Primary, in reaching a decision as to an accounting, auditing or  financial reporting issue; or (ii) any matterthat was either the subject of a disagreement, as  that term is defined in Item 304(a)(1)(iv) ofRegulation S-B and the related instructions to Item 304 of Regulation S-B, or a reportable event, as that term isdefined in Item 304(a)(1)(iv) of Regulation S-B.

 

**ITEM8A.    CONTROLS AND PROCEDURES**

 

Our management,including our Chief Executive Officer and Chief Financial Officer, carried outan evaluation of our disclosure controls and procedures (as defined inRule 15d-15(e) under the Securities Exchange Act of 1934, as amended) asof the end of the period covered by this report. Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that we hadeffective controls and procedures for (i) recording, processing,summarizing and reporting information that is required to be disclosed in itsreports under the Securities Exchange Act of 1934, as amended, within the timeperiods specified in the Securities and Exchange Commission’s rules and formsand (ii) ensuring that information required to be disclosed in suchreports is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding disclosure.

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedDecember 31, 2004 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

Our Board of Directorsaddopted a code of ethics as of March 1, 2004. Our Code of Ethics andConduct covers all our employees including exicutive officers.

 

##### ***PART III.***

 

**ITEM9.    DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THEEXCHANGE ACT.**

 

The following table sets forththe names, ages and positions of our executive officers and directors as ofMarch 26, 2004. Under our bylaws, each director holds office until theelection and qualification of his successor or until his earlier resignation orremoval.

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                     |
|----------------------|------------|---------|------------|--------------------------------------------------|
|                 |       |    |       |                                             |
| Patrick  D. Matthews |       | 45      |       | Chairman,  Chief Executive Officer and President |
|                 |       |    |       |                                             |
| Amanda  Sinclair     |       | 22      |       | Director,  Executive Vice President, Secretary   |
|                 |       |    |       |                                             |
| Connie  Matthews     |       | 45      |       | Director                                         |

 

PATRICK D. MATTHEWS has beenChairman, CEO, CFO and President since November 29, 2003.  Mr. Matthews was the founder of PrimaryBusiness Systems LLC., and established the company in October 1999.  From February 1997, Mr. Matthews was aFounder, Director, Vice President of Aerostaff Services Inc., a PEO. FromMarch 1992 Mr. Matthews was a Director and Regional Vice President of BSIa Texas based PEO. From June 1990

 

24

----

 

Mr. Matthews was founder and Owner of MatthewsPainting Co., a commercial and residential painting company.  From March 1979 Mr. Matthews was VicePresident with Piccadilly Cafeterias. Mr. Matthews is the husband of Connie Matthews and the father of AmandaSinclair.

 

AMANDA SINCLAIR has been Director, Secretary and VicePresident since November 29, 2003. Mrs. Sinclair was a Member, director ofoperations of Primary Business Systems LLC since January 2000. From 1998 Mrs.Matthews was employed by Lane Bryant as a sales associate. Mrs. Sinclair iscurrently enrolled in a business degree program at St. Phillips College. AmandaSinclair is the daughter of Patrick D. Matthews and Connie Matthews.

 

CONNIE MATTHEWS was a founding Member of PrimaryBusiness Systems LLC. From 1993 to 1997 Mrs. Matthews was President of AHJRInc. DBA Connie’s Kids, a state registered day care facility.  Mrs. Matthews obtained an Associates Degreefrom St. Philips College in 1979. Connie Matthews is the wife of Patrick D.Matthews and the mother of Amanda Sinclair.

 

### **Compensationof Directors**

 

As all of ourdirectors are also employees of our company, we do not pay an additionalretainer to the persons currently serving on our Board of Directors.

 

### **Meetings and Committees of the Board of Directors.**

 

During the fiscal year ended December 31, 2004, theBoard of Directors met on eight****occasions andacted by unanimous written consent on eight occasions.****Nomember of the Board of Directors attended less than 75% of the aggregate numberof the total number of meetings of the Board of Directors

 

The Board of Directors has not established anycommittees.  All matters relating toaudit, compensation, nominations and corporate governance and considered andacted upon by our Board of Directors.

 

### **Compensation Committee Interlocks andInsider Participation in Compensation Decisions**

The Board does not have a compensation committee.There are no interlocks between our Directors and Directors of other companies.

 

**Audit Committee Financial Expert**

Our Board of Directors has determined that we do not have at least one member that qualifies as an audit committee financial expert pursuant to Item 401 of Regulation S-B.

 

 

### **CertainReports**

 

No person who,during the fiscal year ended December 31, 2003, was a Director, officer orbeneficial owner of more than ten percent of our common stock (which is theonly class of our securities registered under Section 12 of the SecuritiesExchange Act of 1934  failed to file on atimely basis, reports required by Section 16 of the Securities Exchange Actduring the most recent fiscal year or prior years.  The foregoing is based solely upon our reviewof Forms 3 and 4 during the most recent fiscal year as furnished us under Rule16a-3(d) under the Securities Exchange Act, and Forms 5 and amendments theretofurnished to us with respect to its most recent fiscal year, and anyrepresentation received by us from any reporting person that no Form 5 isrequired.

 

**Code of Ethics.**

 

Our Board of Directors adopted a code of ethics as of March 1, 2004. ** **Our Code of Ethics and Conduct covers all our employees and Directors, including our Chief Executive Officer and Chief Financial Officer. A copy of our Code of Ethics and Conduct is included as an exhibit to Form 10KSB for the year ended December 31, 2003 as previously filed with the Commission.

 

**ITEM 10****.    EXECUTIVE COMPENSATION**

 

The following table sets forth executive compensationinformation as of December 31, 2004 with respect to each executive officerwhose total annual salary and bonus exceeded $100,000 or more:

 
| ** **                           | ** ** | ** **  | ** ** | ** **         | ** ** | ** **     | ** ** | **Long  Term Payouts**           |
|--------------------------------------|------------|-------------|------------|--------------------|------------|----------------|------------|----------------------------------|
| **Anual  compensation**              | ** ** | **Awards**  | ** ** | **Payouts  Other** |
| **a  Name and  principal  position** | ** ** | **b  Year** | ** ** | **c  Sallary**     | ** ** | **d  Bonuses** | ** ** | **e  Other annual compensation** | ** ** | **f  Restricted  Stock  awards** | ** ** | **g  Securities  underlying  options/  SAR’s #** | ** ** | **h  LTIP  Payout** | ** ** | **i  Other** |
| Patrick Matthews CEO                 |       | 04          |       | 0                  |       | 0              |       | 0                                |   | 0 |   | 0 |   | 0 |   | 0 |
| Patrick Matthews CEO                 |       | 03          |       | 0                  |       | 0              |       | 0                                |   | 0 |   | 0 |   | 0 |   | 0 |

 

25

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Mr. Matthewsjoined the company in November 2002. Prior managemnet including the former CEO prior to Mr. Matthews are nolonger with the company.

 

##### ***OPTION/SAR GRANTS IN LAST FISCAL YEAR***

 

There were nostock option grants to any executive officers granted during the year endedDecember 31, 2004.

