UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




[ x ]
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of
1934






For the
fiscal year ended February
29, 2008




Commission File Number333-86706




PAPERFREE MEDICAL SOLUTIONS,
INC.


(Exact
name of registrant as specified in its charter)




Nevada
            
            98-0375957(State
      or other jurisdiction of Incorporation
      or organization)
            
            (IRS
      Employer Identification
      No.)1817 Dogwood Court
              Kokomo,
      Indiana 46901
            
            46901(Address
      of Principal Executive offices)
            
            (Zip
      Code)


Registrant's
telephone number, including area code:(765)
456-1089
 
 Securities
registered pursuant to Section 12(b) of the Act: None
 
 Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $.001 par value
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o   No
x
 Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o    No
x
 Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x     No
o
 
 Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. Yes o     No
x
 
 Indicate
by check mark if the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Check one:
 o
              Large
      accelerated filer
              
              o
              Accelerated
      filero
              Non-accelerated
      filer
              
              x
              Smaller
      reporting company
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o    No
x
 
 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last
business day of the registrant’s most recently completed second fiscal quarter:
$126,497as of August
31, 2007.
 
 Number of
shares outstanding of issuer’s Common Stock, no par value outstanding as of July
11, 2008: 97,561,908.
 
 List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 414(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). None.
 
 
 
 
 TABLE
OF CONTENTS
 (Omits
inapplicable items)
 PagePART
      IItem
      1.
              Business
              3Item
      2.
              Properties
              6Item
      3.
              Legal
      Proceedings
              6PART
      IIItem
      5.
              Market
      for Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities
              7Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              9Item
      8.
              Financial
      Statements and Supplementary Data
              11Item
      9A.
              Controls
      and Procedures
              12PART
      IIIItem
      10.
              Directors,
      Executive Officer; Corporate Governance
              13Item
      11.
              Executive
      Compensation
              15Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              17Item
      13.
              Certain
      Relationships and Related Transactions and Director
      Independence
              17Item
      14.
              Principal
      Accountant Fees and Services
              20PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              21Signatures
              28
 
 We want
to provide you with more meaningful and useful information. This Annual Report
on Form 10-K contains certain "forward-looking statements" (as such term is
defined in Section 21E of the Securities Exchange Act of 1934, as amended).
These statements reflect our current expectations regarding our possible future
results of operations, performance and achievements. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.
 
 Wherever possible, we have tried to
identify these forward-looking statements by words such as “anticipate,”
“believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions. These
statements reflect our current beliefs and are based on information currently
available to us. Accordingly, these statements are subject to certain risks,
uncertainties, and contingencies, which could cause our actual results,
performance, or achievements to differ materially from those expressed in, or
implied by, such statements. These risks, uncertainties and contingencies
include, without limitation, the factors set forth under Item 7.Management’s Discussion and Analysis
of Financial Condition and Results of Operation.
 
 
 
 PART
I
 Item
1. Business.
 
 We
provide billing services under the trade name LEAPprn that enable medical
providers to comply with the Health Insurance Portability and Accountability Act
of 1996 (“HIPAA”). Under provisions of HIPAA and regulations thereunder,
providers that bill or receive compensation from the federal government are
required to move to a digital office environment and meet certain security
standards by 2014.
 
 Our
services have been delivered two ways: direct, managed services provision,
wherein we deliver services through a combination of direct, on-site
implementation, and software services through broadband connectivity in which
our customers perform all data entry using our software on our host
computer.
 
 Our
marketing focus has been sole practitioners, doctors and other health providers
operating in clinics of up to ten providers outside major metropolitan areas in
the Midwest. We no longer expect to achieve a critical mass of business to
establish a stable niche in our business. We have approximately 15 customers, a
decline from 31 at the beginning of fiscal 2008. This decline is due to the
consolidation of medical practices in our market area and our inability to
provide our former products and services that required a presence at the
customer site or data entry as a result of the elimination of our full-time work
force.
 
 During
fiscal 2009, we will try to sell our business and/or acquire a new business
through a reverse merger or similar acquisition. If not, we will in all
likelihood go out of business and file for protection under the federal
bankruptcy laws.
 
 We have
one part-time employee: Michael Gelmon, our Chief Executive Officer, Chief
Financial Officer, President, Treasurer, Secretary and director. This represents
a reduction from approximately twenty full time and four part time employees at
the end of fiscal 2007. This reduction included the resignation effective
January 31, 2008 of our former Chief Executive Officer and director and our
former Chief Financial Officer and director. An interim Chief Financial Officer,
Chief Financial Officer, director and President was appointed that date; he
then, along with the other two remaining directors resigned effective May 21,
2008 when Mr. Gelmon was appointed. Our Vice President of Business Development
resigned June 16, 2008. See Item 10. Directors and Executive Officers;
Corporate Governance.
 
 Effective
May 24, 2006 the Company entered into an engagement agreement for Revenue Cycle
Management Services with Saint John’s Health System in Andersen Indiana,
pursuant to which our KMS Computer Services, Inc. subsidiary (“KMS”) provided
outsourced billing and collections services.
 
 In
September 2006, we acquired Doctors Billing Corporation, a Michigan Corporation
(“DBC”), to bring in-house the practice management and occupational medicine
software we have used to deliver billing management services. We acquired 100%
of the shares of DBC, in exchange for $76,058: $74,308 in cash and 175,000
shares of common stock valued at $1,750. The assets and revenue of DBC were not
material. The purchase price was allocated to goodwill and intangible assets,
and was written off at the end of fiscal 2007.
 
 Effective
December 1, 2006, we entered into a billing management service contract with
Bona Vista Programs of Kokomo, Indiana pursuant to which KMS provided outsourced
billing and collections services.
 
 We were
incorporated in Nevada in 2002.
 
 Healthcare
provider markets are highly competitive and characterized by rapid changes due
to regulation and technological improvements. The healthcare industry is
currently being driven by process optimization initiatives especially as it
relates to HIPAA compliance, reducing medical errors and improving financial
performance.
 
 Our
products and services have competed with other healthcare software-based
companies currently in the market, and other companies that may enter the market
with emerging technologies. We have been at a severe competitive disadvantage
because our competitors possess financial, technological and human resources far
greater than ours, as well as established reputations and products.
 
 Item
1A. Risk Factors.
 
 Omitted.
 
 Item
1B. Unresolved Staff Comments.
 
 None.
 
 Item
2. Property.
 
 The
Company’s 3,000 square foot offices in Kokomo Indiana are leased for $4,167 per
month. The lease expires August 31, 2011.
 
 Item
3. Legal Proceedings.
 
 We are
the plaintiff in a case captioned PaperFree Medical Solutions, Inc. v. Kim
Allbaugh and KMS, LLC pending in the Marion Superior Court, State of Indiana
filed on July 27, 2007. Mr. Allbaugh is the former Chief Operating Officer of
KMS. KMS, LLC is purportedly a limited liability company owned and controlled by
Mr. Allbaugh. Our complaint seeks actual and punitive damages for breach of a
representation and warranty and fraud by Mr. Allbaugh, the seller, in connection
with our acquisition of KMS in 2005, and breach of a related employment
agreement with Mr. Allbaugh and the office lease for our former premises with
KMS, LLC. The case is not yet scheduled for trial. The defendants have filed
counterclaims for unspecified damages from breach of contract and fraud,
including a separate case against KMS in which a $46,276 judgment was entered on
May 5, 2008. We intend to seek to have this default judgment
vacated.
 
 Item 4. Submission of Matters to a
Vote of Security Holders.
 
 None.
 
 PART
II
 
 Item
5. Market for the Registrant’s Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities.
 
 Market
Prices, Number of Shareholders and Dividends
 
 Our
Common Stock is traded on the OTC Bulletin Board under the symbol "PFMS.OB". The
following table sets forth the high and low bid prices of our Common Stock, as
reported by the OTC Bulletin Board for each fiscal quarter since March 1,
2006.
 Bid
      PriceFiscal
      Year
                Quarter
                High
                Low2009
                First
      quarter ended May 31, 2008
                $.0028
                $.00072008
                First
      quarter ended May 31, 2007
                $.0035
                $.001Second
      quarter ended August 31, 2007
                $.0039
                $.0012Third
      quarter ended November 30, 2007
                $.0035
                $.0008Fourth
      quarter ended February 29, 2008
                $.0015
                $.00082007
                First
      quarter ended May 31, 2006
                $.015
                $.015Second
      quarter ended August 31, 2006
                $.0175
                $.0012Third
      quarter ended November 30, 2006
                $.006
                $.0055Fourth
      quarter ended February 28, 2007
                $.004
                $.0035
  We have
approximately 330 shareholders of record and an unknown number that hold shares
in street name.
 
 No
dividends have been declared since February 28, 2006. We presently intend to
retain any earnings to fund development of our business. Decisions concerning
dividend payments in the future will depend on income and cash requirements.
Holders of common stock are entitled to receive such dividends as may be
declared by our board of directors. There are no contractual restrictions on our
ability to pay dividends to our shareholders, except as set forth in Item
13.Certain Relationships and
Related Transactions and Director Independence – Securities Purchase
Agreements.
 
 Securities
authorized for issuance under equity compensation plans.
 
