UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(Mark One)

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
                                     FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

|_|   TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
                         FOR THE TRANSITION PERIOD FROM __________ TO __________
                         COMMISSION FILE NUMBER ________________________________


                             KNOCKOUT HOLDINGS, INC.
                 (Name of small business issuer in its charter)

            DELAWARE                                  13-4024018
            --------                                  ----------
  (State or other jurisdiction of           (I.R.S. Employer Identification No.)
  incorporation or organization)


                  100 W. WHITEHALL AVENUE, NORTHLAKE, IL 60164
                  --------------------------------------------
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone Number: (708) 273-6900
                                              ----------------

Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value

Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. |_|

      Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes|_| No|X|

      Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

      State issuer's revenues for its most recent fiscal year. $1,883,201

      The aggregate market value of the voting and non-voting common equity held
by non-affiliates, computed by reference to the average bid and asked price of
such common equity as of May 15, 2006 was $841,059.52.

      As of May 15, 2006, the issuer had 12,015,136 outstanding shares of Common
Stock.

                    DOCUMENTS INCORPORATED BY REFERENCE: NONE

      Transitional Small Business Disclosure Format (check one): Yes |_| No |X|



<PAGE>


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                                      PAGE
                                     PART I

<S>                                                                                                    <C>
Item 1.   Description of Business ............................................................           1
Item 2.   Description of Property ............................................................          12
Item 3.   Legal Proceedings ..................................................................          12
Item 4.   Submission of Matters to a Vote of Security Holders ................................          12

                                     PART II

Item 5.   Market for Common Equity and Related Stockholder Matters ...........................          13
Item 6.   Management's Discussion and Analysis or Plan of Operation ..........................          15
Item 7.   Financial Statements ...............................................................          23
Item 8.   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure          23
Item 8A.  Controls and Procedures ............................................................          24
Item 8B.  Other Information ..................................................................          24

                                 PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
          Compliance With Section 16(a) of the Exchange Act ..................................          25
Item 10.  Executive Compensation .............................................................          27
Item 11.  Security Ownership of Certain Beneficial Owners and Management
          and Related Stockholder Matters ....................................................          29
Item 12.  Certain Relationship and Related Transactions ......................................          32
Item 13.  Exhibits ...........................................................................          35
Item 14.  Principal Accountant Fees and Services .............................................          36


SIGNATURES ...................................................................................          38

</TABLE>


<PAGE>



36

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

      Knockout Holdings, Inc. ("the Company," "we," "us," or "our"), through its
wholly owned  subsidiary The Knockout Group,  Inc., is currently  engaged in the
business of selling industrial  cleaning  products,  household cleaning products
and  automobile  cleaning  products  that are  based on a  proprietary  patented
technology.  We operate  under a license  agreement  with  George  Foreman,  the
two-time  World  Heavyweight  boxing  champion.  Initial  sales of our  cleaning
products began in August 2004.

      We also currently own a 50% interest in Access:  New Age Corp., which owns
and operates an Internet  website  that was launched in April 1996.  The website
offers a large selection of "New Age" information,  products and services - most
of which are holistic, esoteric, spiritual, metaphysical and/or philosophical in
character.  Access: New Age Corp. has never had significant  business operations
and is not material to our current business.

ORGANIZATION

      We were formed under the laws of the State of Delaware in  September  1998
as United Network Marketing Services,  Inc. Upon our formation, we were a wholly
owned subsidiary of United Network  Technologies,  Inc., a Delaware corporation.
In January 1999, all of our issued and outstanding  shares were distributed as a
dividend to the stockholders of United Network Technologies,  Inc. Following the
dividend,  United Network Technologies,  Inc. no longer owned any of our shares.
In May 1999, we acquired a 50% ownership  interest in Access: New Age Corp. at a
cost of $17,000.  From our inception in September  1998 until December 28, 2004,
we generated no revenues and did not have any significant business operations.

RECAPITALIZATION AND MERGER

      On December 28, 2004,  we acquired  The  Knockout  Group,  Inc. by issuing
796,568 shares of Series A Preferred  Stock to the  stockholders of The Knockout
Group,  Inc. in  exchange  for all of the issued and  outstanding  shares of The
Knockout Group,  Inc. Each share of Series A Preferred Stock will  automatically
convert  into 160  shares of our  common  stock  immediately  after we amend our
Certificate of Incorporation to authorize the issuance of a sufficient number of
shares  to  complete  the  conversion.  Prior  to  the  transaction,  we  had no
significant  operations.  Subsequent to completion of the transaction we changed
our name to Knockout Holdings, Inc.

      For financial reporting  purposes,  this transaction has been reflected in
the  accompanying  financial  statements as a  recapitalization  of The Knockout
Group,  Inc.  and the  financial  statements  reflect the  historical  financial
information of The Knockout Group,  Inc.,  which was incorporated in Delaware in
April 2003. Therefore, for accounting purposes, the shares recorded as issued in
the transaction are the 8,175,747 shares owned by our shareholders  prior to the
transaction.

      Unless context indicates otherwise,  references  throughout this report to
the "Company,"  "we," "us," or "our" are to Knockout  Holdings,  Inc.,  together
with our operating subsidiary, The Knockout Group, Inc.

OUR BUSINESS

      We  market  and  sell a line of  cleaning  products  that  are  based on a
patented   proprietary   technology.   Our  current  product  offering  includes
industrial  cleaning  products,   household  cleaning  products  and  automobile
cleaning  products.  We have a  limited  operating  history  and  operated  as a
development  stage company until August 2004.  Pre-launch  activities began with
initial orders from several major retailers in August 2004. In the third quarter
2005,  we  implemented  our  first  regional   marketing  campaign  in  Southern
California,  and we expect to implement  marketing campaigns in other regions of
the United States  beginning in the fourth quarter 2006 after focusing our sales
initiatives on the governmental, commercial and institutional marketplace.

      Our  vision is to build  brands  that will be  category  leaders  and have
unique product  positioning in each market segment in which we compete.  We will
provide  customers  with  products  that  provide   efficacy,   value,  and  are
environmentally responsible. We will strive to deliver products that:

                                       1
<PAGE>

      o     Exceed customer and consumer expectations;
      o     Create and sustain long term brand equity;
      o     Enrich consumers' well-being and healthy lifestyle;
      o     Protect the environment; and
      o     Meet  financial  objectives  and  deliver  exceptional  returns  for
            shareholders.

      While the product  offerings of each of our brands will be different,  the
underlying strategies will be the same:

            CHOOSE THE RIGHT  CELEBRITY  SPOKESPERSON.  We will  ensure that the
            celebrity  endorser has the passion and conviction  associated  with
            the brand.
            OFFER THE HIGHEST  QUALITY  BRANDED  PRODUCTS.  We will  incorporate
            innovations  that add value and  differentiate  our brands  from our
            competitors.
            DEVELOP PRODUCTS THAT WORK AND ARE CONSISTENT WITH OUR MISSION.  Our
            products will do  everything  that we say they do and will help make
            the world a better place.  Our products will accomplish this through
            our environmentally safe technologies.

KNOCK-OUT(R) CLEANING PRODUCTS

      Our  cleaning  products  are  based  on  two  different  technologies,  an
Encapsulation technology and a botanical disinfectant technology.  The Knock-Out
cleaning product line utilizes a patented Encapsulation  technology intended for
easy removal of dirt, grease and grime. The cleaning products are intended to be
powerful  cleaners  that  are  environmentally  friendly,   contain  no  harmful
ingredients,  and  function  as  multiple  use  products.  The  ingredients  are
biodegradable and predominantly water-based. We own the formulas and all related
patent applications have been assigned to us by the inventors.

      Our Knock-Out  products also include a disinfectant  technology using pure
plant  extracts.  With a pH of 7.0, the same as pure water,  the  formulation is
intended to be less corrosive than  competing  disinfectants.  It is approved by
the United  States  Environmental  Protection  Agency for use on household  food
contact  surfaces when used as directed.  It is suitable for use around children
and pets.

      We believe there is a growing awareness of the benefits of environmentally
safe,  non-toxic cleaning products amongst local, state and national  government
officials. The EPA and several major state officials,  including the governor of
New York,  have  announced  intentions  to shift  procurement  practices  toward
products  that are  environmentally  safe. As such, we believe that this segment
represents an excellent marketing opportunity for our products.

      We are currently  exploring  distribution and marketing  opportunities for
our cleaning  products for use in industrial  and commercial  applications.  Our
Knock-Out(TM)  Pro Green industrial line of cleaning  products was developed for
governmental,  institutional and commercial use to provide a safe alternative to
traditional  toxic cleaning  chemicals used in the janitorial  supply  industry.
Many  products  on the market  claim  "environmental"  but still  contain  toxic
chemicals that are harmful to humans.  Knock-Out(TM)  Pro Green provides all the
benefits of cleaning  "green"  without  health risks.  While we do not currently
have any industrial and commercial  contracts in place,  we believe our products
provide significant benefits versus current competitive offerings.  We intend to
enhance  our  product and  packaging  configurations  to meet the needs of these
potential customers.

      Our Knock-Out  household  cleaning  system  consolidates  up to 20 regular
household  cleaning products currently used in many households and replaces them
with four multi-use  products for spot and large surface  cleaning.  Our current
household  product  offering  consists  of a  George  Foreman  Grill  and  Small
Appliances Cleaner,  Multi-Purpose Cleaner,  Streak Free Glass Cleaner,  Laundry
Stain Remover and Disinfectant.

      In  addition  to the  industrial  and  household  products,  we have  also
developed a line of specialty  cleaning products for automobiles that includes a
George Foreman  Exterior  Cleaner and Polisher,  a Dash, Seat and Carpet Cleaner
and a Bug,  Grime and Wheel  Cleaner.  We plan to  initiate  the  sell-in of our
automotive  line to  retailers  in the fourth  quarter of 2006.  We believe  our
products have the same, or greater,  cleaning  efficacy as current  offerings in
the market with the added benefit of being non-toxic and  environmentally  safe.
We are in the early stages of this sell-in  process,  but expect our products to
gain initial distribution in many automotive aftermarket stores.


                                       2
<PAGE>

      We believe our  Encapsulation  technology  provides us with the ability to
create a broad array of products over the next several  years,  including  fruit
and  vegetable  wash,  silk plant  cleaner,  and pet shampoo.  We may  introduce
additional products depending upon the success of our current offerings, outcome
of certain concept testing and consumer research, and availability of resources.

      We currently  distribute  our products  solely in the  continental  United
States. We believe it is important to establish a strong initial presence in the
U.S. before considering major international expansion.  However, we believe that
our  celebrity   endorser  has  high  name  recognition  and  awareness  amongst
international  consumers.  As a result,  we intend to explore the possibility of
entering  into  marketing  and  distribution  arrangements  for our  products in
locations outside the United States at a future date.

PRODUCT DEVELOPMENT

      Our development strategy is related to our Encapsulation  technology which
we  believe  provides  us with a  strategic  advantage,  in that it gives us the
ability  to  leverage  the  underlying  formulation  to create a broad  array of
products including industrial  applications,  household and automotive cleaners,
pet shampoo, and many other products. We have filed twelve patents with the U.S.
Patent and Trademark  Office (of which one has already been granted)  related to
our proprietary formulation,  concentrate process and various other applications
not related to the patented  formulation.  We believe we have developed  related
intellectual  property  around these areas and have already  received one patent
with the other  eleven  currently  pending.  If we are  awarded  patents for the
eleven patents pending or additional patents for future filings, we believe this
will have a  substantial  impact on our asset  quality  and  ability to leverage
these assets in our marketing activities.  There is no assurance that we will be
granted  additional patent rights for current or future filings,  or if granted,
that such patents will not be contested by others.

MARKET

      There is a difference between  "environmental"  and "people safe" cleaning
products.  Many products on the market claim  "environmental"  but still contain
toxic chemicals that are harmful to humans. Knock-Out(TM) Pro Green provides all
the benefits of cleaning "green" without health risks. Our completely non-toxic,
plant-derived formula contains no bleach,  carcinogens,  harmful chemicals,  and
are non-reactive with a low PH.

      Below are a few informative facts about the cleaning products market which
were  published  by the  Office of  Environmental  Policy and  Compliance,  U.S.
Department of the Interior
(http://greeninginterior.doi.gov/procure/environ_performan.ppt):

      o     An average of 58.2 lbs. of chemical  cleaning  products are used per
            janitor per year.
      o     6%   of   cleaners    should   be   avoided   because   of   serious
            health/environmental threats.
      o     35% of cleaners  require  extreme  care during use because  they can
            blind the unprotected  user, can cause severe skin damage, or can be
            absorbed through the skin or be inhaled to harm internal organs.

      According to an analysis of worker comp claims in Washington  State by Tom
Barron,  chemical related worker injuries  include acute blindness,  skin damage
and lung  damage.  Longer  term  exposure  has caused  damage to fetus,  hormone
modification,  cancer and organ damage. About 40% of worker injuries involve eye
irritation and burns,  35% involve skin  irritation  and burns,  and 12% involve
breathing chemical fumes. Six of 100 employees have loss time at an average cost
of $725 per claim. (See
http://greeninginterior.doi.gov/procure/environ_performan.ppt)

      Household  cleaners  are found in every home and in a variety of  products
such as disinfectants,  polish, bleach, abrasive powders,  detergents and fabric
softeners.  While these products are offered for every task, in every room, many
can present health risks.  Household cleaners can contain hazardous  ingredients
such as organic solvents and petroleum distillates, exposure to which can result
in a variety of physical symptoms including  headaches,  fatigue,  burning eyes,
runny nose and skin  rashes.  These  symptoms can occur  immediately  or shortly
after product use.


