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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



(Mark One)

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



For the quarterly period ended March 31, 2004



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: 33-7106-A



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NATURADE, INC.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                      
|------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                      |  | 23-2442709                           
|(State or other jurisdiction ofincorporation or organization) |  | (I. R. S. EmployerIdentification No.)



14370 Myford Rd.,
Irvine, California 92606

(Address of principal executive offices) (Zip code)



(714) 573-4800

(Registrants telephone number, including area code)



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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 ̈



Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



Indicate the number of shares outstanding of the registrants common stock, as of the latest practicable date: 44,533,886 shares as of April 30, 2004.

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##### Table of Contents

FORM 10-Q

QUARTERLY REPORT

Quarter Ended March 31, 2004

TABLE OF CONTENTS



|         |  |                                                                                                                     |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                     |  | PAGE
|PART I.  |  | FINANCIAL INFORMATION                                                                                               |  |     
|Item 1.  |  | Financial Statements                                                                                                |  |     
|         |  | Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003 (audited)                                     |  | 3   
|         |  | Statements of Operations for the three month period ended March 31, 2004 (unaudited) and March 31, 2003 (unaudited) |  | 4   
|         |  | Statements of Cash Flows for the three months ended March 31, 2004 (unaudited) and March 31, 2003 (unaudited)       |  | 5   
|         |  | Notes to Financial Statements                                                                                       |  | 6   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 13  
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 22  
|Item 4   |  | Controls and Procedures                                                                                             |  | 22  
|PART II. |  | OTHER INFORMATION                                                                                                   |  |     
|Item 1.  |  | Legal Proceedings                                                                                                   |  | 23  
|Item 2.  |  | Changes in Securities, Use of Proceeds and Issuers Purchase of Equity Securities                                    |  | 23  
|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                                                                                    |  | 24  
|         |  | SIGNATURES                                                                                                          |  | 25  





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##### Table of Contents

NATURADE, INC.



Balance Sheets

As of March 31, 2004 and December 31, 2003



|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  | March 31, 2004 |             |   | December 31,2003 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  | (Unaudited)    |             |   | (Audited)        |  
|ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                |             |   |                  |   |             |  
|Current assets:                                                                                                                                                                                                                                                                                                                                                                                                           |  |                |             |   |                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                 |  | $              | 77,586      |   |                  | $ | 144,102     |  
|Accounts receivable, net                                                                                                                                                                                                                                                                                                                                                                                                  |  |                | 1,532,607   |   |                  |   | 2,333,394   |  
|Inventories, net                                                                                                                                                                                                                                                                                                                                                                                                          |  |                | 1,064,090   |   |                  |   | 1,246,371   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                                                                                                 |  |                | 334,215     |   |                  |   | 148,503     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  
|Total current assets                                                                                                                                                                                                                                                                                                                                                                                                      |  |                | 3,008,498   |   |                  |   | 3,872,370   |  
|Property and equipment, net                                                                                                                                                                                                                                                                                                                                                                                               |  |                | 143,984     |   |                  |   | 161,885     |  
|Other assets                                                                                                                                                                                                                                                                                                                                                                                                              |  |                | 48,302      |   |                  |   | 42,302      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  
|Total assets                                                                                                                                                                                                                                                                                                                                                                                                              |  | $              | 3,200,784   |   |                  | $ | 4,076,557   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                                                                                                                                                                                                                                                                     |  |                |             |   |                  |   |             |  
|Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                      |  |                |             |   |                  |   |             |  
|Accounts payable                                                                                                                                                                                                                                                                                                                                                                                                          |  | $              | 2,361,374   |   |                  | $ | 2,310,317   |  
|Accrued expenses                                                                                                                                                                                                                                                                                                                                                                                                          |  |                | 651,074     |   |                  |   | 475,286     |  
|Current portion of Notes Payable to Related Parties                                                                                                                                                                                                                                                                                                                                                                       |  |                | 612,287     |   |                  |   | 644,471     |  
|Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                                                                         |  |                | 1,635,419   |   |                  |   | 2,231,778   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  
|Total current liabilities                                                                                                                                                                                                                                                                                                                                                                                                 |  |                | 5,260,154   |   |                  |   | 5,661,852   |  
|Long-term debt, less current maturities                                                                                                                                                                                                                                                                                                                                                                                   |  |                |            |   |                  |   | 5,609       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  
|Total Liabilities                                                                                                                                                                                                                                                                                                                                                                                                         |  |                | 5,260,154   |   |                  |   | 5,667,461   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                             |  |                |             |   |                  |   |             |  
|REDEEMABLE CONVERTIBLE PREFERRED STOCK                                                                                                                                                                                                                                                                                                                                                                                    |  |                |             |   |                  |   |             |  
|Redeemable convertible preferred stock, Series B including accumulated preferred stock dividends of $494,755 at March 31, 2004 and $433,908 at
December 31, 2003, less discount of $1,357,143 at March 31, 2004, and $1,428,572 at December 31, 2003, par value $0.0001 per share: authorized 50,000,000 shares; issued and outstanding, 13,540,723 at March 31, 2004 and December 31, 2003 ($2,000,000
redemption value) |  |                | 903,010     |   |                  |   | 770,734     |  
|WARRANT                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                | 500,000     |   |                  |   | 500,000     |  
|STOCKHOLDERS DEFICIT:                                                                                                                                                                                                                                                                                                                                                                                                    |  |                |             |   |                  |   |             |  
|Common stock, par value $0.0001 per share; authorized, 100,000,000 shares; issued and outstanding, 44,533,886 at March 31,2004 and December
31, 2003                                                                                                                                                                                                                                                                      |  |                | 4,453       |   |                  |   | 4,453       |  
|Preferred stock, Series A, par value $0.0001 per share; authorized, 2,000,000 shares; issued and outstanding, 0 at March 31, 2004 and December
31, 2003                                                                                                                                                                                                                                                                   |  |                | 0           |   |                  |   | 0           |  
|Non-Voting Common stock, par value $0.0001 per share; authorized, 2,000,000 shares; issued and outstanding, 117,284 at March 31, 2004 and
December 31, 2003                                                                                                                                                                                                                                                               |  |                | 12          |   |                  |   | 12          |  
|Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                                                                |  |                | 18,987,458  |   |                  |   | 18,987,458  |  
|Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                       |  |                | (22,454,303 | ) |                  |   | (21,853,561 | )
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  
|Total stockholders deficit                                                                                                                                                                                                                                                                                                                                                                                               |  |                | (3,462,380  | ) |                  |   | (2,861,638  | )
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  
|Total liabilities and stockholders deficit                                                                                                                                                                                                                                                                                                                                                                               |  | $              | 3,200,784   |   |                  | $ | 4,076,557   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                |             |   |                  |   |             |  



See accompanying notes
to financial statements.



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NATURADE, INC



Statements of Operations for the Three Months

Ended March 31, 2004
and March 31, 2003



|                                                                                          |  |                                |            |   |                                 |    |            |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ------------------------------- | -- | ---------- | -
|                                                                                          |  | Three MonthsEndedMarch 31,2004 |            |   | Three MonthsEndedMarch 31, 2003 |   
|                                                                                          |  | (Unaudited)                    |            |   | (Unaudited)                     |   
|Net sales                                                                                 |  | $                              | 3,552,624  |   |                                 | $  | 3,866,055  |  
|Cost of sales                                                                             |  |                                | 1,943,615  |   |                                 |    | 2,078,236  |  
|                                                                                          |  |                                |            |   |                                 |    |            |  
|Gross profit                                                                              |  |                                | 1,609,009  |   |                                 |    | 1,787,819  |  
|                                                                                          |  |                                |            |   |                                 |    |            |  
|Costs and expenses:                                                                       |  |                                |            |   |                                 |    |            |  
|Selling, general and administrative expenses                                              |  |                                | 1,996,319  |   |                                 |    | 1,933,129  |  
|Depreciation and amortization                                                             |  |                                | 17,901     |   |                                 |    | 19,198     |  
|                                                                                          |  |                                |            |   |                                 |    |            |  
|Total operating costs and expenses                                                        |  |                                | 2,014,220  |   |                                 |    | 1,952,327  |  
|                                                                                          |  |                                |            |   |                                 |    |            |  
|Operating loss                                                                            |  |                                | (405,211   | ) |                                 |    | (164,508   | )
|Other expense:                                                                            |  |                                |            |   |                                 |    |            |  
|Interest expense                                                                          |  |                                | 66,921     |   |                                 |    | 30,295     |  
|Other expense (income)                                                                    |  |                                | (3,665     | ) |                                 |    | (2,945     | )
|                                                                                          |  |                                |            |   |                                 |    |            |  
|Loss before provision for income taxes                                                    |  |                                | (468,467   | ) |                                 |    | (191,858   | )
|Provision for income taxes                                                                |  |                                |           |   |                                 |    | 800        |  
|                                                                                          |  |                                |            |   |                                 |    |            |  
|Net loss                                                                                  |  |                                | (468,467   | ) |                                 | ($ | 192,658    | )
|Less:                                                                                     |  |                                |            |   |                                 |    |            |  
|Preferred Stock Dividend                                                                  |  |                                | (60,847    | ) |                                 |    | (55,124    | )
|Deemed Dividend                                                                           |  |                                | (71,429    | ) |                                 |    | (71,249    | )
|                                                                                          |  |                                |            |   |                                 |    |            |  
|Net loss applicable to common shares                                                      |  | $                              | (600,743   | ) |                                 | $  | (319,031   | )
|                                                                                          |  |                                |            |   |                                 |    |            |  
|Basic and Diluted Loss per share                                                          |  | $                              | (0.01      | ) |                                 | $  | (0.01      | )
|                                                                                          |  |                                |            |   |                                 |    |            |  
|Weighted Average Number of Shares used in Computation of Basic and Diluted Loss per Share |  |                                | 44,533,886 |   |                                 |    | 44,533,886 |  
|                                                                                          |  |                                |            |   |                                 |    |            |  