 The
following is provided with respect to compensation plans (including individual
compensation arrangements) under which equity securities are authorized for
issuance as of February 29, 2008.
 
 Equity
Compensation Plan Information
  Plan
      category
                Number of securities to be issued upon exercise of
      outstanding options, warrants and rights
                  (a)
                Weighted-average exercise price of outstanding options,
      warrants and
      rights
                  (b)
                Number of securities
      remaining available
      for future
      issuance under equity compensation
      plans (excluding
      securities reflected
      in column
      (a))
                  (c)Equity
      compensation plans approved by security holders
                -0-
                N/A
                N/AEquity
      compensation plans not approved by security holders
                7,500,000
      (1)
                $.0021
                2,500,000
      (1)Total
                7,500,000
                $.0021
                2,500,000
 (1)           
Under our 2006 Directors, Officers, Employees and Consultants Stock Option,
Stock Warrant and Stock Award Plan, all options expire 90 days after the
optionee resigns from the company.  Our Chief Executive Officer and
Chief Financial Officer resigned on January 31, 2008.  As a result,
5,500,000 of these options expired on May 1, 2008. See Item 11. Executive Compensation - Equity
Compensation Plans.
 
 Recent
Sales of Unregistered Securities
 
 In fiscal
2008 we issued 1,500,000 shares of common stock for services valued at
$6,675.  We also issued 19,000,000 shares of common stock in
connection with the conversion of convertible notes.  In addition, we
sold $1,004,750 in additional convertible notes and 45,000,000 warrants to these
investors in the transactions described in Item 13.Certain Relationships and Related
Transactions and Director Independence – Securities Purchase
Agreements.
 
 We relied
on the exemptions form registration afforded by Section 4(2) of the Securities
Act of 1933 and Rule 506 of Regulation D of the General Rules and Regulations
thereunder for the sale of the convertible notes and warrants to investors and
the shares issued for services. We complied with the manner of sale, access to
information and investor accreditation requirements of such
exemptions.
 
 Item
6. Selected Financial Data.
 
 Not
Applicable.
 
 Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operation.
 
 Plan
of Operation for 2009
 
 Our
operating activities have not yet generated a positive cash flow. We do not
expect that they will generate a positive cash flow because our expenses far
exceed revenues. We will require financing from external sources this fiscal
year in order to be able to continue in operation as a going concern and to pay
our general and administrative expenses. There can be no assurance that we can
attract financing in order to fulfill our requirements.
 
 In 2005,
we entered into an arrangement that has to date provided $3,005,000 from the
sale of convertible notes to an investment group. The proceeds were used to
develop our products and services, and as working capital for operating expenses
and accounts payable. We do not expect the investment group to provide
additional financing. As of July 8, 2008, the investment group has converted to
stock approximately $26,155 of the notes. The aggregate outstanding principal
amount of the remaining convertible notes was approximately $2,978,845 as of
that date. We believe without assurance that the investment group will continue
to convert the notes to stock. However, the rate of conversion has been minimal
as a result of the decrease in our stock price, to which the rate of conversion
is tied. It is not likely that all of the remaining debt will be converted when
it begins to become due on March 1, 2009.
 
 On July
10, 2008, we agreed to amend our convertible note agreements to increase the
interest rate from 8% to 12%. All other provisions of the note agreements
remained unchanged.
 
 As a
result of our inability to achieve a critical mass of customers to establish a
stable niche in our business, generate a positive cash flow, or to obtain
additional financing, we reduced our staff to one part-time
employee.  While we are still servicing our customers, we are
redirecting our efforts towards selling our business or assets and/or acquiring
a business in a reverse merger. In addition, all our former officers and
directors resigned and we recruited new management. Given our vulnerable
financial condition and lack of personnel, there can be no assurance that during
this attempted turnaround we can implement our business plan and become
profitable.
 
 Our plan
of operation for the remainder of fiscal 2009 is as follows:
 
 To
maintain our existing customer revenue in the interim;
 
 To sell
our medical billing and applications software business or assets;
 
 To
acquire another business in a reverse merger or similar acquisition;
and,
 
 To obtain
additional debt and equity financing to fund our working capital
deficiency.
 
 To date
our operations have not been self-sustaining. Additional liquidity and capital
resources will be necessary to defray our ongoing expenses that have risen
significantly, while revenue decreased in 2008 and for the year to date. In the
event we are unable to obtain additional liquidity through the sale of
additional convertible notes or stock, and, ultimately, to repay, refinance or
restructure our indebtedness, we may be unable to continue in
operation.
 
 Financial
condition at February 29, 2008 and February 28, 2007
 
 February29,2008. Accumulated deficit
was $65,653,003 and we had a working capital deficiency of
$988,576.  Principal sources of liquidity in 2008 included net
proceeds of $958,507 from the sale of convertible notes.
 
 As shown
in the accompanying financial statements, we incurred net losses of $2,077,674
and $2,760,570 in 2008 and 2007, respectively, and had an accumulated deficit of
$65,653,003 and a working capital deficit of $988,576 at February 29, 2008.
These conditions raise substantial doubt as to our ability to continue as a
going concern. Management’s plans include selling our business or assets or
acquiring a business in a reverse merger. The financial statements do not
include any adjustments that might be necessary if we are unable to continue as
a going concern.
 
 February 28, 2007.Accumulated deficit was $63,575,329 and working capital deficiency was
$325,662. Principal sources of liquidity in 2007 included net proceeds of
$1,180,000 from the sale of convertible notes.
 
 Results
of operation –Fiscal Years ended February 29, 2008 and February 28,
2007
 
 Revenue
decreased to $523,212 in 2008 compared to $867,208 in 2007. The decrease in
revenue was primarily due to the expiration of contracts with
clients.
 
 General
and administrative expenses increased to $1,829,122 in 2008 compared to
$1,758,389 in 2007 as result of an increase in payroll expense.
 
 We
incurred an impairment of assets of $101,905 in 2008. We did not incur this
expense in 2007. This increase was primarily due to a fiscal 2008 impairment
charge related to the impairment of computer and other equipment due to the
decline in operations. We incurred goodwill impairment of $1,703,560 in 2007. We
did not incur any good will impairment in 2008.  Accordingly, net
losses decreased to $2,077,674 in 2008 from $2,760,570 in
2007.
 
 We
recognized a loss on derivatives of $50,961 in 2008 compared to a gain of
$166,196 in 2007.  The variance was due to a decrease in the estimated
market value of the derivative instrument resulting mainly from the decrease in
the price of our stock on which the estimated market value is
based.
 
 Interest
expense increased to $574,785 in fiscal 2008 compared to $300,856 in 2007. This
increase was primarily due to the issuance of additional convertible notes and
the amortization of the debt discount.  Net loss decreased to
$2,077,674 in 2008 from $2,760,570 as a result of the items discussed
above.
 
 Item
7A. Quantitative and Qualitative Disclosures About Market Risk.
 
 Not
applicable.
 
 Item
8. Financial Statements and Supplementary Data.
    
 
 
 
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
   To the
Board of Directors
 PaperFree
Medical Solutions, Inc.
 Kokomo,
Indiana
 
 We have
audited the accompanying consolidated balance sheets of PaperFree Medical
Solutions, Inc. (“PaperFree”) as of February 29, 2008 and February 28, 2007 and
the related consolidated statements of operations, changes in stockholders’
deficit and cash flows for the two years then ended. These consolidated
financial statements are the responsibility of PaperFree’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatements.  The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as
a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PaperFree as of
February 29, 2008 and February 28, 2007 and the consolidated results of its
operations and its cash flows for the two years then ended in conformity with
accounting principles generally accepted in the United States of
America.
 
 The
accompanying financial statements have been prepared assuming that PaperFree
will continue as a going concern. PaperFree incurred net loss of $2,077,674 and
$2,760,570 for fiscal 2008 and 2007, respectively and has an accumulated deficit
of $65,653,003 and a working capital deficit of $988,576 as of February 29,
2008. These factors, among others, as discussed in Note 1 to the financial
statements; raise substantial doubt about PaperFree’s ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 
  MALONE
& BAILEY, PC
 www.malone-bailey.com
 Houston,
Texas
 
 July 21,
2008
  
 -
8-
 
 PAPERFREE
MEDICAL SOLUTIONS, INC.
 CONSOLIDATED
BALANCE SHEETS
  February
      29, 2008
                
                February
      28, 2007ASSETSCurrent
      assets:Cash
                $
      7,309
                
                $
      286,293Accounts
      receivable, net allowance for bad debts of $81,935 and
    $80,558
                16,122
                
                82,798Prepaid and other
      current assets
                3,854
                
                24,974Total current
      assets
                27,285
                
                394,065Fixed assets, net
      accumulated depreciation and impairment of $280,032 and
      $134,014
                20,000
                
                150,366Deferred financing
      costs
                118,403
                
                82,050Other
      assets
                -
                
                3,569Total
      assets
                $
      165,688
                
                $
      630,050LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities:Account payable
      and accrued liabilities
                $
      601,236
                
                $
      288,207Accrued
      Interest
                302,703
                
                99,518Notes payable -
      related parties
                36,322
                
                249,808Line of
      credit
                -
                
                6,594Mandatory
      redeemable Series C Preferred Stock, $0.001 par value, 90,000 shares
      authorized, issued and outstanding
                75,600
                
                75,600Total
      current liabilities
                1,015,861
                
                719,727Derivative
      liability
                307,394
                
                103,469Callable
      secured convertible notes payable, net of discount
                2,512,836
                
                1,433,849Total
      liabilities
                3,836,091
                
                2,257,045Commitments
      and contingenciesStockholders’
      deficit:Series
      A and B Convertible Preferred Stock, $0.001 par value, 4,910,000 shares
      authorized, 0 shares issued and outstanding
                -
                
                -Common
      stock, $0.001 par value, 500,000,000 shares authorized, 97,061,908 and
      76,561,857 shares issued and outstanding as of February 2008 & 2007,
      respectively
                97,066
                
                76,561Additional
      paid-in capital
                61,885,534
                
                61,871,773Accumulated
      deficit
                (65,653,003)
                
                (63,575,329)Total
      stockholders’ deficit
                (3,670,403)
                
                (1,626,995)Total
      liabilities and stockholders’ deficit
                $
      165,688
                
                $630,050
   See
accompany summary of accounting policies and notes to the consolidated financial
statements.