                                       3
<PAGE>


      Some ingredients  used in household  cleaners are known to cause cancer in
animals and are suspected of causing cancer in humans. In addition,  ingredients
in household cleaners may be harmful to unborn children.  This is one reason why
pregnant women are cautioned to restrict their use of household chemicals.

      o     The average  American home has 3-10 gallons of hazardous  materials.
            (Source: Children's Health Environmental Coalition)

      o     The  average  household  typically  uses  and  stores  more  than 60
            hazardous  products,   including   household  cleaners,   automotive
            products,  paints, solvents and pesticides.  (Source:  Seattle Daily
            Journal of Commerce)

      o     In 1999,  2.1 million human  poisonings  were reported to the poison
            control  centers in the United  States.  More than 50 percent of the
            cases  involved  children under the age of five.  (Source:  American
            Association  of  Poison  Control  Centers,   via  Children's  Health
            Environmental Coalition)

      o     EPA studies of human exposure to air pollutants indicate that indoor
            air levels of many  pollutants  may be 2-5 times and,  occasionally,
            more than 100 times higher than outdoor  levels.  Cleaning  products
            and other household  products are among the many culprits.  (Source:
            EPA)

      o     Over 150  chemicals  found in the  average  home have been linked to
            allergies,  birth defects,  cancer and psychological  abnormalities.
            (Source:     Consumer     Product     Safety     Commission,     via
            www.earthwellness.com)

      We believe industry and consumers are looking for institutional, household
and automotive cleaners that are reliable, effective, easy to use, non-toxic and
environmentally  friendly.  There are only a small number of brands that satisfy
this need,  but they are generally  classified as niche brands and sold over the
Internet or in very  limited  retail  distribution.  We believe that none of the
niche brands have  effectively  driven awareness of the health and safety issues
involved in the use of many household cleaners.

CHANNELS OF DISTRIBUTION

      We currently  distribute  our  products  direct to  industrial  end users,
retail  and  wholesale  outlets  in the United  States.  We also  intend to sell
products  through   alternate   distribution   channels   including   television
infomercials,   QVC,  industrial  and  governmental  markets,  and  directly  to
consumers through the Internet. Initially, we plan to sell our cleaning products
primarily within the United States and Canada.

      We generate sales through a small,  dedicated sales force and a network of
independent  commissioned  sales  organizations  (brokers).  The retail  outlets
through which we distribute our cleaning  products  include mass  merchandisers,
warehouse clubs, drug, hardware and grocery stores, and automotive retailers. We
also have run  infomercials  for our products,  but have not yet contracted with
any television channels.

PRINCIPAL SUPPLIERS

      On July 22,  2004,  our  operating  subsidiary  The Knockout  Group,  Inc.
entered into an exclusive  agreement with Charleston  Holdings,  LLC, a Delaware
limited liability  company,  in which two of our former directors own a minority
interest, to provide concentrate for some of our products.  Under the agreement,
Charleston Holdings,  LLC transferred ownership to us of the proprietary formula
for the concentrate, and we granted Charleston Holdings, LLC the exclusive right
to provide the  concentrate to us. In the event that  Charleston  Holdings,  LLC
identifies an application for the proprietary formula that we are not interested
in pursuing, Charleston Holdings, LLC may sell the formula for such use with our
express written approval. In such event,  Charleston Holdings, LLC will pay us a
royalty  of  $0.20  for each  gallon  of  ready-to-use  product  containing  the
proprietary formulation.

                                       4
<PAGE>

      If Charleston Holdings,  LLC elects not to manufacture or fails to deliver
concentrate to us in the required  specification  within 60 days of receipt of a
purchase order, we have the option to have a third party  manufacturer  buy bulk
ingredients  to mix,  bottle and  package  our  products.  Should we select this
option due to business  needs,  we must pay Charleston  Holdings,  LLC $0.20 per
gallon of ready-to-use product produced. The agreement with Charleston Holdings,
LLC  continues in effect until  terminated  in  accordance  with its terms.  The
agreement may be terminated by us for the following  reasons:  (a) if Charleston
Holdings, LLC defaults in its obligations to procure and maintain insurance; (b)
if Charleston  Holdings,  LLC becomes  insolvent,  makes an  assignment  for the
benefit of  creditors or has a petition in  bankruptcy  filed for or against it;
(c) if  Charleston  Holdings,  LLC  is  convicted  of a  felony  related  to the
manufacture,  use or  sale  of the  concentrate  formula;  or (d) if  Charleston
Holdings,  LLC defaults in the  performance of any other  obligations  under the
agreement  and the  default  is not cured  within 60 days of  receiving  written
notice from us of such  default.  The  agreement may be terminated by Charleston
Holdings,  LLC for the following reasons: (a) if we fail to procure and maintain
adequate  insurance;  (b) if we become  insolvent,  make an  assignment  for the
benefit of creditors or have a petition in  bankruptcy  filed for or against us;
(c) if we are convicted of a felony related to the  manufacture,  use or sale of
the concentrate formula; (d) if we cease  manufacturing,  marketing,  selling or
distributing  products  that use the  concentrate;  or (e) if we  default in the
performance of our obligations  under the agreement and the default is not cured
within 60 days of  receiving  written  notice of such  default  from  Charleston
Holdings, LLC.

      We have a  non-exclusive  license  agreement to market and  distribute our
botanical disinfectant product, which can only be obtained from a sole provider.
The current  contract  covers a three-year  period  beginning  February 24, 2004
until February 23, 2007. The contract contains certain performance requirements.
There can be no assurance that this contract will be renewed or renewed on terms
and conditions comparable to the existing agreement.

MANUFACTURING, WAREHOUSING, AND DISTRIBUTION

      We believe our core  competency is in branding,  sales and  marketing.  As
such, we have outsourced manufacturing,  warehousing and distribution activities
to third party  vendors.  As is typical for companies  with a limited  operating
history  such  as  us,  in  order  to  maintain  operational  flexibility,   our
arrangements  with these  third  party  vendors  have not been  memorialized  in
definitive  agreements.  The  markets for third  party  contract  manufacturing,
warehousing,  and distribution services are well developed in the United States.
We do not maintain exclusive relationships with any one vendor in these areas.

      Once products are developed or identified,  we seek either a patent on the
technology  or  attempt  to  negotiate  exclusive  licensing   agreements.   The
manufacturing   of  our  products  are  then   contracted  out  to  third  party
manufacturers that are certified by the United States  Environmental  Protection
Agency.  We are  periodically  contacted  by third party  manufacturers  seeking
contract  manufacturing  opportunities.  As such,  we do not maintain  exclusive
relationships  with any one  vendor in these  areas and  believe  that  there is
adequate manufacturing,  warehousing, and distribution services capacity to meet
our requirements at this time.

COMPETITION

      The market for  consumer  products  is highly  competitive.  Our  products
compete with other nationally advertised brands within the industrial, household
and automotive cleaning categories and with "private label" brands and "generic"
non-branded  products  of grocery  chains and  wholesale  cooperatives.  We also
compete with similar and  alternative  products,  many of which are produced and
marketed by major national enterprises having financial resources  substantially
greater than ours. Our products compete on price,  quality and other benefits to
industrial  clients  and  consumers  from our  proprietary  technology.  A newly
introduced  consumer product usually  encounters intense  competition  requiring
substantial  expenditure for advertising and sales promotion. If a product gains
consumer   acceptance,   it  typically  requires   continuing   advertising  and
promotional  support to maintain its relative market  position.  Since we have a
limited  operating  history,  our market position is marginal when compared with
larger  sellers  of  cleaning  products  such as Proctor & Gamble and The Clorox
Company.


                                       5
<PAGE>

GOVERNMENT REGULATION

      Our business is subject to regulation  by the United States  Environmental
Protection  Agency,  the Food and Drug  Administration  and the Consumer Product
Safety Commission.  Most states have agencies that regulate in parallel to these
federal agencies.  The failure to comply with applicable laws and regulations in
these or other  areas  could  subject  us to civil  remedies,  including  fines,
injunctions, recalls or asset seizures, as well as potential criminal sanctions,
any of which could have a material  adverse  effect on our business.  Loss of or
failure to obtain necessary permits and registrations  could delay or prevent us
from meeting  current product  demand,  introducing  new products,  building new
facilities or acquiring new  businesses  and could  adversely  affect  operating
results.

      In addition,  substantially  all aspects of our marketing  operations  are
subject  to  oversight  and  regulation  by  federal,  state and local  agencies
including the Federal Trade Commission. Federal Trade Commission regulations are
primarily  governed  under  Section  5  of  the  Federal  Trade  Commission  Act
prohibiting  deceptive  advertising.  Various state and local  governments  have
comparable  fair practice  laws,  which are  applicable to us. In addition,  the
infomercial  industry has set up guidelines for the truth and  substantiation of
infomercial claims and products through its  self-regulation  trade association,
Electronic  Retailing  Association,  of which we are a member. We believe all of
our  current  infomercials  comply  with  applicable  Federal  Trade  Commission
standards and the Electronic Retailing Association guidelines.

INTELLECTUAL PROPERTY

      Our cleaning product technology has been granted one patent (US 7,008,917)
on April 7,  2006  with an  expiration  date of June  l5,  2024 for a method  of
formulating a cleaning  composition in a concentrated  form and our disinfectant
products  are  protected  by patents  that we are  licensed to use pursuant to a
memorandum of understanding  dated February 24, 2004 between The Knockout Group,
Inc. and  Sensible  Life  Products,  a division of Laid Back  Designs,  Ltd. The
disinfectant patent is licensed to us for an in initial term of three years with
the right to renew for successive  three-year  periods  provided certain minimum
order  requirements are met. The license allows us to sell products  exclusively
for retail household and retail automotive hard surface disinfectant markets and
on a non-exclusive basis to U.S. federal, state and local governments;  however,
we have a right of first refusal to exclusively  market,  sell an distribute the
product to U.S. federal, state and local governments.

      We have filed an additional  twelve patent  applications  that are pending
with the U.S. Patent and Trademark Office, two of which have been granted serial
numbers as follows:  (1) 1406-003: A cleaning composition in a concentrated form
- Serial  No.  10/868,541;  (2)  1406-004:  Method  of  formulating  a  cleaning
composition  for use in cleaning - Serial No.  10/868,464.  In December  2005 an
additional  ten patents  were filed on behalf of the  company.  The  application
numbers are as follows:  (1)  11/299,483:  A cleaning wipe material and cleaning
composition;  (2)  11/299,495:  A cleaning  composition  which renders a surface
stain resistant;  (3) 11/301,044: A cleaning wipe with photo reactive agent; (4)
11/301,041:  A cleaner which renders a surface  hydrophobic;  (5) 11/301,006:  A
thixotropic cleaning  composition;  (6) 11/301,966:  A cleaning composition with
time-release cleaning; (7) 11/301,967:  A cleaning composition with time-release
fragrance;  (8)  11/301,968:  A cleaning  composition  with a coloring  agent to
indicate  coverage;  (9)  11/299,496:  A streak  free  glass  cleaner;  and (10)
11/299,419: A cleaner which renders a surface hydrophilic.

      We own a trademark on the name "Knock-Out"  (Registration  No.  19804430).
This trademark was granted by the U.S.  Patent and Trademark  Office on June 18,
1996.

      We have  applied  for  trademarks  of the  names  "Knockout"  (Serial  No.
78355935)  and   "Encapsulation"   (Serial  No.   78502945).   These   trademark
applications are pending with the U.S. Patent and Trademark Office.

      Our patents,  patent licenses and similar arrangements are material to our
business and will be defended  against apparent  infringements.  Our brand names
and trademarks are highly important to our business, and we will pursue a course
of vigorous action against apparent infringements.

EMPLOYEES

      As of May 12,  2006,  we had eleven full time  employees  and no part time
employees. We consider our relations with our employees to be good.


                                       6
<PAGE>

RISK FACTORS

OUR FINANCIAL  STATUS  CREATES DOUBT WHETHER WE WILL CONTINUE AS A GOING CONCERN
FOR MORE THAN 12 MONTHS FROM THE DATE OF THIS REPORT, AND, IF WE DO NOT CONTINUE
AS A GOING CONCERN, INVESTORS WILL LOSE THEIR ENTIRE INVESTMENT.