See accompanying notes
to financial statements



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NATURADE, INC



Statements of Cash Flows for the Three Months

Ended March 31, 2004
and March 31, 2003



|                                                                                |  |                                  |          |   |                                |   |          |  
|------------------------------------------------------------------------------- |  | -------------------------------- | -------- | - | ------------------------------ | - | -------- | -
|                                                                                |  | Three Months Ended March 31,2004 |          |   | Three MonthsEndedMarch 31,2003 |  
|                                                                                |  | (Unaudited)                      |          |   | (Unaudited)                    |  
|Cash flows from operating activities:                                           |  |                                  |          |   |                                |   |          |  
|Net loss                                                                        |  | $                                | (468,467 | ) |                                | $ | (192,659 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                  |          |   |                                |   |          |  
|Depreciation and amortization                                                   |  |                                  | 17,901   |   |                                |   | 19,198   |  
|Changes in assets and liabilities:                                              |  |                                  |          |   |                                |   |          |  
|Accounts receivable                                                             |  |                                  | 800,787  |   |                                |   | 243,261  |  
|Inventories                                                                     |  |                                  | 182,281  |   |                                |   | 563,892  |  
|Prepaid expenses and other current assets                                       |  |                                  | (185,712 | ) |                                |   | (151,358 | )
|Other assets                                                                    |  |                                  | (6,000   | ) |                                |   | (9,000   | )
|Accounts payable and accrued expenses                                           |  |                                  | 226,845  |   |                                |   | (242,680 | )
|                                                                                |  |                                  |          |   |                                |   |          |  
|Net cash provided by operating activities:                                      |  |                                  | 567,635  |   |                                |   | 230,654  |  
|Cash flows from financing activities:                                           |  |                                  |          |   |                                |   |          |  
|Net borrowings under line of credit                                             |  |                                  | (596,359 | ) |                                |   | (544,263 | )
|Payments of long-term debt                                                      |  |                                  | (37,792  | ) |                                |   | (7,196   | )
|                                                                                |  |                                  |          |   |                                |   |          |  
|Net cash used in financing activities:                                          |  |                                  | (634,151 | ) |                                |   | (551,459 | )
|Net decrease in cash and cash equivalents                                       |  |                                  | (66,516  | ) |                                |   | (320,805 | )
|Cash and cash equivalents, beginning of period                                  |  |                                  | 144,102  |   |                                |   | 722,583  |  
|                                                                                |  |                                  |          |   |                                |   |          |  
|Cash and cash equivalents, end of period                                        |  | $                                | 77,586   |   |                                | $ | 401,778  |  
|                                                                                |  |                                  |          |   |                                |   |          |  
|Supplemental Disclosures of Cash Flow Information                               |  |                                  |          |   |                                |   |          |  
|Cash paid during the period for:                                                |  |                                  |          |   |                                |   |          |  
|Interest                                                                        |  | $                                | 47,363   |   |                                | $ | 30,405   |  
|Taxes                                                                           |  | $                                | 0        |   |                                | $ | 800      |  
|Non-cash financing activities:                                                  |  |                                  |          |   |                                |   |          |  
|Preferred stock dividend accrued                                                |  | $                                | 60,847   |   |                                | $ | 55,124   |  
|Deemed dividend                                                                 |  | $                                | 71,429   |   |                                | $ | 71,429   |  



See accompanying notes
to financial statements.



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NATURADE, INC.

Notes to Financial Statements



|1. | Basis of PresentationThe accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United
States 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 accounting principles generally accepted in the
United States for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In
the opinion of management, the information contained herein includes all adjustments necessary for the fair presentation of the financial statements. All such adjustments are of a normal recurring nature. These financial statements do not include
all disclosures associated with the Companys annual audited financial statements included in the Companys Annual Report on Form 10-K and accordingly, should be read in conjunction with such statements.



The Companys financial statements have been prepared based upon the
assumption that the Company will continue as a going concern. The Companys independent certified public accountants have qualified their report on the Companys financial statements for the fiscal year ended December 31, 2003 with a
statement that substantial doubt exists as to the Companys ability to continue as a going concern. The financial statements do not include any adjustments that might result from a negative outcome of this uncertainty.



|2. | InventoriesInventories are stated at the lower of weighted average cost or market. Weighted average cost is determined on a first-in, first-out basis. Inventories at
March 31, 2004 and December 31, 2003 consisted of the following:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                  |  |               |           |   |                  |   |           |  
|------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                  |  | March 31,2004 |           |   | December 31,2003 |  
|                                                  |  | (Unaudited)   |           |   | (Audited)        |  
|Raw Materials                                     |  | $             | 176,134   |   |                  | $ | 208,615   |  
|Finished Goods                                    |  |               | 946,574   |   |                  |   | 1,115,007 |  
|                                                  |  |               |           |   |                  |   |           |  
|Subtotal                                          |  |               | 1,122,708 |   |                  |   | 1,323,622 |  
|Less: Reserve for Excess and Obsolete Inventories |  |               | (58,618   | ) |                  |   | (77,251   | )
|                                                  |  |               |           |   |                  |   |           |  
|                                                  |  | $             | 1,064,090 |   |                  | $ | 1,246,371 |  
|                                                  |  |               |           |   |                  |   |           |  



|3. | LeasesThe Company rents property and equipment under certain noncancellable operating leases expiring in various years through 2006. Future minimum commitments under
operating leases as of March 31, 2004 are as follows:
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                      |  |        |          
|--------------------- |  | ------ | ---------
|Year                  |  | Amount
|2004 (April-December) |  | $      | 313,932  
|2005                  |  |        | 441,813  
|2006                  |  |        | 297,246  
|                      |  |        |          
|Total                 |  | $      | 1,052,991
|                      |  |        |          



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|4. | Loan Agreements with Majority Shareholder and Other InvestorsIn August 2000, the Company entered into a Loan Agreement (the Investor Notes) with Health
Holdings & Botanicals, LLC, (Health Holdings), a principal shareholder of the Company, and other investors (the Lender Group). The Investor Notes allowed for advances (the Loan Advances) of up to $1.2 million
at an interest rate of 8% per annum with due dates of September 11, 2002 for $50,000 and August 31, 2003 for the remaining balance outstanding. Interest only payments were to be required on a quarterly basis.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Loan Agreement further provided that the Lender Group could elect to
convert all or any part of the Loan Advances into shares of the Companys Common Stock at a conversion price equal to the lower of (a) the average closing bid of the Companys Common Stock for the ten trading days prior to the making of a
Loan Advance or (b) the average closing bid of the Companys Common Stock for the ten trading days prior to the date of receipt of notice of conversion. On June 13, 2001, two investors converted their total debt of $150,000 plus accrued
interest of $2,400 into Common Stock, receiving a total of 476,250 shares of the Companys Common Stock based on the then fair market value of $0.32. On January 2, 2002, as part of the Private Equity Transaction as described below, Health
Holdings converted into Common Stock all of the Companys Investor Notes due to Health Holdings, plus accrued interest of $11,051 for a total debt conversion of $752,496. On August 8, 2002, one investor (a member of the Board of Directors)
converted debt of $50,000 which was due September 11, 2002 plus accrued interest of $427 into Common Stock, receiving a total of 720,392 shares of the Companys Common Stock based on the then fair market value of $0.07.



On August 21, 2003, the terms of the remaining outstanding Investor Notes
totaling $202,345 were modified to include increasing the interest rate to 15% per annum paid in quarterly increments and setting a principal repayment schedule of $20,000 each on September 15, 2003 and October 15, 2003, installments of $10,000 per
month from January 15, 2004 through July 15, 2004 and a final payment of $92,345 on August 15, 2004. As of March 31, 2004, there is $132,345 outstanding on the Investor Notes.



On April 14, 2003, the Company entered into a loan agreement (the Loan Agreement) with Health Holdings and
certain other lenders (the Lender Group), pursuant to which the Lender Group has agreed to lend the Company $450,000 and, subject to the discretion of the Lender Group, up to an additional $300,000. All advances under the Loan Agreement
bear interest at the rate of 15% per annum, are due on December 31, 2004, are secured by substantially all of the assets of the Company, and are subordinated to the Companys indebtedness to Wells Fargo Business Credit, Inc. (Wells
Fargo). The advances under the Loan Agreement will be used by the Company for working capital and general corporate purposes. In consideration of the extension of credit under the Loan Agreement, Wells Fargo waived all defaults of the Company
as of December 31, 2003 under the Credit and Security Agreement dated as of February 27, 2000 and amended the agreement to, among other things, reduce the covenants regarding minimum net income and minimum book net worth and increased the interest
rate to the prime rate plus 4.5%. On April 14, 2004, the terms of the Loan Agreement were modified by the Joinder of Bill D. Stewart, the Chief Executive Officer of the Company, as a member of the Lender Group, subject to all of the terms and
conditions of the Loan Agreement, and the Lender Group advanced an additional $200,000, of which Bill D. Stewart advanced $100,000. Further, on May 3, 2004, the Lender Group advanced the Company an additional $100,000. There are no additional
amounts available to advance under the Loan Agreement. Proceeds of the loan will be used for working capital.