-
9 -
   
  PAPERFREE
MEDICAL SOLUTIONS, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
  Years
      endedFebruary
      29, 2008
              
              February
      28, 2007Revenue
              $
      523,212
              
              $
      867,208Operating
      expenses:General
      and administrative
              1,829,122
              
              1,758,389Depreciation
      expense
              44,113
              
              22,293Impairment
      of assets
              101,905
              
              -Goodwill
      impairment
              -
              
              1,703,560Lawsuit
      settlement
              -
              
              8,876Loss
      from continuing operations
              (1,451,928)
              
              (2,625,910)Other
      income (expense):Gain
      (loss) on derivatives
              (50,961)
              
              166,196Interest
      expense
              (574,785)
              
              (300,856)Net
      loss
              $
      (2,077,674)
              
              $
      (2,760,570)Basic
      and diluted loss per share
              $(0.02)
              
              $
      (0.04)Weighted
      average shares outstanding - basic and diluted
              89,455,059
              
              69,988,483
 
 See
accompanying summary of accounting policies and notes to consolidated financial
statements.
    
 -
10 -
   
 PAPERFREE
MEDICAL SOLUTIONS, INC.
 CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
 Years
ended February 29, 2008 and February 28, 2007
 
 Common
              Additional
      Paid-in Capital
              Accumulated
      Deficit
              TotalShares
              AmountBalance
      February 28, 2006
              68,561,857
              68,561
              61,749,888
              (60,814,759)
              1,003,690Shares
      issued for DBC acquisition
              175,000
              175
              1,575
              -
              1,750Shares
      issued for services
              3,575,000
              3,575
              27,825
              -
              31,400Shares
      issued to NIR upon conversation
              4,250,000
              4,250
              7,908
              -
              12,158Imputed
      interest on related party loan
              
              
              17,922
              
              17,922Stock
      options and warrants for services
              
              
              66,655
              
              66,655Net
      Loss
              -
              -
              -
              (2,760,570)
              (2,760,570)Balances
      February 28, 2007
              $ 
      76,561,857
              $ 
      76,561
              $
      61,871,773
              $
      (63,575,329)
              $
      (1,626,995)Shares
      issued to NIR upon conversion
              19,000,000
              19,005
              (4,932)
              
              14,073Shares
      issued for services
              1,500,051
              1,500
              5,175
              
              6,675Stock
      options and warrants for services
              
              
              6,430
              
              6,430Imputed
      interest on related party loan
              
              
              7,088
              
              7,088Net
      Loss
              -
              -
              -
              (2,077,674)
              (2,077,674)Balances
      February 29, 2008
              $ 
      97,061,908
              $
      97,066
              $
      61,885,534
              $
      (65,653,003)
              $
      (3,670,403)
 
 
 See
accompanying summary of accounting policies and notes to consolidated financial
statements.
      
 
 -
11 -
 
 PAPERFREE
MEDICAL SOLUTIONS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Years
ended February 29, 2008 and February 28, 2007
  2008
                
                2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                $
      (2,077,674)
                
                $(2,760,570)Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      expense
                44,113
                
                22,293Deferred
      financing costs amortization
                66,147
                
                29,619Goodwill
      impairment
                -
                
                1,703,560Impairment
      of fixed assets
                101,905
                
                -Convertible
      debt discount amortization
                287,566
                
                184,098Common
      stock issued for services
                6,675
                
                31,400Stock
      option expense
                6,430
                
                66,655Imputed
      interest
                7,088
                
                17,922Loss
      (Gain) on derivatives
                50,961
                
                (166,196)Changes
      in assets and liabilities:Accounts
      receivable
                76,676
                
                (28,944)Other
      asset
                24,689
                
                (17,481)Accounts
      payable and accrued liabilities
                311,165
                
                (57,986)CASH
      USED IN OPERATING ACTIVITIES
                $
      (1,094,259)
                
                $  (975,630)CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of DBC
                -
                
                (74,308)Purchase
      of fixed assets
                (15,652)
                
                (113,404)CASH
      USED IN INVESTING ACTIVITIES
                (15,652)
                
                (187,712)CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      from related party
                -
                
                142,272Payments
      of financing costs
                (102,500)
                
                (20,000)Repayment
      to related party
                (18,486)
                
                (78,993)Repayment
      on line of credit
                (6,594)
                
                (10,319)Borrowings
      on notes payable, net
                958,507
                
                1,200,000Repayment
      of note receivable
                -
                
                3,307CASH
      PROVIDED BY FINANCING ACTIVITIES
                830,927
                
                1,
      236,267NET
      INCREASE IN CASH
                (278,984)
                
                72,925Cash,
      beginning of year
                286,293
                
                213,368Cash,
      end of year
                $       7,309
                
                $  286,293Cash
      paid for:Interest
                $              -
                
                $    10,945Income
      tax
                $            
       -
                
                $              -Non-cash
      investing and financing activities:Shares
      issued for purchase of DBC
                $              -
                
                $    
       1,750Reclass
      of related party debt to accounts payable
                $
       205,000
                
                $    
              -Conversion
      of NIR notes into common stock
                $  
       14,073
                
                $  
      12,158Discount
      on convertible debt
                $ 
      155,132
                
                $ 109,358
   
 See
accompanying summary of accounting policies and notes to consolidated financial
statements.
 
 -
12 -
 PAPERFREE
MEDICAL SOLUTIONS, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
 NOTE
1 – GOING CONCERN
 
 As a
result of our inability to establish a stable niche in our business and
continued financial difficulties, we reduced our staff to one part-time
employee. In addition, all our former officers and directors resigned. While we
are still servicing some of our customers, we are redirecting our efforts
towards selling our business or assets and/or acquiring a business in a reverse
merger.
 
 As shown
in the accompanying financial statements, we incurred net losses of $2,077,674
and $2,760,570 in 2008 and 2007, respectively, and had an accumulated deficit of
$65,653,003 and a working capital deficit of $988,576 at February 29, 2008.
These conditions raise substantial doubt as to our ability to continue as a
going concern. Management’s plans include selling our business or assets or
acquiring a business in a reverse merger. The financial statements do not
include any adjustments that might be necessary if PaperFree is unable to
continue as a going concern.
 
 NOTE
2 - SUMMARY OF ACCOUNTING POLICIES
 
 PaperFree
Medical Solutions, Inc. (the "Company") was incorporated on January 29, 2002
under the laws of the State of Nevada under the name of Link Media Publishing
Ltd. PaperFree is engaged, through its subsidiaries, in providing paper-free
turnkey medical solutions for small to large multi-physician, and
multi-specialty offices.
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include the accounts of
PaperFree, its wholly owned subsidiaries, LEAPprn, KMS Computer Services and
Doctor’s Billing Corporation (DBC). We do not have any variable interests where
we are the primary beneficiary. All significant inter-company accounts and
balances have been eliminated in consolidation.
 
 Reclassifications
 
 Certain
prior year amounts have been reclassified to conform with the current year
presentation
 
 Use
of Estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
 Revenue
Recognition
 
 We
recognize revenues in accordance with the provisions of Statement of Position,
or SOP, No. 97-2, "Software Revenue Recognition," as amended by SOP No. 98-9 and
clarified by Staff Accounting Bulletin, or SAB, 101 "Revenue Recognition in
Financial Statements." SOP No. 97-2, as amended, generally requires revenue
earned on software arrangements involving multiple elements to be allocated to
each element based on the relative fair values of those elements.
 
 Our
contractual arrangements are evaluated on a contract-by-contract basis and often
require judgment and estimates that affect the timing of revenue recognized our
statements of operations. Specifically, we may be required to make judgments
about:
 
 w
                whether
      the fees associated with our products and services are fixed or
      determinable;w
                whether
      or not collection of our fees is reasonably assured;w
                whether
      professional services are essential to the functionality of the related
      software product;w
                whether
      we have the ability to make reasonably dependable estimates in the
      application of the percentage-of- completion method;
andw
                whether
      we have verifiable objective evidence of fair value for PaperFree products
      and services.
 
 Revenue
associated with our billing service is based on a percentage of collections and
is recognized when collection are received. Revenue derived from our hosting
services are recognized when the service is performed, usually
monthly.
 
