---

---

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

---

FORM 10-Q/A

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

FOR THE PERIOD ENDED JUNE 30, 2000

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM  TO

---

Commission file number 0-18160

OMNI NUTRACEUTICALS, INC.(Exact name of registrant as specified in its charter)

---

UTAH(State of incorporation)

87-0468225(I.R.S. Employer Identification No.)


5310 Beethoven Street
Los Angeles, California 90066(Address of principal executive offices)

Registrant's
telephone number:(310) 306-3636

---

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

The
number of shares of the registrant's Common Stock, par value $.01 per share, outstanding as of June 30, 2000 was 32,372,364.

---

---

---



Omni Nutraceuticals, Inc.  Index to Form 10-Q/A

|           |  |                                                                                                                |  | Page
|---------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|Part I.    |  | Financial Information                                                                                          |  |     
|Item 1.    |  | Financial Statements:                                                                                          |  | 4   
|           |  | Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999                              |  | 4   
|           |  | Consolidated Statements of Operations for Three Months and Six Months Ended June 30, 2000 and 1999 (unaudited) |  | 5   
|           |  | Consolidated Statements of Cash Flows for Six Months Ended June 30, 2000 and 1999 (unaudited)                  |  | 6   
|           |  | Notes to Consolidated Financial Statements                                                                     |  | 8   
|Item 2.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                          |  | 15  
|Part II.   |  | Other Information                                                                                              |  |     
|Item 1.    |  | Legal Proceedings                                                                                              |  | 21  
|Item 2.    |  | Changes in Securities and Use of Proceeds                                                                      |  | 21  
|Item 3.    |  | Defaults Upon Senior Securities                                                                                |  | 23  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                            |  | 23  
|Item 5.    |  | Other Information                                                                                              |  | 23  
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                               |  | 23  
|Signatures |  | 25                                                                                                            

2

---

THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS QUARTERLY REPORT, INCLUDING, WITHOUT LIMITATION,
THOSE REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS, MARKETING AND PRODUCT INTRODUCTION AND DEVELOPMENT PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "RISKS RELATED TO THE BUSINESS OF THE COMPANY" AND
ELSEWHERE IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THE ANNUAL REPORT. ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON BEHALF OF THE COMPANY, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.

3

---



PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

OMNI NUTRACEUTICALS, INC.  CONSOLIDATED BALANCE SHEETS  Restated

|                                          |                            | June 30,
2000 |             | December 31,
1999 |  
|----------------------------------------- | -------------------------- | ------------- | ----------- | ----------------- | -
|
|
|Current Assets                            |                            |               |             |                   |  
|Accounts Receivable, net                  |                            | $             | 6,181,000   |                   | $
|Inventories                               |                            |               | 5,101,000   |                   |  
|Prepaid Expenses and Other                |                            |               | 1,415,000   |                   |  
|Notes Receivable                          |                            |               | 447,000     |                   |  
|                                          |                            |               |             |                   |  
|                                          | Total Current Assets       |               |             | 13,144,000        |  
|Property and Equipment, net               |                            |               | 1,495,000   |                   |  
|Trademarks and Websites                   |                            |               | 17,467,000  |                   |  
|Intangibles                               |                            |               | 2,263,000   |                   |  
|Other Assets                              |                            |               | 957,000     |                   |  
|                                          |                            |               |             |                   |  
|                                          | Total Assets               |               | $           | 35,326,000        |  
|                                          |                            |               |             |                   |  
|Liabilities and Stockholders' Equity      |                            |               |             |                   |  
|Current Liabilities                       |                            |               |             |                   |  
|Cash Overdraft                            |                            | $             | 890,000     |                   | $
|Accounts Payable                          |                            |               | 8,781,000   |                   |  
|Accrued Liabilities                       |                            |               | 4,095,000   |                   |  
|Line of Credit                            |                            |               | 4,979,000   |                   |  
|Current Portion of Term Loan              |                            |               | 2,332,000   |                   |  
|Current Portion of Notes Payable          |                            |               | 21,000      |                   |  
|Income Taxes Payable                      |                            |               |            |                   |  
|Customer Deposits                         |                            |               | 450,000     |                   |  
|                                          |                            |               |             |                   |  
|                                          | Total Current Liabilities  |               |             | 21,548,000        |  
|Term Loan, net of Current Portion         |                            |               | 8,529,000   |                   |  
|Notes Payable, net of Current Portion     |                            |               | 98,000      |                   |  
|Minority Interest                         |                            |               |            |                   |  
|Stockholders' Equity                      |                            |               |             |                   |  
|Shares issueable under legal settlement   |                            |               |             |                   |  
|Common Stock                              |                            |               | 324,000     |                   |  
|Additional Paid in Capital                |                            |               | 34,498,000  |                   |  
|Treasury Stock                            |                            |               | (50,000     | )                 |  
|Deficit                                   |                            |               | (29,621,000 | )                 |  
|                                          |                            |               |             |                   |  
|                                          | Total Stockholders' Equity |               |             | 5,151,000         |  
|                                          |                            |               |             |                   |  
|Total Liabilities and Stockholders equity |                            | $             | 35,326,000  |                   | $
|                                          |                            |               |             |                   |  

See
Notes to Consolidated Financial Statements

4

---



OMNI NUTRACEUTICALS, INC.  CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED

|                                            |                                    | Three months Ended
June 30 |            | Six months Ended
June 30 |  
|------------------------------------------- | ---------------------------------- | -------------------------- | ---------- | ------------------------ | -
|
|
|Net Sales                                   |                                    | $                          | 10,846,000 |                          | $
|Cost of Sales                               |                                    |                            | 6,663,000  |                          |  
|                                            |                                    |                            |            |                          |  
|                                            | Gross Profit                       |                            |            | 4,183,000                |  
|Costs and Expenses                          |                                    |                            |            |                          |  
|                                            | Distribution Expenses              |                            |            | 608,000                  |  
|                                            | Sales and Marketing                |                            |            | 1,689,000                |  
|                                            | General and Administrative         |                            |            | 1,694,000                |  
|                                            | Depreciation and Amortization      |                            |            | 721,000                  |  
|                                            | Write-off of Surgical Technologies |                            |            |                          |  
|                                            |                                    |                            |            |                          |  
|                                            | Total Costs and Expenses           |                            |            | 4,712,000                |  
|(Loss) from Operations                      |                                    |                            | (529,000   | )                        |  
|Other Income (Expense)                      |                                    |                            |            |                          |  
|                                            | Interest Income                    |                            |            | 9,000                    |  
|                                            | Interest Expense                   |                            |            | (636,000                 | )
|                                            | Other Income (Expense)             |                            |            | 10,000                   |  
|                                            |                                    |                            |            |                          |  
|                                            | Total Other Income (Expense)       |                            |            | (617,000                 | )
|                                            |                                    |                            |            |                          |  
|Minority Interest                           |                                    |                            |           |                          |  
|Net (Loss) before Income Taxes              |                                    |                            | (1,146,000 | )                        |  
|                                            |                                    |                            |            |                          |  
|Income Tax (Benefit)                        |                                    |                            |           |                          |  
|Net (Loss)                                  |                                    |                            | (1,146,000 | )                        |  
|                                            |                                    |                            |            |                          |  
|Preferred Stock Dividends                   |                                    |                            |           |                          |  
|                                            |                                    |                            |            |                          |  
|Net (Loss) Available to Common Shareholders |                                    | $                          | (1,146,000 | )                        | $
|                                            |                                    |                            |            |                          |  
|Net (Loss) per common share                 |                                    |                            |            |                          |  
|                                            | Basic                              |                            | $          | (0.04                    | )
|                                            | Diluted                            |                            | $          | (0.04                    | )
|Weighted Average Shares Outstanding         |                                    |                            |            |                          |  
|                                            | Basic                              |                            |            | 32,028,218               |  
|                                            | Diluted                            |                            |            | 32,028,218               |  