As of March 31, 2004 there is $450,000 outstanding under the Loan Agreement.



Line of CreditOn January 27, 2000, the Company entered into a three year Credit and Security Agreement (the
Credit Agreement) with Wells Fargo, which initially allowed for maximum borrowings of up to $3,000,000, based on certain percentages of eligible accounts receivable and inventories as defined. As more fully described in Private Equity
Transactionbelow, on December 20, 2001, the terms of the Credit Agreement were modified to include waiving the enforcement of existing defaults as of December 20, 2001, increasing the credit available to the Company to a maximum of $4,500,000
with an inventory maximum subline of $2,000,000, increasing the floating rate to the prime rate plus 2% and extending the maturity date to December 31, 2003. On September 19, 2002, the terms of the Credit Agreement were modified to include waiving
the enforcement of existing defaults, reducing the credit availability of the Company to a maximum of $4,325,000, requiring that the Company maintain certain minimum levels of cash, and reducing the covenants regarding minimum net income and minimum
book net worth. In consideration of the extension of credit under the Loan Agreement on April 14, 2003, Wells Fargo waived all defaults of the Company as of December 31, 2002 under the Credit Agreement and amended the agreement to, among other
things, reduce the covenants regarding minimum net income and minimum book net worth and increased the interest rate to the prime rate plus 4.5%. On March 29, 2004, the Company further amended the Credit Agreement to extend the term of the Credit
Agreement to December 31, 2005, reduce maximum borrowings to $3.5 million, and among other things, set the covenants regarding minimum net income and minimum book net worth for 2004.



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Borrowings under the Credit Agreement, which totaled $1,635,419 at March 31, 2004, are collateralized by
substantially all assets of the Company. At March 31, 2004, the prime rate was 4.0% and the interest charge under the Credit Agreement was 8.50%. The Credit Agreement contains covenants, which, among other things, require that certain financial
ratios be met. As of March 31, 2004, the Company was in compliance with all covenants.



Private Equity Transaction On January 2, 2002, the Company privately sold 13,540,723 shares of Series B Convertible Preferred Stock (the Shares) for $2 million, and warrants, which expire on
December 31, 2004, to purchase an additional 33,641,548 shares of Series B Convertible Preferred Stock at an aggregate exercise price of $3.5 million (the Warrants), for $500,000. The Shares and Warrants were purchased by Westgate Equity
Partners, L.P. (Westgate). The Series B Convertible Preferred Stock bears dividends at a rate of 10% per annum, which will accumulate and compound semi-annually if not paid in cash. The Series B Convertible Preferred Stock may be
converted into Common Stock at any time at the option of the holder. On the seventh anniversary of its issuance, any unconverted shares of Series B Convertible Preferred Stock will be automatically redeemed by the Company at the original issuance
price plus accrued and unpaid dividends, provided the Company is legally able to do so. Two members of the Board of Directors of the Company are elected exclusively by the holders of the Series B Convertible Preferred Stock voting as a separate
class.



The Company may redeem the Series B Convertible
Preferred Stock at any time prior to December 31, 2004 if the Company receives a bona fide offer from a third party to invest equity capital in the Company and the holders of the Series B Convertible Preferred Stock do not make a Qualified
Counter-Offer. A Qualified Counter-Offer is a written offer for an equity investment in the Company that will yield gross proceeds in excess of the third partys offer (but need not exceed $3,500,000), and which either (A) is
accomplished through the exercise of some or all of the Warrants, or (B) will provide capital on the same or better terms as the third party offer. The Series B Convertible Preferred Stock had a beneficial conversion feature of $2,000,000, which was
recorded as a discount and is being amortized over seven years.



As part of this transaction, Health Holdings agreed to convert all of the Companys outstanding debt to Health Holdings, including accrued interest (approximately $5,316,000), and to surrender all of Health Holdings Series A
Convertible Preferred Stock (1,250,024 shares) for cancellation without conversion, in exchange for 35,989,855 shares of the Companys Common Stock. Furthermore, the warrants that Health Holdings holds to purchase up to 600,000 shares of Common
Stock have been modified to be exercisable for Non-Voting Common Stock at an exercise price of $1 per share.



As part of this transaction, the Company entered into a Management Services Agreement under which certain principals of Westgate or its affiliates will
provide management and consulting services to the Company and amended and extended the employment agreement with the Companys CEO. Also, on December 20, 2001 as part of this transaction and effective on its completion, Wells Fargo agreed to
modify the terms of its Credit Agreement with the Company, to include waiving the enforcement of existing defaults, increasing credit available to the Company to a maximum of $4,500,000, increasing the floating rate to the prime rate plus 2% and
extending the maturity date to December 31, 2003, as more fully described above under Line of Credit.



Under the terms of the Private Equity Transaction, if Westgate exercises the warrants in full, Westgate would hold a total of 47,182,271 shares of Series
B Convertible Preferred Stock which would be convertible into the same number of shares of Common Stock, subject to adjustment for anti-dilution, or 51% of the Companys Common Stock on a fully diluted basis as of March 31, 2004.



After the completion of the Private Equity Transaction, Westgate asserted
that the Companys representations and warranties concerning the Companys capitalization in the Purchase Agreement were inaccurate in that they omitted to disclose the fact that certain outstanding promissory notes of the Company in an
amount of $252,345 in Investor Notes were convertible into shares of the Common Stock of the Company at the market price of the Common Stock on the date of conversion. Investor Notes in the amount of $50,000 have been converted into 720,392 shares
of Common Stock to date, and $132,345 in Investor Notes remain outstanding and were convertible into 367,625 shares as of March 31, 2004.



8



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##### Table of Contents

The Company and Westgate agreed to resolve this dispute by adjusting the conversion formula for the
Series B Convertible Preferred Stock. In addition, Westgate and Health Holdings agreed that (i) the Company may grant additional options to purchase up to 1,250,000 shares of Common Stock to employees in accordance with the Naturade, Inc. 1998
Incentive Stock Option Plan, and (ii) Health Holdings would grant to Westgate a proxy to vote 1.041 shares of Common Stock owned by Health Holdings for each share of Common Stock issued on exercise of the new options.



The net proceeds of the transactions have been used by the Company for
working capital and general corporate purposes



|5. | Stock-Based Compensation
|-- | ------------------------



Employee Stock Option PlanIn February 1998, the Company adopted an Incentive Stock Option Plan (the Plan) to enable
participating employees to acquire shares of the Companys Common Stock. The Plan provided for the granting of incentive stock options up to an aggregate of 850,000 shares, as amended. In October 2001, the Company amended the Plan by increasing
to 2,000,000 the number of shares of the Companys Common Stock that may be subject to awards granted pursuant to the Plan. The actual number of incentive stock options that may be granted to employees is determined by the Compensation
Committee based on the parameters set forth in the Plan. Under the terms of the Plan, incentive stock options may be granted at not less than 100% of the fair market value at the date of the grant (110% in the case of 10% shareholders). Incentive
options granted under the Plan vest over a four-year period from the date of grant. The Company has granted 1,619,500 incentive options under the Plan at the weighted average exercise price per share of $0.14 as of March 31, 2004. These options
expire seven years from the date of grant.



Director Stock
OptionsIn October 1999, 87,500 options were issued to each of two then new board members at an exercise price of $1.03.



WarrantsOn January 2, 2002, the Company sold warrants to purchase 33,641,548 shares of Series B Convertible Preferred Stock.
The aggregate purchase price of the warrants was $500,000 and the aggregate exercise price is $3.5 million. This transaction is described more fully in Note 4 under Private Equity Transaction.



In 1999, the Company granted 600,000 warrants in conjunction with certain
financing agreements. These warrants expire ten years from the date of grant. As part of the Private Equity Transaction described in Note 4, the holders of the warrants agreed they would be exercisable for Non-Voting Common Stock.



A summary of the Companys outstanding stock options is as follows:



|                                 |  |                 |  |                                       |      |                   |         |                              |   |     
|-------------------------------- |  | --------------- |  | ------------------------------------- | ---- | ----------------- | ------- | ---------------------------- | - | ----
|                                 |  | Number ofShares |  | WeightedAverageExercisePrice perShare |      | NumberExercisable |         | WeightedAverageExerciseprice
|Outstanding at December 31, 2003 |  | 1,707,000       |  | $                                     | 0.19 |                   | 771,000 |                              | $ | 0.35
|Granted                          |  | 0               |  | $                                     | 0    |                   |         |                              |   |     
|Exercised                        |  | 0               |  |                                       |      |                   |         |                              |   |     
|Expired                          |  | 0               |  | $                                     | 0    |                   |         |                              |   |     
|                                 |  |                 |  |                                       |      |                   |         |                              |   |     
|Outstanding at March 31, 2004    |  | 1,707,000       |  | $                                     | 0.19 |                   | 891,000 |                              | $ | 0.32
|                                 |  |                 |  |                                       |      |                   |         |                              |   |     