      For the fiscal year ended  December 31,  2005,  the Company had revenue of
$1.9  million,  compared  with  revenue of  $679,000  for the fiscal  year ended
December 31, 2004. We incurred a net loss of $17.4 million for 2005,  with a net
loss available to common  shareholders  of $19.7 million after  reflecting  $2.3
million in dividends to preferred shareholders. For 2004, we incurred a net loss
of $12.6  million,  with a net loss  available to common  shareholders  of $14.2
million after reflecting $1.6 million in dividends to preferred shareholders. At
December  31,  2005,  we had a working  capital  deficiency  of  $3,869,064,  an
accumulated deficit of $31,724,586,  and we are currently in default of interest
payments  required under our outstanding 11% Senior Secured Note. The failure to
pay  interest  when due on the 11% Senior  Secured Note also caused a default on
our outstanding  16.66% Senior Convertible Notes. As a result of these defaults,
the debt holders have the right at any time to declare the full principal amount
of the debt,  together with interest and other amounts owing in respect thereof,
immediately due and payable in cash. If the holder of our outstanding 11% Senior
Secured Note exercises its right to accelerate our payment obligations, we would
be required to repay 115% of the  outstanding  principal  amount and,  beginning
five days after the date of default of October 5, 2005,  the interest rate would
accrue at the rate of 20% per annum or such  lower  maximum  amount of  interest
permitted to be charged under  applicable law. If the holders of our outstanding
16.66% Senior  Convertible  Notes exercise their right to accelerate our payment
obligations,  we would be required to pay interest on the outstanding  principal
and unpaid interest plus interest thereon beginning seven trading days after the
date of default of October 5, 2005 at the lower of 18% per annum or the  highest
rate permitted by law. If any of our debt holders exercise their rights we could
be forced into  bankruptcy.  As a result of our  continuing  losses and negative
cash flows, our independent registered public accounting firm, BDO Seidman, LLP,
issued a "going concern" opinion in connection with their audit of our financial
statements  for the  year  ended  December  31,  2005.  This  opinion  expressed
substantial  doubt as to our ability to continue as a going concern.  Because of
these conditions, we will require additional working capital to develop business
operations.  We intend  to raise  additional  working  capital  through  private
placements of debt or equity securities. There are no assurances that we will be
able to achieve a level of revenues  adequate to generate  sufficient  cash flow
from  operations  or obtain  additional  financing  through  private  placements
necessary to support our working capital requirements. No assurance can be given
that  additional  financing  will  be  available,  or if  available,  will be on
acceptable terms.  These conditions raise substantial doubt about our ability to
continue as a going concern.  If adequate working capital is not available,  the
Company may be forced to discontinue operations,  which would cause investors to
lose their entire investment.

NOT HAVING  SUFFICIENT  ACCESS TO CAPITAL  WOULD  PREVENT US FROM  MARKETING  OR
EXPANDING  OUR PRODUCT LINE.  IN ADDITION,  SIGNIFICANT  INFUSIONS OF ADDITIONAL
CAPITAL  MAY RESULT IN  DILUTION  TO YOUR  OWNERSHIP  AND  VOTING  RIGHTS IN OUR
SECURITIES.

      Our business plan  contemplates  a rapid rollout of our cleaning  products
through multiple channels, which will require significant capital. We expect our
business plan will require  approximately $15 million in additional capital over
the next 12 to 18 months. We may not be able to obtain  additional  financing in
sufficient  amounts or on acceptable  terms when needed,  which could  adversely
affect our operating  results and  prospects.  If we cannot raise the additional
capital  required to implement our business  plan,  we will have to  discontinue
operations.  Further  additional  debt  financing  must be repaid  regardless of
whether or not we generate  profits or cash flows from our business  activities.
Equity financing may result in dilution to existing stockholders and may involve
securities  that have rights,  preferences or privileges  that are senior to our
common stock.

OUR AUDITORS HAVE IDENTIFIED  MATERIAL WEAKNESSES IN THE DESIGN AND OPERATION OF
OUR  INTERNAL  CONTROLS,  WHICH,  IF NOT  PROPERLY  REMEDIATED,  COULD RESULT IN
MATERIAL MISSTATEMENTS IN OUR FINANCIAL STATEMENTS IN FUTURE PERIODS.

      In connection with both our 2005 and 2004 year-end audits, our independent
registered public accounting firm identified  material  weaknesses in the design
and operation of our internal  controls.  A material  weakness is defined by the
Public  Company  Accounting  Oversight  Board  (United  States) as a significant
deficiency,  or combination of  significant  deficiencies,  that results in more
than a remote  likelihood that a material  misstatement of the annual or interim
financial statements will not be prevented or detected. A significant deficiency
is a control deficiency, or combination of control deficiencies, that results in
more than a remote  likelihood that a misstatement  of the financial  statements
that is more than  inconsequential  will not be prevented or detected. A control
deficiency  exists  when the  design or  operation  of a control  does not allow
management or  employees,  in the normal  course of  performing  their  assigned
functions, to prevent or detect misstatements on a timely basis.

                                       7
<PAGE>

      In connection  with our 2004  year-end  audit and the  preparation  of our
quarterly reviews during 2005, our independent registered public accounting firm
identified  three  material  weaknesses  relating to our  internal  controls and
procedures. These material weaknesses were (1) inadequate preparation of account
reconciliations  on a timely basis;  (2) inadequate  controls over the inventory
system resulting in errors in inventory costing; and (3) an inadequate system to
identify, track and properly record stock compensation.

      The material  weaknesses  identified by our independent  registered public
accounting firm as of December 31, 2005 related to a lack of review and analysis
of significant  contracts and transactions,  such as debt and equity agreements,
to determine the appropriate accounting treatment.

      These  weaknesses  are  attributable  to the lack of staff  with  adequate
experience,  inadequate  supervision of financial  accounting  personnel and the
resignation of two chief  financial  officers during the second and third fiscal
quarters  of  2005.  Given  the  current  small  scale of our  operations,  upon
identification  of these  problems in our  internal  control  structure,  senior
management  of  the  Company  was  able  to  closely   review  all   significant
transactions  during the reporting periods in order to ensure that the Company's
financial statements complied with GAAP.

      In order to address the  deficiencies  described  above and to improve our
internal  disclosure and control procedures for future periods, we are searching
for a new chief  financial  officer and have  retained  accounting  support from
outside  consultants to bridge the gap until a permanent chief financial officer
is  hired.  While we have not yet hired a new chief  financial  officer,  in the
fourth  quarter of 2005 we hired  outside  consultants  to review our  financial
reporting  and internal  controls and oversee the financial  reporting  process,
including the implementation of improvements in these areas.

      These steps constitute  significant  changes in internal controls that are
reasonably  likely to  materially  affect our internal  control  over  financial
reporting.  We will  continue to evaluate the  effectiveness  of our  disclosure
controls and internal controls and procedures on an ongoing basis, and will take
further  action  as  necessary.  If we are not able to  adequately  address  the
material  weaknesses  in our internal  controls,  it is possible that a material
misstatement of our annual or interim financial statements will not be prevented
or detected.  Any failure in preventing or detecting a material  misstatement of
our annual or interim  financial results could have a material adverse effect on
our stock price and on our results of operations.

FAILURE TO ACHIEVE  MARKET  ACCEPTANCE  OF OUR PRODUCTS  WOULD RESULT IN LACK OF
REVENUES.

      Our business is primarily based on a new line of industrial, household and
automobile cleaning products.  There is no assurance that our products will gain
wide consumer  acceptance or any acceptance.  Market  acceptance of our products
may take a long  time.  The  introduction  of a new brand  generally  requires a
minimum of twelve to eighteen  months  before a new product will receive  market
acceptance  from  consumers  and  retailers.  If  our  products  do  not  gain a
sufficient  level of  consumer  acceptance,  our  revenues  could  be  adversely
affected which would have a material impact on our business.

OUR EXCLUSIVE  ENDORSEMENT  AND  LICENSING  ARRANGEMENT  WITH GEORGE  FOREMAN IS
SUBJECT TO TERMINATION IN CERTAIN INSTANCES, WHICH COULD RESULT IN A SUBSTANTIAL
LOSS OF REVENUES FROM OUR PRODUCTS.

      We have entered into an exclusive  endorsement  and licensing  arrangement
with George Foreman,  the boxing and marketing  personality.  Under the terms of
this  arrangement,  we are  obligated  to make certain  minimum  payments to Mr.
Foreman.  Failure to meet these  payments  would  result in a default  under the
contract.  If the license  terminates,  we would no longer have the right to use
the name and likeness of Mr.  Foreman and would be unable to sell products under
the George Foreman label,  which we expect to account for  substantially  all of
our  product  sales in the  immediate  future.  If this were to occur,  we could
likely experience a substantial loss of revenue from our products.

                                       8
<PAGE>

OUR INABILITY TO OBTAIN PATENTS ON OUR  TECHNOLOGY  WOULD  ADVERSELY  AFFECT OUR
ABILITY TO MARKET OUR PRODUCTS.

      Failure to obtain additional patents on our Encapsulation technology might
adversely affect our ability to market our cleaning products. This technology is
the subject of pending patent  applications  with the U.S.  Patent and Trademark
Office.  If  these  patents  are not  granted,  it may  reduce  our  ability  to
effectively market our products in a distinctive manner.

OUR DEPENDENCE ON A SINGLE CELEBRITY FOR MARKETING PURPOSES MAKES THE SUCCESS OF
OUR BUSINESS  SUBJECT TO THE RISKS OF DEATH OR  DISABILITY  OF THE  CELEBRITY OR
CONVICTION OF THE CELEBRITY IN A CIVIL OR CRIMINAL MATTER.

      We are  highly  dependent  upon  George  Foreman to  generate  significant
awareness  for  our  cleaning  brands.  Extenuating  circumstances  and  events,
including  death,  illness,  or civil or criminal  penalties  filed  against Mr.
Foreman could have a significant adverse impact on the business. Furthermore, we
are  subject  to risks  associated  with  having  our  brand  identified  with a
celebrity personality. If consumer views toward Mr. Foreman should significantly
change, our brand value could be severely  impacted,  which could be detrimental
to our business.

THE  SUCCESS OF OUR  ADVERTISING  AND  MARKETING  EFFORTS  AND THEIR  ABILITY TO
PRODUCE SALES ARE UNCERTAIN.

      Our  business  is  directly  affected  by the  success  or  failure of our
advertising and promotional  efforts.  Future  advertising  efforts by us may be
costly and may not result in anticipated  sales.  Failure to realize  sufficient
revenue from our  advertising and  promotional  expenditures,  together with the
possible  adverse  impact on our brand value and inability to gain market share,
would have a negative impact on our revenue and results of operations.

INTENSE  COMPETITION MAY MAKE IT DIFFICULT OR IMPOSSIBLE TO GENERATE  SUFFICIENT
DEMAND FOR OUR PRODUCTS TO MAKE A PROFIT.

      We face intense  competition  from large  multinational  manufacturers  of
industrial,  household  and  automotive  cleaning  products,  as well as smaller
specialty  manufacturers.  The  industrial,  household and  automotive  cleaning
markets  are mature  markets  with  modest  overall  growth  anticipated.  Large
multinational  companies with popular brand products control a substantial share
of both markets.  We compete  within these  markets based  primarily on products
sold, price, quality, service and distribution. From time to time, the intensity
of competition  results in price discounting in a particular industry or region.
Such price  discounting  puts  pressure  on margins  and can  negatively  impact
operating  profit.  Our  prospects  depend on our ability to increase our market
share.  An  unexpected  inability to gain market share or meet our business plan
could  result  from  pricing  or  product  strategies  pursued  by  competitors,
unanticipated product or manufacturing  difficulties,  or a failure to price the
product competitively,  leading to severe downward pressure on the prices of our
products. If this occurs, our revenue may be materially adversely affected.

INABILITY TO SATISFY  DEMAND FOR OUR PRODUCT  WOULD REDUCE OUR ABILITY TO GAIN A
FOOTHOLD IN THE MARKET.

      Even if our  cleaning  products do gain  industrial,  consumer  and retail
acceptance,  there is no assurance that we will be able to successfully meet the
market's  demand should our  manufacturers'  capacity become limited or if we do
not have sufficient  capital to pay  manufacturing  costs. If we cannot meet the
demand for our  products,  our  ability to gain a foothold  in the market may be
compromised,  with  consumers  turning to other  products  that are available in
sufficient numbers.

                                       9
<PAGE>

IF OUR  SUPPLIERS ARE UNABLE TO DELIVER  PRODUCT,  OUR REVENUE,  AND  ULTIMATELY
PROFITS, WOULD BE REDUCED.

      We are  highly  dependent  on  third  party  vendors  to  manufacture  and
distribute  our cleaning  products.  The  availability  of production  capacity,
fluctuations in the manufacturing yields at third parties' facilities,  the cost
of raw materials,  and quality  control of suppliers are all risks.  There is no
assurance  that  these  vendors  or our  manufacturers  will  be  able  to  meet
production  demands or quality  control  standards,  the  failure of which could
significantly impact our results of operations.

THE DEPARTURE OF KEY  PERSONNEL  COULD  ADVERSELY  AFFECT OUR ABILITY TO RUN OUR
BUSINESS.

      Our future success is dependent on the personal  efforts,  performance and
abilities of key  management,  including  John  Bellamy,  our Chairman and Chief
Executive Officer, and Dr. Isaac Horton, III, a consultant and our Secretary and
our Vice  Chairman.  Both of these  individuals  are integral parts of our daily
operations.  On June 2, 2005,  Oscar  Turner  resigned  from his  positions as a
director,  our  Chief  Financial  Officer,   Principal  Accounting  Officer  and
Treasurer,  and on June 21, 2005, Ahmed Shaikh resigned from his position as our
Chief  Operating  Officer.  On June 2,  2005,  we hired  Richard S. Han as Chief
Financial  Officer,  and Mr. Han subsequently  resigned on October 27, 2005. Mr.
Bellamy is presently  acting as our  Principal  Financial  Officer.  On June 21,
2005,  we hired  David E.  Malone as Chief  Operating  Officer,  and Mr.  Malone
subsequently  was  terminated  on  December  7,  2005.  We do  not  yet  have  a
replacement  for Mr.  Malone.  To our  knowledge,  none of our  other  executive
officers  currently  have  any  plans to  retire  or leave  our  company  in the
forseeable  future.  We have an  employment  agreement  with Mr.  Bellamy  and a
consulting agreement with Dr. Horton, and we had employment  agreements in place
for Messrs. Turner, Shaikh, Han and Malone. Further, although we have employment
or  consulting  agreements  in  place  with  our key  management  personnel,  as
demonstrated  by the  resignations  of  Messrs.  Turner,  Shaikh and Han and the
termination of Mr. Malone,  such agreements do not ensure that such persons will
remain with our company.  We do not maintain any key life insurance policies for
any of our  executive  officers or other  personnel.  The  turnover in our Chief
Financial  Officer  position  has  contributed  to  existing  weaknesses  in our
disclosure  controls  and  procedures.  The loss of other  members of our senior
management could significantly  impact our business until adequate  replacements
can be identified and put in place.