See
Notes to Consolidated Financial Statements

5

---



OMNI NUTRACEUTICALS, INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED

|                                                                                                   |                                           | Six Months Ended June 30 |           
|-------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------ | ----------
|
|
|Cash Flows From Operating Activities                                                               |                                           |                          |           
|Net Income (Loss)                                                                                  |                                           | $                        | (7,922,000
|Adjustments to reconcile Net Income
(Loss) to Net Cash Provided by
(Used in) Operating Activities: |                                           |                          |           
|                                                                                                   | Depreciation and Amortization             |                          |           
|                                                                                                   | (Gain) Loss on Disposal of Assets         |                          |           
|                                                                                                   | Write-off of Surgical Technologies Assets |                          |           
|                                                                                                   | Issuance of Warrants and Options          |                          |           
|                                                                                                   | Issuance of Shares for Services           |                          |           
|                                                                                                   | Amortization of Notes from Officers       |                          |           
|                                                                                                   | (Increase) Decrease in:                   |                          |           
|                                                                                                   |                                           | Accounts Receivable      |           
|                                                                                                   |                                           | Inventory                |           
|                                                                                                   |                                           | Prepaid and Other        |           
|                                                                                                   | Increase (Decrease) in:                   |                          |           
|                                                                                                   |                                           | Bank Overdraft           |           
|                                                                                                   |                                           | Accounts Payable         |           
|                                                                                                   |                                           | Accrued Liabilities      |           
|                                                                                                   |                                           | Income Taxes             |           
|                                                                                                   |                                           |                          |           
|Cash Provided by (Used in) Operating Activities                                                    |                                           |                          | (2,186,000
|Cash Flows From Investing Activities                                                               |                                           |                          |           
|                                                                                                   | Acquisition of Fixed Assets               |                          |           
|                                                                                                   | Purchase of Inholtra and HVE              |                          |           
|                                                                                                   | Net Proceeds from Asset Dispositions      |                          |           
|                                                                                                   | Decrease in Other Assets                  |                          |           
|                                                                                                   | Collections on Notes Receivable           |                          |           
|                                                                                                   |                                           |                          |           
|Cash Provided by (Used in) Investing Activities                                                    |                                           |                          | 41,000    
|Cash Flows From Financing Activities                                                               |                                           |                          |           
|Proceeds from Issuance of Common Stock                                                             |                                           |                          | 2,418,000 
|Proceeds from Issuance of Preferred Stock                                                          |                                           |                          | 1,900,000 
|Proceeds from sale of minority interest                                                            |                                           |                          | 1,000,000 
|Proceeds from Issuance of Warrants                                                                 |                                           |                          | 100,000   
|Repayments of previous line of credit                                                              |                                           |                          |          
|Borrowings (Repayments) under existing Line of Credit                                              |                                           |                          | (1,457,000
|Borrowings on Long Term Borrowings                                                                 |                                           |                          |          
|Repayments from Long Term Borrowings                                                               |                                           |                          | (1,716,000
|Costs Incurred with Financing                                                                      |                                           |                          | (100,000  
|                                                                                                   |                                           |                          |           
|Cash Provided by (Used in) Financing Activities                                                    |                                           |                          | 2,145,000 
|                                                                                                   |                                           |                          |           
|Net Increase (Decrease) in Cash                                                                    |                                           |                          |          
|Cash and Cash Equivalents, Beginning of Period                                                     |                                           |                          |          
|                                                                                                   |                                           |                          |           
|Cash and Cash Equivalents, End of Period                                                           |                                           | $                        |          
|                                                                                                   |                                           |                          |           

See Notes to Consolidated Financial Statements

6

---



SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING,  INVESTING AND FINANCING ACTIVITIES

1999

In
connection with the sale of the Company's facility in Boulder, Colorado, (i) a note receivable of $458,000 was received from the buyer, and (ii) $1,300,000 of debt was assumed by
the buyer.

In
connection with the acquisition of Health and Vitamin Express Inc., the Company (i) issued 363,636 shares of the Company's common stock valued at $2,273,000, and
(ii) assumed $571,000 of debt.

In
connection with the acquisition of certain assets and liabilities of Inholtra, Ltd., short term debt of $10,000,000 was incurred by the Company.

2000

The
Company recorded a preferred dividend of $1,950,000 related to the issuance of preferred stock with a conversion rate below the market price of the Company's common stock.

The
Company issued two directors a total of 40,000 shares of common stock and recorded a non-cash charge of $40,000.

The
Company recorded a compensation charge of $1,720,000 related to the transfer of personal shares from an officer and major shareholder to a departing board member.

The
Company issued 800,000 shares of common stock to a financial consulting firm for services provided with the private placement of 700,000 shares of common stock for $2,100,000.

The
Company issued 838,941 shares of common stock to acquire certain assets of Healthshop.Com, Inc. The shares had a value of $3,500,000.

The
Company issued 170,000 shares of common stock to acquire SmartBasics, Inc. The shares had a value of $510,000.

7

---



Omni Nutraceuticals, Inc.  Notes to Consolidated Financial Statements  Six Months Ended June 30, 2000  (Unaudited)

Note 1.  Basis of Presentation

The accompanying unaudited consolidated financial statements reflect the results of operations for Omni Nutraceuticals, Inc. (the "Company"), and have
been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals, with the exception of the adjustments described below, in the consolidated financial statements) considered necessary
for a fair presentation have been included. Operating results for the three-month and six-month periods are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Form 10-K/A for the year ended
December 31, 1999. Certain 1999 amounts have been reclassified to conform to 2000 presentation. For the three-month and six-month periods ended June 30, 2000 and
June 30, 1999, no common stock equivalents were included in loss per share calculations because they would have been anti-dilutive.

Note 2.  Restatement

Starting in July, 2000, one of the Company's large customers began deducting significant amounts from cash remittances. In addition, certain of the Company's
other customers began taking deductions against cash remittances that were in excess of historical amounts experienced by the Company. Subsequently, the Company conducted an investigation related to
its 1999 and 2000 sales practices, and determined that sales to certain customers were made with rights of return and guarantees. As part of its investigation, the Company reviewed substantially all
of the customer deductions taken in 2000 and determined that certain amounts related not only to "guaranteed" sales, but also to other customer allowances and concessions granted by prior management
in the first quarter of 2000. Substantially all of these arrangements were previously unknown to the current management team.

The
Company has determined the effect of these deductions on its previously issued financial statements and has restated the accompanying financial statements for the six months ended
June 30, 2000. Revenues from any products with "guaranteed" sales have been deferred until the sell through of the product at the customer level and the related product has been treated as
consigned inventory. In situations in which allowances and concessions were granted early in 2000 related to sales in 1999, the reserves for such allowances and concessions have been increased as of
December 31, 1999. In situations in which additional allowances or concessions were granted subsequent to the original issuance of the financial statements, relating to sales made in prior
periods, reserves have been increased in the period such decisions were made and the amounts became known.

The
effect of the adjustments required as a result of this investigation was to restate the Company's financial statements for the third and fourth quarters of 1999 and the first and
second quarters of 2000. The cumulative net impact on the Company's statements of operations from July 1, 1999 through September 30, 2000 which includes the deferral of approximately
$1.9 million of gross profit from previously recorded sales now treated as "guaranteed sales," and an additional $1.4 million of reserves for allowances granted to customers for sales in
prior periods, approximates $3.2 million.

The
accompanying financial statements for the three and six month periods ended June 30, 1999 and 2000 have been restated to reflect the deferral of sales with terms that
provide the customer with a

8

---

guaranteed sell through and to increase the Company's reserves for allowances for doubtful accounts and customer allowances.