The following table
summarizes information about stock options outstanding at March 31, 2004:



|                         |  |                                 |  |                                                 |  |                                |  |                                 |  |                                                          
|------------------------ |  | ------------------------------- |  | ----------------------------------------------- |  | ------------------------------ |  | ------------------------------- |  | ---------------------------------------------------------
|Range of Exercise Prices |  | Options and WarrantsOutstanding |  | Weighted AverageRemainingContract Life In Years |  | Weighted AverageExercise Price |  | Options and WarrantsExercisable |  | Average Exercise Pricefor Exercisable Optionsand Warrants
|$.025                    |  | 1,025,000                       |  | 6                                               |  | $0.03                          |  | 256,250                         |  | $0.03                                                    
|$ 0.15- .875             |  | 559,500                         |  | 4                                               |  | $0.30                          |  | 512,250                         |  | $0.30                                                    
|$ 1.03- 1.13             |  | 122,500                         |  | 1                                               |  | $1.04                          |  | 122,500                         |  | $1.04                                                    
|                         |  |                                 |  |                                                 |  |                                |  |                                 |  |                                                          
|                         |  | 1,707,000                       |  | 4                                               |  | $0.19                          |  | 891,000                         |  | $0.32                                                    
|                         |  |                                 |  |                                                 |  |                                |  |                                 |  |                                                          





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##### Table of Contents

A summary of the Companys outstanding warrants is as follows:



|                                 |  |                 |  |                                       |      |                   |            |                              |   |     
|-------------------------------- |  | --------------- |  | ------------------------------------- | ---- | ----------------- | ---------- | ---------------------------- | - | ----
|                                 |  | Number ofShares |  | WeightedAverageExercisePrice perShare |      | NumberExercisable |            | WeightedAverageExerciseprice
|Outstanding at December 31, 2003 |  | 34,241,548      |  | $                                     | 0.12 |                   | 34,241,548 |                              | $ | 0.12
|Granted                          |  | 0               |  |                                       | 0    |                   | 0          |                              |   | 0   
|Exercised                        |  | 0               |  |                                       | 0    |                   | 0          |                              |   | 0   
|Expired                          |  | 0               |  |                                       | 0    |                   | 0          |                              |   | 0   
|                                 |  |                 |  |                                       |      |                   |            |                              |   |     
|Outstanding at March 31, 2004    |  | 34,241,548      |  | $                                     | 0.12 |                   | 34,241,548 |                              | $ | 0.12
|                                 |  |                 |  |                                       |      |                   |            |                              |   |     



The following table
summarizes information about warrants outstanding at March 31, 2004:



|                         |  |                                |  |                                               |  |                              |  |                                |  |                                                        
|------------------------ |  | ------------------------------ |  | --------------------------------------------- |  | ---------------------------- |  | ------------------------------ |  | -------------------------------------------------------
|Range of Exercise Prices |  | Options andWarrantsOutstanding |  | WeightedAverageRemainingContract LifeIn Years |  | WeightedAverageExercisePrice |  | Options andWarrantsExercisable |  | AverageExercise Pricefor ExercisableOptions andWarrants
|$ 0.10                   |  | 33,641,548                     |  | 0                                             |  | $ 0.10                       |  | 33,641,548                     |  | $ 0.10                                                 
|$ 1.00                   |  | 600,000                        |  | 5                                             |  | $ 1.00                       |  | 600,000                        |  | $ 1.00                                                 
|                         |  |                                |  |                                               |  |                              |  |                                |  |                                                        
|                         |  | 34,241,548                     |  | 0                                             |  | $ 0.12                       |  | 34,241,548                     |  | $ 0.12                                                 
|                         |  |                                |  |                                               |  |                              |  |                                |  |                                                        



Pursuant to SFAS 123,
the Company has elected to continue using the intrinsic value method of accounting for stock-based awards granted to employees and directors in accordance with APB Opinion No. 25 and related interpretations in accounting for its stock option plan.
Had the compensation cost for the Company stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS 123, the Companys net loss and loss per share would have been
the pro forma amounts presented below:



|                                                                                                                |  |                    |          |   |               |   |          |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ------------- | - | -------- | -
|                                                                                                                |  | Three Months Ended |         
|                                                                                                                |  | March 31,2004      |          |   | March 31,2003 |  
|Net loss: As reported                                                                                           |  | $                  | (468,467 | ) |               | $ | (192,658 | )
|Add: Stock-based employee compensation expense included in reported net loss                                    |  |                    | 0        |   |               |   | 0        |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards |  |                    | (280     | ) |               |   | (74,306  | )
|                                                                                                                |  |                    |          |   |               |   |          |  
|Pro forma                                                                                                       |  | $                  | (468,747 | ) |               | $ | (266,694 | )
|                                                                                                                |  |                    |          |   |               |   |          |  
|Basic and Diluted                                                                                               |  |                    |          |   |               |   |          |  
|Net loss per share: As reported                                                                                 |  | $                  | (0.01    | ) |               | $ | (0.01    | )
|Pro forma                                                                                                       |  | $                  | (0.01    | ) |               | $ | (0.01    | )



|
|



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##### Table of Contents

|6. | Segment ReportingOperating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by
the Companys chief decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company has two reportable operating segments: health food specialty stores and mass market stores. The Company does not allocate operating expenses
to these segments, nor does it allocate specific assets to these segments. Therefore, segment information reported includes only sales, cost of sales and gross profit.



Operating segment data for the three months ended March 31, 2004 and March 31, 2003 was as follows:



|                                  |  |                       |           |             |   |           |  |   |          
|--------------------------------- |  | --------------------- | --------- | ----------- | - | --------- |  | - | ---------
|                                  |  | Distribution Channels |           |            
|                                  |  | Health Food           |           | Mass Market |   | Total    
|Three months ended March 31, 2004 |  |                       |           |             |   |           |  |   |          
|Sales                             |  | $                     | 1,937,204 |             | $ | 1,615,420 |  | $ | 3,552,624
|Cost of Sales                     |  |                       | 1,061,383 |             |   | 882,232   |  |   | 1,943,615
|                                  |  |                       |           |             |   |           |  |   |          
|Gross Profit                      |  | $                     | 875,821   |             | $ | 733,188   |  | $ | 1,609,009
|                                  |  |                       |           |             |   |           |  |   |          
|Three months ended March 31, 2003 |  |                       |           |             |   |           |  |   |          
|Sales                             |  | $                     | 2,026,425 |             | $ | 1,839,630 |  | $ | 3,866,055
|Cost of Sales                     |  |                       | 1,057,821 |             |   | 1,020,415 |  |   | 2,078,236
|                                  |  |                       |           |             |   |           |  |   |          
|Gross Profit                      |  | $                     | 968,604   |             | $ | 819,215   |  | $ | 1,787,819
|                                  |  |                       |           |             |   |           |  |   |          



Sales are attributed
to geographic areas based on the location of the entity to which the products were sold. Geographic segment data for the three months ended March 31, 2004 and March 31, 2003 was as follows:



|                                  |  |               |           |               |   |         |  |   |          
|--------------------------------- |  | ------------- | --------- | ------------- | - | ------- |  | - | ---------
|                                  |  | United States |           | International |   | Total  
|Three months ended March 31, 2004 |  |               |           |               |   |         |  |   |          
|Sales                             |  | $             | 3,366,822 |               | $ | 185,802 |  | $ | 3,552,624
|Cost of Sales                     |  |               | 1,844,204 |               |   | 99,411  |  |   | 1,943,615
|                                  |  |               |           |               |   |         |  |   |          
|Gross Profit                      |  | $             | 1,522,618 |               | $ | 86,391  |  | $ | 1,609,009
|                                  |  |               |           |               |   |         |  |   |          
|Three months ended March 31, 2003 |  |               |           |               |   |         |  |   |          
|Sales                             |  | $             | 3,788,115 |               | $ | 77,940  |  | $ | 3,866,055
|Cost of Sales                     |  |               | 2,031,583 |               |   | 46,653  |  |   | 2,078,236
|                                  |  |               |           |               |   |         |  |   |          
|Gross Profit                      |  | $             | 1,756,532 |               | $ | 31,287  |  | $ | 1,787,819
|                                  |  |               |           |               |   |         |  |   |          



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##### Table of Contents

During the three months ended March 31, 2004 and 2003, the Company had sales to three customers whose
purchases exceed 10% of the Companys total net sales as shown in the table below.



Major Customer Table



|                                  |  |              |         |                                      |         |                |   |                                      |  |         |  |                                      |         |  |        
|--------------------------------- |  | ------------ | ------- | ------------------------------------ | ------- | -------------- | - | ------------------------------------ |  | ------- |  | ------------------------------------ | ------- |  | -------
|                                  |  | Customer One |         | Customer Two                         |         | Customer Three
|                                  |  | Sales        |         | AccountsReceivableBalanceQuarter-end |         | Sales          |   | AccountsReceivableBalanceQuarter-end |  | Sales   |  | AccountsReceivableBalanceQuarter-end
|Three Months ended March 31, 2004 |  | $            | 694,600 |                                      | 313,251 |                | $ | 463,700                              |  | 163,127 |  | $                                    | 707,500 |  | 222,861
|Three Months ended March 31, 2003 |  | $            | 960,000 |                                      | 608,115 |                | $ | 761,900                              |  | 283,868 |  | $                                    | 561,600 |  | 172,574



|7. | GuaranteesIn November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation Number (FIN) 45 Guarantors
Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others-an interpretation of FASB Statements No. 5,57 and 107 and rescission of FIN 34.The following is a summary of the Companys
agreements that the Company has determined are within the scope of FIN 45.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of an officers or directors serving in such capacity. The term of the
indemnification period is the officers or directors lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a
directors and officers liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of
these indemnification agreements is minimal and has no liability recorded for these agreements as of March 31, 2004.