FAILURE TO MAXIMIZE OR TO SUCCESSFULLY  ASSERT OUR INTELLECTUAL  PROPERTY RIGHTS
COULD ADVERSELY AFFECT OUR COMPETITIVENESS.

      We have one patent granted,  twelve patent applications  pending and trade
secrets,  proprietary  technology and licensing  agreements in place. We believe
that  implementation  of our business plan is highly dependent upon successfully
protecting our intellectual  property rights. There is no assurance that we will
be able to protect  these  rights if  challenged,  or that these  rights will be
effective in enabling us to achieve our objectives.

OUR INABILITY TO MAINTAIN KEY  TRADEMARKS OR LICENSES IN EFFECT WOULD  ADVERSELY
AFFECT OUR BUSINESS.

      We own and use  trademarks and operate under a trademark and other license
agreements. We believe that these trademarks and licenses have significant value
and are  instrumental  in our  ability  to create  and  sustain  demand  for our
products.  There is no assurance that these trademarks and licensing  agreements
will  remain in effect and  enforceable  or that any  license  agreements,  upon
expiration,  can be renewed on  acceptable  terms or at all.  In  addition,  any
future disputes  concerning  these trademarks and licenses may cause us to incur
significant  litigation  costs  or  force  us to  suspend  use of  the  disputed
trademarks.

WE HAVE A SUBSTANTIAL  NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
OF  OUTSTANDING  PREFERRED  STOCK AND WARRANTS  WHICH WILL CAUSE  IMMEDIATE  AND
SUBSTANTIAL  DILUTION TO OUR EXISTING  COMMON  STOCKHOLDERS  UPON  CONVERSION OR
EXERCISE.

      As of May 12,  2006,  we had 796,568  shares of Series A  Preferred  Stock
outstanding that will  automatically  convert into 127,450,880  shares of common
stock upon  effectiveness of an amendment to our Certificate of Incorporation to
increase the number of shares of common stock that we are authorized to issue to
300,000,000  shares.  As of May 12,  2006,  we had  116,754  shares  of Series B
Preferred  Stock  outstanding  that will  automatically  convert into 18,680,640
shares of common stock upon effectiveness of the amendment to our Certificate of
Incorporation.  On  February 1, 2005,  holders of a majority of our  outstanding
voting capital stock acted by written  consent and approved the amendment to our
Certificate of  Incorporation  to increase the number of our  authorized  common
stock.  The  amendment to our  Certificate  of  Incorporation  will be effective
approximately  20 days after the initial mailing of an information  statement to
our  shareholders  notifying them of the amendment.  As of May 12, 2006, we also
had outstanding warrants to purchase 7,050,775 shares of our common stock. As of
May 12, 2006, we had 12,015,136  shares of common stock issued and  outstanding.
Upon  conversion and exercise of the  outstanding  shares of preferred stock and
the outstanding  warrants,  there will be an estimated 165,197,431 shares of our
common stock  outstanding.  Conversion of the outstanding  Series A and Series B
Preferred  Stock and exercise of outstanding  warrants will cause  immediate and
substantial dilution to the existing holders of our common stock.

                                       10
<PAGE>

THE LIMITED MARKET FOR OUR COMMON STOCK WILL MAKE OUR STOCK PRICE MORE VOLATILE;
THEREFORE YOU MAY HAVE DIFFICULTY SELLING OUR COMMON STOCK.

      The market for our common stock is limited,  and we cannot assure you that
a larger  market will ever be developed  or  maintained.  Currently,  our common
stock is traded on the OTC Bulletin Board.  Market  fluctuations and volatility,
as well as general economic,  market and political conditions,  could reduce our
market price.  As a result,  this may make it difficult or impossible for you to
sell our common stock.

FUTURE SALES UNDER RULE 144 MAY IMPAIR OUR ABILITY TO RAISE  ADDITIONAL  CAPITAL
THROUGH THE SALE OF EQUITY  SECURITIES  WHEN  NEEDED TO FINANCE  OUR  CONTINUING
OPERATIONS.

      As of May 12, 2006,  we had  12,015,136  shares of common stock issued and
outstanding, of which we believe approximately 3,014,063 shares to be restricted
shares.  Rule  144  provides,  in  essence,  that a person  holding  "restricted
securities"  for a period of one year may sell only an amount every three months
equal to the greater of (a) one percent of a  company's  issued and  outstanding
shares, or (b) the average weekly volume of sales during the four calendar weeks
preceding the sale. The amount of "restricted  securities" which a person who is
not an affiliate of our company may sell is not so limited, since non-affiliates
may sell without volume  limitation  their shares held for two years if there is
adequate current public information available concerning our company. In such an
event,  "restricted  securities"  would be eligible for sale to the public at an
earlier  date.  We  believe  that most if not all of the  12,015,136  issued and
outstanding shares of our common stock are owned by non-affiliates and have been
held for over two years. The sale in the public market of these shares of common
stock may adversely affect prevailing market prices of our common stock.

OUR  COMMON  STOCK IS  SUBJECT  TO THE  "PENNY  STOCK"  RULES OF THE SEC AND THE
TRADING MARKET IN OUR  SECURITIES IS LIMITED,  WHICH MAKES  TRANSACTIONS  IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.

      The  Securities  and  Exchange  Commission  has adopted  Rule 3a51-1 which
establishes the definition of a "penny stock," for the purposes  relevant to us,
as any equity  security  that has a market price of less than $5.00 per share or
with an  exercise  price of less  than  $5.00  per  share,  subject  to  certain
exceptions.  For any transaction  involving a penny stock,  unless exempt,  Rule
15g-9 requires:

      o     that a broker or dealer approve a person's  account for transactions
            in penny stocks; and
      o     the broker or dealer  receive from the investor a written  agreement
            to the  transaction,  setting forth the identity and quantity of the
            penny stock to be purchased

      In order to approve a person's  account for  transactions in penny stocks,
the broker or dealer must:

      o     obtain financial information and investment experience objectives of
            the person; and
      o     make a  reasonable  determination  that  the  transactions  in penny
            stocks are  suitable  for that person and the person has  sufficient
            knowledge  and  experience  in  financial  matters  to be capable of
            evaluating the risks of transactions in penny stocks.

      The broker or dealer  must also  deliver,  prior to any  transaction  in a
penny stock, a disclosure  schedule  prescribed by the SEC relating to the penny
stock market, which, in highlight form:

                                       11
<PAGE>

      o     sets  forth  the  basis on  which  the  broker  or  dealer  made the
            suitability determination; and

      o     that the broker or dealer received a signed,  written agreement from
            the investor prior to the transaction.

      Generally,  brokers  may  be  less  willing  to  execute  transactions  in
securities  subject to the "penny stock" rules.  This may make it more difficult
for  investors  to dispose of our common stock and cause a decline in the market
value of our stock.

      Disclosure  also has to be made  about  the  risks of  investing  in penny
stocks  in  both  public  offerings  and in  secondary  trading  and  about  the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities,  and the rights and remedies available to
an  investor  in cases of fraud in penny stock  transactions.  Finally,  monthly
statements  have to be sent  disclosing  recent price  information for the penny
stock held in the account and information on the limited market in penny stocks.

ITEM 2. DESCRIPTION OF PROPERTY.

      We  lease  our  office  space at 100 W.  Whitehall  Avenue  in  Northlake,
Illinois.  We  recently  renegotiated  the lease for a term of  eighteen  months
effective December 1, 2005 to July 31, 2007. We relinquished our warehouse space
since it is no longer needed for retail distribution  purposes. The company will
utilize third party warehouse space in the future.  The base rent is $15,000 per
month plus our  appropriate  share of common area costs,  insurance and property
taxes. The lease does not have specific renewal provisions. At the expiration of
the lease  term,  we  believe  we will be able to find an  adequate  replacement
facility if required.

ITEM 3. LEGAL PROCEEDINGS.

      On December 9, 2005, former Knockout Holdings, Inc. executive David Malone
filed a demand for  arbitration  with JAMS, The  Resolution  Experts in Chicago,
Illinois,  Case No.  1340005682.  In the demand,  Mr. Malone asserts a claim for
breach of contract  against  Knockout  Holdings,  Inc.,  John  Bellamy and Isaac
Horton in relation to his  termination  of  employment.  Mr. Malone alleges that
Knockout Holdings, Inc. terminated him without cause and, therefore,  Mr. Malone
is  entitled  to his base salary for 12 months  ($240,000.00),  an annual  bonus
equal to 50% of his base salary,  prorated  ($34,800) and additional  percentage
compensation  equal to 1 1/2% of Excess Gross Sales  pursuant to the  employment
agreement.  Further,  Mr. Malone is seeking a  declaration  that pursuant to the
employment  agreement  he is  entitled to stock  options to  purchase  8,500,000
shares of common  stock from Mr.  Bellamy and Mr.  Horton who agreed to offer up
their own stock options contingent upon certain conditions being met pursuant to
the  employment   agreement.   Knockout  Holdings,   Inc.  denies  Mr.  Malone's
allegations  and  denies  that he is  entitled  to  recover  any  sums  from the
respondents.  Knockout  Holdings,  Inc.  believes  it  terminated  Mr.  Malone's
employment  for cause  pursuant to the terms of his  employment  agreement.  The
respondents  filed a response to the  arbitration  demand on March 29, 2006. The
parties are  scheduled  to exchange  discovery-relevant  documents  by April 19,
2006. The discovery cut-off date is May 26, 2006 and the arbitration  hearing is
set for July 11 and 12, 2006.  The Company and its legal  counsel are  currently
unable to assess the outcome of this matter at this time. The Company intends to
vigorously defend its position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

      No matter was  submitted to a vote of security  holders  during the fourth
quarter of the fiscal year covered by this report.



                                       12
<PAGE>


                                     PART II

ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

      Our common stock is currently  quoted on the OTC Bulletin  Board under the
symbol KNOH.OB.  For the periods  indicated,  the following table sets forth the
high and low bid  prices  per  share of common  stock.  These  prices  represent
inter-dealer  quotations without retail markup,  markdown, or commission and may
not necessarily represent actual transactions.

<TABLE>
<CAPTION>

                                                   Fiscal 2006         Fiscal 2005          Fiscal 2004
                                               -------------------- ------------------- ---------------------
      Fiscal Quarter                           High       Low       High      Low       High       Low
      -------------------------------------------------------------------------------------------------------
<S>                                            <C>        <C>       <C>       <C>       <C>        <C>
      First Quarter Ended March 31             $0.42      $0.08               $2.20     $0.10      $0.10
      Second Quarter Ended June 30             ---        ---       $2.70     $0.97     $0.15      $0.10
      Third Quarter Ended September 30         ---        ---                 $1.20     $0.12      $0.10
      Fourth Quarter Ended December 31         ---        ---       $0.62     $0.11     $3.30      $0.10

</TABLE>

HOLDERS

      As of May 12, 2006, our shares of common stock were held by  approximately
211  shareholders  of  record.  The  transfer  agent  of  our  common  stock  is
Continental Stock Transfer and Trust Company.

DIVIDENDS

      We have not declared any dividends on our common stock to date. We have no
present  intention  of paying  any cash  dividends  on our  common  stock in the
foreseeable  future,  as we intend to use earnings,  if any, to generate growth.
The payment by us of dividends on our common stock, if any, in the future, rests
within the  discretion  of our Board of Directors  and will depend,  among other
things, upon our earnings, our capital requirements and our financial condition,
as well as other relevant factors.  There are no restrictions in our articles of
incorporation or bylaws that restrict us from declaring  dividends on our common
stock.

RECENT SALES OF UNREGISTERED SECURITIES

      We sold the  following  equity  securities  during the  fiscal  year ended
December 31, 2005 that were not registered  under the Securities Act of 1933, as
amended (the "Securities Act").

      All of the below unregistered sales of securities was made pursuant to the
exemption  from  registration  requirements  provided  by  Section  4(2)  of the
Securities Act and/or Rule 506, promulgated thereunder.  Except as expressly set
forth  below,  the  individuals  and  entities  to whom we sold  securities  are
unaffiliated with us. For each of the below sales of unregistered securities, no
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited  number of persons,  all of whom were
accredited investors, business associates of ours or our executive officers, and
transfer  was  restricted  by us in  accordance  with  the  requirements  of the
Securities  Act. Each of the below  security  holders who were not our executive
officers represented that they are accredited and sophisticated investors,  that
they are capable of analyzing the merits and risks of their investment, and that
they understand the speculative nature of their investment.  Furthermore, all of
the  below-referenced   persons  had  access  to  our  Securities  and  Exchange
Commission filings.