 

**AGGREGATEDOPTION/SAR EXERCISES IN LAST FISCAL YEAR**

**ANDFY-END OPTION/SAR VALUES**

 
| **Name** | ** ** | **Share  Acquired  on  Exercise** | ** ** | **Value  Realized** | ** ** | **Number  of Securities  Underlying Unexercised  Options/SARs at  December 31, 2003  Exercisable/Unexercisable** | ** ** | **Value of  Unexercised In-  The-Money  Options/SARs At  December 31, 2003 Exercisable/Unexercisable** |
|----------|------------|-----------------------------------|------------|---------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|
| none     |       | None                              |       | None                |       | None                                                                                                             |       | None                                                                                                   |

 

### **EmploymentAgreements**

 

All our employeesare employeed “at will” there are no formal employment agreements inplace.  We do not have a writtenemployment agrement with our CEO, Rick Matthews. Mr. Matthews receives a basesallary of  $ 120,000 per year.  We have not paid any bounuses to ourexecutive officers, including Mr. Matthews, during the fiscal yera endedDecember 31, 2004.

 

**ITEM 11****.   SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT.**

 

The following table sets forth common stock ownershipinformation as of March 3, 2005 with respect to:

 

•                  Each personknown to us to be the beneficial owner of more than 5% of our common stock;

•                  Each of ourofficers and directors;

•                  and Alldirectors and officers as a group.

 

This information as to beneficial ownership wasfurnished to us by or on behalf of the persons named. Unless otherwiseindicated, the business address of each person listed is 433 Kitty Hawk Dr.Suite 226 Universal City, TX 78148. Information with respect to the percent ofclass is based on outstanding shares of common stock as of March 26, 2004.Except as otherwise indicated, to our knowledge, each stockholder has solepower to vote and dispose of all the shares of common stock listed opposite hisname.

 

For purposes of this table, each person is deemed tohave beneficial ownership of any shares of our common 

stock such person has the right to acquire on orwithin 60 days after March 26, 2004.

 
| **Name  of Beneficial Owner**          | ** ** | **Amount of Shares  Beneficially Owned** | ** ** | **Percent of Class** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|----------------------|------------|
| Patrick D  Matthews                    |       | 68,393,591                               |       | 78.5                 |       |
| Amanda Sinclair                        |       | 6,417,850                                |       | 7.4                  |       |
| Connie Matthews                        |       | 4,284,813                                |       | 4.9                  |       |
|                                   |       |                                     |       |                 |       |
| All officers and  directors as a group |       | 79,096,254                               |       | 90.8                 |       |

 

26

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##### ***ITEM 12***. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.

 

As a group, the Directors of Primary own a number ofother companies that provide services to and for the benefit of Primary orclients of Primary; the other companies are Consumers Insurance Agency LLC andPBS Premium Funding LLC.  PBS PremiumFunding LLC currently has no operations. Consumers Insurnace Agency LLC (Consumers) provides insurance servicesfor the customers of Primary LLC.  Underthe agreement between Primary LLC and Consumers, Primary pays Consumers 9%managment fee for the insurance accounts of Primary’s clients managed byConsumers.  Consumers sole employee isserviced by Primary LLC.  Primary LLCbills Consumers for normal services provided all Primary LLC customers.

### ** **

### **ITEM13**.  Exhibits and reports on for 8-K

 

(a)           1.             Financial Statements

 

See the Consolidated Financial Statements and Notesthereto, together with the reports thereon of Madsen & Associates, LLPdated February 17, 2005, beginning on page F-1 of this report.

 

2.       Allschedules are omitted because they are not required or applicable, or therequired information is shown in the consolidated financial statements ornotes.

 

3.             Exhibits

 

**INDEX TO EXHIBITS**

 

The exhibits designated with an asterisk (*) are filed herewith.  All other exhibits have been previously filedwith the Commission and, pursuant to 17 C.F.R. §230.411, are incorporated byreference to the document referenced in brackets following the descriptions ofsuch exhibits.

 
| **Exhibit** | ** ** | ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                               |
|-------------|------------|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.**     | ** ** | **Page No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                          |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 3(i)        |       |         |       | Articles of Incorporation of the Company dated May  7, 1997 (Incorporated by reference from Form 10-SB filed March 10, 1999).                                                                                                                                                                                                                            |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 3(ii)       |       |         |       | Amended Articles of Incorporation of the Company  dated April 26, 1999 (Incorporated by reference from Form 10-SB filed March  10, 1999).                                                                                                                                                                                                                |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 3(iv)       |       |         |       | By-laws of the Company (Incorporated by reference  form Form 10-SB filed March 10, 1999).                                                                                                                                                                                                                                                                |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.1        |       |         |       | FORM OF EMPLOYEE STOCK OPTION PLAN AS ADOPTED BY  SHAREHOLDERS ON SEPTEMBER 21, 2004 9FILED AS EXHIBIT B to the Proxy Statement  for the annual meeting of shareholders held on September 21, 2004                                                                                                                                                       |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.2        |       |         |       | Form of Settlement Agreement dated as of January 4,  2005 by and among Primary Business Systems, Inc., Rick Matthews, Pine  Services, Inc., Frank Custable, Jr., Primary Business LLC and Suburban  Capital Corporation with Form of Letter modifying execution date to January  31, 2005.(FILED AS EXHIBIT 10.1 TO THE FORM 8-K DATED JANUARY 31, 2005) |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 14          |       |         |       | Code of Ethics (PREVIOUSLY FILED AS Exhbiit A to the  Proxy Statement for the annual meeting of shareholders held on september 21,  2004                                                                                                                                                                                                                 |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 21*         |       |         |       | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                     |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 23*         |       | F1           |       | Consent Letter of Independent Auditors (Included as  F-1)                                                                                                                                                                                                                                                                                                |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 31*         |       |         |       | Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                       |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 32*         |       |         |       | Certification pursuant to 18 U.S.C Section 1350                                                                                                                                                                                                                                                                                                          |

 

27

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(b)           Reportson Form 8-K

 

During the last quarter of the period covered by thisReport, there were no Current Reports on Form 8-K filed by us.

 

**ITEM 14****. 4 Principal Accountant Fees and Services.**

 

Our Audit Committee hasselected Madsen & Associates CPA’s, Inc. as its independent accountants forthe current fiscal year and for the year ended December 31, 2003.  For the fiscal year ended December 31,2002,  Sellers & Andersen, LLC servedas our independent accountants.  Theaudit services provided by Madsen & Associates CPA’s, Inc. and Sellers& Andersen, LLC, consist of examination of financial statements, servicesrelative to filings with the Securities and Exchange Commission, andconsultation in regard to various accounting matters. The following tablepresents the total fees paid for professional audit and non-audit servicesrendered by our independent auditors for the audit of our annual financialstatements for the years ended December 31, 2004 and December 31, 2003 and feesbilled for other services rendered by our independent auditors during thoseperiods. 

 
| ** **                  | ** ** | **Fiscal Year Ended  December 31, 2004** | ** ** | **Fiscal Year Ended  December 31, 2003** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| **Audit  Fees (1)**         |       | $                                        | 14,680     |                                     | $          | 14,000 |   |
| **Audit-Related  Fees (2)** |       | N/A                                      |       | N/A                                      |       |
| **Tax  Fees (3)**           |       | N/A                                      |       | N/A                                      |       |
| **All  Other Fees (4)**     |       | N/A                                      |       | N/A                                      |       |
| **Total**                   |       | $                                        | 14,680     |                                     | $          | 14,000 |   |

 

----

(1)           Audit servicesconsist of audit work performed in the preparation of financial statements forthe fiscal year and for the review of financial statements included inQuarterly Reports on Form 10-Q during the fiscal year, as well as work thatgenerally only the independent auditor can reasonably be expected to provide,including consents for registration statement flings and responding to SECcomment letters on annual and quarterly filings.

(2)           Audit-relatedservices consist of assurance and related services that are traditionallyperformed by the independent auditor, including due diligence related tomergers and acquisitions, agreed upon procedures report and accounting andregulatory consultations.