The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically business
partners, contractors, customers and landlords and (ii) its agreements with investors. Under these provisions the Company generally agrees to indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party
as a result of the Companys activities or, in some cases, as a result of the indemnified partys activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the
Company with regard to intellectual property rights. These indemnification provisions generally survive the termination of the underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and
to provide salary continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to
defend lawsuits or settle claims related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of
March 31, 2004.



|8. | Subsequent EventsOn April 14, 2003, the Company entered into a loan agreement (the Loan Agreement) with Health Holdings & Botanicals, LLC, a principal
stockholder of the Company, and certain other lenders (the Lender Group), pursuant to which the Lender Group has agreed to lend the Company $450,000 and, subject to the discretion of the Lender Group, up to an additional $300,000. All
advances under the Loan Agreement bear interest at the rate of 15% per annum, are due on December 31, 2004, are secured by substantially all of the assets of the Company, and are subordinated to the Companys indebtedness to Wells Fargo
Business Credit, Inc. (Wells Fargo). The advances under the Loan Agreement will be used by the Company for working capital and general corporate purposes
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On April 14, 2004, the terms of the Loan Agreement were modified by the Joinder of Bill D. Stewart, the Chief Executive
Officer of the Company, as a member of the Lender Group, subject to all of the terms and conditions of the Loan Agreement.



Further, on April 14, 2004, the Lender Group advanced $200,000, of which Bill D. Stewart advanced $100,000, to the Company for working capital purposes.
Subsequently, on May 3, 2004, the Lender Group advanced an additional $100,000 to the Company for working capital purposes. Under the Loan Agreement, there are no additional amounts available to advance by the Lender Group.



On May 10, 2004, the Company completed the Tenth Amendment to the Credit and
Security Agreement with Wells Fargo Business Credit whereby, minimum cash reserve requirements were reduced by $100,000 and provisions for release of the remaining $100,000 of cash reserves were established.



12



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##### Table of Contents

|ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, such statements are inherently subject to risk
and the Company can give no assurances that such expectations will prove to be correct. Such forward-looking statements involve risks and uncertainties, and actual results could differ from those described herein. Future results may be subject to
numerous factors, many of which are beyond the control of the Company. Such risk factors include, without limitation, the risks set forth below under Risk Factors. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.



All comparisons below are for the three month period ended March 31, 2004 compared to the three month period ended March 31, 2003.



General



The Company is a branded natural products marketing company focused on growth through innovative, scientifically supported
products designed to nourish the health and well being of consumers. The Company primarily competes in the $14.3 billion dollar segment defined by Nutrition Business Journal(NBJ) as Sports Nutrition and Weight Loss
(SNWL). In addition to weight control, the Company competes in the soy foods market. In 2002, that category grew by 12.8% to an estimated $3.65 billion according to Spins/Soyatech. According to the report entitled Soyfoods: The
U.S. Market 2003, soy foods have been growing at a rate of more than 14 % per year for the past 10 years. The report points out that sales of soy-based products were growing more quickly in mass market channels than in natural product stores.



Within the broad soy foods market, segments such as meal
replacement drinks, soy milk and bars have outperformed other categories. With many brands entering the market and reduced spending by Slim Fast®, the soy protein powder category flattened in 2003. The Companys products include Naturade Total Soy®, a full line of nutritionally complete meal replacements for weight loss and
cholesterol reduction available in several flavors of powders, ready-to-drink products and bars, Naturade® protein powders, Aloe Vera 80® health and beauty care products, the Diet Lean, which includes products which assist weight loss by helping to block the absorption of starch calories and other niche dietary supplements. In addition, the Company has added the
SportPharma brand of sports nutrition products,
which offers all naturals products for fitness actives. The Companys products are sold in supermarkets (e.g., Kroger, Fred Meyer, Safeway, Albertsons and Ahold), mass merchandisers (e.g., Wal*Mart, Kmart and Shopko), club stores (e.g.,
Sams Clubs, Costco and BJs Wholesale), drug stores (e.g., American Drug and Snyder Drug), natural food supermarkets (e.g., Whole Foods and Wild Oats) and over 5,000 independent health food stores.



Critical Accounting Policies and Use of Estimates



In preparing its financial statements, the Company is required to make
estimates and judgments that affect the results of its operations and the reported value of assets and liabilities. Actual results may differ from these estimates. The Company believes that the following summarizes the critical accounting policies
that require significant judgments and estimates in the preparation of its financial statements.



Revenue Recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, as amended by SAB No. 101A, No. 101B and SAB No. 104. SAB No. 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred
or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) require managements judgments regarding the fixed nature of the fee charged for services rendered
and products delivered and the collectibility of those fees. To satisfy the criteria, we: (1) input orders based upon receipt of a customer purchase order; (2) record revenue upon shipment of goods when risk of loss and title transfer under the
Companys arrangements with customers or otherwise complying with the terms of the purchase order; (3) confirm pricing through the customer purchase order and; (4) validate creditworthiness through past payment history, credit agency reports
and other financial data. Other than through warranty rights, the Companys customers do not have explicit or implicit rights of return. Should changes in conditions cause management to determine the revenue recognition criteria are not met for
certain future transactions, such as a determination that an outstanding account receivable has become uncollectible, revenue recognized for any reporting period could be adversely affected.



13



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Inventory Valuation. Merchandise inventories are stated at the lower of cost (first-in,
first-out basis) or market. The Company considers cost to include the direct cost of finished goods provided by co-packers as well as the cost of those components supplied to the co-packers. At each balance sheet date, we evaluate the Companys
ending inventories for excess quantities and obsolescence. This evaluation includes analyses of forecast sales levels by product and historical demand. We write off inventories that are considered obsolete. Remaining inventory balances are adjusted
to approximate the lower of the Companys cost or market value and result in a new cost basis in such inventory until sold. If future demand or market conditions are less favorable than the Companys projections, additional inventory
write-down may be required, and would be reflected in cost of sales in the period the revision is made.



Accounts Receivable and Allowances for Uncollectible Accounts. Accounts receivable are unsecured, and we are at risk to the extent such
amounts become uncollectible. Accounts receivable is stated net of applicable reserves for returns and allowances, billbacks and doubtful accounts. The Company regularly reviews and monitor individual account receivable balances to determine if the
reserve amounts are appropriate and provides for an allowance for uncollectible accounts by considering historical customer buying patterns, invoice aging, specific promotions and seasonal factors.



Results of Operations



The following table sets forth, for the periods indicated, the percentage which certain items in the statement of operations
data bear to net sales and the percentage dollar increase (decrease) of such items from period to period.



|                                             |  |                          |    |  |                                       |    |  |         |    |  |       |   
|-------------------------------------------- |  | ------------------------ | -- |  | ------------------------------------- | -- |  | ------- | -- |  | ----- | --
|                                             |  | Percent of Net Sales     |    |  | Percentage Dollar Increase (Decrease) |   
|                                             |  | Quarter Ended March, 31, |    |  | Quarter Ended March, 31,              |   
|                                             |  | 2004                     |    |  | 2003                                  |    |  | 2004    |    |  | 2003  |   
|Net Sales                                    |  | 100.0                    | %  |  | 100.0                                 | %  |  | (8.1    | )% |  | 14.6  | % 
|                                             |  |                          |    |  |                                       |    |  |         |    |  |       |   
|Gross profit                                 |  | 45.3                     | %  |  | 46.2                                  | %  |  | (10.0   | )% |  | 20.2  | % 
|Selling, general and administrative expenses |  | 56.7                     | %  |  | 50.5                                  | %  |  | 3.2     | %  |  | (8.5  | )%
|                                             |  |                          |    |  |                                       |    |  |         |    |  |       |   
|Operating profit                             |  | (11.4                    | )% |  | (4.3                                  | )% |  | (146.3  | )% |  | 74.5  | % 
|Other loss                                   |  | (1.8                     | )% |  | (0.7                                  | )% |  | (131.3  | )% |  | (34.1 | )%
|                                             |  |                          |    |  |                                       |    |  |         |    |  |       |   
|Loss before provision for income taxes       |  | (13.2                    | )% |  | (5.0                                  | )% |  | (144.2  | )% |  | 71.2  | % 
|Provision for income taxes                   |  | 0.0                      | %  |  | (0.0                                  | )% |  | 0.0     | %  |  | 0.0   | % 
|                                             |  |                          |    |  |                                       |    |  |         |    |  |       |   
|Net loss                                     |  | (13.2                    | )% |  | (5.00                                 | )% |  | (143.20 | )% |  | 71.1  | % 
|                                             |  |                          |    |  |                                       |    |  |         |    |  |       |   



Net
Sales



Net sales for three months ended March
31, 2004 decreased $313,431, or 8.1%, to $3,552,624 from $3,866,055 for the same period in 2003. The decrease in net sales was primarily due to softness in the mass market channel.



Mass Market Net Sales. For the three months ended March 31, 2004, mass market net sales decreased $224,211, or
12.2%, to $1,615,420 from $1,839,631 for the three months ended March 31, 2003. The decrease in the quarter ended March 31, 2004 is primarily due to softness principally related to a labor strike in the grocery segment which started in the fourth
quarter of 2003 and extended into the first quarter of 2004. Sales within the grocery segment in the three months ended March 31, 2004 decreased 13.4% over the same period in 2003. In addition, the Company had pipeline fill to a new mass market
customer in the first quarter of 2003 that discontinued distribution in November 2003 in a move to a low carbohydrate format for its meal replacement category.



Health Food Net Sales. For the three months ended March 31, 2004, health food channel net sales decreased $89,221, or 4.4%, to $1,937,204
from $2,026,425 for the three months ended March 31, 2003. This decrease in revenue for the quarter ended March 31, 2004 was a result of pipeline fills in 2003 related to the transition of a key health retailer from one distributor to another that
was not repeated in 2004.