The
effect of the restatement on net sales, cost of sales, gross profit, net loss, basic and diluted loss per common share, accounts receivable and inventories as of and for the three
and six months ended June 30, 2000 is as follows:

|                       |         | Three Months Ended June 30, 2000 |           
|---------------------- | ------- | -------------------------------- | ----------
|
|Net Sales              |         | $                                | 9,561,000 
|Cost of Sales          |         |                                  | 5,550,000 
|Gross Profit           |         |                                  | 4,011,000 
|Net Loss               |         |                                  | (1,318,000
|Loss Per Common Share: |         |                                  |           
|                       | Basic   |                                  |           
|                       | Diluted |                                  |           
|Balance sheet data:    |         |                                  |           
|Accounts receivable    |         |                                  | 6,467,000 
|Inventories            |         |                                  | 4,409,000 
|Accrued liabilities    |         |                                  | (1,652,000

|                       |         | Six Months Ended June 30, 2000 |           
|---------------------- | ------- | ------------------------------ | ----------
|
|Net Sales              |         | $                              | 17,350,000
|Cost of Sales          |         |                                | 10,106,000
|Gross Profit           |         |                                | 7,244,000 
|Net Loss               |         |                                | (8,079,000
|Loss Per Common Share: |         |                                |           
|                       | Basic   |                                |           
|                       | Diluted |                                |           

Note 3.  Going Concern Issues

In connection with the audit for the year ended December 31, 1999, the Company received a report from its independent auditors that included an
explanatory paragraph describing the uncertainty of the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from
this uncertainty.

Note 4.  New Authoritative Pronouncements

In December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. Changes in accounting to apply the guidance in SAB No. 101 may be accounted for as a

9

---

change in accounting principles effective January 1, 2000. Management has not yet determined the complete impact of SAB No. 101 on the Company; however, management does not expect that
application of SAB No, 101 will have a material effect on the Company's revenue recognition and results of operations.

Note 5.  Acquisitions

In March 2000, we announced the proposed acquisition of Vitamin Discount Connection, an Internet "e-tailer" and mail order retailer of
nutritional and health-related products. The Company issued 190,000 shares of Common Stock in connection with this acquisition, which was completed November 16, 2000.

On
May 22, 2000, the Company acquired certain assets, including equipment and customer lists, of Healthshop.com. The purchase price called for the issuance 838,951 shares of
common stock valued at $3,500,000; 250,000 common stock purchase options, exercisable at $4.50 per share with a term of 10 years, vesting immediately, issued to the former officers of
Healthshop.com, valued at $872,000; and an option to purchase additional shares of the Company's common stock at a price of $4.15 for a 30-day period, up to a maximum of $2,500,000, valued
at $289,000. The aggregate purchase price was $4,661,000, which has been allocated to Websites and Customer Lists. The acquisition agreement also calls for additional shares to be issued should the
Company's stock price drop below the pre-acquisition levels, up to a maximum of 400,000 shares. In the event the Company is forced to issue additional shares under this provision, these
amounts will be applied to the aggregate Purchase price to increase Websites and Customer Lists.

On
May 25, 2000, the Company acquired Smart Basics, Inc., dba SmartBasics.com, for 170,000 shares of the Company's common stock valued at $510,000. SmartBasics.com is an
internet and mail order business that sells nutritional supplements and health related products.

On
February 2, 2001, we entered into and simultaneously closed a Purchase Agreement with Vitacost.com, Inc. ("Vitacost"), an on-line marketer of vitamins and
nutritional products, whereby Vitacost acquired substantially all of the operating assets of the Company's combined Internet operations in exchange for 6,800,000 shares of Vitacost common stock. This
transaction is described in more detail in Note 8.

Note 6.  Credit Facility

The current credit facility consists of a $13 million (original amount) term loan ("Term Loan") and up to a $7 million revolving loan ("Revolving
Loan"). Initially, the $13 million Term Loan was payable in quarterly installments of $583,333 that began October 15, 1999 and were to increase to $750,000 on October 15, 2002 until the
loan was paid in full on April 15, 2004. The credit facility also contained certain financial and other covenants or restrictions including the maintenance of certain financial ratios,
limitations on capital expenditures, restrictions on acquisitions, limitations on incurrence of indebtedness, and restrictions on dividends paid by the Company.

On
May 8, 2000, the Company's credit facility was amended. As a condition of the waiver of certain covenant defaults, the amendment changed the term of both loans to
April 30, 2001, when the loans were to be payable in full. Further, the Term Loan amortization and interest payment schedule

10

---

was changed from quarterly to monthly. The amendment also required the Company to meet revised financial covenants. As of June 30, 2000, the Company was in default of certain of those
restrictive covenants.

On
October 23, 2000, the credit facility was further amended with respect to both its term debt and revolving loan provisions. In addition, the lender waived any and all
defaults then in existence. The major amendments include an increase in the availability of the line up to the maximum credit limit of $7 million, an extension of both the revolving and term
loans from April 30, 2001 to July 30, 2002 and an agreement to permit all of an equity financing, closed on the same date, to be used for working capital purposes. Also see the Footnote
8 "Subsequent Events". In addition, it was agreed that all principal payments, aggregating approximately $1.75 million, due under the loan would be deferred until June 15, 2001.

Note 7.  Capital Transactions

During the first six months of year 2000, as compensation for serving on the Board of Directors, the Company issued two directors a total of 30,000 shares of
common stock. The accompanying financial statements include a charge of $30,000 to reflect this issue of shares.

On
January 24, 2000, the Company completed an equity transaction whereby the Company issued 2,000,000 shares of its newly created 5% Convertible Preferred Stock,
Series A ("Preferred Shares") and seven-year warrants to purchase 550,000 shares of common stock at an exercise price of $2.25 per share, subject to adjustment. The aggregate purchase price for
the Preferred Shares and warrants sold by the Company was $2,000,000. Concurrently, HealthZone issued 222,222 shares of its common stock (approximately 10% of shares outstanding) and a
seven-year warrant to purchase up to 37,000 shares of its common stock for a purchase price of $1,000,000. In connection with the above transaction, the Company (i) provided the
investor the right to elect one director, (ii) provided the investor certain registration rights, (iii) amended its Articles of Incorporation to provide for the Preferred Shares,
(iv) amended the Settlement Agreement between the Company and Klee Irwin as it related to certain funding provisions of HealthZone, and (v) entered into two separate consulting
agreements, one of which requires the Company to issue 50,000 shares of its common stock. Further, in connection with
the above transaction, the Chairman (Duncan) and the former Chief Executive Officer (Irwin), both significant shareholders, each sold 220,000 (totaling 440,000) shares of their personally held Company
common stock to the investing parties for $250,000 (totaling $500,000). On March 24, 2000, all of the issued and outstanding Preferred Shares, plus accrued dividends, were converted into
2,016,438 shares of common stock. Since the conversion rate was significantly below the trading price of the Company's common stock when the Preferred was issued, the Company recognized a preferred
dividend of $1,950,000, which is reflected as a reduction in net income available to common stockholders.

On
March 12, 2000, the Company entered into a two year Consulting Agreement with Liviakis Financial Communications, Inc. ("LFC") and, in connection therewith,
authorized the issuance of 1,200,000 restricted shares of common stock to LFC in consideration of, and as a retainer and prepayment for, the consulting services to be rendered to the Company by LFC.
Under the terms granted to LFC, the Company issued 800,000 shares during the current quarter. The balance of 400,000 shares will be due and payable in fiscal year 2001 depending on whether the Company
continues to retain LFC. Pursuant to the provision in the Consulting Agreement, LFC is entitled to receive a finders

11

---

fee in connection with any debt or equity financing for the Company from a source introduced to the Company, or its nominee from LFC, and a finders fee in connection with any acquisition of the
Company by any candidate introduced to the Company or its nominee, by LFC. As such, the shares have been recorded as an issuance cost on the accompanying financial statements.

On
March 29, 2000, the Company sold 700,000 shares of common stock to individual investors organized by LFC in a private placement for aggregate proceeds of$2,100,000.

On
April 13, 2000, the Company finalized the settlement of the lawsuit filed by the former shareholders of Health & Vitamin Express by issuing 363,636 shares of common
stock and granting a warrant expiring in 2005 to buy 100,000 shares of common stock for $2.25 per share. Due to the issuance of these shares, the Company has reclassified the contingent shares to
additional paid in capital.