(3)           Tax services consistof all services performed by the independent auditor’s tax personnel, exceptthose services specifically related to the audit of the financial statements,and includes fees in the areas of tax compliance, tax planning, and tax advice.

(4)           Other servicesconsist of those service not captured in the other categories.

 

Our Board has determined that the services provided byour independent auditors and the fees paid to them for such services has notcompromised the independence of our independent auditors.

 

Consistent with SEC policies regarding auditorindependence, the Board has responsibility for appointing, setting compensationand overseeing the work of the independent auditor. In recognition of thisresponsibility, the Board has established a policy to pre-approve all audit andpermissible non-audit services provided by the independent auditor.  Prior to engagement of the independentauditor for the next year’s audit, management will submit a detaileddescription of the audit and permissible non-audit services expected to berendered during that year for each of four categories of services describedbelow to the Board for approval. In addition, management will also provide tothe Board for its approval a fee proposal for the services proposed to berendered by the independent auditor. Prior to the engagement of the independent auditor, the Board willapprove both the description of audit and permissible non-audit servicesproposed to be rendered by the independent auditor and the budget for all suchservices.  The fees are budgeted and theBoard requires the independent auditor and management to report actual feesversus the budget periodically throughout the year by category of service.

 

During the year, circumstances may arise when it maybecome necessary to engage the independent auditor for additional services notcontemplated in the original pre-approval. In those instances, the Boardrequires separate pre-approval before engaging the independent auditor.  To ensure prompt handling of unexpectedmatters, the Board may delegate pre-approval authority to one or more of itsmembers. The member to whom such authority is delegated must report, forinformational purposes only, any pre-approval decisions to the Board at itsnext scheduled meeting.  The fourcategories of services provided by the independent auditor are as defined inthe footnotes to the fee table set forth above.

 

**[THIS SPACE INTENTIONALLY LEFT BLANK]**

 

28

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**PRIMARY BUSINESS SYSTEMS, INC. and SUBSIDIARIES**

 

29

----

 

#### **Audited Financial StatementsDecember 31, 2004 and 2003**

 

 

#### **PRIMARY BUSINESS SYSTEMS, INC. and SUBSIDIARIES**

#### ***FINANCIAL STATEMENTS***

#### ***TABLE OF CONTENTS*December 31, 2004 and 2003**

 

 
| *** ***                                                   |   |
|----------------------------------------------------------------|--------|
| ***REPORT OF INDEPENDENT  REGISTERED PUBLIC ACCOUNTING FIRM*** | F-1    |
| ** **                                                     |   |
| ** **                                                     |   |
| ***FINANCIAL  STATEMENTS:***                                   |   |
| **Balance  Sheets**                                            | F-2    |
| ** **                                                     |   |
| **Statements of Operations**                                   | F-4    |
| ** **                                                     |   |
| **Statements  of Stockholders’ Equity**                   | F-5    |
| ** **                                                     |   |
| **Statements of Cash Flows**                                   | F-7    |
| ** **                                                     |   |
| **NOTES TO FINANCIAL STATEMENTS**                              | F-9    |

 

----

 

| **MADSEN & ASSOCIATES CPAs, INC.**                     | 684 East Vine St #3                      |
|------------------------------------------------------------|------------------------------------------|
| **Certified Public Accountants and Business  Consultants** | Murray, Utah 84107                       |
|                                                       | Telephone 801-268-2632  Fax 801-262-3978 |

 

Board of Directors & Audit Committee

Primary Business Systems, Inc. and Subsidiaries

Universal City, Texas

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

We have audited the accompanying consolidated balance sheets of PrimaryBusiness Systems, Inc. and Subsidiaries as of December 31, 2004 and 2003, andthe related consolidated statements of operations, stockholders’ equity, andcash flows for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of PrimaryBusiness System, Inc. and Subsidiaries as of December 31, 2004 and 2003, andthe results of its consolidated operations and cash flows for the years thenended in conformity with accounting principles generally accepted in the UnitedStates of America.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As disclosed in the consolidatedfinancial statements and notes to the consolidated financial statements, theCompany will need additional working capital for its planned activity and toservice its debt. This raises substantial doubt about the Company’s ability tocontinue as a going concern. Management’s plans regarding these matters aredescribed in the notes to the consolidated financial statements. The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 
| /s/ Madsen & Associates CPAs’, Inc |   |
|---------------------------------------------|--------|
|                                        |
| February 17, 2005                           |
| Murray, Utah                                |

 

F-1

----

 

**PRIMARY BUSINESS SYSTEMS,INC.  and SUBSIDIARIES**

**Consolidated Balance Sheet**

**As of December 31, 2004 and 2003**

 
| ** **                             | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| ASSETS                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets                         |       |       |       |       |       |
| Cash                                   |       | $          | 185,484    |       | $          | 19,845 |   |
| Notes receivable                       |       | 107,949    |       | 46,007     |       |
| Client accounts  receivable            |       | 64,435     |       | 70,589     |       |
| Prepaid Expenses                       |       | 1,051      |       | 73,186     |       |
| Workers  Compensation Prepaid Premiums |       | 96,097     |       | 96,097     |       |
| Total Current  Assets                  |       | 455,016    |       | 305,724    |       |
|                                   |       |       |       |       |       |
| Property &  Equipment              |       |       |       |       |       |
| Furniture &  Fixtures              |       | 54,454     |       | 52,244     |       |
| Computer  equipment                    |       | 91,322     |       | 84,300     |       |
| Vehicles                               |       | 15,485     |       | 0          |       |
| Payroll software                       |       | 43,724     |       | 43,724     |       |
|                                   |       |       |       |       |       |
| (Less)  Accumulated depreciation       |       | 204,986    |       | 180,269    |       |
|                                   |       | (149,213   | )          | (119,153   | )          |
| Total Property  & Equipment        |       | 55,773     |       | 61,116     |       |
|                                   |       |       |       |       |       |
| Other assets                           |       |       |       |       |       |
| Security  Deposits                     |       | 1,054      |       | 1,054      |       |
| Customer list,  net of amortization    |       | 9,000      |       | 11,400     |       |
| Prepaid  marketing                     |       |       |       |       |       |
| Goodwill                               |       | 557,240    |       | 557,240    |       |
| Total Other  Assets                    |       | 567,294    |       | 569,694    |       |
| Total Assets                           |       | $          | 1,078,083  |       | $          | 936,534 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

F-2

----

 

**PRIMARY BUSINESS SYSTEMS, INC.**

**and SUBSIDIARIES**

Consolidated Balance Sheet

As of December 31, 2004and 2003

 
| ** **                                                                                          | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| LIABILITIES                                                                                         |       |       |       |       |       |
|                                                                                                |       |       |       |       |       |
| Current  liabilities                                                                                |       |       |       |       |       |
| Accounts payable                                                                                    |       | $          | 109,812    |       | $          | 214,656 |   |
| Checks drawn on  uncollected payrolls                                                               |       | 177,532    |       | 69,160     |       |
| Client Payroll  Tax payable                                                                         |       | 259,260    |       | 20,024     |       |
| Workers Comp  payable                                                                               |       | 60,953     |       | 45,139     |       |
| Client payroll  amount withheld                                                                     |       | 1,532      |       | 16,477     |       |
| Notes Payable                                                                                       |       | 0          |       | 20,973     |       |
| Line of credit  from banks                                                                          |       | 38,522     |       | 44,988     |       |
| Total Current  Liabilities                                                                          |       | 647,611    |       | 431,416    |       |
|                                                                                                |       |       |       |       |       |
| Other  liabilities                                                                                  |       |       |       |       |       |
| Due to shareholder/officer                                                                          |       | 622,496    |       | 628,023    |       |
| Total  Liabilities                                                                                  |       | 1,270,107  |       | 1,059,448  |       |
|                                                                                                |       |       |       |       |       |
| Stockholders’  Equity                                                                          |       |       |       |       |       |
| Common stock, -  $.001 par value authorized - 750,000,000 shares Issued and outstanding  86,278,279 |       | 86,278     |       | 85,750     |       |
| Additional paid-in  capital                                                                         |       | 976,342    |       | 976,870    |       |
| Accumulated  (deficit)                                                                              |       | (1,254,644 | )          | (1,185,534 | )          |
| Total  Stockholders’ Equity                                                                    |       | (192,024   | )          | (122,914   | )          |
| Total  liabilities and Stockholders’s Equity                                                   |       | $          | 1,078,083  |       | $          | 936,534 |   |