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Channels of DistributionOn a percent of net sales basis, the breakdown of sales between
the mass market and health food channels was 54.5% for the health food channel and 45.5% for the mass market channel for the three month period ended March 31, 2004 as compared to 52.4% and 47.6%, respectively, for the same period in 2003. The
softness in the mass market channel discussed previously, accounts for the majority of the shift in distribution in 2004.



For the three months ended March 31, 2004, domestic net sales decreased $421,294, or 11.1%, to $3,366,822 from $3,788,116 for the three months ended March
31, 2003. The decrease in domestic net sales is principally due to the softness in the mass market channel discussed previously. For the three months ended March 31, 2004, international sales increased $107,862, or 138.4%, to $185,802 from $77,940.
The increase in international sales during the first quarter 2004 was due to pipeline fill related to new distribution in Canada. This new distribution is principally the result of hiring a new broker in Canada and entering into an agreement with a
Canadian distributor to manage the Companys distribution in Canada. These agreements resulted in a reduction in the costs related to Canadian distribution that allowed the Company to reduce retail prices to a more competitive level.



Gross Profit



Gross profit as a percentage of net sales for the three months ended March
31, 2004 decreased .9% to 45.3% of net sales, from 46.2% for the three months ended March 31, 2003. The decrease for the quarter ended March 31, 2004 was due to the increased sales mix of private label products, which carry a lower margin, during
the quarter.



Selling, General and Administrative
Expenses



Selling, general and administrative expenses
(S, G &A) for the three months ended March 31, 2004 increased $63,190 to $1,996,319, or 56.2% of net sales, from $1,933,129, or 50.0% of net sales, for the three months ended March 31, 2003. This increase is primarily due to
increased promotional expenses related to club store sales during the diet season which follows the holidays. Club store shipments were significantly higher in the fourth quarter of 2003 versus 2004 which resulted in additional retail promotional
support required in the first quarter of 2004. As a percent of sales, brand expenses were 16.4% and 15.0%, respectively, for the three months ended March 31, 2004 and 2003. The increase in brand expenses, as a percent of net sales, is primarily due
to the lower net sales during the quarter coupled by the previously discussed increase in club store promotional costs.



Interest Expense



Interest expense for the three months ended March 31, 2004 increased $36,626 compared to the three months ended March 31, 2003 principally due to
borrowings on the Loan Agreement with related parties, more fully explained in Note 4, coupled with increased average borrowings on the Companys credit facility.



Liquidity and Capital Resources



The Companys operating activities provided cash of $567,635 in the three months ended March 31, 2004, compared to cash
provided of $230,655 from operating activities in the three months ended March 31, 2003. This increase in cash provided from operating activities is primarily due to the reduction in the Companys accounts receivable related to higher sales in
the previous quarter, and was partially offset by the increase in operating loss of $275,808.



Net cash provided by inventories was $182,281 for the three months ended March 31, 2004 compared to net cash provided by inventories of $563,892 for the three months ended March 31, 2003. Inventories at the beginning
of the first quarter of 2003 were abnormally high due to lower than expected sales in the preceding quarter. As a result, management elected to reduce these excess inventories during the first quarter of 2003. Inventory levels at the beginning of
the first quarter of 2004 were at normal levels however, the Company elected to reduce base inventory levels during the quarter ended March 31, 2004 in anticipation of effects of a labor strike in the grocery channel.



Net cash provided by accounts receivable was $800,787 for the three month
period ended March 31, 2004 compared to net cash provided from accounts receivable of $243,261 for the same period of 2003, principally due to increased sales volume in December 2003 compared to the same period in 2002. This higher sales level
resulted in increased cash generation from the receivables paid during the first quarter of 2004. Customer terms and the Companys collection policies have remained constant.



Net cash provided by accounts payable and accrued expenses was $226,845 for the three month period ended March 31, 2004
compared to net cash used of $242,680 the same period of 2003, principally due to abnormally high accounts payable at December 31, 2002 resulting from lower than anticipated sales in December 2002. The Company negotiated extended terms with vendors
that were paid during the first quarter of 2003 resulting in a use of cash. Accounts payable levels did not fluctuate significantly from December 31, 2003 to March 31, 2004.



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##### Table of Contents

There was no provision for excess and obsolete inventory for the three month period ended March 31, 2004,
compared to a $30,000 provision for the same period of 2003, principally due to the disposal of excess product lines in 2003 and the implementation of an inventory management system decreasing excess inventory levels.



The Companys working capital decreased $462,174 from ($1,789,482) at
December 31, 2003 to ($2,251,656) at March 31, 2004. This decrease was largely due to the decrease in receivables and inventory as a result of improved collections and a concentrated inventory reduction program partially offset by a decrease in
borrowings on the Companys credit facility.



The
Companys cash used in financing activities of $634,151 for the three months ended March 31, 2004, compared to cash used by financing activities of $551,459 for the same period of 2003. The increase was the result of a net repayment under the
Companys credit facility coupled with payments on other long-term debt.



As of March 31, 2004, the Company was in compliance with all of the covenants of the Credit and Security Agreement with Wells Fargo.



On April 14, 2004, under the Loan Agreement, the Lender Group advanced $200,000, of which Bill D. Stewart, CEO of the
Company, advanced $100,000, to the Company for working capital purposes. Further, on May 3, 2004, the Lender Group advanced an additional $100,000 to the Company for working capital purposes. Under the Loan Agreement, there are no additional amounts
available to advance by the Lender Group.



The accompanying
financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At March 31, 2004, the Company has an accumulated deficit of
$22,454,303, a net working capital deficit of $2,251,656 and a stockholders capital deficiency of $3,462,380, and has incurred recurring net losses. These factors, among others, raise substantial doubt about the Companys ability to
continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Companys independent auditors qualified their opinion on the Companys December 31, 2003
financial statements by including an explanatory paragraph in which they expressed substantial doubt about the Companys ability to continue as a going concern



The Company believes that its existing cash balances and financing arrangements will provide it with sufficient funds to
finance its operations during the next twelve months, provided that the Company does not commit a default under the Credit Agreement and Wells Fargo does not exercise its right to terminate, or demand immediate payment of all amounts outstanding
under the Credit Agreement as a result of said default. However, the Company may seek to raise additional funds through the sale of public or private equity and/or debt financings or from other sources. No assurance can be given that additional
financing will be available in the future or that, if available, such financing will be obtainable on terms acceptable to the Company or its stockholders.



Impact of Contractual Obligations and Commercial Commitments



The following summarizes the Companys contractual obligations at March 31, 2004 and the effects such obligations are expected to have on liquidity
and cash flow in future periods.



|                                                                   |  |                        |           |                  |   |           |  |           |           |               |   |           |  |   |    |  
|------------------------------------------------------------------ |  | ---------------------- | --------- | ---------------- | - | --------- |  | --------- | --------- | ------------- | - | --------- |  | - | -- | -
|                                                                   |  | Payments Due by Period |          
|Contractual Obligations                                            |  | Total                  |           | Less than 1 Year |   | 1-3 Years |  | 4-5 Years |           | After 5 Years |  
|Long-Term Debt                                                     |  | $                      | 2,247,706 |                  | $ | 2,247,706 |  | $         | 0         |               | $ | 0         |  | $ | 0  |  
|Operating Leases                                                   |  |                        | 1,052,991 |                  |   | 313,932   |  |           | 739,059   |               |   | 0         |  |   | 0  |  
|Employment Agreements                                              |  |                        | 1,233,750 |                  |   | 393,000   |  |           | 504,750   |               |   | 336,000   |  |   | (a | )
|Consulting Agreements                                              |  |                        | 800,000   |                  |   | 0         |  |           | 800,000   |               |   | 0         |  |   | 0  |  
|                                                                   |  |                        |           |                  |   |           |  |           |           |               |   |           |  |   |    |  
|Total Contractual Cash Obligations Series B Convertible Redeemable |  |                        | 5,334,447 |                  |   | 2,954,638 |  |           | 2,043,809 |               |   | 336,000   |  |   | 0  |  
|Preferred Stock                                                    |  |                        | 2,000,000 |                  |   | 0         |  |           | 0         |               |   | 2,000,000 |  |   | 0  |  
|                                                                   |  |                        |           |                  |   |           |  |           |           |               |   |           |  |   |    |  
|Total                                                              |  | $                      | 7,334,447 |                  | $ | 2,954,638 |  | $         | 2,043,809 |               | $ | 2,336,000 |  | $ | 0  |  
|                                                                   |  |                        |           |                  |   |           |  |           |           |               |   |           |  |   |    |  



|(a) | Employment agreement for CFO has an indefinite term.
|--- | ----------------------------------------------------



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Recently Issued Statements of Financial Accounting Standards



In May 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity (FAS 150),which establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity. FAS 150 requires an issuer to classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some
circumstances). This statement is effective at the beginning of the first interim period beginning after June 15, 2003 for public companies. The Company adopted this Statement as of July 1, 2003 and it had no material impact on its financial
statements.



In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletins (ARB) No. 51, Consolidated Financial Statements (FIN 46). FIN 46 clarifies the application
of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties. The Company does not believe the adoption of FIN 46 will have a material impact on its financial position and results of operations.



In December 2003, the FASB issued FASB Interpretation No. 46R (FIN46R), a revision to FIN 46. FIN46R
clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN46R is effective at the end of the first interim period ending after March 15, 2004. Entities that have adopted FIN 46 prior to this effective date can
continue to apply the provisions of FIN 46 until the effective date of FIN46R or elect early adoption of FIN46R. The adoption of FIN46R did not have a material impact on the Companys financial statements.