On
April 20, 2000, the Company entered into a one year consulting agreement with a financial advisor. The agreement calls for the issuance of options to purchase 30,000 shares
of common stock at $3.86 per share. The options vest 7,500 at the end of each three months after the initiation of the contract.Related to the agreement, the Company has recorded $115,000 of prepaid
consulting fees, which is being amortized as consulting expense over the term the services are being provided.

On
June 28, 2000 the Company entered into a consulting agreement with an investment banking firm to perform certain financial consulting services. The agreement called for the
issuance of 300,000 options to purchase the Company's common stock at $4.00 per share and covered a term of six months. The options were valued at $747,000 and are being amortized into consulting
expense over the term of the agreement.

Note 8.  Subsequent Events

In separate agreements, two of the Company's trade creditors agreed to convert a portion of their debt in exchange for Common Stock of the Company and to
accept a substantially reduced cash payment and/or note for the balance of the obligation of the Company. On September 7, 2000, approximately $985,000 of debt had been converted in exchange for
approximately 328,300 shares of Common Stock, or approximately $3.00 per share. Both agreements contain provisions that may require future adjustments to the cash amounts they received, contingent on
their realization upon disposition of the common stock they received pursuant to their respective agreements.

On
October 23, 2000 the Company's credit facility was amended with respect to both its term debt and revolving credit agreement. In addition, the lender waived any and all
defaults then in existence. The major amendments to the Waiver and Amendment No. 4 to Secured Credit Agreement include an increase in the availability of the line up to the maximum credit limit
of $7 million, an extension of both
the revolving and term debt agreements from April 30, 2001 to July 30, 2002 and an agreement to permit all of the equity financing described above, which closed on the same date, to be
used for working capital purposes. In addition, it was agreed that all principal payments due under the loan would be deferred until June 15, 2001. The total of the deferred payments will be
$1.75 million. A bank fee of approximately $131,000 is being charged, which will be paid in six equal installments beginning on April 15, 2001.

12

---

On October 27, 2000, the Company entered into a Securities Purchase Agreement with several "accredited investors" ("Holders") whereby the Holders purchased 3000 shares of the
Company's newly-issued Series A Convertible Preferred Stock resulting in gross proceeds of $3,000,000 to the Company. In addition, the Buyers received warrants to purchase up to 600,000 shares
of Common Stock at an exercise price of approximately $0.96 per share. The Company received net proceeds from this transaction of $2,720,000, after fees, costs and expenses of issuance. An additional
50,000 warrants were issued to an intermediary on the same terms as were granted to the Buyers.

The
Preferred Stock is convertible into Common Stock on the following basis. The number of shares of Common Stock to be issued is equal to the stated value of the number of shares of
Preferred Stock being converted, together with any accrued dividends (the "Additional Amount") thereon, divided by the "Conversion Price". The Conversion Price is equal to the lesser of
(i) 115% of the average of the two lowest bid prices quoted on the exchange where the Company's Common Stock is traded during the ten days preceding the closing or, (ii) 80% of the
average of the two lowest bid prices of the Common Stock during the five days preceding conversion. Pursuant to the Securities Purchase Agreement and related documents, the Company is required to
file a registration statement, registering for resale the number of common shares issuable assuming a market price of $.75 per share upon conversion of all of the Preferred Stock, plus
warrants. The Securities Purchase Agreement includes certain provisions for liquidated damages against the Company if a registration statement for the related securities is not filed within
30 days or declared effective within 90 days after October 27, 2000.

On
November 7, 2000, the NASDAQ/NMS halted trading of the Company's Stock. NASDAQ delisted the Common Stock from trading on November 17, 2000. The Company's Common Stock
is currently quoted in the "Pink Sheets," which are published by the National Quotation Bureau.

Some
of the reasons given by NASDAQ include:



During
the fourth quarter of 2000, the Company entered into four agreements with vendors to convert a portion of the debt due them to common stock of the Company. In total,
approximately 271,500 shares were issued in exchange for approximately $496,000 in debt. The shares were issued to these suppliers at or above the quoted market price on the date of each agreement.

During
the fourth quarter of 2000, approximately 155,500 shares of common stock were issued to five holders for services totaling approximately $211,000.

On
November 16, 2000 the Company completed its acquisition of Vitamin Discount Connection, an Internet "e-tailer" and mail order retailer of nutritional and
health-related products. The Company issued 190,000 shares of Common Stock in connection with this acquisition.

On
February 2, 2001, the Company entered into and simultaneously closed a Purchase Agreement with Vitacost.com, Inc. ("Vitacost"), an on-line marketer of
vitamins and nutritional products, whereby Vitacost acquired substantially all of the operating assets of the Company's combined Internet

13

---

operations in exchange for 6,800,000 shares of Vitacost common stock. The agreement contains an optional repurchase right giving us, at any time after four years from the closing, the right to demand
Vitacost repurchase the stock we acquired for $3,400,000 in cash or, at their option, a 60 month note requiring equal monthly payments of $56,667. The agreement also contains an optional
redemption right, giving Vitacost the right to redeem the stock the Company acquired, at any time up to four years from the closing. If this option is exercised between the closing and the first
anniversary thereof, the price is $7,000,000, which compounds at the rate of 10% for each year up to $9,317,000 on the fourth anniversary of the closing. The stock the Company received represents
approximately 19.9% of the total Vitacost common stock outstanding and, accordingly, the Company will record this investment on the cost basis. As long as the Company continues to hold at least a 10%
interest, the Company will have one of the five available seats on the Vitacost Board of Directors. Additionally, the Company has certain anti-dilution rights in the event Vitacost raises
additional equity. The net loss from these discontinued operations was approximately $1,133,000 for the year ended December 31, 1999 and is estimated to be approximately $1,085,000 for the nine
months ended September 30, 2000, respectively. The estimated loss for the fourth quarter of 2000, up to the measurement date of December 1, 2000, approximates $371,000. The Reserve for
Loss on Discontinued Operations represents the difference between the appraised value of the Vitacost.com common stock received and the net assets remaining on our books, including intangibles, and
approximates $573,000, including approximately two months of operating losses.

On
February 21, 2001, the Company was advised of a lawsuit;Media Networks, Inc. v. Omni Nutraceuticals, Inc., Los Angeles Superior Court Case
No. BC 247503,for amounts due an open account pursuant to an agreement filed December 8, 2000. The complaint seeks a total of approximately $480,000,
including interest, attorneys and collection fees, for which plaintiff has filed a Request for Entry of Default and Judgment. Efforts are in process to have the plaintiff agree to set aside the
default if already entered, and to file a motion to set aside the default if it has been entered. Based on the information currently available, the Company is unable to evaluate the likelihood of an
unfavorable outcome.

On
February 21, 2001, the Company received a demand letter from counsel representing the majority of the former owners of Smart Basics, Inc. (dba SmartBasics.com), an Internet
retailer acquired by the Company on May 25, 2000, claiming, among other things, misrepresentations in connection with the transaction in which these individuals exchanged their ownership
interests in Smart Basics, Inc. for
common stock of the Company. The demand letter seeks unspecified relief or, in the alternative, rescission of the original transaction. Smart Basics, Inc., together with the Company's other Internet
properties, were sold to Vitacost.com on February 2, 2001.

The
demand letter threatens that a legal action will commence on February 28, 2001, unless substantial progress is made towards resolving this claim. Based on the information
currently available, the Company is unable to determine the likelihood of an unfavorable outcome to this matter.

The
Company may from time to time be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination, or breach of contract actions
incidental to the operation of its business. The Company is not currently involved in any such litigation.

14

---

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Omni Nutraceuticals, Inc. (the "Company" "Omni") is a formulator and supplier of branded natural health, herbal, and nutritional supplement products.
The Company's products are sold through mass retail, specialty natural health, nutrition and food retail stores, and via the Internet.