 Basic
and Diluted Net Loss per Share
 
 The basic
net loss per common share is computed by dividing the net loss by the weighted
average number of common shares outstanding. Diluted net loss per common share
is computed by dividing the net loss adjusted on an “as if converted” basis, by
the weighted average number of common shares outstanding plus potential dilutive
securities. For the years ended February 29, 2008 and February 28, 2007,
potential dilutive securities had an anti-dilutive effect and were not included
in the calculation of diluted net loss per common share.
 
 Cash
and Cash Equivalents
 
 Cash
equivalents include all highly liquid investments with original maturities of
three months or less.
 
 Goodwill
 
 Effective
February 28, 2007, we reviewed goodwill for impairment consistent with the
guidelines of SFAS 142 using a discounted future cash flow approach to
approximate fair value. The result of testing our goodwill for impairment was a
non-cash charge of $1,703,560.
 
 Property
and equipment and impairment of long-lived assets
 
 Property
and equipment primarily consist of computer equipment, officer furniture and
leasehold improvements and  are carried at the cost of acquisition or
construction and depreciated over the estimated useful lives of the assets.
Costs associated with repair and maintenance are expensed as incurred. Costs
associated with improvements which extend the life, increase the capacity or
improve the efficiency of our property and equipment are capitalized and
depreciated over the remaining life of the related asset. Gains and losses on
dispositions of equipment are reflected in operations. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
which are 3 to 10 years.
 
 We review
the carrying value of its long-lived assets annually or whenever events or
changes in circumstances indicate that the historical-cost carrying value of an
asset may no longer be appropriate. We assesse recoverability of the asset by
comparing the undiscounted future net cash flows expected to result from the
asset to its carrying value. If the carrying value exceeds the undiscounted
future net cash flows of the asset, an impairment loss is measured and
recognized. An impairment loss is measured as the difference between the net
book value and the fair value of the long-lived asset. Fair value is estimated
based upon either discounted cash flow analysis or estimated salvage value. An
impairment charge of $101,905 was recorded in the year ended February 29,
2008.
 
 
 Valuation
of the Embedded and Warrant Derivatives
 
 We do not
use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks. We evaluate all of our financial instruments to determine if
such instruments are derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are accounted for as
liabilities, the derivative instrument is initially recorded at its fair value
and is then re-valued at each reporting date using the Black-Scholes pricing
model or the lattice model, with changes in the fair value reported as charges
or credits to income.
 
 A warrant
derivative liability is determined in accordance with SFAS No. 133 and Emerging
Issues Task Force Issue No. 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”
Based on EITF 00-19, warrants which are determined to be classified as
derivative liabilities are marked-to-market each reporting period, with a
corresponding non-cash gain or loss charged to the current period. The practical
effect of this has been that when our stock price increases so does our
derivative liability, resulting in a non-cash loss that reduces our earnings and
earnings per share. When our stock price declines, we record a non-cash gain,
increasing our earnings and earnings per share. To determine the fair value of
our embedded derivatives, management evaluates assumptions regarding the
probability of certain future events. We use the Black-Scholes option-pricing
model to value our warrant derivative liabilities and a lattice model to value
our embedded derivatives. Other factors used to determine fair value include our
period end stock price, historical stock volatility, risk free interest rate and
derivative term.
 
 The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end of
each reporting period. Derivative instrument liabilities are classified in the
balance sheet as non-current.
 
 Share-based
Compensation
 
 We
account for employee stock options in accordance to SFAS No. 123(R), which
requires companies to measure the cost of employee services received in exchange
for an award of an equity instrument based on the grant-date fair value of the
award. For share-based awards granted during the year, compensation expense is
recognized on a straight-line basis over the requisite service period, which is
normally the vesting period. Share-based awards that vest immediately are fully
recognized into expense on the date of grant.
 
 We also
issue stock as compensation to employees and outside consultants for services
provided to the company. Employee share-based awards are accounted for in
accordance with SFAS 123(R), which requires us to measure the cost of employee
services received based on the grant-date fair value of the award. We account
for non-employee share-based awards in accordance with EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquisition, or in Conjunction with Selling, Goods or
Services.”
 
 Income
Taxes
 
 We
recognize deferred tax assets and liabilities based on differences between the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences are
expected to be recovered. We provide a valuation allowance for deferred tax
assets for which it does not consider realization of such assets to be more
likely than not.
 
 Recently
Issued Accounting Pronouncements
 
 In March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 161, Disclosures about Derivative
Instruments and Hedging Activities –an amendment of SFAS 133. SFAS 161
seeks to improve financial reporting for derivative instruments and hedging
activities by requiring enhanced disclosures regarding the impact on financial
position, financial performance, and cash flows. To achieve this increased
transparency, SFAS 161 requires: (1) the disclosure of the fair value of
derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and (3)
cross-referencing within the footnotes. SFAS 161 is effective for us on March 1,
2009. We are in the process of evaluating the new disclosure requirements under
SFAS 161.
 
 In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, as
amended in February 2008 by FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement No.
157. SFAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. FSP FAS 157-2
defers the effective date of SFAS 157 for all nonfinancial assets and
liabilities, except those items recognized or disclosed at fair value on an
annual or more frequently recurring basis, until January 1, 2009. As such, we
partially adopted the provisions of SFAS 157 effective March 1, 2008. The
partial adoption of this statement did not have a material impact on our
financial statements. We expect to adopt the remaining provisions of SFAS 157
beginning in 2009. We do not expect this adoption to have a material impact on
our financial statements.
 
 In
February 2007, FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities–including an Amendment of FASB Statement No.
115. This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions in
SFAS 159 are elective; however the amendment to SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale securities. The fair value option established by SFAS 159
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity will report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option: (a) may be applied
instrument by instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method; (b) is irrevocable (unless a new election
date occurs); and (c) is applied only to entire instruments and not to portions
of instruments. We have adopted this statement as of March 1, 2008. The adoption
created no impact to our financial statements.
 
 NOTE
3 - CALLABLE SECURED CONVERTIBLE NOTES PAYABLE
 
 PaperFree
entered into a securities purchase agreement with four investors (the “Note
Holders”) on November 30, 2005. This financing facility is composed of callable
secured convertible notes (“Notes”) and warrants (“Warrants”). The callable
secured convertible notes bear interest at 8% per annum from the date of
issuance and is payable quarterly. On July 10, 2008, we agreed to amend our
convertible note agreements to increase the interest rate from 8% to 12%. All
other provisions of the note agreements remained unchanged.  The
callable secured convertible notes are convertible into common stock at the Note
Holders' option, at the lower of (i) $0.05 or (ii) 55% of the average of the
three lowest intraday trading prices for the common stock for the 20 trading
days before but not including the conversion date. The callable secured
convertible notes are secured by PaperFree's assets, including inventory,
accounts receivable and intellectual property. The agreement restricts the Note
Holder’s ability to convert their callable secured convertible notes or exercise
their warrants and receive shares of common stock such that the number of shares
of common stock held by them in the aggregate and their affiliates after such
conversion or exercise does not exceed 4.99% of the then issued and outstanding
shares of common stock. As of February 29, 2008 the Note Holder’s and their
affiliates held approximately 4.9% of the aggregate outstanding shares. However,
the Note Holders may repeatedly sell shares of common stock in order to reduce
their ownership percentage, and subsequently convert additional callable secured
convertible notes. Since the financing facility was established, PaperFree has
sold Notes and Warrants as follows:
 1.
              $800,000
      on November 30, 2005 due November 30, 2008, and 1,600,000 warrants to
      purchase common stock at an exercise price of $0.10 per
share;2.
              $200,000
      on August 31, 2006 due August 31, 2009, and 400,000 warrants to purchase
      common stock at an exercise price of $0.10 per share;3.
              $200,000
      on October 27, 2006 due October 27, 2009, and 400,000 warrants to purchase
      common stock at an exercise price of $0.10 per share;4.
              $300,000
      on December 12, 2006 due December 12, 2009, and 600,000 warrants to
      purchase common stock at an exercise price of $0.10 per
share;5.
              $500,000
      on February 7, 2007 due February 10, 2010 and 5,000,000 warrants to
      purchase common stock at an exercise price of $0.01 per
share.6.
              $330,000
      on May 31, 2007 due May 31, 2010 and 5,000,000 warrants to purchase common
      stock at an exercise price of $0.01 per share.7.
              $250,000
      on July 17, 2007 due July 17, 2010 and 20,000,000 warrants to purchase
      common stock at an exercise price of $.0012 per share.8.
              $175,000
      on September 14, 2007 due September 14, 2010 and 5,000,000 warrants to
      purchase common stock at an exercise price of $.0001 per
      share.9.
              $250,000
      on November 21, 2007 due November 21, 2010 and 15,000,000 warrants to
      purchase common stock at an exercise price of $.001 per
    share.
 
 As of
February 29, 2008, the note holders have converted $26,155 of the debt into
common shares. Further, the note holders provided a waiver related to payment of
principal and interest and any defaults related the above notes. This waiver was
given through March 1, 2009. As a result, this debt was classified as a
non-current liability.
 