      On January 10, 2005,  we sold an  aggregate  of 69,624  shares of Series B
Preferred Stock and warrants to purchase  1,113,984 shares of common stock to 17
accredited investors for aggregate gross proceeds of $3,265,000.  On January 17,
2005,  we sold an  aggregate  of 47,130  shares of Series B Preferred  Stock and
warrants to purchase  754,087 shares of common stock to 22 accredited  investors
for aggregate gross proceeds of $2,210,000. We sold shares of Series B Preferred
Stock for a per share  purchase  price of  $46.8933.  For each share of Series B
Preferred Stock purchased,  investors received warrants to purchase 16 shares of
common  stock.  The  warrants  are  exercisable  for five years from the date of
issuance at a price of $2.25 per share.  Each share of Series B Preferred  Stock
will automatically convert into 160 shares of our common stock immediately after
we amend our  Certificate  of  Incorporation  to  authorize  the  issuance  of a
sufficient  number of shares to complete the conversion.  These  securities were
sold  pursuant  to the  exemption  from  registration  requirements  provided by
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.  On July
12, 2005 the Company  amended these  warrants by reducing the exercise  price to
$.50 per share.

                                       13
<PAGE>

      On May 2, 2005, we sold a $3,000,000 11% Senior Secured Note and a warrant
to purchase 700,000 shares of our common stock to one accredited  investor.  The
warrants  were  subsequently  cancelled on August 2, 2005, in exchange for 4,375
Shares of Series A Preferred  Stock,  contributed  by the  Company's  CEO,  John
Bellamy. The first 15 months of interest on the 11% Senior Secured Note was held
in an escrow account to be disbursed as quarterly  interest payments become due,
and  $364,453  was  subsequently  released in September  2005 as  prepayment  of
outstanding  principal,  reducing the note balance to  $2,635,547.  The terms of
this debt originally  called for interest at a rate of 11% with interest payable
quarterly.  In September  2005, the Company entered into an amended and restated
agreement with the 11% debt holder, which (1) granted the debt holders the right
to convert at their option the  principal  amount of the note into shares of the
Company's common stock at a conversion price of $0.50, (2) required funds in the
amount of  $364,453  which  were  being  held in escrow  to pay  interest  to be
released to the debt holders as a pre-payment of the outstanding principal,  (3)
required a  shareholder  of the Company to transfer to the debt  holders  18,750
shares of Series A preferred  stock,  (4) reduced the exercise  price of 364,720
warrants to purchase common stock from $0.50 to $0.30 and (5) terminated the 11%
debt  holders'  security  interest  in  substantially  all of the  assets of the
Company.  Under the original and amended terms, after expiration of the first 15
months,  we have the option to pay  interest in shares of common stock at a rate
equal to 85% of the volume weighted average price of the common stock for the 20
trading days immediately prior to the applicable interest payment date. However,
payment in shares of common  stock may only occur if during the 20 trading  days
prior to the applicable  interest  payment date certain equity  conditions  have
been met,  the  payment  in shares of common  stock  would not exceed 25% of the
trading  volume for any of the previous  ten trading  days and provided  that we
have given the holder  written  notice  thereof  within ten  trading  days of an
interest  payment date. In addition,  beginning 15 months after  issuance of the
Note,  on the first  business  day of each  month we must  redeem  1/21st of the
original  principal  amount of the Note plus accrued and unpaid interest and any
other  amounts then owing to the holder under the Note.  The monthly  redemption
amount may be paid in cash or by the  issuance of common stock on the same terms
of interest payments described above. These securities were sold pursuant to the
exemption  from  registration  requirements  provided  by  Section  4(2)  of the
Securities Act and Rule 506 promulgated thereunder.

      On September  15,  2005,  we sold an  aggregate  principal  amount of $2.8
million  of  16.66%  Senior  Convertible  Notes  to  accredited  investors.  The
principal  amount and  interest at a rate of 16.66% per annum are payable on the
16.66%  Senior  Convertible  Notes on March 31,  2007.  In  connection  with the
issuance of this debt, a shareholder of the Company, Kevin Waltzer,  contributed
59,302 shares of Series A preferred  stock to the Company which were then issued
to the 16.66%  debt  holders.  Any  outstanding  principal  amount  and  accrued
interest on the 16.66% Senior  Convertible  Notes are convertible into shares of
the our common stock at the option of the holder at a  conversion  price of $.50
per share,  subject to  adjustment in the event we issue common stock at a price
less  then  the  then  effective   conversion  price  while  the  16.66%  Senior
Convertible  Notes are  outstanding.  These securities were sold pursuant to the
exemption  from  registration  requirements  provided  by  Section  4(2)  of the
Securities Act and Rule 506 promulgated thereunder.

      During 2005 we issued warrants to purchase  150,000 shares of common stock
to consultants as compensation for services  received.  As the fair market value
of these services was not readily determinable, these services were valued based
on the fair market value of the  warrants at the time of issuance,  which ranged
from  $1.45 to $1.75  per  warrant.  The  warrants  have a term of ten years and
exercise  prices  ranging from $0.293 to $1.00 per share.  These  warrants  were
issued  pursuant to the exemption  from  registration  requirements  provided by
Section 4(2) of the Securities Act.

      During  2005 we  issued  8,750  shares  of common  stock in  exchange  for
services  rendered.  As the fair market  value of the  services  was not readily
determinable,  the value  recorded for the services was based on the fair market
value of the common stock issued which totaled  $14,437.  These shares of common
stock were  issued  pursuant to the  exemption  from  registration  requirements
provided by Section 4(2) of the Securities Act.


                                       14
<PAGE>


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

FORWARD-LOOKING STATEMENTS

      The  following  discussion  and analysis of our  financial  condition  and
results  of  operations  should  be  read  in  conjunction  with  our  financial
statements  and the  related  notes  thereto  contained  elsewhere  in this Form
10-KSB. This discussion contains  forward-looking  statements that involve risks
and uncertainties.  All statements regarding future events, our future financial
performance and operating results, our business strategy and our financing plans
are forward-looking  statements. In many cases, you can identify forward-looking
statements  by  terminology  such  as  "may,"  "should,"  "expects,"  "intends,"
"plans," "anticipates,"  "believes,"  "estimates,"  "predicts,"  "potential," or
"continue" or the negative of such terms and other comparable terminology. These
statements  are only  predictions.  Known and unknown risks,  uncertainties  and
other factors  could cause our actual  results to differ  materially  from those
projected in any forward-looking statements. In evaluating these statements, you
should  specifically  consider various factors,  including,  but not limited to,
those set forth under "Risk  Factors"  appearing  under "Item 1.  Description of
Business." and elsewhere in this report on Form 10-KSB.

      This  discussion  should  not be  construed  to  imply  that  the  results
discussed  herein  will  necessarily  continue  into  the  future,  or that  any
conclusion  reached herein will  necessarily  be indicative of actual  operating
results  in the  future.  Such  discussion  represents  only  the  best  present
assessment of our management.

BACKGROUND

      Knockout   Holdings,   Inc.  is  a  marketing  company  committed  to  the
development   of   celebrity   products   that  are  safe  for   human  use  and
environmentally  friendly.  We are currently  engaged in the business of selling
cleaning products that are based on a proprietary "encapsulation" technology. We
operate under an exclusive license  agreement with George Foreman,  the two-time
World  Heavyweight  boxing  champion,  and sell our products  primarily  through
retail stores  throughout the United  States.  Our product  offerings  currently
consist of industrial,  household and automotive  cleaning  products for retail,
institutional and commercial use. The George Foreman "Grill" cleaner product was
sold  minimally  during 2005, and the Company is in the process of a 2006 launch
of the grill cleaner as an extension of our product line.

      Our  wholly  owned  subsidiary,  The  Knockout  Group,  Inc.,  a  Delaware
corporation, was formed in April 2003 and began operations the same year. All of
our business operations are through The Knockout Group, Inc. The Knockout Group,
Inc. has a limited operating history and operated as a development stage company
until  August  2004.  In August 2004,  we received  initial  orders from several
retailers  and by year-end  2004 our  products  were being sold in major  retail
stores across the country.  After less than  acceptable  sales in retail outlets
over several months,  we completed concept testing of our products in April 2005
and  conducted  various  focus groups and consumer  testing  activities  to this
extent.  We launched a successful  momentum market campaign in late 2005 to test
our products  utilizing a variety of advertising and promotional  initiatives in
Southern  California  to  determine  the  velocity  of product  sales from store
shelves.  The campaign tested pricing  strategies against  competitive  products
utilizing coupons, in-store promotions,  celebrity appearances, media buys, etc.
After the success of the campaign,  we developed a  comprehensive  regional roll
out  strategy  including  media and  promotional  plans to support the sales and
marketing of our products into retail channels based on lessons learned from the
campaign.

      To help support the costs  associated with the planned  regional roll out,
in December 2005 we completed the development of a commercial and  institutional
line of  environmentally  friendly  cleaning  products and adopted a strategy to
focus on  governmental  and  industrial  sales  during  2006.  Since the product
development was initiated in December, the Company did not generate contracts or
revenue from industrial and governmental sales during 2005.  Although we believe
there is a substantial  market for effective,  non-toxic,  environmentally  safe
cleaning products, there is no assurance that we will be successful in acquiring
contracts or gaining distribution through these channels.

      We are planning a retail  initiative  that will rely on sales based on the
credibility  of the products  being on the shelves of certain  retailers  rather
than relying solely on mass media  advertising.  We expect this  initiative will
occur prior to our planned  regional roll out strategy in the forth quarter 2006
to  grocery,  drug,  convenience  chains  and mass  retailers,  including  those
retailers that have discontinued  carrying our products and those that are still
carrying  them.  The  marketing  elements  of  the  initiative  will  include  a
combination   of  retailer  and   consumer   promotional   programs,   in  store
merchandising,  and Internet  marketing.  Media  activities  planned include the
launch of household and automotive infomercials, release of a news program which
highlights the impact of harmful chemicals, and radio and television advertising
and public  relations  activities.  An  essential  element of this  campaign  is
personal  appearances  by George  Foreman on local and national talk shows which
began in April 2005.

                                       15
<PAGE>

      We plan to initiate the sell-in of our automotive line to retailers in the
fourth  quarter of 2006. We believe our products have the same, or more cleaning
efficacy  as current  offerings  in the market  with the added  benefit of being
non-toxic  and  environmentally  safe.  We have  presented  our  commercial  and
institutional  product line to major  corporations,  governmental and industrial
targets and are in the early stages of this sell-in process.  However, we expect
our  automotive  products  will  gain  initial  distribution  in many  of  these
facilities  by  the  end  of  2006.  In  addition  to  our  current  commercial,
institutional,   household  and  automotive  offerings,   we  believe  that  our
proprietary  formulation  will enable us to  introduce  several new  products as
additional line extensions.  We are currently  exploring the  attractiveness  of
certain  distribution and marketing  arrangements  with third parties to enhance
distribution of our automotive products.

      We are also exploring strategic  acquisitions in the facilities management
and cleaning chemical  distribution industry that could provide distribution and
marketing  opportunities  for  our  cleaning  products  for  use in  industrial,
commercial and governmental applications.  There is no assurance that we will be
successful in acquiring targeted companies or gaining distribution through these
channels,  but we believe our products provide significant  benefits compared to
current competitive offerings.

      We currently  distribute  our products  solely in the  continental  United
States. We believe it is important to establish a strong initial presence in the
United States before  considering major  international  expansion.  However,  we
believe our celebrity  endorser has high name  recognition  and awareness  among
international  consumers.  As a result,  we intend to explore the possibility of
entering  into  marketing  and  distribution  arrangements  for our  products in
locations  outside  the  United  States  in the  long-term  future.  There is no
assurance that we will be successful in gaining distribution in these markets.

      We filed three patents with the U.S.  Patent and Trademark  Office related
to our proprietary  formulation and concentrate process, of which one patent has
been granted.  An  additional  ten patent  applications  were filed in the third
quarter of 2005 related to a variety of proprietary  cleaning  applications.  We
believe we have developed related  intellectual  property around these areas. If
we are granted  patents for the remaining  twelve filings or additional  patents
for future filings,  we believe this will have a substantial impact on our asset
quality and ability to leverage these assets in our marketing activities.  There
is no assurance that we will be granted  additional patent rights for current or
future  filings,  or if granted,  that such  patents  will not be  contested  by
others.

      From inception of The Knockout Group,  Inc. in April 2003 through December
31,  2005,  Knockout  Holdings,  Inc. and The  Knockout  Group Inc.  have raised
approximately $13.7 million through the issuance of convertible  preferred stock
and another $8.3 million through the issuance of debt with detachable  warrants,
including debt  convertible  into our common stock. We have incurred  cumulative
losses of $31.7 million through  December 31, 2005, at which date we had cash of
$791,011 and negative working capital of $3.7 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      The  following  are  some  of the  more  critical  judgment  areas  in the
application of accounting policies that currently affect our financial condition
and results of operations.

Use of Estimates

      Preparation of the  consolidated  financial  statements in accordance with
accounting   principles   generally  accepted  in  the  United  States  requires
management to make estimates and assumptions  affecting the reported  amounts of
assets,  liabilities,  revenues and expenses and related contingent liabilities.
On an on-going  basis,  the Company  evaluates its  estimates,  including  those
related to stock  compensation,  future cash flows  associated  with  impairment
testing for long-lived  assets, and accrued  liabilities.  The Company bases its
estimates on historical  experience  and on various other  assumptions  that are
believed to be reasonable  under the  circumstances.  Actual  results may differ
from these estimates under different assumptions or conditions.

                                       16
<PAGE>

Revenue Recognition

      Revenue is derived  primarily  from  product  sales and is recorded net of
provisions for discounts, returns, rebates to customers and other adjustments as
can be reasonably  determined.  We recognize revenue when all of the fundamental
criteria for revenue  recognition  have been met;  specifically,  when the sales
price is fixed and determined,  title and risk of loss transfer to the customer,
and collectibility is reasonably  assured.  All of these criteria are present at
the time of product shipment.