Omni
is a Utah Corporation, and was formerly known as Irwin Naturals/4Health Inc., which was formerly known as 4Health, Inc. Omni is the surviving corporation of a
merger (the "Merger") of 4Health, Inc., a Utah corporation ("4Health") with Irwin Naturals, Inc., a California corporation ("IN") consummated June 30, 1998. Pursuant to the Merger
that was accounted for as a pooling of interests 4Health issued 15,750,000 shares of common stock in exchange for all the outstanding shares of Irwin Naturals.

Effective
March 12, 2000, both the Company's Chairman of the Board, R. Lindsey Duncan and its President and Chief Executive Officer, Louis Mancini ceased to be employed.
Mr. Mancini was replaced by Mr. Klee Irwin as President and Chief Executive Officer.

On
March 12, 2000, the Board also authorized the termination of that certain Settlement Agreement dated October 8, 1999, by and among the Company and Mr. and
Mrs. Klee Irwin, and the ancillary agreements executed and delivered by the Company in connection therewith. On October 8, 1999, the Company and Mr. Klee Irwin had entered into a
settlement agreement (the "Settlement Agreement") in order to resolve certain mutual claims that had arisen between the Company and Mr. Irwin.

Starting
in July, 2000, one of the Company's large customers began deducting significant amounts from cash remittances. In addition, certain of the Company's other customers began
taking deductions against cash remittances that were in excess of historical amounts experienced by the Company. Beginning in August, 2000, the Company conducted an investigation related to its 1999
and 2000 sales practices, and determined that sales to certain customers were made with rights of return and guarantees. As part of its investigation, the Company reviewed substantially all of the
customer deductions taken in 2000 and determined that certain amounts related not only to "guaranteed" sales, but also to other customer allowances and concessions granted by prior management in the
first quarter
of 2000. Substantially all of these arrangements were previously unknown to the current management team.

The
Company has determined the effect of these deductions on its previously issued financial statements and has restated the accompanying financial statements for the year ended
December 31, 1999. Revenues from any products with "guaranteed" sales have been deferred until the sell through of the product at the customer level and the related product has been treated as
consigned inventory. In situations in which allowances and concessions were granted early in 2000 related to sales in 1999, the reserves for such allowances and concessions have been increased as of
December 31, 1999. In situations in which additional allowances or concessions were granted subsequent to the original issuance of the financial statements, relating to sales made in prior
periods, reserves have been increased in the period such decisions were made and the amounts became known.

The
effect of the adjustments required as a result of this investigation was to restate the Company's financial statements for the third and fourth quarters of 1999 and the first and
second quarters of 2000. The cumulative net impact on the Company's statements of operations from July 1, 1999 through September 30, 2000 includes the deferral of approximately
$1.9 million of gross profit from previously recorded sales now treated as "guaranteed sales," and an additional $1.4 million of reserves for allowances granted to customers for sales in
prior periods.

The
accompanying financial statements for the three and six month periods ended June 30, 1999 and 2000 have been restated to reverse sales with terms that provide the customer
with a guaranteed

15

---

sell through its customers and to increase the Company's reserves for allowances for doubtful accounts and customer allowances.

Operating Results

Consolidated net sales for the three months ended June 30, 2000 were $10,846,000 with an operating loss of $529,000 and a net loss of $1,146,000 or
$0.04 per basic and diluted share. Consolidated net sales for the same period in the prior year were $7,989,000 with an operating loss of $2,833,000 and a net loss of $3,162,000 or $.11 per basic and
diluted share. Total operating expenses for the three months ended June 30, 2000 were $4,712,000 compared with $6,872,000 for the same period in 1999.

Consolidated
net sales for the six months ended June 30, 2000 were $18,912,000 with an operating loss of $6,757,000, a net loss of $7,922,000 and a net loss available to common
shareholders of $9,872,000 or $.33 per basic and diluted share. Consolidated net sales for the same period in the prior year were $14,980,000 with an operating loss of $3,995,000 and a net loss of
$3,816,000 or $.14 per basic and diluted share. Total operating expenses for the six months ended June 30, 2000 were $14,158,000 compared with $11,618,000 for the same period in 1999.

Sales

Net sales for the three months ended June 30, 2000 increased by $2,857,000 or 36%, to $10,846,000, from $7,989,000 for the comparable period in 1999.
The increase in sales relates to introduction of new products in 2000 and an overall increase in sales from some of the existing product lines.

Net
sales for the six months ended June 30, 2000 increased by $3,932,000 or 26%, to $18,419,000, from $14,980,000 for the comparable period in 1999. The increase in sales
relates to introduction of new products in 2000 and an overall increase in sales from some of the existing product lines.

Gross Profit

Gross profit for the three months ended June 30, 2000 increased by $144,000 or 4%, to $4,183,000 from $4,039,000 for the comparable period in 1999.
Gross profits as a percentage of sales for the three months ended June 30, 2000 decreased to 39% from 51% in the comparable period in 1999. The decrease in the margin percentage relates to a
shift in the product-mix to certain items that have a slightly lower margin, increased pricing concessions offered and sales adjustments given to customers.

Gross
profit for the six months ended June 30, 2000 decreased by $222,000 or 3%, to $7,401,000 from $7,623,000 for the comparable period in 1999. Gross profits as a percentage
of sales for the six months ended June 30, 2000 decreased to 39% from 51% in the comparable period in 1999. The decrease in the margin percentage relates to a shift in the
product-mix to certain items that have a slightly lower margin, increased pricing concessions offered and sales adjustments given to customers.

Sales and Marketing

Sales and marketing expenses for the three months ended June 30, 2000 decreased by $1,154,000 or 41% to $1,689,000 from $2,843,000 for the comparable
period in 1999. The decrease primarily relates to approximately $964,000 of reduction in advertising and promotion costs, and a $116,000 reduction in wages.

Sales
and marketing expenses for the six months ended June 30, 2000 increased by $1,654,000 or 36% to $6,252,000 from $4,598,000 for the comparable period in 1999. This was
mainly due to a $1,925,000 increase in media and co-op advertising campaigns initiated by the former management in an attempt to increase sales for the first quarter and for the year 2000.
The main products promoted were Inholtra, Veromax and Cholestaid. This increase was partially offset by a $200,000 decrease in wages.

16

---

General and Administrative

General and administrative expenses for the three months ended June 30, 2000 decreased by $592,000 or 26% to $1,694,000 from $2,286,000 for the
comparable period in 1999. The decrease primarily relates to approximately $400,000 reduction in wages, consulting and travelling expenses, and $156,000 of reduced costs at the Company's
HealthZone.com operations.

General
and administrative expenses for the six months ended June 30, 2000 increased by $908,000 or 21% to $5,336,000 from $4,428,000 for the comparable period in 1999. The
increase primarily relates to a single item of $1,720,000. In connection with Withdrawal Agreement between the Company and its former Chairman of the Board, the current CEO transferred one million
shares of personally owned company common stock to the former Chairman of the Company. Although the Company did not issue any additional shares, the applicable accounting rules require the Company to
record a one-time non-cash compensation expense of $1,720,000 being the fair market value of the stock transferred. This was partially offset by an approximately $502,000
decrease in wages, consulting and travelling expenses. The remainder of the decrease relates to overall savings in operating and overhead costs.

Depreciation and Amortization

Depreciation and amortization expenses for the three months ended June 30, 2000 increased by $123,000 or 21% to $721,000 from $598,000 for the
comparable period in 1999. The increase relates to amortization costs of the Inholtra and HVE acquisitions, and the acceleration of the amortization of costs associated with the credit facility.

Depreciation
and amortization expenses for the six months ended June 30, 2000 increased by $516,000 or 60% to $1,376,000 from $860,000 for the comparable period in 1999. The
increase relates to amortization costs of the Inholtra and HVE acquisitions, and the acceleration of the amortization of costs associated with the credit facility.

Other Income (Expense)

Interest expense for the three months ended June 30, 2000 increased by $164,000 or 35% to $636,000 from $472,000 for the comparable period in 1999. The
increase is consistent with the increase in company's line of credit utilization.