 

**The accompanying notes are an integral part oftheses financial statements.**

 

F-3

----

 

**PRIMARY BUSINESS SYSTEMS, INC.**

**and SUBSIDIARIES**

ConsolidatedStatements of Operations

For The Years EndedDecember 31, 2004 and 2003

 
| ** **                                             | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                               |       | $          | 3,339,019  |       | $          | 2,684,396 |   |
| Cost of revenues                                       |       | 2,057,354  |       | 1,906,307  |       |
| Gross Profit                                           |       | 1,281,665  |       | 778,089    |       |
| Operating  Expenses                                    |       |       |       |       |       |
| General and  Administrative                            |       | 629,050    |       | 608,022    |       |
| Wages,  commissions & salaries                     |       | 721,725    |       | 422,807    |       |
| Consulting  services for acquisition                   |       | 0          |       | 75,000     |       |
| Total Operating  Expenses                              |       | 1,350,775  |       | 1,105,829  |       |
| (Loss) from  Operations                                |       | (69,110    | )          | (327,740   | )          |
| Other Income                                           |       | 0          |       | 18,970     |       |
| (Loss) Before  Prevision For Income Tax                |       | (69,110    | )          | (308,770   | )          |
| Provision for  Income Taxes                            |       | —     |       | —     |       |
| Net (Loss)                                             |       | (69,110    | )          | (308,770   | )          |
|                                                   |       |       |       |       |       |
| Basic and  Diluted Net (Loss) Per Share                |       | $          | (0.00      | )          | $          | (0.00 | ) |
| Basic and  Diluted Weighted Average Shares Outstanding |       | 86,278,279 |       | 85,253,767 |       |

 

The Accompanying notes are an integral part of thesefinancial statements.

 

F-4

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 **PRIMARY BUSINESS SYSTEMS,INC.  and SUBSIDIARIES**

Consolidated Statementsof Stockholders’ Equity (Deficiency)

For the Years EndedDecember 31, 2004 and 2003

 
| ** **                                                                                                               | ** ** | ** **       | ** ** | **Additional  Paid-in-  Capitol** | ** ** | **Accumulated  Deficit** | ** ** | **Total Equity  (Deficiency)** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                                                                                                               | ** ** | **Common Stock** | ** ** | ** **                        | ** ** | ** **               |
| **Shares**                                                                                                               | ** ** | **Amount**       |
| Balance  12/31/2004                                                                                                      |       | 85,750,747       |       | $                                 | 87,750     |                     | $          | 976,870                        |       | $ | (1,185,534 | ) | $ | (122,914 | ) |
| Correction in  number of shares issued and outstanding after a change in transfer agents (no  shares issued during 2004) |       | 527,550          |       | 528                               |       | (528                     | )          | —                         |       | — |   |
| Net (Loss)                                                                                                               |       | —           |       | —                            |       | —                   |       | (69,110                        | )          | (69,110 | ) |
| Balance December  31, 2003                                                                                               |       | 86,278,267       |       | 86,278                            |       | 976,342                  |       | (1,254,644                     | )          | (192,024 | ) |
|                                                                                                                          |            |                  |            |                                   |            |                          |            |                                |            |  |  |  |  |  |  |

 

The Accompanying notes are an integral part of thesefinancial statements.

 

F-5

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**PRIMARY BUSINESS SYSTEMS, INC.& SUBSIDIARIES**

Consolidated Statementsof Stockholders' Equity (Deficiency)(continued)

For the years EndedDecember 31, 2004 and 2003

 
| ** **                                                                                                | ** ** | ** **       | ** ** | **Additional  Paid-in-  Capitol** | ** ** | **Accumulated  Deficit** | ** ** | **Total Equity  (Deficiency)** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                                                                                                | ** ** | **Common Stock** | ** ** | ** **                        | ** ** | ** **               |
| **Shares**                                                                                                | ** ** | **Amount**       |
| Balance December  31, 2003                                                                                |       | 11,202,664       |       | 11,202                            |       | 1,069,806                |       | (876,764                       | )          | 204,244 |   |
| Issuance of  Restricted Stock for acquisition of AHJR, INC stock                                          |       | 72,400,000       |       | 72,400                            |       | (65,160                  | )          |                           |       | 7,240 |   |
| Issuance of  unrestricted stock for services                                                              |       | 3,700,000        |       | 3,700                             |       | 181,300                  |       |                           |       | 185,000 |   |
| Issuance of  restricted stock for services                                                                |       | 100,000          |       | 100                               |       | 4,900                    |       |                           |       | 5,000 |   |
| Return of  unrestricted stock for non performance of services                                             |       | (3,000,000       | )          | 3,000                             | )          | (147,000                 | )          |                           |       | (150,000 | ) |
| Return of  restricted stock for non performance of services – of originally issued  1,790,000 shares |       | (500,000         | )          | (500                              | )          | (279,500                 | )          |                           |       | (280,000 | ) |
| Issuance of  restricted stock for services                                                                |       | 494,728          |       | 495                               |       | 44,505                   |       |                           |       | 45,000 |   |
| Issuance of  stock for prepaid services                                                                   |       | 876,355          |       | 876                               |       | 82,966                   |       |                           |       | 83,872 |   |
| Issuance of  restricted stock for purchases of assets                                                     |       | 152,000          |       | 152                               |       | 37,848                   |       |                           |       | 38,000 |   |
| Issuance of  restricted stock for services                                                                |       | 75,000           |       | 75                                |       | 22,425                   |       |                           |       | 22,500 |   |
| Issuance of  restricted stock for prepaid services                                                        |       | 250,000          |       | 250                               |       | 24,750                   |       |                           |       | 25,000 |   |
| Net (Loss)                                                                                                |       | —           |       | —                            |       | —                   |       | (308,770                       | )          | (308,770 | ) |
| Balance December  31, 2004                                                                                |       | 85,750,747       |       | $                                 | 85,750     |                     | $          | 976,870                        |       | $ | (1,185,543 | ) | $ | (122,914 | ) |
|                                                                                                           |            |                  |            |                                   |            |                          |            |                                |            |  |  |  |  |  |  |

 

The Accompanying notes are an integral part of thesefinancial statements.