Impairment Charges

      Approximately  $3.1 million of our assets,  representing  56% of our total
assets at  December  31, 2004  consisted  of definite  lived  intangible  assets
relating to patents applied for and our licensing agreement with George Foreman.
We use a  non-discounted  cash flow analysis  method of assessing  impairment of
these definite  lived  intangible  assets.  Significant  management  judgment is
required in the  forecasting of future  operating  results which are used in the
preparation of the projected  non-discounted cash flows. Due to recurring losses
and  negative  cash flows from  operations,  in 2005 the Company  evaluated  its
trademarks,  patents and licensing fee for impairment.  To date, the Company has
not been  successful  in  achieving  its  financial  projections  and cash  flow
estimates.  Fair value was estimated using a discounted cash flow method.  Entry
into the retail market has required a  significantly  higher  investment than we
had initially anticipated.  As a result and based on our performance to date and
the lack of history of meeting our financial projections, we determined that the
trademarks,  patents  and  licensing  fee  were  impaired  and  we  recorded  an
impairment charge of $2.8 million for the year ended December 31, 2005.

Stock-Based Compensation

      Historically,  we have used stock  options,  warrants  and stock grants to
attract key employees and to pay for services provided by consultants,  advisors
and other professional services providers.  We will likely continue to use stock
based  compensation in this manner in future periods.  The Company  accounts for
such stock grants  (including grants to employees) in accordance with SFAS 123 -
Accounting  for Stock  Compensation.  As  required  under SFAS 123,  stock based
compensation  expense is  determined  based on the fair value of the  options or
warrants  granted.  We  determine  fair  value  by  applying  the  Black-Scholes
option-pricing model.  Significant assumptions used in calculating fair value by
applying a  Black-Scholes  option pricing model include (1) expected stock price
volatility,  (2) risk-free interest rate, (3) expected dividend rate and (4) the
expected  option or warrant  life.  During the year ended  December 31, 2005 and
2004, we granted warrants,  options,  and common stock to employees,  directors,
investors  and  consultants  for  services.  The  impact  of these  transactions
resulted in non-cash selling, general and administrative expense of $756,000 and
$4.6 million for the years ended December 31, 2005 and 2004, respectively.

Accounting for Debt Discount

      During the years ended December 31, 2005 and 2004, the Company issued both
convertible  debt and debt with  detachable  warrants.  When debt is issued with
detachable  warrants,  the  Company  determines  the value of these  warrants in
accordance  with a  Black-Scholes  option  pricing  model.  The  value  of these
warrants is then  recorded as a discount on the related  debt and  amortized  as
non-cash interest expense over the term of the debt.

      Also, for certain  convertible  debt issued by the Company,  this debt was
considered to have a beneficial  conversion  feature since the fair market value
of the common stock  issuable  upon  conversion  of the debt  exceeded the value
allocated to the debt on the date of issuance. The difference between the market
value of the shares issuable upon conversion and the value allocated to the debt
is considered to be the value of the  beneficial  conversion  feature,  which is
recorded as a discount on the related debt and  amortized  as non-cash  interest
expense over the term of the debt.

      As a result debt  discounts  resulted  from both  detachable  warrants and
beneficial  conversion  features  associated  with debt  issued by the  Company.
During the years ended December 31, 2005 and 2004, the Company incurred non-cash
interest  expense  of  $229,000  and  $983,000,  respectively.  Should  we issue
detachable  warrants with debt financing in the future or issue convertible debt
with beneficial conversion features, we may incur similar charges.

                                       17
<PAGE>

RESULTS OF OPERATIONS

      We generated sales of $1,883,202 and $679,008 for the years ended December
31, 2005 and 2004, respectively.  The increase in sales of $1,204,194,  or 177%,
from  2004 to 2005 is  attributed  to a full  year of  sales  activity  in 2005,
compared to five months of sales in 2004.  From our  inception  at April 9, 2003
until August 2004, we operated as a development  stage  company,  with our first
sales occurring in August 2004.

      Cost of sales totaled $2,364,474 and $451,977 for the years ended December
31, 2005 and 2004, respectively, increasing by $1,912,497, or 423%. The increase
in sales from 2004 to 2005 caused a corresponding  increase in cost of sales. If
sales prices  compared to cost were  consistent  between years,  the increase in
cost of sales  due to the  increase  in  sales  volume  would  be  approximately
$800,000. In addition to the $800,000 increase,  cost of sales increased by more
than the $300,000, as a result of the Company selling certain of its products at
reduced  margins  in order  to  reduce  inventory  in line  with its  rebranding
activities,  and  also  as the  Company  entered  the  wholesale  outlets.  Also
contributing  to  the  increase  in  cost  of  sales  is a  charge  in  2005  of
approximately  $550,000 for certain  inventory  that was deemed  obsolete due to
changes made to the Company's packaging and labeling materials.

      Selling,  general and administrative  expenses (SG&A) totaled  $10,695,601
and  $11,743,370 for years ended December 31, 2005 and 2004,  respectively.  The
decrease  in SG&A  expenses  of  $1,047,769  is  primarily  attributable  to the
following:

                                             Increase
                                            (Decrease)

         Stock based compensation           $ (3,844,000)
         Salaries and related benefits         1,020,000
         Royalty expense                       1,850,000
         Marketing expenditures                 (960,000)
         Office and warehouse                    572,000
         Depreciation and amortization           320,000
         Total listed                       $ (1,042,000)

      During the years ended December 31, 2005 and 2004, the Company  recognized
stock based  compensation  expense of  $756,000  and  $4,600,000,  respectively,
relating  to the grant of  warrants,  options  and  common  stock to  employees,
directors,  investors and consultants  for services,  resulting in non-cash SG&A
expense.  As fewer  warrants,  options and shares of common stock were issued in
2005 compared to 2004, stock based compensation expense decreased by $3,844,000.

      Salaries and related benefits increased from approximately  $1,480,000 for
the year ended  December 31, 2004 to $2,500,000  for the year ended December 31,
2005,  resulting in an increase of $1,020,000  of SG&A expense.  The 2005 fiscal
year includes  twelve months of operations and related  personnel  costs,  while
most of 2004 was the start up phase of the Company.  The year ended December 31,
2004  included  a  total  of 13  employees  as of July 1,  2004,  growing  to 22
employees as of December 31,  2004.  During the first two quarters of 2005,  the
average  headcount was 27 employees.  On July 15, 2005, there was a reduction in
force,  reducing  the number of employees to 17.  Another  employee  resigned in
August 2005, and two executives  left the Company in the fourth quarter of 2005,
reducing the  headcount to 14 as of December 31, 2005.  In addition to a greater
number  of  employees  during  2005  compared  to 2004,  the  number  of  highly
compensated employees increased, as executives and senior managers were added to
the management team.

      Royalty  expense in the year ended  December 31, 2005 totaled  $2,000,000,
representing  the minimum  amount due under the royalty  agreement  entered into
with George  Foreman on November 4, 2004. In 2004,  $150,000 was charged to SG&A
relating  to the  initial  licensing  payment to Mr.  Foreman,  resulting  in an
increase in royalty expense of $1,850,000 from 2004 to 2005.

                                       18
<PAGE>

      Marketing expenditures totaled approximately  $1,520,000 in the year ended
December  31,  2005,  compared to  $2,480,000  in year ended  December 31, 2004,
resulting in a decrease of $960,000.  Infomercial  production  expenses declined
significantly,  from  approximately  $1,100,000  in 2004  to  $66,000  in  2005,
contributing  to the  decrease by  $1,034,000.  Offsetting  this  decrease  were
increased marketing  expenditures incurred during 2005, as the Company rebranded
its products, changed its messaging and developed new labeling for its products.

      Office and warehouse  expense  increased by $572,000,  from  approximately
$348,000  for the year ended  December  31, 2004 to $920,000  for the year ended
December 31, 2005.  The  increase is  primarily  attributable  to a full year of
office and warehouse  space lease expense  during year ended  December 31, 2005,
compared to a partial year during the year ended  December  31, 2004.  Effective
December 1, 2005, the lease was amended, reducing the space being leased to only
the office space, and releasing the warehouse space. The Company also sublet the
warehouse  space  during  2005,  as it had  excess  capacity,  from June 1, 2005
through  November 30, 2005.  The sublease  income is reflected as a reduction in
Office and warehouse  expense.  In 2004, the Company initially leased its office
and  warehouse  space on a  month-to-month  basis from April 1, 2004 to July 31,
2004, and then entered into a three year lease beginning  August 1, 2004 through
July 31, 2007.

      Depreciation and amortization increased from approximately $83,000 for the
year ended  December 31, 2004 to $405,000 for the year ended  December 31, 2005,
an increase of $320,000. This increase is due to a full year of depreciation and
amortization expense in the year ended December 31, 2005, while depreciation and
amortization  expense  for the year ended  December  31,  2004  included  only a
partial year, as fixed assets were placed in service in mid 2004, and intangible
assets were placed in service in late 2004.

      An  impairment  loss of  $2,814,072  was  recorded as expense for the year
ended  December 31,  2005,  whereas  there was no similar  loss during 2004.  As
discussed more fully above, in the "Critical Accounting Policies and Estimates,"
section,  "Potential  Impairment  Charges",  the  Company  determined  that  its
trademarks,  patents, and licensing fee assets were significantly  impaired, and
recorded an  impairment  charge of  $2,814,072  for the year ended  December 31,
2005, reflecting the entire net book value of these assets.

      Loss on  extinguishment  of debt of $2,622,101 was recorded as expense for
the year ended December 31, 2005, whereas there was no similar loss during 2004.
In connection with the Company's issuance of its 16.66% notes in September 2005,
the Company amended and restated its 11% notes sold during May 2005. Because the
modifications made to the 11% notes were significant,  the changes resulted in a
debt  extinguishment  in accordance  with EITF 96-19.  As a result,  the Company
recognized a loss on extinguishment of debt in the amount of $2,622,101 which is
attributable to: (a) the difference  between the fair value of the modified debt
instrument  and the carrying value of the former debt  instrument,  (b) the fair
value of preferred stock issued in connection with the debt extinguishment,  (c)
the incremental increase in the fair value of certain warrants (held by the debt
holders) as a result of the reduction in the exercise price of the warrants, and
(d) the  write-off  of deferred  financing  fees  related to the  original  debt
agreement.

      Interest  expense  for the year  ended  December  31,  2005  was  $796,976
compared to  $1,058,363  for the year ended  December 31,  2004,  resulting in a
decrease of $261,387.  Approximately  $229,000 and $983,000 of interest  expense
for the years ended December 31, 2005 and 2004, respectively,  represent imputed
interest on several  convertible  debt and preferred  stock  financings,  due to
beneficial  conversion  features.  Offsetting the reduction in imputed interest,
interest  expense on debt for the years ended December 31, 2005 and 2004 totaled
approximately  $568,000 and $75,000,  respectively.  2005 interest  expense also
includes:  (a) interest on notes totaling  $1,200,000 payable to Galt Enterprise
Corporation  which was repaid in full in May 2005;  (b) a  $3,000,000  principal
amount 11% note issued on May 3, 2005 and amended in September 2005 reducing the
principal  balance to $2,635,547;  and (c) interest on the $2,800,000  principal
amount of 16.66% notes issued on September 15, 2005.  At December 31, 2005,  the
Company  had  outstanding  debt of  approximately  $5,435,000,  with a  weighted
average interest rate of 13.9%.  2004 interest expense also includes interest on
the notes payable held by Galt  Enterprise  Corporation and Taylor Group (Taylor
Notes converted to common stock in December 2004).

      The Company  incurred a net loss for the year ended  December  31, 2005 of
$17,410,022  compared to a loss of  $12,574,702  for the year ended December 31,
2004. As indicated above, the increase in the operating loss primarily  reflects
the impairment loss, the obsolete inventory charge, and the increases in royalty
expense,  staffing increases, and office & warehouse costs, offset by a decrease
in stock based compensation expense and infomercial production costs.

                                       19
<PAGE>

      For the year ended  December 31, 2005, the Company  incurred  dividends on
outstanding  preferred stock of $2,286,759,  compared to $1,610,000 for the year
ended December 31, 2004. The 2005 dividends totaling $2,286,759 include a deemed
dividend of approximately $693,000 resulting from amendments to certain warrants
held by preferred shareholders on July 12, 2005 reducing the exercise price from
$2.25 per share to $0.50 per share.  The 2004 dividends of $1,610,000  represent
deemed  dividends  resulting  from the repricing of certain  warrants  issued in
March 2004 from $0.28 per share to $0.0005 per share.

      The net loss available to common shareholders for the years ended December
31, 2005 and 2004 was $19,696,781 and $14,184,702, respectively.

LIQUIDITY AND CAPITAL RESOURCES

      From the  inception  of The  Knockout  Group,  Inc. in April 2003  through
August 2004, the Company operated as a development stage company. The Company is
currently in default of interest  payments  required under its  outstanding  11%
Senior  Secured  Note.  The failure to pay  interest  when due on the 11% Senior
Secured Note also caused a default on the  Company's  outstanding  16.66% Senior
Convertible  Notes.  As a result of these  defaults,  the debt  holders have the
right at any time to declare  the full  principal  amount of the debt,  together
with interest and other amounts owing in respect  thereof,  immediately  due and
payable  in cash.  If the holder of our  outstanding  11%  Senior  Secured  Note
exercises its right to accelerate our payment obligations,  we would be required
to repay 115% of the outstanding principal amount and, beginning five days after
the date of default of October 5, 2005,  the  interest  rate would accrue at the
rate of 20% per annum or such lower maximum  amount of interest  permitted to be
charged under  applicable law. If the holders of our  outstanding  16.66% Senior
Convertible Notes exercise their right to accelerate our payment obligations, we
would be  required  to pay  interest  on the  outstanding  principal  and unpaid
interest plus interest  thereon  beginning  seven trading days after the date of
default  of October  5, 2005 at the lower of 18% per annum or the  highest  rate
permitted by law. If any of our debt holders  exercise  their rights we could be
forced into  bankruptcy.  In addition,  we have suffered  recurring  losses from
operations  and had an  accumulated  deficit and working  capital  deficiency at
December 31, 2005 and at December 31, 2004 that raises  substantial  doubt about
its ability to continue as a going concern as noted in the  accompanying  report
of our Independent Registered Public Accounting firm.