Risk Factors



The short and long-term success of the Company is subject to certain risks, many of which are substantial in nature.
Stockholders and prospective stockholders in the Company should consider carefully the following risk factors, in addition to other information contained herein. This Form 10-Q contains forward-looking statements which are subject to a variety of
risks and uncertainties. The Companys actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below.



Future losses and ability to continue as a going concern



Naturades independent accountants have
qualified their opinion on the Companys December 31, 2003 financial statements, expressing substantial doubt concerning the Companys ability to continue as a going concern. At March 31, 2004, the Company had an accumulated deficit of
$22,454,303, net working capital deficit of $2,251,656 and a stockholders capital deficiency of $3,462,380. The Company anticipates that it will incur net losses for the foreseeable future and will need access to additional financing for
working capital and to expand its business. Management has taken a number of steps to address this situation, including the Private Equity Transaction completed on January 2, 2002, the Loan Agreement entered into on April 14, 2003 under which the
Company can borrow, subject to certain conditions, $450,000 and can borrow up to an additional $300,000 at the discretion of the lenders and efforts to decrease operating losses by expanding sales and reducing costs. Nevertheless, the Company
expects to incur operating losses for some time in the future and cannot give assurance that additional financing will be available when needed or that it will obtain any needed waivers or modifications of the Credit and Security Agreement. If
unsuccessful in those efforts, Naturade could be forced to cease operations and investors in Naturades Common Stock could lose their entire investment.



Dependence on current and ongoing financing



The Companys success is dependent on its current financing as well as new financing to support its working capital requirements and fund its
operating losses. As of March 31, 2004, the Company was in compliance with all covenants of the Credit and Security Agreement with its principal lender. However, from time to time, the Company has been in default of these covenants and has had to
seek a waiver of the covenants. There is no assurance that the Companys lenders will grant such waivers if need in the future and will not demand immediate payment of all amounts owed. See Item 7. Managements Discussion and
Analysis of Financing Condition and Results of OperationsLiquidity and Capital Resources and Note 4 to the Financial Statements.



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Dependence on continued business from the Companys key customers



The Companys three largest customers together account for 52.6% of
sales revenue. One mass market customers, represented approximately 19.6 % and two health food distributors accounted for 33.0% of the Companys total sales during the quarter ended March 31, 2004. The loss of any of these customers could have
a material adverse effect on the Companys results of operations. From time to time, major customers of Naturade have experienced financial difficulties. Such difficulties can cause customers to reduce their order, to delay payments or fail to
pay amounts owed entirely. Naturade does not have long-term contracts with any of its customers and, accordingly, there can be no assurance that any customer will continue to place orders with Naturade to the same extent it has in the past, or at
all.



Dependence on third-party manufacturers



The use of contract manufacturers and the resulting
loss of direct control over production could result in the Companys failure to receive timely delivery of products of acceptable quality. Although the Company believes that alternative sources of contract manufacturing services are available,
the loss of one or more contract manufacturers could have a material adverse effect on the Companys results of operations until an alternative source is located and has commenced producing the Companys products.



Although the Company requires that its contract manufacturers comply with FDA
manufacturing guidelines, Naturade cannot assure that these third-party companies will always act in accordance to these regulations. If the manufacturing facilities used by the Companys third-party manufacturers did not meet those standards,
the production of the Companys products could be delayed until the necessary modifications are made to comply with those standards or alternate manufacturers are located. Furthermore, the potential exists for circumstances to arise which would
require Naturade to seek out alternate manufacturers who operate in compliance with the FDAs requirements.



Impact of government regulation



The Companys operations, properties and products are subject to regulation by various foreign, federal, state and local government entities and
agencies, including the FDA and FTC. Among other matters, such regulation is concerned with statements and claims made in connection with the packaging, labeling, marketing and advertising of the Companys products. The governmental agencies
have a variety of processes and remedies available to them, including initiating investigations, issuing warning letters and cease and desist orders, requiring corrective labeling or advertising, requiring consumer redress, seeking injunctive relief
or product seizure, imposing civil penalties and commencing criminal prosecution.



As a result of the Companys efforts to comply with changes in applicable statutes and regulations, the Company has from time to time reformulated, eliminated or relabeled certain of its products and revised
certain aspects of its sales, marketing and advertising programs. The Company may be subject in the future to additional laws or regulations administered by federal, state, local or foreign regulatory authorities, the repeal or amendment of laws or
regulations which the Company considers favorable, such as DSHEA, or more stringent interpretations of current laws or regulations. The Company cannot predict the nature of future laws, regulations, interpretations or applications, nor can the
Company predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on the Companys business in the future. Such future laws and regulations could, however, require the reformulation of
products to meet new standards, the recall or discontinuance of products that cannot be reformulated, the imposition of additional record keeping requirements, expanded documentation of product efficacy, expanded or modified labeling and scientific
substantiation, including health warnings or restrictions on benefits described for the Companys products. Any of or all of such requirements could hurt sales of the Companys products or increase the Companys costs, resulting in
material harm to the Companys results of operations and financial condition.



Naturade may not be able to identify suitable strategic partners to realize the Companys growth strategy.



In addition to internal expansion of its existing business, The Company has a strategy to expand its business externally by identifying compatible
companies for strategic alliances and strategic investments in the Company. The Company may not succeed in identifying these potential strategic partners or may be unable to conclude agreements with them. If so, the Companys future growth may
be limited, and it may be unable to achieve profitability.



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Competition



The market for nutraceutical products is highly competitive. Many of the Companys competitors have substantially
greater capital resources, research and development capabilities, and manufacturing and marketing resources, capabilities and experience than the Company. The Companys competitors may succeed in developing products that are more effective or
less costly than any products that may be developed by the Company.



Future sales of equity securities could dilute the Companys Common Stock



The Company may seek to obtain new financing from various sources, including the sale of its securities. Future sales of Common Stock or securities
convertible into Common Stock at or below recent market prices could result in dilution of the Common Stock. In addition, the conversion of the 13.5 million shares of Series B Convertible Preferred Stock originally sold to Westgate Equity Partners,
L.P. (Westgate), for $2 million, together with conversion of the 35,989,555 shares of Series B Convertible Preferred Stock issuable on exercise of warrants, which expire on December 31, 2004, held by Westgate, which have an exercise
price of approximately $0.104 per share (and, including the original cost of the warrant, a total consideration of approximately $0.119 per share), has resulted in dilution of the Common Stock. The perceived risk of dilution may cause some of the
Companys stockholders to sell their shares, which could further reduce the market price of the Common Stock.



Dependence on qualified personnel



The Companys success depends upon its ability to attract and retain qualified sales, marketing, scientific and executive management personnel. To
commercialize its products and product candidates, the Company must maintain and expand its personnel, particularly in the areas of product sales and marketing. The Company faces intense competition for such personnel from other companies, academic
institutions, government entities and other research organizations. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel. Moreover, managing the integration of such new personnel could pose
significant risks to the Companys development and progress and increase its operating expenses.



Expanding the Companys sales in the mass market has increased branding costs and resulted in less stable demand for the Companys
products.



The Company, traditionally a marketer for
the health food market, has recently built a presence in the mass market. While yielding increased revenue, selling to the mass market has also resulted in significant risks for the Company. Compared to sales in the health food market, the aggregate
volume of mass market orders can vary significantly from period to period and tends to be more sensitive to short term or local variations in market conditions. The instability can make planning difficult and can cause unexpected reductions in
sales, or in orders that exceed the Companys short-term capacity, in either case resulting in lost revenue. Failure to manage the costs and risks associated with the mass market could cause material harm to the Companys business.



Closely controlled stock



At April 30, 2004, Westgate beneficially owned approximately 51.0 % of the
Companys Common Stock, Health Holdings beneficially owned 92.2 % of the Companys Common Stock, and executive officers and directors of the Company as a group beneficially owned 97.4% of the Companys Common Stock. Shares
beneficially owned include shares that a person owns or has a right to acquire within 60 days, either directly or through affiliates. Accordingly, Westgate and Health Holdings have the ability to control the outcome on all matters
requiring stockholder approval, including, but not limited to, the election and removal of directors, any merger, sale, consolidation or sale of substantially all of the assets of the Company, and to control the Companys management and
affairs.



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Technological changes



The Company currently is engaged in developing nutraceuticals, which are characterized by extensive and costly research
efforts and rapid technological progress and change. New process developments are expected to continue at a rapid pace in both industry and academia. The Companys future success will depend on its ability to develop and commercialize its
existing product candidates and to develop new products. There can be no assurance that the Company will successfully complete the development of any of its existing product candidates or that any of its future products will be commercially viable
or achieve market acceptance. In addition, research and development and discoveries by others could render some or all of the Companys programs or potential product candidates uncompetitive or obsolete.



The Company may face interruption of production and services due to
increased security measures in response to terrorism



The Companys business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorist activities and threats aimed at the U.S., transportation, mail, financial and other services
have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services could have a material adverse effect on the Companys business, results of operations and financial condition. Furthermore,
the Company may experience an increase in operating costs, such as costs for transportation, insurance and security, as a result of the terrorist activities and potential activities. The Company may also experience delays in receiving payments from
payers that have been affected by terrorist activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact the
Companys results of operations, impair its ability to raise capital or otherwise adversely effect its ability to grow its business.