 

F-6

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###### **PRIMARY BUSINESS SYSTEMS, INC. and SUBSIDIARIES**

ConsolidatedStatements of Cash Flows

For the Years EndedDecember 31, 2004 and 2003

 
| ** **                                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net Income                                                                                           |       | $        | (69,110    | )        | $          | (308,770 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used by) operating  activities: |       |     |       |     |       |
| Depreciation and  amortization                                                                       |       | 32,460   |       | 31,776   |       |
| (Increase)  decrease in accounts receivable                                                          |       | 6,154    |       | (7,116   | )          |
| (Increase)  decrease in prepaid expense                                                              |       | 72,135   |       | (73,186  | )          |
| (Increase)  decrease in workers comp deposit                                                         |       | 0        |       | (16,000  | )          |
| (Increase)  decrease in other assets                                                                 |       | 0        |       | 7,792    |       |
| Increase  (decrease) in accounts payable                                                             |       | (104,844 | )          | (14,507  | )          |
| Increase  (decrease) in client payroll tax liability                                                 |       | 239,236  |       | 36,501   |       |
| Increase  (decrease) in other current liabilities                                                    |       | 869      |       | 183,653  |       |
| (Increase)  decrease in other assets                                                                 |       | (61,942  | )          | 262,306  |       |
| Consulting  Services for Acquisition                                                                 |       |     |       |     |       |
| Checks drawn on  uncollected payrolls                                                                |       | 108,372  |       | (42,089  | )          |
| Total  Adjustments                                                                                   |       | 292,440  |       | 369,131  |       |
| Net cash  provided by (used in) operating activities                                                 |       | 223,330  |       | 60,360   |       |
| Cash flows from  investing activities                                                                |       |     |       |     |       |
| Payments for the  purchase of property                                                               |       | (24,717  | )          | (55,994  | )          |
| Net cash  provided by (used in) investing activities                                                 |       | (27,717  | )          | (55,994  | )          |
| Cash flows from  financing activities                                                                |       |     |       |     |       |
| Net adjustment  for common stock transaction                                                         |       | 0        |       | (18,388  | )          |
| Net borrowing  under line of credit                                                                  |       | (6,465   | )          | (10,819  | )          |
| Net borrowing on  notes payable                                                                      |       | (20,973  | )          | 20,973   |       |
| Principal  payments on short-term debt                                                               |       |     |       | (41,893  | )          |
| Due to  shareholders/officers                                                                        |       | (5,536   | )          | 34,738   |       |
| Net cash  provided by (used in) financing activities                                                 |       | (32,974  | )          | (15,389  | )          |
| Net increase  (decrease) in cash and cash equivalents                                                |       | 165,639  |       | (11,023  | )          |
| Cash and cash  equivalents at beginning of year                                                      |       | 19,845   |       | 30,086   |       |
| Cash and Cash  equivalents at end of year                                                            |       | $        | 185,484    |     | $          | 19,845 |   |

 

**The accompanying notes are an integral part ofthese financial statements**

 

F-7

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| ** **                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Supplemental  information                                      |       |     |       |     |       |
| Cash payments  for interest expense                            |       | $        | 15,644     |     | $          | 18,859 |   |
| Cash payments  for incom taxes                                 |       | $        | —     |     | $          | — |   |
| Non Cash Items                                                 |       |     |       |     |       |
| Stock for  goodwill                                            |       | $        |       |     | $          | 7,240 |   |
| Stock for professional  services                               |       | $        |       |     | $          | 343,872 |   |
| Stock (returned)  for non performance of services              |       | $        |       |     | $          | (270,000 | ) |
| Stock (returned)  for non performance of professional services |       | $        |       |     | $          | (160,000 | ) |
| Stock issued for  purchase of assets                           |       | $        |       |     | $          | 38,000 |   |

 

The Accompanying notes are an integral part of thesefinancial statements.

 

F-8

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PRIMARY BUSINESS SYSTEMS,INC. and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIALSTATEMENTS

FOR THE PERIOD ENDINGDECEMBER 31, 2004

 

**NOTE 1 - Organization and Nature of Business**

 

***History***

 

Primary Business Systems, Inc. (the “Company”), was incorporated in theState of Nevada in 1996 under the name of Anonymous Data Corporation.  In July 2001 the Company was name changed toShareCom, Inc..  The Company then changedits name to Primary Business Systems, Inc. on March 2003.

 

On May 28, 2002 the Company filed a Form 8-K with the United StatesSecurities and Exchange Commission (“SEC”). It states:

 

“On or about May 28, 2002, a change of control of the Registrantoccurred, as a result of Pine Services, Ltd (“Purchaser”) purchasing432,551,000 shares of $.001 par value, capital voting stock of the Registrant(the “Shares”) from Mr. Brad Nordling, the former president of theRegistrant.  The consideration for thepurchase included the payment of $100,000 to the Seller; the release of certainnote obligations aggregating approximately $885,000 and permitting certainassets of the Registrant to be transferred to another entity controlled bySeller.  The source of the cash componentof the consideration for the purchase of the Shares was the working capital ofthe Purchaser.

 

“The basis of the control is Purchaser’s ownership of 432,551,000shares representing approximately 59% of the issued and outstanding Shares.  The transaction which resulted in the changein control was the closing of a stock purchase agreement.”

 

From about May 28, 2002 to around November 29, 2002 the Company didtransactions, including a 2500 for 1 reverse stock split of common stock. TheCompany at that juncture was a “publicly held shell company” of which priormanagement confirms it personally assumed all debt, leaving the Company withoutany assets and without any liabilities.

 

On or about November 29, 2002 Pine Services, Inc. (Pine) sold itsequity interest in ShareCom, Inc, of approximately 59% controlling interest inShareCom, Inc., to the owners of Primary Business Systems, LLC (Primary LLC).

 

In March 2003 the company changed its name to Primary Business SystemsInc. (Primary)

 

On February 28, 2003 theCompany purchased all of the outstanding shares of AHJR, Inc. (a State of Texascorporation), an inactive corporation, in a stock for stock transaction.   AHJR Inc., was previously owned principallyby Patrick Matthews, the primary shareholder of the Company.  In the stock for stock transaction all sharesof AHJR, Inc., passed to Primary in exchange for 72,400,000 shares ofrestricted stock of Primary valued at $.0001 per share, or $7,240.  The $7,240 is recorded as goodwill on the balancesheet.  AHJR Inc. is currently operatingunder the trade name Concord Staffing Services (Concord).

 

**Business Activity**

 

Primary Business Systems Inc. is a holding companywhose subsidiaries operate in the Professional Employment Organization (“PEO”) industryand in the temporary staffing services industry. Its wholly owned subsidiary,  Primary LLC, is a provider of PEOservices.  PEO is defined as anorganization that provides an integrated and cost effective approach to themanagement and administration of the human resources and employer risk of itsclients, by contractually assuming substantial employer rights,responsibilities,  and risks and, throughthe establishment and maintenance of an employer relationship with the workersassigned to its clients.  Its otherwholly owned subsidiary, Concord is a temporary staffing services company andworks with temporary employment services. It began operations March 1, 2003. It has a third wholly ownedsubsidiary Primary HR Services LLC which operates as a human resourcesoutsourcing company and is based in Mississippi.  It began operations in June 2004.

 

**NOTE 2 - Summary of Significant AccountingPolicies**

 

**(a) - Principles of Consolidation**

 

The consolidated financial statements shown in this report excludes thehistorical operating information of the parent before December 31, 2002, andinstead includes the operating information of the wholly owned

 

F-9

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subsidiary, Primary Business Systems, LLC. (PrimaryLLC) from January 1, 2001 to December 31, 2004. It also includes the operations of its wholly owned subsidiary ConcordStaffing Services (Concord) since it began operations March 1, 2003.  In 2004 the Company established the whollyowned subsidiary Primary HR Services, LLC (Primary HR) and the year financialstatements include those activities since 2004.