 PaperFree
has incurred direct financing costs of $222,500 associated with the issuance of
the convertible notes. These costs were recorded as deferred financing costs to
be amortized over the life of the notes using the effective interest method.
Amortization of $66,147 and $29,619 was recorded for the years ended February
29, 2008 and February 28, 2007, respectively. The following table summarizes
deferred financing costs since inception of the notes:
 2008
              2007Debt
      arrangement fees
              $
      142,500
              $
      45,000Broker
      fees
              45,000
              40,000Key
      man life insurance single premium
              20,000
              20,000Legal
      fees
              15,000
              15,000Less:
      amortization
              (104,097)
              (37,950)Deferred
      financing costs
              $
      118,403
              $
      82,050
 
 These
Notes are a hybrid instrument containing more than one embedded derivative
feature. We evaluated the application of SFAS 133 and EITF 00-19 for the
conversion options on the debentures and the warrants, resulting in a single,
compound derivative referred to as the “Single Compound Embedded Derivatives
within the Convertible Notes.” The single compound embedded derivative features
include the conversion feature within the convertible notes, the early
redemption option and the contract rate adjustment. Based on the guidance in
SFAS 133 and EITF 00-19, we concluded that both the conversion option and the
warrants were required to be accounted for as derivatives. As a result, we are
required to bifurcate and separately account for the conversion option as an
embedded derivative and the warrants as freestanding derivatives. We are
required to record the fair value of the conversion options and the warrants on
our balance sheet at fair value with changes in the values of these derivatives
reflected in the consolidated statement of operations.
 
 The stock
purchase warrants are freestanding derivative financial instruments which were
valued using the Black-Scholes method. The embedded derivatives were valued
using the lattice model. A derivative liability was created upon each issuance
of each tranche of our convertible notes and warrants. The fair value of these
derivatives was recorded as a reduction of the initial carrying amount (as
unamortized discount) of the convertible notes and as a derivative liability.
The unamortized discount is amortized into interest expense using the effective
interest method over the life of the convertible notes, or 36 months. The
derivative liability is marked-to-market each reporting period and the change in
fair value is reflected in the consolidated statement of operations. As of
February 29, 2008, the fair value of the embedded derivative was computed using
the lattice model at $264,861 and the fair value of the warrant derivative was
computed at $42,534. The aggregate liability is classified as non-current,
consistent with the classification of the related convertible debt.
 
 Variables
used in the Black-Scholes option-pricing model include: (1) 1.65% to 2.96%
risk-free interest rate, (2) expected warrant life is the actual remaining life
of the warrant as of each period end, (3) expected volatility is from 417.31%
and (4) zero expected dividends.
 
 Variables
used in the lattice model for valuing embedded derivatives include: (1) Prime
rate of 5% increasing .25% per quarter; (2) 1 year volatility of 300%; (3)
Growth rate at cost of equity; (4) Trading volume of $11,444 increasing 5% per
quarter; (5) Registration of 95% increasing 1% per quarter; (6) Default of 5%
increasing .1% per quarter; (7) Alternative financing of 0% increasing at 2.5%
per quarter to max of 15%; (8) Dilutive reset of $0.001 occurring at 0%
increasing 5% per quarter to max of 25%; and (9) O/S shares increasing 1% per
quarter.
 
 The
impact of the application of SFAS 133 and EITF 00-19 on the balance sheets and
statements of operations as of and through February 29, 2008 were as
follows:
  Liability
      as of
                February
      28, 2007
              
              Debt
      converted to equity
              
              Additional
      derivative liability
              
              Mark-to-market
      (gain)/loss
              
              Liability
      as of
                February
      29, 2008Convertible
      notes
              $
      71,936
              
              $
      (2,168)
              
              $
      99,255
              
              $
      95,837
              
              $
      264,861Warrants
              31,533
              
              -
              
              55,876
              
              (44,874)
              
              42,534Total
              $
      103,469
              
              $
      (2,168)
              
              $
      155,132
              
              $
      50,961
              
              $
      307,394
 
 The
following summarizes the financial presentation of the Convertible Notes at
February 29, 2008:
 
 2008
              2007Face
      value of convertible notes
              $
      3,005,000
              $
      2,000,000Adjustments:Discount
      for derivative liability – convertible notes with compound embedded
      derivatives
              (725,882)
              (626,626)Discount
      for derivative liability – investors warrant
              (200,506)
              (144,630)Impact
      of conversions on notes and note discount
              (20,855)
              (12,158)Cash
      discount
              (49,750)
              -Amortization
      of debt discount
              504,829
              217,263Convertible
      notes balance, net
              $
      2,512,836
              $
      1,433,849
 
 We
amortized $287,566 and $184,098 of discount related to the convertible notes
during the years ended February 29, 2008 and February 28, 2007,
respectively.
 
 The
convertible notes and warrants are subject to a registration rights agreement
which requires us to register the underlying shares by 90 days from the date of
the agreements or pay liquidated damages of 2% of the purchase price of the note
each month the securities are not registered. As of February 29, 2008, aggregate
liquidated damages potentially due under the registration rights agreement total
$1,455,352. The damages are payable in cash or stock at our option. If the
damages are settled in stock, the conversion rate is the same as the convertible
notes. FSP No. EITF 00-19-2 requires us to evaluate the recognition and
measurement of the registration rights arrangement in accordance with SFAS No.
5. We have received a waiver from the note holders through March 1, 2009 and
believe the likelihood of paying these liquidated damages is remote.
Accordingly, there was no accrual as of February 29, 2008.
 
 NOTE
4 − DBC ACQUISITION
 
 On
September 28, 2006, PaperFree acquired all of the shares issued and outstanding
of Doctors Billing Corporation, in exchange for the issuance of 175,000 shares
of common stock valued at $1,750 and $74,308 of cash due in three installments
payable September 28, 2006, October 28, 2006 and November 28, 2006. As of
February 28, 2007, all three all three installments have been made. Doctors
Billing Corporation is a developer, licensor and maintenance supporter of
proprietary Practice Management and Occupational Medicine software applications.
Doctors Billing Corporation at the time of acquisition held customer contracts
with annual revenues less than $15,000; proprietary rights to its software and
fixed assets with a fair market value of $5,000; and no
liabilities.
 
 The
estimated fair values of the assets acquired at September 28, 2006 was as
follows:
 Property
      and equipment
              $      5,000Goodwill
              71,058Total
              $    76,058
  Effective
February 28, 2007, we review goodwill for impairment consistent with the
guidelines of SFAS 142. As a result of this analysis, we recorded a non-cash
impairment charge for the full balance of goodwill.
 
 NOTE
5 - RELATED PARTY TRANSACTIONS
 
 In
connection with the purchase of KMS, we entered into an 18 year office space
lease agreement with the former owner of KMS, who continued his employment with
PaperFree subsequent to the acquisition. This lease agreement provided for a
monthly lease rate of $10,000 and was scheduled to expire in 2023. The lease
rate was net of utilities, taxes and insurance. However, as a result of a
dispute that arose between the former owner of KMS and PaperFree, the premise
was vacated in 2007. As a result, we discontinued accruing the monthly rent
expense under this lease agreement. In addition, the former owner of KMS
departed during the year and was not a related party at February 29, 2008 (see
Note 10 for additional information).
 
 In
addition, we have also received various cash advances from certain shareholders.
These advances are due on demand, bear no interest and are unsecured. Interest
expense is imputed at a rate of 8.25% and $7,088 of imputed expense was recorded
during the year ended February 29, 2008. At February 29, 2008 and February 28,
2007, the total amount owed to related parties in connection with these
transactions was $36,322 and $249,808, respectively.
 
 NOTE
6 - MANDATORILY REDEEMABLE PREFERRED STOCK
 
 We have
an aggregate 5,000,000 shares of $0.001 par preferred stock authorized as of
February 29, 2008, of which, 90,000 were issued in 2004.
 
 On
September 16, 2004 PaperFree issued 90,000 shares of Series C preferred stock
for cash consideration of $60,000. These shares, as a class, carry the number of
votes equal to the number of votes of all outstanding Common Stock plus one
additional vote such that the holders of shares of Preferred Stock shall always
constitute a majority of the voting rights of the Corporation. The Preferred
Stock was mandatorily redeemable ninety days after issuance for the cash
redemption price of $0.84 per share or a total of $75,600 for all such shares.
However, the shares were not redeemed and the liability remained outstanding at
February 29, 2008.
 
 NOTE
7 - INCOME TAXES
 
 PaperFree
uses the asset and liability method, where deferred tax assets and liabilities
are determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for financial
and income tax reporting purposes. During fiscal 2008 and 2007, PaperFree
incurred net losses and, therefore, has no tax liability. The net deferred tax
asset generated by the loss carry-forward has been fully reserved. The
cumulative net operating loss carry-forward is approximately $61,500,000 at
February 29, 2008, and will expire in the years 2023 through 2027.
 
 At
February 29, 2008, deferred tax assets consisted of the
following:
 
 Deferred
      tax assets:Net
      operating losses
              $
      (20,922,471)Less:
      valuation allowance
              20,922,471Net
      deferred tax asset
              $                    -
  NOTE
8 - COMMON STOCK
 
 During
the year ended February 29, 2008:
 
 We issued
1,500,051 shares for services valued at $6,675 using the quoted stock price on
the date of grant.
 