      Our ability to  continue as a going  concern is  ultimately  dependent  on
obtaining additional equity capital and generating substantial sales. Based upon
our current cash resources,  management  believes we have sufficient  capital to
fund  operations  through May 2006.  We expect to need  additional  financing of
approximately  $15.0 million over the next 12 to 18 months.  Approximately  $3.8
million is required to fund  operations  through the fiscal year ending December
31, 2006, and we expect to need an additional $9.2 million to fund marketing and
advertising  initiatives  starting in the fourth  quarter of 2006.  We intend to
seek  outside  debt  and/or  equity  financing  through  private  placements  to
accredited  investors.   We  are  also  currently  exploring  various  financing
alternatives with financing sources to provide working capital financing to fund
our business plan. We do not currently have any  commitments  for such financing
and there is no assurance that we will be successful in obtaining such funds. If
we cannot obtain additional  financing in the time frame required,  we will have
to discontinue operations.

      For the year ended December 31, 2005, we used  approximately  $7.8 million
of cash for operations versus $7.0 million for the year ended December 31, 2004.
The $0.8 million  increase in cash used for operations was primarily  related to
an increase in marketing, selling and royalty expenses related to the rollout of
the  Company's  product  line,  an  increase in  staffing  over the period,  and
increased professional fees.

      During the fiscal year ended December 31, 2004 we used  approximately $7.0
million of cash for our  operations.  The cash used in operations was associated
with the start-up nature of our business including product development costs, an
increase  in  personnel   costs,   development   of  products,   development  of
infomercials and increased legal and professional  services  associated with all
activities.

                                       20
<PAGE>

      Net cash used for  investing  activities  for the year ended  December 31,
2005  approximated  $18,300,  versus  $1,452,200 for the year ended December 31,
2004. The higher level of investing  activities in 2004 was primarily related to
the acquisition of patents and trademarks.

      For the year ended December 31, 2005 the Company had cash flow provided by
financing  activities  of  $8,594,650,  versus  $8,174,739  for the  year  ended
December 31, 2004.  During 2005, we raised net proceeds of $10,682,542  from the
issuance of preferred stock and convertible  debt.  Payments on notes payable of
$1,564,453 and preferred  stock  dividends of $501,500 were paid during the year
ended December 31, 2005. Proceeds of $30,141 were generated from the exercise of
warrants  during 2005.  An  obligation to a related party was reduced by $52,080
during the year ended December 31, 2005.

      To date,  we have funded our  operations  primarily by cash  provided from
financing  activities.  During 2004, cash provided from financing activities was
approximately $8.1 million of which $6.7 million of gross proceeds were received
in  connection  with the issuance of  preferred  stock.  Costs  related to those
preferred  stock issuances were  approximately  $400,000.  The Company  received
$2,600,000  from the  issuance  of debt and repaid  $450,000 of this debt during
2004. In addition, during 2004, the Company repaid $158,000 relating to start-up
costs  financed  by a  related  party  on  behalf  of the  Company  prior to the
incorporation of The Knockout Group, Inc. The financing  transactions  which the
Company undertook during 2005 are discussed in greater detail below.

      Since our inception,  we have funded  operations  from  financing  sources
using a combination of convertible debt and convertible preferred stock. We have
also used stock  options,  warrants,  and stock grants to attract key employees,
pay for  services  provided  by  consultants,  advisors  and other  professional
service providers,  to acquire  intangible assets, and obtain financing.  During
2005, to  accelerate  our business  plans,  primarily for the purpose of product
development,   producing  our  household  and  automotive  infomercials,  market
research,  and  production  of  inventory,  we engaged in a series of  financing
transactions as described below:

      In January  2005,  we completed a private  placement of 116,754  shares of
Series B Preferred Stock, which at the presently  effective  conversion rate are
convertible  into  18,680,640  shares of common stock,  and warrants to purchase
1,868,071  shares of  common  stock.  We  completed  the  January  2005  private
placement in two closings as follows.  On January 10, 2005, we sold an aggregate
of 69,624 shares of Series B Preferred Stock and warrants to purchase  1,113,984
shares of common stock to 17 accredited  investors for aggregate  gross proceeds
of  $3,265,000.  On January 17, 2005,  we sold an aggregate of 47,130  shares of
Series B Preferred Stock and warrants to purchase 754,083 shares of common stock
to 22 accredited  investors for aggregate gross proceeds of $2,210,000.  We sold
shares of Series B Preferred  Stock for a per share  purchase price of $46.8933.
For each share of Series B Preferred Stock purchased investors received warrants
to purchase 16 shares of common stock.  The warrants were  exercisable  for five
years from the date of issuance at a price of $2.25 per share. On July 12, 2005,
the Company  reduced the exercise price to $0.50 per share and recorded a deemed
dividend of  approximately  $693,000 in  connection  with the  reduction  of the
exercise price.

      On May 3, 2005,  we  completed a private  placement  of a  $3,000,000  11%
Senior  Secured  Note  to one  accredited  investor.  The  terms  of  this  debt
originally called for interest at a rate of 11% with interest payable quarterly.
The first fifteen months of interest, totaling $417,000 was placed in escrow and
was being disbursed to the holder of the note as quarterly  payments become due.
The  principal  on this note is due in  monthly  installments  of  approximately
$143,000  beginning in August 2006  through May 2008.  After  expiration  of the
first 15 months,  we have the option to pay interest in shares of common  stock.
In  addition,  beginning  15 months  after  issuance  of the Note,  on the first
business  day of each  month we must  redeem  1/21st of the  original  principal
amount of the Note plus accrued and unpaid  interest and any other  amounts then
owing to the holder under the Note. The monthly redemption amount may be paid in
cash  or by  the  issuance  of  common  stock  at a  price  equal  to 85% of the
volume-weighted  average  closing  price of our  common  stock if,  among  other
things,  we are not in default of any provision of the  agreement,  our stock is
traded or quoted on a an exchange or over the counter market,  and the number of
shares  does not exceed 25% of the  trading  volume for any of the  previous  10
trading days.

      In September  2005,  we issued new debt which  required the consent of the
holder of the 11% Senior  Secured Note. As a result,  we entered into an amended
and restated  agreement  with the 11% debt holder,  which:  (1) granted the debt
holder the right to convert at its option the principal  amount of the note into
shares of common stock at a conversion price of $0.50; (2) required funds in the
amount of  $364,453  which  were  being  held in escrow  to pay  interest  to be
released to the debt holder as a pre-payment of the outstanding  principal;  (3)
required one of our shareholders,  Kevin Waltzer, to transfer to the debt holder
18,750  shares of Series A preferred  stock;  (4) reduced the exercise  price of
364,720  warrants  to  purchase  common  stock  from  $0.50  to  $0.30;  and (5)
terminated the 11% debt holder's  security  interest in substantially all of our
assets.

                                       21
<PAGE>

      On September 15, 2005,  we completed a private  placement of 16.66% Senior
Convertible  Notes to six  institutional  accredited  investors in the aggregate
principal  amount  of  $2.8  million.  In  connection  with  this  issuance,   a
shareholder of the Company  contributed  59,302 shares of preferred stock to the
Company which were then issued to the 16.66% debt holders.  The principal amount
and  interest  at a rate of  16.66%  per annum  are due on March  31,  2007.  In
addition, any outstanding principal amount and accrued interest on the Notes are
convertible  into  shares of our  common  stock at the option of the holder at a
conversion price of $0.50 per share, subject to adjustment in the event we issue
common stock at a price less than the then effective conversion price.

CONTRACTUAL OBLIGATIONS

      The following table summarizes our contractual  obligations as of December
31, 2005:

<TABLE>
<CAPTION>

                                                                                                                   More
                                              Total         One Year        Years 1-3        Years 3-5     than 5 Years
                                              -----         --------        ---------        ---------     ------------
<S>                                     <C>              <C>              <C>              <C>              <C>
Long Term Lease Obligation (a)          $   285,000      $   180,000      $   105,000               --               --
Minimum Royalty Payments (b)            $20,000,000      $ 2,000,000      $ 4,000,000      $ 6,500,000      $ 7,500,000
Long Term Notes Payable (c):
      11% Senior Secured Note due
           May 2, 2008                  $ 2,635,547          715,000      $ 1,920,547               --               --
      16.66% Convertible Notes due
           Mach 31, 2007                $ 2,800,000               --      $ 2,800,000               --               --
TOTAL                                   $25,720,547      $ 2,895,000      $ 8,825,547      $ 6,500,000      $ 7,500,000

</TABLE>

      (a) We currently  lease office and warehouse  space at 100 West  Whitehall
Avenue in  Northlake,  Illinois.  Through the  remainder of the lease term,  our
minimum lease payments are as follows:

                                    2006    180,000
                                    2007    105,000

      (b) On November 4, 2004, our wholly owned  subsidiary The Knockout  Group,
Inc.  entered  into an eight year,  exclusive  licensing  agreement  with George
Foreman to represent our George  Foreman's  Knock Out line of cleaning  products
worldwide.  The agreement  has an initial term of five years,  with a three-year
option term,  which requires us to pay a retention  bonus of $1.5 million at the
end of year five (2009).  The minimum  annual  royalty  amount of $2,000,000 for
2005  (year  1  of  the   agreement)   is  included  in  Selling,   General  and
Administrative  Expenses in the  Consolidated  Statement of Operations  for year
ended December 31, 2005. As the 2005 minimum annual royalty amount of $2,000,000
was not paid during 2005, it is included in Accrued  Expenses  ($1,968,790)  and
Accounts  Payable  ($31,210) at year end  December  31, 2005.  The Company is in
default on the payment of the $1,968,790 payment relating to the 2005 royalties,
and is currently in discussions  with Mr.  Foreman's  representatives  regarding
this matter.

      The minimum  annual  royalty  payments  required under the contract are as
follows:

                                    Years   1-5      $2,000,000
                                    Year    6        $3,000,000
                                    Year    7        $3,500,000
                                    Year    8        $4,000,000

      (c) As  discussed  in Risk  Factors  (Part I,  Item 1) and  Liquidity  and
Capital  Resources (Part I, Item 6) above, the Company is in default of interest
payments required under its 11% Senior Secured Note. The failure to pay interest
when due on the 11% Senior  Secured Note also caused a default on the  Company's
outstanding  16.66% Senior Convertible Notes. As a result, the Convertible Notes
Payable  balance of $92,451 (net of  unamortized  discount of  $5,343,096) as of
December  31, 2005 is shown as a current  liability on December 31, 2005 balance
sheet.  The Long Term Notes  Payable  presented  above  reflect the original due
dates of the underlying notes. Also,  payments on long term debt presented above
do not include interest.

                                       22
<PAGE>

OFF-BALANCE SHEET ARRANGEMENTS

      We do not have any off  balance  sheet  arrangements  that are  reasonably
likely to have a current or future effect on our financial condition,  revenues,
results of operations, liquidity or capital expenditures.

RECENT ACCOUNTING PRONOUNCEMENTS

      In May 2005, the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections"  ("SFAS  154"),  which  replaces  APB Opinion  No. 20,  "Accounting
Changes," and SFAS No. 3,  "Reporting  Accounting  Changes in Interim  Financial
Statements." SFAS 154 requires retroactive application of a change in accounting
principle to prior period financial statements unless it is impracticable.  SFAS
154 also  requires  that a change  in method of  depreciation,  amortization  or
depletion for long-lived,  non-financial  assets be accounted for as a change in
accounting  estimate  resulting  from a change in  accounting  principle.  It is
effective for accounting  changes and corrections of errors made in fiscal years
beginning after December 15, 2005.  Depending on the type of accounting  change,
the  adoption  of SFAS  154  may  have a  material  impact  on our  consolidated
financial statements.

ITEM 7. FINANCIAL STATEMENTS.

      All financial  information required by this Item is attached hereto at the
end of  this  report  beginning  on  page  F-1  and is  hereby  incorporated  by
reference.

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

      On January 12, 2005, in connection  with our  acquisition  of The Knockout
Group,  Inc.,  our Board of  Directors  unanimously  approved  the  dismissal of
Goldstein Golub Kessler LLP as our independent registered public accountants. On
January  12,  2005,  we  notified  Goldstein  Golub  Kessler  LLP  that  we were
terminating Goldstein Golub Kessler LLP's services. Also on January 12, 2005, we
engaged  the firm of BDO  Seidman,  LLP to serve as our  independent  registered
public accountants for the fiscal year ended December 31, 2004.