Interest
expense for the six months ended June 30, 2000 increased by $748,000 or 166% to $1,198,000 from $450,000 for the comparable period in 1999. The increase is consistent
with the increase in company's line of credit utilization and Term Loan that the company secured on June 10, 1999.

Liquidity and Capital Resources

As of June 30, 2000, the Company had cash and cash equivalents of zero, and approximately $1,131,000 of availability under our revolving credit line. As
of November 1, 2000, the Company had approximately, $180,000 in cash and cash equivalents and approximately $3,100,000 under our revolving credit line available. The increase in cash and cash
equivalents primarily relates to the receipt of approximately $2,720,000 of net proceeds from the October 27, 2000 private placements during the six months ended June 30, 2000. As of
June 30, 2000, the Company had total current liabilities of $21,548,000, $8,781,000 of which consisted of accounts payable to vendors. Further as of September 30, 2000, the Company had a
working capital deficit of $8,404,000, and an accumulated deficit of $29,621,000. The Company estimates that, based on the current rate of negative cash flow from operations, the cash and that
available under the revolving credit line as of November 21, 2000 (approximately $2,000,000) will be sufficient to provide a source of working capital through approximately March 31,
2001. However, this estimate does not give effect to payments, which may be made to vendors to reduce outstanding accounts payables. Further, there can be no assurances that the vendors will continue
to supply the Company with goods and services in the event that such accounts

17

---

payables are not reduced, which may have an adverse effect on the Company's continued operations. In addition, based on the past practice of the Company's largest customers to take deductions against
accounts receivables to the Company, although the Company believes that it has identified and reserved for such deductions, such practices may have an adverse effect on the Company's future cash flow.

During
the six months ended June 30, 2000, the Company experienced negative cash flow from operations of $2,186,000. The sale of equity securities in January, 2000 and of a
minority interest in the Company's subsidiary, HealthZone.com, provided an aggregate of approximately $5,418,000 in proceeds
to the Company. Approximately $3,273,000 of these proceeds were used for the repayment of an existing line of credit and other long term borrowings, as well as for costs incurred with the financings.

The
current credit facility consists of a $13 million (original amount) term loan ("Term Loan") and up to a $7 million revolving loan ("Revolving Loan"). The
$13 million Term Loan was payable in quarterly installments of $583,333 that began October 15, 1999 and were to increase to $750,000 on October 15, 2002 until the loan was paid in full
on April 15, 2004. The credit facility also contained certain financial and other covenants or restrictions, including the maintenance of certain financial ratios, limitations on capital
expenditures, restrictions on acquisitions, limitations on incurrence of indebtedness, and restrictions on dividends paid by the Company. As of March 31, 2000, the Company was in violation of
several of the covenants.

On
May 8, 2000, the Company's credit facility was amended. As a condition of the waiver of certain covenant defaults, the amendment changed the term date of both loans to
April 30, 2001, when the loans are payable in full. Further, the Term Loan amortization and interest payment schedule was changed from quarterly to monthly. The amendment also required the
Company to meet revised financial covenants. As of June 30, 2000, the Company was in violation of several of the revised covenants.

On
October 27, 2000, the credit facility was further amended with respect to both its term debt and revolving credit agreements. In addition, the lender waived any and all
defaults then in existence. The major amendments of the Waiver and Amendment No. 4 to Secured Credit Agreement included an increase in the availability of the line up to the maximum credit
limit of $7 million, an extension of both the revolving and term debt agreements from April 30, 2001 to July 30, 2002 and an agreement to permit the October, 2000 equity
financing, to be used for working capital purposes. Also see the financial statement footnote "Subsequent Events". In addition, the Company and the lender agreed that all principal payments due under
the loan would be deferred until June 15, 2001. The total of the deferred payments will be approximately $1.75 million. The lender also allowed the Company to use the proceeds from a
private placement of securities, closed on October 27, 2000, resulting in net proceeds of approximately $2,720,000 to the Company, for working capital purposes. The lender charged the Company a
fee for the restructuring of the indebtedness of approximately $131,000, payable in six equal installments commencing April 15, 2001.

On
January 24, 2000, the Company sold 2,000,000 shares of its newly created 5% $.01 par Convertible Preferred Stock for $1,900,000 and sold seven year warrants to purchase
500,000 shares of common stock at $2.25 per share for $100,000. The Company incurred issuance costs of $100,000, which consisted of legal and placement agent fees. On March 24, 2000, the Company
converted all of these preferred shares, plus accrued dividends, for 2,016,438 shares of its common stock. Since the conversion rate was significantly below the trading price of the Company's common
stock when the Preferred was issued, the Company recognized a preferred dividend of $1,950,000, which is reflected as a reduction in net income available to common stockholders.

Concurrent
with the issuance of the preferred stock, the Company sold a 10% interest in its wholly owned subsidiary, HealthZone.com, to the same investors for $1,000,000. The excess
of the investment over the interest in the subsidiary's net equity that was sold has been recorded as an increase in paid in capital on the Company's financial statements.

18

---

On March 27, 2000, the Company sold 700,000 shares of common stock to individual investors organized by LFC in a private placement for aggregate proceeds of $2,100,000. On
September 7, 2000, two of the Company's suppliers settled the balances due them from the Company, which approximated $950,000, by converting such debt of the Company into equity. In connection
therewith, the Company issued an aggregate of 328,334 shares to these suppliers. The conversion agreement are substantially similar and contain certain provisions to minimize losses in value in the
event the Company is sold or the control shareholder is able to sell stock at higher values.

In
separate agreements, two of the Company's trade creditors agreed to convert a portion of their debt in exchange for Common Stock of the Company and to accept a substantially
reduced cash payment and/or note for the balance of the obligation of the company. On September 7, 2000, approximately $985,000 of debt had been converted in exchange for approximately 328,300
shares of Common Stock, or approximately $3.00 per share.

On
October 27, 2000, the Company entered into a Securities Purchase Agreement with several "accredited investors" ("Holders") whereby the Holders purchased 3000 shares of the
Company's newly-issued Series A Convertible Preferred Stock resulting in gross proceeds of $3,000,000 to the Company. In addition, the Buyers received warrants to purchase up to 600,000 shares
of Common Stock at an exercise price of approximately $0.96 per share. The Company received net proceeds from this transaction of $2,720,000, after fees, costs and expenses of issuance. An additional
50,000 warrants were issued to an intermediary on the same terms as were granted to the Buyers.

The
Preferred Stock is convertible into Common Stock on the following basis. The number of shares of Common Stock to be issued is equal to the stated value of the number of shares of
Preferred Stock being converted, together with any accrued dividends (the "Additional Amount") thereon, divided by the "Conversion Price". The Conversion Price is equal to the lesser of
(i) 115% of the average of the two lowest bid prices quoted on the exchange where the Company's Common Stock is traded during the ten days preceding the closing or, (ii) 80% of the
average of the two lowest bid prices of the Common Stock during the five days preceding conversion. Pursuant to the Securities Purchase Agreement and related documents, the Company is required to
file a registration statement, registering
for resale the number of common shares issuable assuming a market price of $.75 per share upon conversion of all of the Preferred Stock, plus warrants.

The
Preferred Stock may be redeemed by the Company at any time after closing at a price per share equal to the greater of (i) $1,400, plus an Additional Amount per Share,
defined as 6% of the face amount of the Preferred Stock being redeemed, multiplied by the number of days since the closing, divided by 365 (the "Optional Redemption Price") or, (ii) the market
price of the Common Stock into which the Preferred Stock being redeemed could be converted as of the date of the notice of optional redemption. On the fourth anniversary of the Issue date, any
existing shares of Preferred Stock, together with the additional amount, must either be converted into Common Stock pursuant to the conversion formula or redeemed for cash at the Optional Redemption
Price.

In
the event any conversion of Preferred Stock would result in the issuance of more than 19.9% of the number of shares of common stock outstanding on the date of the closing, the
Preferred Stock representing such excess must be redeemed, in cash for $1,400.00 per share, plus the additional amount.