 We issued
19,000,000 shares in connection with the conversion of certain notes payable
described in Note 3. The notes were converted at an average conversion price of
$0.0007 per share for $14,073.
 
 NOTE
9 - WARRANTS AND OPTIONS
 
 Options
 
 During
the year ended February 29, 2008:
 
 We
granted 1,500,000 stock options to employees, with a weighted average exercise
price of $0.005 per share. These options had an aggregate value of $6,430. They
were valued using the Black-Scholes option pricing model using the following
assumptions: Risk free rate of 7.25%, volatility of approximately 231%, and
weighted average expected term of approximately 1.5 years.
 
 Under our
2006 Stock Option Plan, unexercised employee stock options automatically cancel
three months after the termination of the employee. Due to the resignation of
our Executive Management and Directors, all of our outstanding stock options
will automatically cancel within three months of their departure unless
exercised.
 
 During
the year ended February 28, 2007:
 
 PaperFree
granted 2,000,000 stock options, exercisable at $0.012, valued at $21,287 to its
CFO. The options were valued using a Black-Scholes model with the following
assumptions: Risk free rate of 4.8%, volatility of 219%, and expected option
term of 2.08 years.
 
 PaperFree
granted 2,000,000 stock options, exercisable at $0.015 valued at $27,882 to its
CEO. The options were valued using a Black-Scholes model with the following
assumptions: Risk free rate of 4.8%, volatility of 254% and expected option term
of 1.16 years.
 
 PaperFree
granted 500,000 options to each of its non-Executive directors for a total of
2,000,000 stock options, exercisable at $0.05 valued at $17,486. The options
were valued using a Black-Scholes model with the following assumptions Risk free
rate ranging from 4.52% to 4.8%, volatility ranging from 220% to 2,196%, and
expected option term of 5 years.
 
 The
following table provides a summary of employee stock options:
  Stock
                Options
              
              Weighted
      average exercise price
              
              Aggregate
      intrinsic value
              
              Weighted
      Average remaining contractual life (years)Outstanding
      at February 28, 2006
              -
              
              $              -Granted
              6,000,000
              
              0.026Exercised
              -
              
              -Forfeited
              -
              
              -Expired
              -
              
              -Outstanding
      at February 28, 2007
              6,000,000
              
              $      0.026Granted
              1,500,000
              
              0.005Exercised
              -
              
              -Forfeited
              -
              
              -Expired
              -
              
              -Outstanding
      at February 29, 2008
              7,500,000
              
              $      0.021
              
              $               -
              
              8.56Exercisable
      at February 29, 2008
              7,500,000
 
 We
adopted SFAS No. 123R effective March 1, 2006. In our statement of
operations for the year ended February 28, 2007, we recorded $66,655 of
compensation cost for share-based payment arrangements. No stock options or
warrants were exercised during the year ended February 28, 2007.
 
 Warrants
 
 During
the year ended February 29, 2008
 
 We issued
45,000,000 warrants, with a weighted average exercise price of $0.002 in
connection with convertible debt issued during fiscal year 2008 described in
Note 3. No warrants were exercised during the year.
 
 During
the year ended February 28, 2007:
 
 We did
not issue any warrants during fiscal year 2007.
 
 The
following table provides a summary of stock warrants:
  Stock
                Warrants
              
              Weighted
      average exercise price
              
              Aggregate
      intrinsic value
              
              Weighted
      Average remaining contractual life (years)Outstanding
      at February 28, 2006
              
              3,000,000
              
              $       0.10Granted
              
              5,000,000
              
              0.01Exercised
              
              -
              
              -Forfeited
              
              -
              
              -Expired
              
              -
              
              -Outstanding
      at February 28, 2007
              
              8,000,000
              
              $       0.044Granted
              
              45,000,000
              
              0.002Exercised
              
              -
              
              -Forfeited
              
              -
              
              -Expired
              
              -
              
              -Outstanding
      at February 29, 2008
              
              53,000,000
              
              $      0.008
              
              $       -
              
              6.25Exercisable
      at February 29, 2008
              
              53,000,000
 
 
 NOTE
10 – COMMITMENTS AND CONTINGENCIES
 
 We leased
our premises from Kim Allbaugh, the former Chief Operating Officer of KMS and
employee of Paperfree Medical Solutions, pursuant to an 18-year lease expiring
February 28, 2023. Under the terms of the lease, the rent amount is set at
$10,000 per month without escalation. In addition, Mr. Allbaugh paid certain
expenses on our behalf. As of February 29, 2008, we have recorded an aggregate
$208,000 in amounts owed to Mr. Allbaugh, which is in dispute. He claims the
amount owed is $321,139. We do not believe a settlement of the disputed amount
is probable. We are plaintiffs in a case captioned Paperfree Medical
Solutions, Inc. v. Kim Allbaugh and KMS, LLC pending in the Marion Superior
Court, State of Indiana filed on July 27, 2007. Mr. Allbaugh is the former Chief
Operating Officer of KMS. KMS, LLC is purportedly a limited liability company
owned and controlled by Mr. Allbaugh. Our complaint seeks actual and punitive
damages for breach of a representation and warranty and fraud by Mr. Allbaugh,
the seller in connection with our acquisition of KMS in 2005, and breach of
related employment agreement with Mr. Allbaugh and the office lease for our
former premises with KMS, LLC. The case is not yet scheduled for trial. The
defendants have filed counterclaims for unspecified damages from breach of
contract and fraud, including a separate case against KMS in which a $46,276
judgment was entered on May 5, 2008.  This amount is included in our
accrual.
 
 During
the year ended February 28, 2006, a former director of PaperFree sold 179,000
shares of common stock to investors for proceeds of $89,500. These stock sales
were not approved by the board prior to their occurrence and the director never
transferred the proceeds to PaperFree. PaperFree has agreed to issue the
investors the stock in exchange for indemnification. As of February 28, 2007,
claims had been received for $2,726 resulting in the issuance of 54,500 shares.
No additional claims were received and no common stock was issued during fiscal
year 2008. It is unknown if the 179,000 shares represent all shares sold by the
former director without the board's approval. PaperFree may have further
liabilities to accrue and stock to issue if future claims are made. As of
February 29, 2008 and February 28, 2007, we had $86,774 accrued in accounts
payable and accrued liabilities for future claims.
 
 In
September 2005, PaperFree entered into a settlement agreement with PW
Management. Pursuant to the agreement, any additional issuances of common stock
in excess of the number of shares outstanding as of the settlement date will
activate an anti−dilution right for PW Management. This right, which applies for
a period of five years from the settlement date, entitles PW Management to
additional shares to keep their ownership percentage at 14.7%. Under the terms
of the settlement agreement, the anti-dilution right is terminated if PW
Management’s aggregate ownership fell below 1%. On July 11, 2007, we were
notified that PW Management no longer owned any shares of Paperfree Medical
Solutions. As such, the accrual of $25,951 was reversed. As of February 29, 2008
and February 28, 2007, we had $0 and $25,951, respectively,
accrued.
 
 NOTE
11 - SUBSEQUENT EVENTS
 
 Since
March 1, 2008, 5,500,000 of employee stock options discussed in Note 11 have
expired.
 
 On March
12, 2008, $170 of convertible notes, as described in Note 8, were converted to
500,000 shares of our common stock at a conversion rate of
$0.00034.
  On May
21, 2008, our three remaining former directors and interim chief executive and
chief financial officer resigned and a new person was appointed sole director,
chief executive officer, chief financial officer, president, treasurer and
secretary.  Since June 1, 2008, he has accrued a monthly salary of
$10,000.
  On July
10, 2008, we agreed to amend our convertible note agreements to increase the
interest rate from 8% to 12%. All other provisions of the note agreements
remained unchanged.
 
 
 Item
9. Changes in and Disagreements with Accountants on Financial Statement
Disclosure.
 
 None.
 
 Item
9A. Controls and Procedures.
 
 Evaluation
of Disclosure Controls and Procedures
 
 Our
management, principally our chief executive officer, evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by
this report. Based on that evaluation, our management concluded that our
disclosure controls and procedures as of the end of the period covered by this
report were not effective such that the information required to be disclosed by
us in reports filed under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and (ii) accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding disclosure. In particular, we
have identified the following material weakness of our internal
controls:
 
 s
              There
      is an over-reliance upon independent financial reporting consultants
      for review of critical accounting areas and disclosures and material
      non-standard transactions.s
              There
      is a lack of sufficient accounting staff which results in a lack of
      segregation of duties necessary for a good system of internal
      control.
 
 Management’s
Annual Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934, as amended) for the company.
 
 In order
to ensure whether our internal control over financial reporting is effective,
management has assessed such controls for its financial reporting as of February
29, 2008. This assessment was based on criteria for effective internal control
over financial reporting described in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”).
 
 In
performing this assessment, management has identified the following material
weaknesses:
 
 There is
an absence of adequate segregation of duties relating to oversight and
management of our systems. This resulted primarily from the fact that certain
parts of the work of our chief financial officer are not monitored or reviewed.
The absence of adequate segregation of duties may have an effect on the systems
which we use in the evaluating and processing of certain accounts and areas and
in the posting and recording of journal entries into certain accounts, as
described below:
 s
              Financial
      statements closing process – There was a material weakness in the
      process of closing and consolidating our financial statements which
      resulted from the fact that the work of processing the trial balance,
      evaluating and implementing accounting policies and practices, and
      drafting the consolidated financial statements and related footnotes is
      performed by consultants and not reviewed by a qualified accountant within
      our company.
 
