Note 3 - Correction of Errors

On April 13, 2012, Epazz, Inc. restated its Form 10-K/A (the "First Amendment") to its Annual Report for the Annual period ended December 31, 2010, which was filed with the Securities and Exchange Commission ("SEC") on April 15, 2011 (the "Original Report") in response to certain issues set forth in our Quarterly Report on Form 10-Q filed with the SEC on November 22, 2010 (the "Form 10-Q"). The consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2010 and the Quarterly Reports on Form 10-Q for the three months ended March 31, 2011, the six months ended June 30, 2011 and nine months ended September 30, 2011 required restatement in order to correct errors related to the following (which reports have previously been restated):

The Company determined that it had not properly recorded the September 30, 2010 acquisition of its subsidiary, IntelliSys. Subsequently, the balance sheet has been adjusted to properly reflect the Goodwill that should have been recognized when the acquisition was initially recorded. Intangible assets, retained earnings and the Consolidated Statement of Operations have also been adjusted to correct related recording errors originally recorded at the time of the acquisition. The Company also determined that it had omitted accrued expenses that should have been recorded on the balance sheet dated December 31, 2010. Accounts payable and accrued expenses have been adjusted to correct this omission.

The Company also determined that it did not properly record stock issued in exchange for services rendered. Accordingly, the stock transaction, which was originally recorded to prepaid expense, has been reclassified to the Company's equity account.

EPAZZ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

	As Originally
	Reported						As Restated
	December 31,						December 31,
	2010			Adjustments			2010
Assets							(Restated)
Current assets:
Cash	$	40,013		$	600		$	40,613
Accounts receivable, net		294,532			-			294,532
Deferred financing cost, current		3,633			-			3,633
Other current assets		8,852			(600	)		8,252
Total current assets		347,030			-			347,030

Property and equipment, net		238,010			3,164			241,174
Intangible assets, net		407,944			158,701			566,645
Goodwill		-			53,588			53,588
Prepaid expense		1,000,000			(1,000,000	)		-

Total assets	$	1,992,984		$	(784,547	)	$	1,208,437


Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable	$	51,960		$	-		$	51,960
Accrued expenses		81,205			20,772			101,977
Deferred revenue		266,891			-			266,891
Current maturities of capital lease obligations payable		46,764			-			46,764
Current maturities of notes payable, related parties		246,316			-			246,316
Current maturities of long term debt		111,120			-			111,120
Total current liabilities		804,256			20,772			825,028

Capital lease obligations payable, net of current maturities		61,331			-			61,331
Notes payable, related parties, net of current maturities		296,103			-			296,103
Long term debt, net of current maturities		299,337			-			299,337
Total liabilities		1,461,027			20,772			1,481,799

Stockholders' equity (deficit):
Common stock, Series A, $0.01 par value, 60,000,000 shares
authorized, 30,448,294 shares issued and outstanding		304,483			-			304,483
Common stock, Series B, $0.01 par value, 60,000,000 shares
authorized, 2,500,000 shares issued and outstanding		25,000			-			25,000
Additional paid in capital		2,268,360			-			2,268,360
Stockholders' receivable		-			(1,000,000	)		(1,000,000	)
Accumulated deficit		(2,065,886	)		194,681			(1,871,205	)
Total stockholders' equity (deficit)		531,957			(805,319	)		(273,362	)

Total liabilities and stockholders' equity (deficit)	$	1,992,984		$	(784,547	)	$	1,208,437

When the acquisition of Intellisys was originally recorded, it erroneously included pre-acquisition activity. An adjustment was made to correct this error in the most recently restated reports. On the December 2010 Amended Report the following adjustments were made:

EPAZZ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS

	As Originally
	Reported						As Restated
	December 31,						December 31,
	2010			Adjustments			2010
							(Restated)
Revenue	$	898,692		$	(193,687	)	$	705,005

Expenses:
General and administrative		638,506			(233,887	)		404,619
Depreciation and amortization		106,245			169			106,414
Total operating expenses		744,751			(233,718	)		511,033

Net operating income		153,941			40,031			193,972

Other income (expense):
Interest income		25			132			157
Interest expense		(74,408	)		1,064			(73,344	)
Total other income (expense)		(74,383	)		1,196			(73,187	)

Net income	$	79,558		$	41,227		$	120,785

The following adjustments were made on the December 2010 Restated Statement of Cash Flows:

EPAZZ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS

	As Originally
	Reported						As Restated
	December 31,						December 31,
	2010			Adjustments			2010
							(Restated)
Cash flows from operating activities
Net income (loss)	$	79,558		$	41,227		$	120,785
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization		102,911			169			103,080
Decrease (increase) in assets:
Accounts receivable		(219,999	)		15,363			(204,636	)
Deferred financing cost		3,334			-			3,334
Other current assets		(8,852	)		600			(8,252	)
Increase (decrease) in liabilities:
Current liabilities and deferred revenues		260,870			(72,817	)		188,053
Net cash provided by operating activities		217,822			(15,458	)		202,364

Cash flows from investing activities
Purchase of equipment		(346,338	)		43,102			(303,236	)
Acquisition of subsidiaries		(153,454	)		28,772			(124,682	)
Net cash used in investing activities		(499,792	)		71,874			(427,918	)

Cash flows from financing activities
Proceeds from long term debt, related parties		170,371			-			170,371
Repayment of long term debt, related parties		(156,871	)		-			(156,871	)
Proceeds from convertible debt		-			-			-
Proceeds from long term debt		392,835			(55,816	)		337,019
Repayment of long term debt		(131,627	)		-			(131,627	)
Net cash provided by financing activities		274,708			(55,816	)		218,892

Net increase (decrease) in cash		(7,262	)		600			(6,662	)
Cash - beginning		47,275			-			47,275
Cash - ending	$	40,013		$	600		$	40,613

Supplemental disclosures:
Interest paid	$	24,563		$	48,781		$	73,344
Income taxes paid	$	-		$	-		$	-

Non-cash investing and financing activities:
Acquisition of subsidiary in exchange for debt	$	-		$	30,815		$	30,815
Common stock issued in exchange for services
and interest payment on related party debt	$	1,000,000		$	(1,000,000	)	$	-