A
registration statement is required to be filed within 30 days of the closing to cover the common stock underlying the conversion of the Preferred Stock ("Conversion Shares")
and the exercise of the warrants, and such indeterminate number of shares of common stock issuable pursuant to the anti-dilution adjustment provisions of the Preferred Stock and warrants.
For registration purposes only, the number of Conversion Shares to be registered is calculated based upon an assumed conversion price per share of $0.75. In the event that the market price for the
common stock for any five consecutive trading days is less than $1.00, the Company is obligated to register additional Conversion Shares assuming a conversion price per share of $0.50.

19

---

The Securities Purchase Agreement includes certain provisions for liquidated damages against the Company if a registration statement for the related securities is not filed within
30 days or declared effective within 90 days after October 27, 2000. These liquidated damages provisions require the Company to pay an additional amount to the Holders equal to:
(a) in the event of a late filing, 1% of the gross purchase price for such securities from the period commencing October 27, 2000 through the 30th day following such date
and each 30th day thereafter (each a "Computation Date"), if the registration statement is not filed by such Computation Date, and (b) in the event of a late effective date, 1% of
the gross purchase price for such securities from the period commencing on the previous Computation Date through the 30th day following such date and each 30th day
thereafter, if the registration statement is not declared effective by the relevant Computation Date. The Company may also be liable for certain liquidated damages in the event the Company fails to
issue timely shares of common stock upon conversion of the Preferred Stock or exercise of the warrants. These liquidated damages may be paid
by the Company either in cash or in Common Stock, at the option of the Company. There can be no assurances as to whether the Company will incur such liquidated damages, or if so, as to the amount of
such liquidated damages.

The
Company has primarily funded its operations to date through internally generated capital, bank loans or private equity financing. The Company's future capital requirements will
depend on many factors, including the nature and timing of orders from customers, collection of trade accounts receivable, the expansion of sales and marketing efforts, costs associated with entering
into new channels of distribution, and the status of competing products. Management believes that additional investment capital will be required to permit the Company to meet its business objectives
in the near term. Such funds may be raised either through debt or equity offerings, or some combination of the two. However, there is no assurance that the Company will be able to secure such funds on
commercially reasonable terms, if at all. If not successful in securing additional funds, the Company may be forced to dispose of its assets outside of its normal course of business and/or resort to
bankruptcy protection.

The
Company's auditors have included an explanatory paragraph in their report of Independent Public Accountants included in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1999, as amended, to the effect that the Company's losses from operations for the year ended December 31, 1999, and the
working capital deficit and the retained deficit at December 31, 1999 raise substantial doubt about the Company's ability to continue as going concern.

On
November 7, 2000, the NASDAQ/NMS halted trading in the Company's Stock. NASDAQ delisted the Common Stock from trading on November 17, 2000. The Company's Common Stock
is currently quoted in the "Pink Sheets," which are published by the National Quotation Bureau. The Company believes that the delisting by NASDAQ is likely to have an adverse effect on the market for
the Company's Common Stock and on the Company's ability to raise additional capital.

In
December 1999, the SEC staff released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on the recognition, presentation and
disclosure of revenue in financial statements. Changes in accounting to apply the guidance in SAB No. 101 may be accounted for as a change in accounting principle effective January 1, 2000.
Management has not yet determined the complete impact of SAB No. 101 on the Company; however, management does expect that application of SAB No. 101 will have a material effect on the
Company's revenue recognition and results of operations.

20

---



PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

On December 23, 1999, a lawsuit was filed against the Company and certain officers by former shareholders of Health & Vitamin Express alleging various
causes of action. The proposed terms of the settlement provided that the Company immediately issue the 363,636 shares of common stock, which could have been issuable to the former shareholders of HVE
if future earnings targets were met. On April 13, 2000, the Company finalized the settlement by issuing 363,636 shares of common stock and granting a warrant expiring in 2005 to buy 100,000
shares of common stock for $2.25 per share.

The
Company was recently served in a lawsuit.Veromax International, LLC (Plaintiff) v. Omni Nutraceuticals, Inc. (Defendant),
currently pending in the Circuit Court of Maryland for Baltimore County, Case No. 03-C-00-009605. The litigation concerns a Distribution Agreement between
Veromax and Omni, dated September 10, 1999, wherein Omni was appointed the exclusive distributor for the product Veromax. In the litigation, Veromax International seeks to terminate the
Distribution Agreement and seeks damages for breach of contract. The Company contends that it is not in breach of the agreement between parties, the distributorship is still valid, and it should
continue to sell the product. It ancitipates filing a cross-complaint against the plaintiff for the plantiff's breach of contract and seeking substantial damages. The parties are currently working to
resolve the dispute without futher litigation. While it is far too early to predict an outcome, if this matter is ultimately found in favor of the plaintiff, it could have a material adverse affect on
the Company's financial position.

On
January 19, 2001 a lawsuit was filed in Los Angeles County Superior Court: Unified Western Grocers, Inc. (Plaintiff) v. Omni Nutraceuticals, Inc., Case
No. 01 000066. The complaint seeks recovery of approximately $20,000, including legal fees for amounts which the plaintiff claims are owed for an open account. The Company denies that the
amount is due to the plaintiff. A responsive pleading was filed by the Company on February 14, 2001. At present, Management does not believe that the outcome of this litigation is likely to
materially impact the Company.

On
January 23, 2001, the Labor Commissioner of the State of California entered a judgment against the Company in the amount of approximately $42,000 in the action: Richard F.
Lynch v. Omni
Nutraceuticals, Inc., Labor Commissioner, State of California, State Case No. 05-19487 ICC. The Company denies any amounts are due Lynch. The Company has filed an appeal,
which required posting a bond in the amount of the judgment, seeking a new trial in the Superior Court. The final outcome of this case is uncertain, but appears unlikely that it will have a material
impact on the Company.

A
judgment was recently entered against the Company for approximately $117,000, plus an undetermined amount for attorneys fees, interest and costs, in a matter entitled: Pacific Foods
of Oregon, Inc. v. Omni Nutraceuticals, Inc., United States District Court, District of Oregon, Case No. CV 00-1014 JO. This case involves the Company's open account
with the plaintiff. The Company has not yet received a copy of either the complaint or the judgment, but recently received a Notice of Deposition with respect to a Judgment Debtor Examination. It is
currently too early to assess the outcome of this matter.

On
February 21, 2001, the Company was advised of a lawsuit;Media Networks, Inc. v. Omni Nutraceuticals, Inc., Los Angeles Superior Court Case
No. BC 247503,for amounts due an open account pursuant to an agreement filed December 8, 2000. The complaint seeks a total of approximately $480,000,
including interest, attorneys and collection fees, for which plaintiff has filed a Request for Entry of Default and Judgment. Efforts are in process to have the plaintiff agree to set aside the
default if already entered, and to file a motion to set aside the default if it has been entered. Based on the information currently available, the Company is unable to evaluate the likelihood of an
unfavorable outcome.

21

---

On February 21, 2001, the Company received a demand letter from counsel representing the majority of the former owners of Smart Basics, Inc. (dba SmartBasics.com), an Internet
retailer acquired by the Company on May 25, 2000, claiming, among other things, misrepresentations in connection with the transaction in which these individuals exchanged their ownership
interests in Smart Basics, Inc. for common stock of the Company. The demand letter seeks unspecified relief or, in the alternative, rescission of the original transaction. Smart Basics, Inc., together
with the Companies other Internet properties, was sold to Vitacost.com on February 2, 2001.

The
demand letter threatens that a legal action will commence on February 28, 2001, unless substantial progress is made towards resolving this claim. Based on the information
currently available, the Company is unable to determine the likelihood of an unfavorable outcome to this matter.

The
Company may from time to time be involved in various claims, lawsuits, disputes with third parties, actions involving allegations of discrimination, or breach of contract actions
incidental to the operation of its business. The Company is not currently involved in any such litigation.