 As a
result of these material weaknesses in our internal control over financial
reporting, our management concluded that our internal control over financial
reporting as of February 29, 2008, was not effective based on the criteria set
forth by COSO in Internal Control – Integrated Framework. A material
weakness in internal control over financial reporting is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
 
 Management’s
Plan for Remediation of Material Weaknesses
 
 Based on
our financial condition, there are limitations to the level of remediation
possible. If we expand our operations, management will implement the following
plan intended to remediate our ineffectiveness and to strengthen our internal
controls over financial reporting:
 s
              Hiring
      a qualified accounting staff to manage, review and verify the day-to-day
      accounting and the financial statement closing process.s
              Improving
      the control and oversight of the duties relating to the systems we use in
      the evaluation and processing of certain accounts and areas in the posting
      and recording of journal entries into certain accounts. This improvement
      should include reviews by management of the accounting processes as well
      as a reorganization of some of the accounting functions.s
              The
      segregation of duties relating to the processing of accounts and the
      recording of journal entries into certain
  accounts.
 
 This
annual report does not include an attestation report of our public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by our registered public accounting firm pursuant
to temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this annual report.
 
 Item
9(B). Other Information.
 
 Not
applicable.
 
 PART
III
 Item
10. Directors and Executive Officers; Corporate Governance
 
 Name
              Age
              PositionsMichael
      J. Gelmon
              43
              Director,
      Chief Executive Officer, Chief Financial Officer, President, Treasurer and
      Secretary
  Our Board
of Directors is comprised of one director of one class. Each director is elected
to hold office until the next annual meeting of shareholders and until his
successor has been elected and qualified. The following is a brief description
of the background and experience of our director and officer.
 
 Michael J. Gelmon has been
Director, Chief Executive Officer, Chief Financial Officer, President,
Treasurer, and Secretary since May 21, 2008. Mr. Gelmon is an experienced
franchising entrepreneur and executive as well as a real estate lawyer. He has
been the Chief Executive Officer and a director of Banyan Corporation, a
publicly owned corporation, since 2001. From 1993 through 1997, Mr. Gelmon was a
founding shareholder, director, as well as head of acquisitions and real estate
for Domino's Pizza of Canada Ltd., the Domino's Pizza master franchisor in
Canada. He was an integral part of the team that was responsible for growing the
Domino's Pizza chain to 200 stores throughout Canada. Since 1999 Mr. Gelmon has
also practiced law with his brother in a law partnership, Britannia Law Firm.
Mr. Gelmon received his Bachelor of Laws with honors from the University of
London in 1988 and a Bachelor of Arts from the University of Calgary in
1988.
 
 Seven
directors and executive officers have resigned since February 28,
2007.
 
 Jeffrey McGill, Vice
President of Business Development since October 2007 resigned on June 16,
2008.
 William L. Sklar, Interim
President, Chief Financial Officer and Chief Executive Officer since February
12, 2008, and Director since January 2004, resigned on May 21,
2008.
 
 T. Marshall Wilde, Director
since June 2005, resigned on May 21, 2008.
 
 David L. Bailey, Director
since October 2004, resigned on May 21, 2008.
 
 Stephen Hawksworth, Director,
President and Chief Executive Officer since August 2006, resigned on January 31,
2008.
 
 Craig S. Barrow, Director,
President and Chief Financial Officer since August 2006, resigned on January 31,
2008.
 
 Richard Paver, Director since
October 2004, resigned on October 12, 2007.
 
 Committees of the
Board of Directors
 
 Audit Committee.We have no
audit committee of the Board of Directors. We are exempt from the Securities and
Exchange Commission requirements for a separate audit committee.
 
 No Compensation Committee.We
have no compensation committee of the Board of Directors. The entire board acts
as our compensation committee. Transactions between our management and us are
not conducted at arm's-length. These include their compensation arrangements set
forth in Item 11. Executive
Compensation and the transactions set forth in Item 13. Certain Relationships and Related
Transactions and Director Independencebelow. Mr. Gelmon, without any
independent authorization, review or oversight sets the terms of these
arrangements and transactions. There can be no assurance that the terms thereof
are comparable to those that would be negotiated at arm's-length or otherwise
fair and reasonable, despite the good faith belief of Mr. Gelmon that they
are.
 
 Meetings of
Directors
 
 There
were no formal meetings of the Board of Directors and no formal meeting of
committees thereof in fiscal 2008. The board acted by unanimous consent one
time. We have adopted a policy that all directors must attend the annual meeting
of directors following the shareholders meeting and two-thirds of all other
meetings of directors.
 
 Codes
of Ethics
 
 During
2006, we adopted a Code of Business Conduct and Ethics that addresses, among
other things, conflicts of interest, corporate opportunities, confidentiality,
fair dealing, protection and use of company assets, compliance with laws
(including insider trading laws), and reporting of unethical behavior. The Code
of Ethics is applicable to our directors, officers and all
employees.
 
 Compliance with
Section 16(a) of the Exchange Act
 
 The
following table sets forth reports required by Section 16(a) including Forms 3,
4 and 5 that our directors and executive officers failed to file on a timely
basis, during the most recent fiscal year and the year to
date.
 
  Name
              Form
      3
              Form
      4
              Form
      5
              TotalMichael
      J. Gelmon
              1
              0
              0
              1Jeffrey
      McGill
              1
              0
              1
              2William
      L. Sklar
              1
              2
              1
              4T.
      Marshall Wilde
              0
              1
              2
              3David
      L. Bailey
              0
              1
              0
              1Stephen
      Hawksworth
              0
              1
              1
              2Craig
      S. Barrow
              0
              2
              2
              4Richard
      Paver
              0
              1
              0
              1Total
      reports
              3
              8
              7
              15
 
  As of the
date hereof, the report required by Section 16(a) for Mr. Gelmon has been filed.
Reports will be made available on our web site www.mdpaperfree.com.
 
 Item
11. Executive Compensation.
 
 Summary
Compensation Table
 
 The
following table sets forth certain information about the compensation paid to
management during the 2007 and 2008 fiscal years:
  Name
      and Principal Position
                Year
                Salary
                  ($)(1)
                Bonus
                  ($)(2)
                Stock
      Awards
                  ($)(3)
                Option
      Awards
                  ($)(4)
                Non-Equity
      Incentive Plan Compensation
                  ($)(5)
                Change
      in Pension Value and Nonqualified Deferred Compensation
      Earnings
                  ($)(6)
                All
      Other Compensation
                  ($)(7)
                Total
                  ($)Michael
      J Gelmon
                2008
                $   —
                $   —
                —
                $    —
                $   —
                $   —
                —
                $   —Director,
      CEO, CFP , President,
                  Treasurer & Secretary
                2007
                —
                —
                —
                —
                —
                —
                —
                —Jeffrey
      McGill
                2008
                10,000
                —
                —
                —
                —
                —
                —
                10,000Former
      Vice President,
                  Treasurer &
      Secretary
                2007
                —
                —
                —
                —
                —
                —
                —
                —Stephen
      Hawksworth
                2008
                95,208
                —
                —
                3,933
                —
                —
                —
                99,141Former
      Director, CEO and President
                2007
                100,000
                20,000
                —
                —
                —
                —
                —
                120,000Craig
      S. Barrow
                2008
                124,147
                —
                —
                2,497
                —
                —
                —
                126,644Former
      Director & CFO
                2007
                84,000
                —
                —
                —
                —
                —
                —
                84,000William
      L. Sklar
                2008
                —
                —
                —
                —
                —
                —
                —
                —Former
      Director, Interim
                  President, & CFO
                2007
                20,000
                —
                —
                4,371
                —
                —
                —
                24,371David
      L. Bailey
                2008
                —
                —
                —
                —
                —
                —
                —
                —Former
      Director
                2007
                —
                —
                —
                4,371
                —
                —
                —
                4,347Richard
      Paver
                2008
                —
                —
                —
                —
                —
                —
                —
                —Former
      Director
                2007
                —
                —
                —
                4,371
                —
                —
                —
                4,371T.
      Marshall Wilde
                2008
                —
                —
                —
                —
                —
                —
                —
                —Former
      Director
                2007
                $   —
                $   —
                $   —
                $   4,371
                $   —
                $   —
                $   —
                $   4,371
 Equity
Compensation Plan Information
 
 In 2006, the Board of Directors
adopted the 2006 Directors, Officers, Employees and Consultants Stock Option,
Stock Warrant and Stock Award Plan (the " Plan") to provide incentive
compensation to employees, directors, officers and others who serve us. The Plan
provides for the issuing of up to 10,000,000 shares of Common Stock or options
to purchase Common Stock to our personnel on such terms as the directors may
determine. The directors may amend the Plan.As of the February 29,
2008, we had issued stock options for 7,500,000 shares.  Under the
Plan, all options expire 90 days after the optionee resigns from company. The
Chief Executive Officer and the Chief Financial Officer resigned on January 31,
2008. As a result, 5,500,000 of these options expired on May 1, 2008 and
8,000,000 options are available to be issued in the future.
 