 

Primary prepares its books and records on the accrual basis forfinancial reporting and for income taxes. The financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America.  Primary LLC before becoming a subsidiary ofthe Company maintained its books and records on an accrual basis of accountingand it reported the results of its operations for income tax purposes as an “S”corporation.  These financial statementshave been modified to present them on an ongoing basis of accounting and taxreporting, including but not limited to accruing compensation to officers(members) as part of the wages, commissions & salaries on the statement ofoperations.

 

All significant intercompany transactions have been eliminated.

 

**(b) - Cash Equivalents**

 

For purposes of reporting of cash flows, Primary classifies all cashand short-term investments with maturities of three months or less to be cashequivalents.

 

**(c) - Receivables**

 

Management has elected to record bad debts using the direct write-offmethod.  Accounting principles generallyaccepted in the United States require that the allowance method be used toreflect bad debts.  However, inmanagements’ opinion, the effect of the use of the direct write-off method isnot materially different from the results that would have been obtained had theallowance method been followed.

 

**(d) - Property and Equipment**

 

Property and equipment are valued at cost.  Depreciation is provided by use of thestraight-line method over the estimated useful lives of the assets.  Useful lives of the respective assets aregenerally from three to seven years. Purchase of property and equipment greater than $500 and major repairsof existing equipment that extends the useful life of the asset are capitalized

 

Depreciation and amortization expense for the years December 31, 2004and 2003 are $32,460 and 31,776 respectively.

 

**(e) - Intangible Assets**

 

The Financial Accounting Standards Board has issued FASB 142  “Goodwill and Other Intangible Assets”effective for fiscal years beginning after December 15, 2001.  According to this FASB, goodwill should notbe amortized.  Instead, it should bereviewed for impairment at least annually and charged to earnings only when itsrecorded value exceeds its fair value. Primary has elected to follow FASB 142.

 

**(f) -****Impairment of Long-Lived Assets**

 

It is Primary’s policy to periodically evaluate the economic recoverability of all of its long-lived assets. In accordance with that policy, when Primary determines that an assethas been impaired, it recognizes the loss in its statement of operations.

 

F-10

----

 

**(g) - Fair Value of Financial Instruments**

 

The methods and assumptions used to estimate the fair value of eachclass of financial instruments are as follows:

 

Cash and cash equivalents, receivables, prepaidpremiums, accounts payable, and notes payable are reflected in the financialstatements at fair value because of the short maturity of these instruments.

 

Amounts due to shareholder/officer for stock yet toissue are contingent on the future value of the stock yet to issue from time totime.  Therefore, the amount reflected inthe financial statements is not measurable. Refer to the Note discussing equity and stock commitments for furtherinformation.

 

**(h) -****Concentration of Credit Risk**

 

Financial instrumentswhich potentially subject Primary to concentrations of credit risk consistprincipally of cash deposits.  Primarywill exceed the FDIC insurable limit in an account only when gross payrollsbilled and collected post to the payroll bank account before the payroll checksand tax deposits are posted.  The timelinessof the deposits and withdrawals are such that no material credit risk isestimated by management.

 

Primary provided itsservices to its clients based upon an evaluation of each client’s financialcondition.  Exposure to losses onreceivables is primarily dependent on each client’s financial condition.  Primary mitigates such exposure by requiringcustomers to immediately pay via electronic funds transfer the amount of thepayroll billed, through COD payment of invoices, through deposits or letters-of-creditor personal guarantees from certain clients. Exposure to credit losses is monitored by Primary, and allowances foranticipated losses are established when necessary.

 

**(i) - Revenue Recognition**

 

Primary Subsidiaries (Primary HR, Primary LLC &Concord) bills its clients on each payroll date an administrative fee for: 1)the actual gross salaries and wages plus related employment taxes and employeebenefits of the company’s worksite employees, 2) actual costs associated withworksite employees, (e.g. recruiting costs, drug testing, etc.), 3) workerscompensation and unemployment costs, 4) other benefits associated with the worksiteemployees, 5) other insurance premiums associated with the client, and 6)payroll processing.

 

Primary Subsidiaries administrative fee is computedbased upon either a fixed fee per worksite employee or an establishedpercentage of gross salaries and wages, negotiated at the time the clientservice agreement is executed.  Primary Subsidiariesadministrative fee varies by client based primarily upon the nature and size fthe client’s business and Primary Subsidiaries assessment of the costs andrisks associated with the employment of the client’s worksite employees.

 

Accordingly, Primary Subsidiaries administrative feeincome will fluctuate based on the number and gross salaries and wages ofworksite employees, and the mix of client fee income will fluctuate based onthe mix of total client fee arrangements and terms.  Although most contracts are for one year andrenew automatically, Primary Subsidiaries and its clients generally have theability to terminate the relationship with 30 days notice.

 

F-11

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**(j) - Income Taxes**

 

Primary has adopted the provisions of statements of FinancialAccounting Standards No. 109, “Accounting for Income Taxes,” which incorporatesthe use of the asset and liability approach of accounting for incometaxes.  The asset and liability approachrequires the recognition of deferred tax assets and liabilities for theexpected future consequences of temporary differences between the financialreporting basis and the income tax basis of assets and liabilities.

 

During 2002, Primary underwent an ownership change as defined inSection 382 of the Internal Revenue Code. Consequently, management believes the net operating loss carry forwardsare lost.  The Federal net operatinglosses since the ownership change is $1,149,038.  Primary continues to suffer operating lossesand there remains an uncertainty as to whether any income tax benefit can beused in the future.  Therefore, norecognition of any net operating loss carry forwards or benefits are recognizedin these financial statements.

 

**(j) - Comprehensive Income**

 

Primary has adopted SFAS No. 130 Reporting Comprehensive Income.  Primary has no reportable differences betweennet income and comprehensive income, therefore a statement of comprehensiveincome has not been presented.

 

**(k) - Stock-Based Compensation**SFASNo. 123, “Accounting for Stock-Based Compensation” established accounting anddisclosure requirements using a fair-value based method of accounting forstock-based employee compensation plans. Primary has elected to remain on its current method of 

Accounting as described above, and has adopted the disclosurerequirements of SFAS No. 123.

 

**(l) - Net (Loss) Per Share ofCommon Stock**

 

The basic and diluted net income (loss) per commonshare in the accompanying statements of operations are based upon the netincome (loss) divided by the weighted average number of shares outstandingduring the periods presented.  Dilutednet (loss) per common share is the same as basic net (loss) per share becauseincluding any pending shares to issued for goodwill or otherwise would beanti-dilutive.

 

**(m) - Advertising Costs**

 

Primary’s advertising costs are expensed when incurred.  Total advertising costs of $7,982 and $17,093were incurred for the years ended December 31, 2004 and 2003, respectively.

 

**(n) – Reclassifications**

 

Certain amounts in2003 have been reclassified and represented to conform to the current financialstatement presentation.

 

**(o) - Use of Accounting Estimates**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

**(p) - Other Recent AccountingPronouncements**

 

The Company does not expect that the adoption of other recentpronouncements from the Public Company Accounting Oversight Board to have any materialimpact on its financial statements.

 

F-12

----

 

**NOTE 3 - Equity & Common Stock**

 

On November 29, 2002 Pine Services, Inc. (“Pine”) sold its equityinterest in the Company, of approximately 59% controlling interest in theCompany (a publicly held “shell” at the time), to the owners of PrimaryBusiness Systems, LLC (Primary LLC). This agreement left the other existing stockholders of the Companybefore the acquisition, which was a reverse merger, a total of 126,104 freetrading shares of common stock valued at a negative $7,500.