Item 2.  Changes in Securities and Use of Proceeds

During the first six months of year 2000, as compensation for serving on the Board of Directors, the Company issued two directors a total of 40,000 shares of
common stock. The accompanying financial statements include a charge of $40,000 to reflect this issue of shares.

On
January 24, 2000, the company sold 2,000,000 shares of its newly created 5% $.01 par Convertible Preferred Stock for $1,900,000 and sold seven year warrants to purchase 500,000
shares of common stock at $2.25 per share for $100,000. The Company incurred issuance costs of $100,000, which consisted of legal and placement agent fees. On March 24, 2000, the Company converted all
of these preferred shares, plus accrued dividends, for 2,016,438 shares of its common stock. Since the conversion rate was significantly below the trading price of the Company's common stock when the
Preferred was issued, the Company recognized a preferred dividend of $1,950,000, which is reflected as a reduction in net income available to common stockholders.

Concurrent
with the issuance of the preferred stock, the Company sold a 10% interest in its wholly owned subsidiary, HealthZone.com to the same investors for 1,000,000. The excess of
the investment over the interest in the subsidiary's net equity that was sold has been recorded as an increase in paid in capital on the Company's financial statements.

On
March 12, 2000, the Company entered into a two year consulting agreement with Liviakis Financial Communications, Inc. ("LFC") and, in connection therewith,
authorized the issuance of 1,200,000 restricted shares of common stock to LFC in consideration of, and as a retainer and prepayment for, the consulting services to be rendered to the Company by LFC.
Under the terms granted to LFC, the Company issued 800,000 shares during the current year. The balance of 400,000 shares will be due and payable in fiscal year 2001 depending on whether the Company
continues to retain LFC. Pursuant to a provision in the consulting agreement, LFC is entitled to receive a finders fee in connection with any debt or equity financing for the Company from a source
introduced to the Company, or its nominee, from LFC and a finders fee in connection with any acquisition of the Company by any candidate introduced to the Company, or its nominee, by LFC. The shares
have been recorded as an issuance cost on the accompanying financial statements.

On
March 27, 2000, the Company sold 700,000 shares of common stock to individual investors organized by LFC in a private placement for aggregate proceeds of $2,100,000.

On
April 13, 2000, the Company finalized the settlement of the lawsuit filed by the former shareholders of Health & Vitamin Express by issuing 363,636 shares of common
stock and granting a warrant expiring in 2005 to buy 100,000 shares of common stock for $2.25 per share.

22

---

On May 22, 2000, the Company acquired certain assets of HealthShop.com, Inc. for $3,500,000 in value of the Company's common stock (838,951 shares with up to 400,000
additional shares issuable if, the common stock value is less than $3,500,000 by February 2001). HealthShop.com, Inc. is an Internet business that sells nutritional supplements and
health related products.

On
May 25, 2000, the Company acquired Smart Basics, Inc., DBA SmartBasics.com, for 170,000 shares of the Company's common stock. SmartBasics.com is an Internet and mail order
business that sells nutritional supplements and health related products.

On
June 28, 2000 the Company entered into a consulting agreement with an investment banking firm to perform certain financial consulting services. The agreement called for the
issuance of 300,000 options to purchase the company's common stock at $4.00 per share and covered a term of six months. The options were valued at $747,000 and are being amortized into consulting
expense over the term of the agreement.

On
June 28, 2000 the Company entered into a consulting agreement with an investment banking firm to perform certain financial consulting services. The agreement called for the
issuance of 25,000 warrants with a 7-year term and immediate vesting, to purchase the company's common stock at $0.01 per share. Subsequent to June 30, 2000, the agreement with the
investment banking firm was terminated and the warrants cancelled.

On
August 3, 2000, the Company finalized all requirements in connection with its acquisition of the assets of Vitamin Discount Connection, Inc. ("VDC"), and, in
connection therewith issued 190,000 shares of common stock.

On
September 7, 2000, two of the Company's suppliers settled the balances due them from the Company, which approximated $950,000, by converting such debt of the Company into
equity. In connection therewith, the Company issued an aggregate of 328,334 shares to these suppliers. The conversion agreement are substantially similar and contain certain provisions to minimize
losses in value in the event the Company is sold or the control shareholder is able to sell stock at higher values.

In
September and October 2000, agreements were reached with five public relations firms to perform certain services for the Company. The nature of the services is similar,
although each employs a different venue. The terms of the agreements vary. An aggregate of 205,500 shares will be issued in connection with these agreements.

On
October 27, 2000, the Company completed a $3 million private equity financing. This private placement consisted of the sale of 3,000 shares of Series A
Convertible Preferred Stock ("Series A") and warrants to acquire an aggregate of 600,000 shares of the Company's common stock to ten investors ("Holders") for $3,000,000. The Company will use the net
proceeds of the offering in the amount of approximately $2,720,000, after certain fees and expenses, for working capital purposes. Among other rights granted the Holders, the Company is to
file a registration statement for the common stock into which the Series A is convertible within 30 days after the closing.

Item 3.  Defaults Upon Senior Securities

As of June 30, 2000, the Company was in violation of several of the revised covenants contained in the credit facility and is negotiating with the lender for
waivers. See note 6 to Consolidated Financial Statements.

Item 4.  Submission of Matters to a Vote of Securities

None

No
other matters were submitted to the security holders for a vote during the period covered by this report.

23

---

Item 5.  Other Information

None

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports on Form 8-K

On April 14, 2000 the Company filed a report on Form 8-K under Item 5 disclosing (i) the resignation of Lindsey Duncan from
the board of directors and as an officer of the Company and related agreements between Mr. Duncan and the Company; and (ii) the election of Martin Sumichrast as a director, and
subsequent resignation; (iii) the termination of employment of Louis Mancini as President and Chief Executive Officer of the Company; (iv) the appointment of Klee Irwin as President and
Chief Executive Officer; (v) the adoption of a consulting agreement with Liviakis Financial Communications, Inc.; (vi) the approval and execution of a termination agreement with
Mr. Louis Mancini; and (vii) the closing of a transaction with investors for a private placement of 700,000 shares of the Company's common stock at $3.00 per share with total gross
proceeds of $1,200,000.

On
April 20, 2000 the Company filed a report on Form 8-K under Item 4 reflecting a change in the Company's accountants from Arthur Andersen LLP to Singer,
Lewak, Greenbaum & Goldstein LLP.

On
August 8, 2000 the Company filed a report on Form 8-K under Item 5 disclosing the engagement of Rabobank International to perform a variety of investment
banking services to explore strategic alternatives for the Company.

On
August 8, 2000, the Company filed a Form 8-K regarding its engagement of Rabobank to explore strategic alternatives for the Company.

On
November 2, 2000, the Company filed a Form 8-K indicating it was in the process of finalizing adjustments that had an estimated cumulative impact
approximating $3 million, and which it believed would result in restatement of previously filed documents.

On
November 3, 2000, the Company filed a From 8-K regarding the completion, on November 27, 2000, of a private placement of its newly-created Series A
Convertible Preferred Stock.

On
November 6, 2000, the Company filed a Form 8-K regarding Waiver and Amendment No. 4 to Secured Credit Agreement, which further amended the terms of
the Company's term debt and revolving credit agreement.

On
November 13, 2000, the Company filed a Form 8-K regarding the halt of trading in the Company's common stock on the Nasdaq Stock Market.

On
November 17, 2000, the Company filed a Form 8-K regarding the delisting from the Nasdaq National Market System of the Company's common stock.

On
February 2, 2001, the Company filed a Form 8-K regarding the discontinued effectiveness of certain lock-up agreements between four of its
largest shareholders covering approximately nineteen million shares of the Company's common stock.

24

---



SIGNATURES

Pursuant to the requirements 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.

| |  | OMNI NUTRACEUTICALS, INC.
| |  | -------------------------
| |  | By                       

Dated:
February 22, 2001

25

---

QuickLinks