 Option
Issues to Management in 2008
 
 Option issues to management
during 2008 and 2007 were as
follows:
 OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END
  Option Awards(1)
                Stock Awards(7)Name
                Year
                Number of
      Securities Underlying Unexercised Options
    (#) Exercisable
                Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
                Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options(#)
                Option
      Exercise Price
                  ($)
                Option
      Expiration Date
                Number
      of Shares or Units of Stock That Have Not Vested
                  (#)
                Market
      Value of Shares or Units of Stock That Have Not Vested
                  ($)
                Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other
      Rights That Have Not Vested (#)
                Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares,
      Units or Other Rights That Have Not Vested ($)Stephen
      Hawksworth (1)
                2008
                2,000,000
                —
                —
                0.015
                3/6/16
                —
                —
                —
                —2007
                1,000,000
                —
                —
                0.0035
                3/1/17Craig
      S. Barrow (1)
                2008
                2,000,000
                —
                —
                0.05
                8/28/16
                —
                —
                —
                —2007
                500,000
                —
                —
                .00555
                2/16/17William
      L. Sklar (2)
                2007
                500,000
                —
                —
                0.05
                12/21/16
                —
                —
                —
                —David
      Bailey
                2007
                500,000
                —
                —
                0.05
                12/21/16
                —
                —
                —
                —Richard
      Paver
                2007
                500,000
                —
                —
                0.05
                12/21/16
                —
                —
                —
                —T.
      Marshall Wilde (2)
                2007
                500,000
                —
                —
                0.05
                12/21/16
                —
                —
                —
                —
  (1) The
options issued to Messrs. Hawksworth and Barrow expired three months after their
resignations on January 31, 2008.
 
 (2) The
options issued to Messrs. Sklar and Wilde expire three months after their
resignations on May 21, 2008.
 
 Employment
and Other Compensation-Related Agreements with Management
 
 Effective
June 1, 2008, Mr. Gelmon has accrued a monthly salary of $10,000.
 
 Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
 
 The
following table sets forth information, as of June 5, 2008, with respect to the
beneficial ownership of our common stock by each person known to be the
beneficial owner of more than five percent of the outstanding common stock, and
by our director and executive officer, individually and as a
group.
  Name
      and Address
              Numbers
      of Shares Beneficially Owned
              %Michael
      J. Gelmon,
                8
      Fisherman’s Point
                Elbow
      Valley
                Rocky
      View MD No 44
                Calgary,
      Alberta, Canada T3Z 1B1
              -0-
              0.0%Directors
      and Executive Officer as a Group (one person)
              -0-
              0.0%
  Item
13. Certain Relationships and Related Transactions and Director
Independence.
 
 Transactions
with Directors, Officers and Principal Shareholders
 
 Through
July 2007, we leased office space from KMS, LLC, purportedly a limited liability
company owned and controlled by a former officer, at a rate of $10,000 per month
for a term expiring in 2013. We vacated the premises in August 2007 and are
seeking to rescind the lease for breach of contract and fraud. See Item 3. Legal
Proceedings.
 
 Certain
former directors and officers who are still minority shareholders made cash
advances to the Company at various times. These advances are due on demand, bear
no interest and are unsecured. Interest expense is imputed at a rate of 8.25%
and $7,088 of imputed interest was recorded during the year ended February 29,
2008. At February 28, 2007, the total amount owed to related parties in
connection with these transactions was $36,382.
 
 Securities
Purchase Agreements
 
 2005-2007
Securities Purchase Agreements
 
 Beginning
effective November 30, 2005 and ending November 21, 2007, we entered into a
series of Securities Purchase Agreements with AJW Offshore, Ltd., AJW Partners,
LLC, AJW Qualified Partners, LLC, and New Millennium Capital Partners II (the
“Investors”) and ancillary agreements. Under the Securities Purchase Agreements,
we sold the Investors a total of $3,005,000 in Callable Secured Convertible
Notes (the "Convertible Notes") due in three years, respectively, with 12%
annual interest payable quarterly.  The interest rate was 8% prior to
July 10, 2008. The Investors may convert the Convertible Notes into shares at
the lower of $.05 per share or 55% of the three lowest intraday trading prices
during the twenty trading days prior to conversion. We issued the Investors for
no additional cash consideration Stock Purchase Warrants (the "Warrants") to
purchase an aggregate of 53,000,000 shares at $.0001 per share, except for
20,000,000 warrants having an exercise price of $.0012 and 5,000,000 warrants
for which the exercise price was $.0001. The Warrants expire seven years from
the date issued.
 
 As of
July 8, 2008, the Investors have converted approximately $26,155 of the
Convertible Notes into 23,750,000 shares of Common Stock. Based on a weighted
average conversion price of $.001125 the remaining $2,978,845 in Convertible
Notes may be converted into more than 2,500,000,000 shares. Management believes
that the actual conversion price may be lower and additional shares may be
issued if accrued interest is converted.
 
 Provisions
of the Transaction Agreements
 
 The
Investors will be entitled to exercise the Warrants on a cashless basis if the
shares of common stock underlying the Warrants are not then registered pursuant
to an effective registration statement. In the event that an Investor exercises
the Warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the Warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of the Warrant or issued in connection with the
Convertible Notes issued pursuant to the Securities Purchase Agreements. Upon
the issuance of shares of common stock below the market price, the exercise
price of the Warrants will be reduced accordingly. The market price is
determined by averaging the last reported sale prices for our shares of common
stock for the five trading days immediately preceding such issuance as set forth
on our principal trading market. The exercise price shall be determined by
multiplying the exercise price in effect immediately prior to the dilutive
issuance by a fraction. The numerator of the fraction is equal to the sum of the
number of shares outstanding immediately prior to the offering plus the quotient
of the amount of consideration received by us in connection with the issuance
divided by the market price in effect immediately prior to the issuance. The
denominator of such issuance shall be equal to the number of shares outstanding
after the dilutive issuance.
 
 In
addition, the conversion price of the Convertible Notes and the exercise price
of the Warrants will be adjusted in the event that we issue common stock at a
price below the fixed conversion price or below market price, with the exception
of any securities issued in connection with the Securities Purchase Agreements.
The conversion price of the Convertible Notes and the exercise price of the
Warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the Investors’ positions.
 
 Payment
of the Convertible Notes is secured by all of our assets pursuant to a Security
Agreement and an Intellectual Property Security Agreement.
 
 Pursuant
to a Registration Rights Agreement we agreed to file a registration statement to
register on request by the Investors the shares underlying the Notes and
Warrants. We will be subject to the payment of certain penalties and damages in
the event we do not satisfy our obligations under the Transaction Agreements
including those with respect to registration of the shares underlying the
Convertible Notes and Warrants.
 
 Item
14. Principal Accountant Fees and Services.
 
 The
following table presents fees for professional services rendered by Malone &
Bailey, P.C. to us for 2008 and 2007:
 
 Types of
      Fees
              Year Ended
                February 29,
      2008
              Year Ended
                February 28,
      2007Audit Fees
      (a)
              $51,760
              $55,382Tax Fees
      (b)
              -0-
              -0-Other Fees
      (c)
              -0-
              -0-
  
 To
safeguard the continued independence of the independent auditors, the Board has
adopted a policy that expands our existing policy preventing our independent
auditors from providing services to us that are prohibited under Section 10A(g)
of the Securities Exchange Act of 1934, as amended. This policy also provides
that independent auditors are only permitted to provide services to the Company
that have been pre-approved by the Board of Directors. Pursuant to the policy,
all audit services require advance approval by the directors. All other services
by the independent auditors that fall within certain designated dollar
thresholds, both per engagement as well as annual aggregate, have been
pre-approved under the policy. Different dollar thresholds apply to the three
categories of pre-approved services specified in the policy (Audit Related
services, Tax services and other services). The directors must approve all
services that exceed the dollar thresholds in advance.
 
 PART
IV
 
 Item
15. Exhibits, Financial Statement Schedules.
 
 4.1
              Form
      of Securities Purchase Agreement, Callable Secured Convertible Note,
      Security Agreement, Intellectual Property Security Agreement, Subsidiary
      Guaranty, Registration Rights Agreement, and Common Stock Purchase Warrant
      signed with or, issued by the Registrant, as the case may be, to the
      Investors (1)23.1
              Consent
      of Malone & Bailey, P.C. dated July 21, 2008 (2)31.1
              Certification
      of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              Certification
      of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
              Certification
      of Principal Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
              Certification
      of Principal Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
 (1)
              Incorporated
      by reference to the Registrant’s Form 10-K filed with the Securities and
      Exchange Commission on July 18, 2006.
 (2)
              Filed
      herewith.
  
 
 
  SIGNATURES
   Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  Date:
      July 21, 2008
              
              PaperFree
      Medical Solutions, Inc.By:
              /s/Michael J.
      GelmonMichael
      J. Gelmon,
                Officer,
      CEO, CFO, President, Treasurer, Secretary and Director
  
   Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and dates indicated.
  Date:
      July 21, 2008By:
              /s/Michael J.
      GelmonMichael
      J. Gelmon,
                Officer,
      CEO, CFO, President, Treasurer, Secretary and
  Director