 

The new controlling owners of the Company, who were the prior owners ofPrimary LLC, received 2,696,254 restricted shares of common stock.  The new owners of the Company agreed to payPine $550,000 for its controlling interest in the Company.  The new major shareholder of the Companypledged up to 60% of his stock in the Company as security to Pine that it willbe paid in full the $550,000.  The newowners have three years to pay it off (approximately the end of 2005).  The Company issued an additional 4,000,000restricted shares of common stock to the new major shareholder for services,giving the new owners received as a group a total of 6,696,254 restrictedshares of common stock valued at a total of $51,650.

 

On February 28, 2003 Primary purchased all of the outstanding shares ofConcord Staffing, Inc.(“Concord”), in a stock for stock transaction.  All of the shares of Concord were exchangedfor 72,400,000 shares of restricted stock of Primary valued at $.0001 pershare, or $7,240.

 

During 2003 Primary issued 3,700,000 unrestrictedshares of stock for services of which 3,000,000 were cancelled for nonperformance for a net value of $35,000. (Refer to Note on Contingent Liabilities.)

 

An Additional 1,453,355 shares of restricted commonstock were issued for services andasset purchase for a total value of $174,372.

 

During 2003 an additional 494,728 shares ofunrestricted common stock were issued for services with an assigned value of $45,000.

 

During 2004 no new issues of stock occurred.

 

During 2004 the Company changed stock transferagents.  In the change over the new stocktransfer agent identified an additional 527,550 shares of stock issued andoutstanding not previously recognized by the former stock transfer agent (about0.6% of the total issued and outstanding stock of the Company).  Management believes these additional sharescome from free trading shares of stock paid to consultants for services thatthey in turn sold to others before the Company cancelled the stock for nonperformance of services.  The Company hasdetermined to treat such stock issued as non recoverable and non assessable andto drop efforts of recourse back to the consultants.

 

**NOTE 4 -Goodwill**

 

Goodwill is the amount paid by the Company to acquireits Subsidiaries in excess of the assets received less liabilitiesassumed.  Goodwill is valued at cost,which is $557,240.  Management evaluatedgoodwill for impairment as of December 31, 2004 and determined the value ofgoodwill exceeds its cost.  Therefore,goodwill has no impairment as of December 31, 2004 and 2003.  In addition, refer to the Note discussingStock-Based Compensation and the Note on Pending Change in Majority Ownershipfor additional explanation of what comprises Primary LLC portion of goodwill,which is $550,000.

 

**NOTE 5 -Employee Benefit Plan**

 

During 2001 Primary LLC established a 401-K employeebenefit plan for its office and administrative employees and worksiteemployees.  Approximately $12,000 of theplan contribution for 2004 pertains to Primary LLC per se as the balance of theplan contribution relates to its clients and the worksite employees associatedwith them.

 

F-13

----

 

**NOTE 6 - Prepaid Marketing**

 

During 2003 management concluded there was no value left in prepaidmarketing and wrote it off to the Statement of Operations.  During 2004 there were no prepaid marketingtransactions.

 

**NOTE 7 -Prepaid Expenses**

 

During 2003 Primary paid in stock $108,872 in prepaid consultingservices to three unrelated companies. These services were received over one year and are amortized at $9,073per month with $27,215 amortized in 2003 and the balance of $81,657 amortizedin 2004 with no remaining balance in prepaid expenses as of December 31, 2004.

 

**NOTE 8 -Related Party Transactions**

 

The majority shareholder advances the Company funds as needed from timeto time.  The funds advanced, includingfor stock yet to issue, is $622,496 and $628,032 at December 31, 2004 and 2003respectively.

 

The note receivable of $107,949 and $46,007 as of December 31, 2004 and2003 respectively is for amounts due from Consumers Insurance Agency LLC(Consumers), an entity owned by the Company’s CEO.  The Company bills Consumers and it reimbursesthe Company for use of 500 square feet of office space, office supplies, andpayroll.  These reimbursements are notincome, but rather offset the related operating expenses in the statement ofoperations.

 

**NOTE 9 -Lease Commitments**

 

The Company leases the two facilities it operates out of and it leasesone piece of equipment as of December 31, 2004.

 

The lease expense for years ended December 31, 2004 and 2003 is $35,841and $36,687 respectively.  Primarynegotiated a new lease agreement as of July 2002 for the space currentlyoccupied for the main office for $1,715 per month.  The lease ends in January 2005 with an optiontaken by the Company to continue the lease on a month-to-month basis for six monthsto July 2005.  The sales office in downtownSan Antonio, Texas is committed through May 2006 for a base price of $1,067through May 2005 and $1,118 thereafter. The Company leases equipment through September 2005 at $248 per month.

 

Totallease commitment is:

 

| ** ** | ** ** | **Average Monthly****Commitment** | ** ** | **Total****Commitment** | ** ** |
|------------|------------|-----------------------------------|------------|-------------------------|------------|
|       |       |                              |       |                    |       |
| 2005       |       | $                                 | 2,141      |                    | $          | 25,686 |   |
| 2006       |       | $                                 | 1,118      |                    | $          | 5,592 |   |
|       |       |                              |       |                    |       |
| Total      |       |                              |       | $                       | 31,277     |   |
|            |            |                                   |            |                         |            |  |  |  |

 

The Company sub rents 500 square feet to ConsumersInsurance Agency LLC (“Consumers”) starting in May 2002.  Rents received in 2004 and 2003 are $5,390and $4,490 respectively.

 

**NOTE 10 –Accounts Receivable**

 

Except to accounts receivables factored, the Companyhas pledged its accounts receivable as security for a line of credit with afinancial institution.  Refer to Note on “Lineof Credit.”

 

F-14

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**NOTE 11 –Accounts Receivable Factored**

 

Concord, the Company’s subsidiary factors its accountsreceivable.  As of December 31, 2004 and2003 it had $7,677 and $0 accounts receivable factored, all with recourse, noneof which have ever returned to the Company for lack of payment.  The Company has made no provision for loss onthese receivables factored as it believes the risk exposure is minimal.

 

**NOTE 12 -Line of Credit**

 
| **Lines of Credit are:**                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                         |       |     |       |     |       |
| Jourdanton State Bank, limit of $50,000 at 8% interest.  Collateralized by equipment and accounts receivable |       | $        | 33,732     |     | $          | 44,988 |   |
|                                                                                                         |       |     |       |     |       |
| Frost Bank,  limit of $10,000 at 5% interest, Unsecured due on May 30, 2003                                  |       | 4,790    |       | 0        |       |
|                                                                                                         |       | $        | 38,522     |     | $          | 44,988 |   |

 

**NOTE 13 -Notes Payable**

 

Primary has two notes payable to non financial institutions, both dueduring 2004 for a total amount of $20,973. The notes bear interest at approximately 9% per annum.  The Company paid off these notes during 2004.

 

**NOTE 14 -Workers Compensation**

 

Primary LLC maintains workers compensation insurance for worksiteemployees and its regular and administrative employees.  Gross payroll to employees is over$13,000,000 for December 31, 2003 and over $14,000,000 for December 31, 2004.The insurance carrier audits the premiums yearly and based on their findingsassess in the renewal process the amount to pay up front in premiums the nextyear.  Premium deposits are $96,097 and$96,097 as of December 31, 2004 and 2003 respectively.

 

**NOTE 15 -Going Concern Issues**

 

Primary continues suffering significant losses and working capitalreflects more current liabilities than current assets.  Unless sufficient additional cash flows comeinto Primary, either through equity financing, profits, or a reduction of cashexpenses, Primary could be in jeopardy of continuing operations.  Management has developed a strategy, which itbelieves will accomplish this objective through additional long and short termloans and sale of common stock of Primary to related and unrelatedparties.  In addition, refer to the nextnote.