Variability of quarterly results



The Company has experienced, and expects to continue to experience, variations in its net sales and operating results from quarter to quarter. The Company
believes that the factors which influence this variability of quarterly results include the timing of the Companys introduction of new product lines, the level of consumer acceptance of each product line, general economic and industry
conditions that affect consumer spending and retailer purchasing, the availability of manufacturing capacity, the timing of trade shows, the product mix of customer orders, the timing of placement or cancellation of customer orders, the weather,
transportation delays, the occurrence of chargebacks in excess of reserves and the timing of expenditures in anticipation of increased sales and actions of competitors. Accordingly, a comparison of the Companys results of operations from
period to period is not necessarily meaningful, and the Companys results of operations for any period are not necessarily indicative of future performance.



Product liability exposure



Product liability risk is inherent in the testing, manufacture, marketing and sale of the Companys products and
product candidates, and there can be no assurance that the Company will be able to avoid significant product liability exposure. The Company may be subject to various product liability claims, including, among others, that its products include
inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances. The Company currently maintains a general liability insurance policy and a product liability insurance policy. There can
be no assurance that the Company will be able to maintain insurance in sufficient amounts to protect the Company against such liabilities at a reasonable cost. Any future product liability claim against the Company could result in the Company paying
substantial damages, which may not be covered by insurance and may have a material adverse effect on the business and financial condition of the Company.



The dietary supplement industry as a whole has experienced fluctuating sales growth.



The Companys business consists primarily of selling natural products
and functional foods, including soy protein-based products. The soy foods category as a whole has recently experienced increased sales. Other categories of dietary supplements have experienced reduced sales in recent periods after several years of
dramatic growth. In particular, revenues in both the herbal and health food store categories have had periods of significant decline. There can be no assurance that this general consumer trend will not be experienced by the Companys product
categories as well. Even if the Company is successful in increasing sales within its market category, a decline in the overall market for natural products or functional foods could have a material adverse affect on the Companys business.



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Effect of adverse publicity



The Companys products are formulated with vitamins, minerals, herbs and other ingredients that the Company regards as
safe when taken as suggested by the Company and that scientific studies have suggested may involve health benefits. While the Company conducts extensive quality control testing on its products, the Company generally does not conduct or sponsor
clinical studies relating to the benefits of its products. The Company is highly dependent upon consumers perception of the overall integrity of its business, as well as the safety and quality of its products and similar products distributed
by other companies which may not adhere to the same quality standards as the Company. The Company could be adversely affected if any of the Companys products, or any similar products distributed by other companies, should prove or be asserted
to be harmful to consumers or should scientific studies provide unfavorable findings regarding the effectiveness of such products. The Companys ability to attract and retain distributors could be adversely affected by negative publicity
relating to it or to other direct sales organizations or by the announcement by any governmental agency of investigatory proceedings regarding the business practices of the Company or other direct sales organizations.



Intellectual property protection



The Companys success depends in part on the Companys ability to
preserve the Companys trade secrets and know-how, and operate without infringing on the property rights of third parties. The Company does not have any patents, and as a result another company could replicate one or more of the Companys
products. The Companys policy is to pursue registrations for all of the trademarks associated with its key products. The Company relies on common law trademark rights to protect its unregistered trademarks as well as its trade dress rights.
Common law trademark rights generally are limited to the geographic area in which the trademark is actually used, while a U.S. federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third
party anywhere in the U. S. The Company intends to register its trademarks in certain foreign jurisdictions where the Companys products are sold. However, the protection available, if any, in such jurisdictions may not be as extensive as the
protection available to the Company in the U.S.



Currently, the
Company has U.S. trademarks as well as a California registration on four trademarks. The Company also maintains trademark registrations in approximately eleven foreign countries. Because of its limited financial resources, the Company cannot in all
cases exhaustively monitor the marketplace for trademark violations. It will evaluate and pursue potential infringement on a case-by-case basis in accordance with its business needs and financial resources. If the Company is not aware of some
infringing uses or elects not to pursue them, the value of its trademarks could be substantially weakened. If the Company takes action to enforce its intellectual property rights, litigation may be necessary. Any such litigation could be very costly
and could distract the Companys personnel. Due to limited financial resources, The Company may be unable to pursue some litigation matters. In matters it does pursue, The Company can provide no assurance of a favorable outcome. An unfavorable
outcome in any proceeding could have a material adverse effect on the Companys business, financial condition and results of operations.



Introduction of new products



Each year, the Company introduces new products to meet consumer demands and counter competitive threats. These new products include product line
extensions, such as new flavors to currently existing products, as well as new formulations or configurations, such as ready-to-drink products and bars. The Company experiences significant costs in formulating new products, designing packaging and
merchandising. While the Company conducts extensive market research to determine consumer trends in both the mass market and health food market, there can be no assurance that consumers and retailers will accept the Companys new products. In
addition, there can be no assurance that once new products are initially distributed to mass market and health food retailers, there will be repeat orders for these new products. Furthermore, expensive introductory retailer charges for additional
shelf space may negate any initial increase in sales.



Stock price



The market price of the
Companys Common Stock is likely to be volatile and could be subject to significant fluctuations in response to the factors such as quarterly variations in operating results, operating results which vary from the expectations of securities
analysts and investors, changes in financial estimates, changes in market valuations of competitors, announcements by the Company or its competitors of a material nature, loss of one or more customers, additions or departures of key personnel,
future sales of Common Stock and stock market price and volume fluctuations. Also, general political and economic conditions such as recession, or interest rate or currency rate fluctuations may adversely affect the market price of the
Companys Common Stock.



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|ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



The Companys earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies as a result of international
purchases. As a result, the Company bears the risk of exchange rate gains or losses that may result in the future as a result of this financing structure. The Companys exposure to market risk for changes in interest rates relates primarily to
the Companys long-term debt.



The Companys
long-term debt primarily consists of a $3.5 million line of credit originally entered into on January 27, 2000 a $450,000 Loan Agreement with a majority shareholder and other investors and $132,345 in Investor Notes. The line of credit bears
interest at prime rate plus 4.5%. The Loan Agreement bears interest at 15% per annum and is due on December 31, 2004 and provides for the borrowing of an additional $300,000 at the discretion of the lenders . The Investor Notes bear interest at 15%
per annum with a principal installments of $10,000 per month from January 15, 2004 thru July 15, 2004 and the remaining balance on August 15, 2004. However, given the fixed interest rate on the Loan Agreement and Investor Notes, interest rate
changes generally will have no effect on the interest rates under the Loan Agreement, the Investor Notes or on the Companys results of operations. Given the variable interest rate on the line of credit, the impact of interest rate changes on
the line of credit could have a material impact on the Companys results of operations. For the three month period ended March 31, 2004 the interest expense on the line of credit was $41,148. If the interest rate on the line of credit for the
three month period ended March 31, 2004 had increased by one percent to prime rate plus 5.5%, this would result in an interest expense of $45,989.



|ITEM 4. | Controls and Procedures
|------- | -----------------------



The Companys Chief Executive Officer, Bill D. Stewart, and Chief Financial Officer, Stephen M. Kasprisin, with the participation of the
Companys management, carried out an evaluation of the effectiveness of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 15d-14(c). Based upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer believe that, as of the end of the period covered by this report, the Companys disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated
subsidiaries) required to be included in this report.



Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entitys disclosure objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such a simple errors or mistakes or
intentional circumvention of the established process.



There
was no change in the Companys internal control over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer that occurred during the period covered by the report that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II. Other Information



|ITEM 1. | Legal Proceedings.
|------- | ------------------



NONE



|ITEM 2. | Changes in Securities, Use of Proceeds and Issuers Purchases of Equity Securities.
|------- | ----------------------------------------------------------------------------------



NONE



|ITEM 3. | Defaults on Senior Securities.
|------- | ------------------------------



NONE.



|ITEM 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------



NONE



|ITEM 5. | Other Information.
|------- | ------------------



NONE



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##### Table of Contents

|ITEM 6. | Exhibits and Reports of Form 8-K
|------- | --------------------------------



(a) Exhibits



|            |  |                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                       
|            | 
|10.52       |  | Tenth Amendment to Credit and Security Agreement between Naturade, Inc. and Wells Fargo Business Credit Inc., dated May 10, 2004.                 
|            | 
|31.1        |  | Certification Pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.2        |  | Certification Pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|            | 
|32          |  | Certification Pursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                       



(b) Reports on Form 8-K:



On April 22, 2004 the Company filed a Report on Form 8-K
reporting under Item 5, the Joinder of Bill D. Stewart to the Loan Agreement dated April 14, 2003 and the advance of $200,000 to the Company for working capital purposes under the Loan Agreement.



On May 6, 2004 the Company filed a Report on Form 8-K reporting under Item 9,
the advance of $100,000 to the Company for working capital purposes under the Loan Agreement.



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##### Table of Contents

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.



|                   |  |    |  |                            
|------------------ |  | -- |  | ---------------------------
|                   |  |    |  | NATURADE, INC.             
|                   |  |    |  | (Registrant)               
|                   |  |    |  |                            
|DATE: May 14, 2004 |  | By |  | /s/    Bill D. Stewart     
|                   |  |    |  |                            
|                   |  |    |  | Bill D. Stewart            
|                   |  |    |  | Chief Executive Officer    
|                   |  |    |  |                            
|                   |  |   
|DATE: May 14, 2004 |  | By |  | /s/    Stephen M. Kasprisin
|                   |  |    |  |                            
|                   |  |    |  | Stephen M. Kasprisin       
|                   |  |    |  | Chief Financial Officer    



25