 

F-15

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**NOTE 16 -Pending Change in Majority Ownership and Liquidation of the Operations,  Assets, and Liabilities of the Company inSettlement of Ongoing Litigation**

 

The Company and its majority shareholders (“Matthews”)are in litigation with Suburban Capital, et al (“Advisor”) and Pine Inc.(“Pine”), jointly called (“Former Owners”). The Advisor claims the Company owes them significant amounts ofunrestricted stock of the Company for services provided and that the Companyand Matthews have impeeded them from receiving additional significant amountsof stock of the Company.  Pine claims theCompany has defaulted on the Promissory Note that is not due until November2005.  The Company and Matthews on theother hand have refused to issue additional stock, and even cancelled somestock previously issued in an effort to reduce its loss for the non performanceof the Advisor.

 

The Company and Matthews filed suite in District courtof Bexar County Texas against the Former Owners and was awarded a defaultjudgment. On December 31, 2004 the Company and Matthews finalized a SettlementAgreement with the Advisor to settle this ongoing litigation.

 

The Settlement Agreement provides that all partiesinvolved essentially unwind the transactions that occurred on or about November2002 and following.  This entailsMatthews returning their returning controlling interest in the Company to Pine.In exchange Matthews will receive all of the operations, assets, andliabilities of the Company from Pine.  Inaddition, Matthews will receive from Pine and the Advisor $200,000 payable$50,000 at the time of signing and $50,000 about each six months beginning inApril 2005 thereafter until paid in full. Matthews retains as security a 59% undilutable equity interest in thetotal equity of the Company until the $200,000 is paid in full.  The change of ownership and the passing ofoperations, assets, and liabilities will take effect upon the Advisor and/orPine paying $100,000 of its payment obligations, anticipated to occur in May2005.  At the point Matthews receives the$100,000 and the ownership changes hands, then all parties anticipate theCompany will have no assets or liabilities and will become a publicly held“shell” company.

 

The Settlement Agreement is subject to numerousclosing conditions; consequently, there can be no assurance that thetransaction will be completed as described or at all.

 

The Company has evaluated the Settlement Agreement andhas determined to not accrue or recognize any potential financial obligation orexposure that may or may not arise from this matter.

 

F-16

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**NOTE 17 –Contingent Liabilities & Litigation**

 

The Company presently has two separate lawsuits filedagainst it pending resolution.  Limiteddiscovery has occurred in both cases. Management believes the contingent liability of these lawsuits isminimal, and therefore, it has concluded to accrue no contingency in thefinancial statements for them. .

 

On August 2, 2004, AMS Staff Leasing, LTD. filed alawsuit in the 298th Judicial District Court, Dallas County, Texas (Cause No. 04-07448-M) against Patrick DeyMatthews,  CEO of the Company, theCompany, and Primary Business Systems LLC (the “Defendants”).  It alleges,among other claims, breach of fiduciary duty, breach of contract andconversion.  On September 13, 2004,the  Defendants filed a motion totransfer venue and answer.

 

On or about September 13, 2004, Primary BusinessSystems L.L.C. (“PBS LLC”), a wholly owned subsidiary of the Company, wasserved with a suit filed in the 341st Judicial District Court, Webb County,Texas, by Laredo Cal-Tex, Inc. (Cause No. 2004- CV F 001296 D3), allegingbreach of contract.  On September 30,2004, PBS LLC filed a motion to transfer venue and answer.

 

The Company intends to vigorously defend itselfagainst both of these lawsuits and to pursue what remedies it may have againstthe plaintiffs.

 

F-17

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of the Exchange Act, theregistrant has caused this report to be signed on its behalf by theundersigned, hereunto duly authorized.

 
|   | Primary Business Systems Inc.         |
|--------|---------------------------------------|
|   |                                  |
|   |                                  |
|   | By:                                   | /s/ Patrick D Matthews |   |
|   | PATRICK D. MATTHEWS,                  |
|   | CHIEF EXECUTIVE OFFICER AND PRESIDENT |

 

Date: March 30, 2005

 

In accordance with the Exchange Act, this report has been signed belowby the following persons on behalf of the registrant and in the capacities andon the dates indicated.

 
| **Signature**                           | ** ** | **Capacity**                                                                                | ** ** | **Date**       |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------------|
|                                    |       |                                                                                        |       |           |
| /s/   Patrick D Matthews |       | Chairman of the Board, Chief Executive Officer and  President (Principal Executive Officer) |       | March 30, 2005 |
| Patrick D Matthews                      |       |                                                                                        |       |           |
|                                    |       |                                                                                        |       |           |
|                                    |       |                                                                                        |       |           |
| /s/   Amanda Sinclair    |       | Director, Executive Vice President, Secretary                                               |       | March 30, 2004 |
| Amanda Sinclair                         |       |                                                                                        |       |           |
|                                    |       |                                                                                        |       |           |
|                                    |       |                                                                                        |       |           |
| /s/ Connie Matthews                     |       | Director                                                                                    |       | March 30, 2005 |
| Connie Matthews                         |       |                                                                                        |       |           |

 

F-18

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**INDEX TO EXHIBITS**

 

The exhibits designated with an asterisk (*) are filed herewith.  All other exhibits have been previously filedwith the Commission and, pursuant to 17 C.F.R. §230.411, are incorporated byreference to the document referenced in brackets following the descriptions ofsuch exhibits.

 
| **Exhibit** | ** ** | ** **   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                               |
|-------------|------------|--------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **No.**     | ** ** | **Page No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                          |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 3(i)        |       |         |       | Articles of Incorporation of the Company dated May  7, 1997 (Incorporated by reference from Form 10-SB filed March 10, 1999).                                                                                                                                                                                                                            |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 3(ii)       |       |         |       | Amended Articles of Incorporation of the Company  dated April 26, 1999 (Incorporated by reference from Form 10-SB filed March  10, 1999).                                                                                                                                                                                                                |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 3(iv)       |       |         |       | By-laws of the Company (Incorporated by reference  form Form 10-SB filed March 10, 1999).                                                                                                                                                                                                                                                                |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.1        |       |         |       | FORM OF EMPLOYEE STOCK OPTION PLAN AS ADOPTED BY  SHAREHOLDERS ON SEPTEMBER 21, 2004 9FILED AS EXHIBIT B to the Proxy Statement  for the annual meeting of shareholders held on September 21, 2004                                                                                                                                                       |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.2        |       |         |       | Form of Settlement Agreement dated as of January 4,  2005 by and among Primary Business Systems, Inc., Rick Matthews, Pine  Services, Inc., Frank Custable, Jr., Primary Business LLC and Suburban  Capital Corporation with Form of Letter modifying execution date to January  31, 2005.(FILED AS EXHIBIT 10.1 TO THE FORM 8-K DATED JANUARY 31, 2005) |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 14          |       |         |       | Code of Ethics (PREVIOUSLY FILED AS Exhbiit A to the  Proxy Statement for the annual meeting of shareholders held on september 21,  2004                                                                                                                                                                                                                 |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 21*         |       |         |       | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                     |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 23*         |       | F1           |       | Consent Letter of Independent Auditors (Included as  F-1)                                                                                                                                                                                                                                                                                                |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 31*         |       |         |       | Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                       |
|        |       |         |       |                                                                                                                                                                                                                                                                                                                                                     |
| 32*         |       |         |       | Certification pursuant to 18 U.S.C Section 1350                                                                                                                                                                                                                                                                                                          |

 

F-19

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