      During the two fiscal  years ended  December 31, 2003 and 2002 and through
January 12, 2005, (i) there were no disagreements between us and Goldstein Golub
Kessler  LLP on any matter of  accounting  principles  or  practices,  financial
statement  disclosure or auditing scope or procedure  which,  if not resolved to
the  satisfaction  of Goldstein  Golub  Kessler LLP would have caused  Goldstein
Golub  Kessler  LLP to  make  reference  to the  matter  in its  reports  on our
financial  statements,  and (ii)  Goldstein  Golub  Kessler LLP's reports on our
financial  statements  did not  contain an  adverse  opinion  or  disclaimer  of
opinion,  or  was  modified  as  to  uncertainty,   audit  scope  or  accounting
principles.  During the two fiscal  years ended  December  31, 2003 and 2002 and
through January 12, 2005, there were no reportable  events as the term described
in Item 304(a)(1)(iv) of Regulation S-B.

      During the two fiscal  years ended  December 31, 2003 and 2002 and through
January 12, 2005, we had not consulted with BDO Seidman, LLP regarding either:

   1. The  application  of accounting  principles  to any specific  transaction,
      either  completed or proposed,  or the type of audit opinion that might be
      rendered on our  financial  statements,  and neither a written  report was
      provided  to us nor  oral  advice  was  provided  that  BDO  Seidman,  LLP
      concluded was an important factor  considered by us in reaching a decision
      as to the accounting, auditing or financial reporting issue; or

   2. Any matter that was either subject of disagreement or event, as defined in
      Item  304(a)(1)(iv)(A)  of Regulation  S-B and the related  instruction to
      Item  304 of  Regulation  S-B,  or a  reportable  event,  as that  term is
      explained in Item 304(a)(1)(iv)(A) of Regulation S-B.

                                       23
<PAGE>

ITEM 8A. CONTROLS AND PROCEDURES.

      As of the end of the  period  covered  by this  report,  we  conducted  an
evaluation,  under  the  supervision  and with the  participation  of our  chief
executive officer and principal financial officer of our disclosure controls and
procedures  (as defined in Rule  13a-15(e)  and Rule  15d-15(e)  of the Exchange
Act).  Based upon this  evaluation,  our chief  executive  officer and principal
financial officer concluded that our disclosure  controls and procedures are not
effective as of the end of the period covered by this report.

      In connection  with our 2004  year-end  audit and the  preparation  of our
quarterly reviews during 2005, our independent registered public accounting firm
identified  three  material  weaknesses  relating to our  internal  controls and
procedures. These material weaknesses were (1) inadequate preparation of account
reconciliations  on a timely basis;  (2) inadequate  controls over the inventory
system resulting in errors in inventory costing; and (3) an inadequate system to
identify,  track and properly record stock  compensation.  These weaknesses were
attributable  to  the  lack  of  staff  with  adequate  experience,   inadequate
supervision  of  financial  accounting  personnel  and  the  resignation  of two
financial officers within the past twelve months.

      In connection  with our 2005 year-end audit,  our  independent  registered
public  accounting firm identified a material  weakness relating to our internal
controls and procedures.  This material weakness related to a lack of review and
analysis of  significant  contracts  and  transactions,  such as debt and equity
agreements,  to determine the appropriate accounting treatment. This weakness is
attributable  to  the  lack  of  staff  with  adequate  experience,   inadequate
supervision of financial  accounting  personnel and the resignation of two chief
financial officers within the past twelve months.

      In order to address the  deficiencies  described  above and to improve our
internal  disclosure and control procedures for future periods, we are searching
for a new chief  financial  officer and have  retained  accounting  support from
outside  consultants to bridge the gap until a permanent chief financial officer
is  hired.  While we have not yet hired a new chief  financial  officer,  in the
fourth  quarter of 2005 we hired  outside  consultants  to review our  financial
reporting  and internal  controls and oversee the  financial  reporting  process
including the implementation of improvements in these areas. We also have begun:

      1.  performing  more detailed  monthly and quarterly  reconciliations  and
      analysis of all general ledger accounts;
      2. reviewing and  implementing  improvements  in  information  systems for
      inventory accounting; and
      3. enhancing staffing and training.

      These steps constitute  significant  changes in internal controls that are
reasonably  likely to  materially  affect our internal  control  over  financial
reporting.  We will  continue to evaluate the  effectiveness  of our  disclosure
controls and internal controls and procedures on an ongoing basis, and will take
further action as necessary.  In designing and evaluating the internal  controls
over  financial   reporting,   management   recognizes  that  any  controls  and
procedures,  no  matter  how  well  designed  and  operated,  can  provide  only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

ITEM 8B. OTHER INFORMATION.

      On  December  1,  2005  The  Knockout  Group,  Inc.  entered  into a Lease
Amendment with Centerpoint  Properties  Trust.  Pursuant to the Lease Amendment,
The Knockout Group, Inc. vacated  approximately 143,171 square feet of warehouse
space  located at 100 W.  Whitehall  Avenue in Northlake,  Illinois.  The leased
premises  were reduced to  approximately  18,576 square feet of office space and
the monthly base rent was reduced to $15,000 per month.  The parties also agreed
that  The  Knockout  Group,  Inc.  was  in  default  under  the  Lease  and  the
then-current  balance of delinquent rent was $186,171.30.  The parties agreed to
amortize the delinquent rent at 11.5% interest over 20 months.


                                       24
<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

      The  following  table sets forth the names and ages of the  members of our
Board of Directors and our executive officers and the positions held by each.

      NAME                          AGE        POSITION
      John Bellamy                  56         Chief Executive Officer,
                                               Acting Principal Financial
                                               Officer and Chairman
      Dr. Isaac Horton, III         47         Secretary and Director
      Kurt A. Garrett               49         Director
      Robert L. Smith, Jr.          43         Director

      Officers are elected  annually by the Board of  Directors  (subject to the
terms of any  employment  agreement),  to hold such  office  until an  officer's
successor has been duly appointed and qualified,  unless an officer sooner dies,
resigns or is removed by the Board. Some of our directors and executive officers
also  serve in various  capacities  with our  subsidiaries.  There are no family
relationships among any of our directors and executive officers.

BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS

      JOHN BELLAMY - Mr. Bellamy has over 25 years of entrepreneurial experience
in various  business  endeavors.  From 1975 to 2003 Mr. Bellamy was President of
Artistic  Communication  Center, Ltd (ACC), a multi-media  production company he
founded. ACC developed and produced media content and television programming for
companies such as NBC, Fox, Kraft, Wal-Mart, and General Electric.  From 1973 to
1993,  Mr.  Bellamy  was  President  and  Founder of Source  Records,  Inc.,  an
independent  recording,  production  and  publishing  company  and  First  World
Management,  Inc., a personal management company. Prior to that, Mr. Bellamy was
Executive  Vice  President of Dick  Gregory  Health  Enterprises,  Inc. a weight
control and health maintenance organization.

      DR. ISAAC HORTON, III - From January 1995 to the present,  Mr. Horton, has
served as  Chairman  and Chief  Executive  Officer  of  Remote  Source  Lighting
International,   Inc.  (RSLI).   Dr.  Horton  is  also  the  founder,   majority
shareholder,  Chairman and CEO of the parent company Remote Light,  Inc.  Remote
Source  Lighting  International,  Inc. (RSLI) has been recognized as the leading
manufacturer of fiber optic lighting products.  Dr. Horton has been awarded more
than 66 patents.

      KURT A.  GARRETT  - Mr.  Garrett  has  created  and  patented  a number of
biotechnology products, devices and formulations.  Since March 2005, Mr. Garrett
has been employed as our Director of Research and Quality  Control.  Mr. Garrett
currently  is the  president  of  CSMO  Incorporated,  a  private  chemical  and
biotechnology  company  located in Raleigh,  North  Carolina.  From 1997 through
1999,  Mr.  Garrett  was a Senior  Scientist  of RSL  International  located  in
Research Triangle Park, North Carolina.

      ROBERT  L.  SMITH,  JR.  - Mr.  Smith is  currently  President  and  Chief
Executive  Officer of The Smith Financial Group, a financial  services  company.
From 1995 until 1999, Mr. Smith was owner of a Gold's Gym franchise until it was
sold to Bally Total  Fitness.  Prior to that,  Mr. Smith was a Marine  Logistics
Officer,  having served as an operations  officer and senior logistic advisor to
several  Commanding  Generals  during his more than  20-year  career in the U.S.
Marine Corps.

BOARD COMPOSITION

      At each  annual  meeting of our  stockholders,  all of our  directors  are
elected  to serve from the time of  election  and  qualification  until the next
annual meeting of stockholders following election. The exact number of directors
is to be determined from time to time by resolution of the board of directors.


                                       25
<PAGE>


CORPORATE GOVERNANCE AND NOMINATING COMMITTEE

      The purpose of the Corporate  Governance  and  Nominating  Committee is to
ensure that the Board of Directors is properly constituted to meet its fiduciary
obligations  to  stockholders  and our  business  and  that we have  and  follow
appropriate  governance  standards.  Our  Corporate  Governance  and  Nominating
Committee is currently  composed only of Dr. Isaac Horton who also is the Acting
Chair of the committee.

      Responsibilities  of the Corporate  Governance  and  Nominating  Committee
include: evaluating the current composition,  organization and governance of the
Board  of  Directors  and  its  other   committees;   determining   the  desired
qualifications,  expertise  and  characteristics  for  potential  directors  and
conducting searches for director candidates that have corresponding  attributes;
Evaluating,  proposing  and  approving  nominees  for  election  to the Board of
Directors,  overseeing the Board of Directors'  performance  evaluation process,
evaluating the  participation of members of the Board of Directors in continuing
education  activities in accordance with SEC rules. The Corporate Governance and
Nominating   Committee  is   empowered   to  form  and  delegate   authority  to
subcommittees when appropriate, evaluate and recommend termination of service of
individual  members  of the Board of  Directors  as  appropriate,  make  regular
written  reports  to the  Board of  Directors,  review  annually  our  corporate
governance  guidelines and make  recommendations  to the Board of Directors with
respect to any proposed changes and review annually its own performance.

AUDIT COMMITTEE

      The Audit  Committee is appointed by the Board of Directors in  fulfilling
its  responsibilities to oversee:  (1) the integrity of our financial statements
and  disclosure  controls;  (2)  the  qualifications  and  independence  of  our
independent accountants; (3) the performance of our independent accountants; and
(4)  compliance  with legal and  regulatory  requirements.  The entire  Board of
Directors currently acts as the Audit Committee.

      The Audit  Committee is authorized to retain our  independent  accountants
and conduct  any  investigation  appropriate  to  fulfilling  its  purposes  and
responsibilities.  It  has,  at all  times,  direct  access  to the  independent
accountants  and to our executive  officers and employees.  The Audit  Committee
also has the authority and  responsibility  to engage outside legal,  accounting
and other advisors, as it deems appropriate, without first seeking authorization
from the Board.

COMPENSATION COMMITTEE

      The  Compensation  Committee  is  appointed  by the Board of  Directors to
discharge the  responsibilities  of the Board  relating to  compensation  of our
executive officers.  Dr. Isaac Horton, III, Kurt A. Garrett and Robert L. Smith,
Jr. currently act as the Compensation Committee.

      The Compensation  Committee,  among other duties,  establishes our overall
compensation philosophy,  reviews management's  recommendations for compensation
of all senior officers and approves such compensation,  determines any long-term
incentive  compensation for our Chief Executive  Officer and our President.  The
Compensation  Committee  reviews and recommends for Board or voting  shareholder
approval,  as appropriate,  all incentive  compensation  plans and  equity-based
plans, and approves any awards to our Chief Executive Officer, our President and
other senior officers under any such plan. The Compensation  Committee  approves
all grants of stock options, determines the terms and conditions of such awards,
carries out the administrative  responsibilities  given to the committee in such
plans  and  establishes  and  periodically  reviews  policies  in  the  area  of
perquisites.  In  connection  with  employee  benefit  plans,  the  Compensation
Committee  approves the adoption or amendment of any deferred  compensation plan
or non qualified  employee  benefit plan,  approves the adoption or amendment of
any tax-qualified employee retirement plan, including any 401(k) savings plan or
their related trust agreements,  which involves a significant substantive change
in the employee retirement or savings plan benefits and approves the appointment
of the  administrators  of such plans. The Compensation  Committee also approves
contracts  or  transactions  with  current  and  former  corporate   executives,
exercises  the sole  authority  to retain  and  terminate  any  compensation  or
benefits  consultant  or other  outside  advisor used to assist us in evaluating
director,  Chief Executive Officer,  President and senior officer  compensation,
including the sole authority to approve any such  consultant's or advisor's fees
and other terms of the engagement and report regularly to the Board.

                                       26
<PAGE>

AUDIT COMMITTEE FINANCIAL EXPERT

      We do not currently have an audit committee financial expert, as that term
is defined in Item 401 of  Regulation  S-B.  We have not been able to identify a
suitable nominee to serve as an audit committee financial expert.

CODE OF ETHICS

      We have adopted a Code of Business  Conduct and Ethics that applies to all
associates,  contractors and non-associate  directors of Knockout Holdings, Inc.
The Code of Business  Conduct and Ethics is filed as Exhibit  14.1 to our annual
report on Form 10-KSB for the fiscal year ended December 31, 2004. Upon request,
we will  provide to any  person  without  charge a copy of our Code of  Business
Conduct and Ethics. Any such request should be made to Attn: Secretary, Knockout
Holdings, Inc., 100 W. Whitehall Ave., Northlake, IL 60164. Our telephone number
is (708) 273-6900. We are in the process of building a section of our website at
www.theknockoutgroup.com  where our Code of Business  Conduct and Ethics will be
available to investors.

SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE

      Section  16(a)  of the  Securities  Exchange  Act  of  1934  requires  our
directors and executive  officers and persons who beneficially own more than ten
percent  of a  registered  class of our equity  securities  to file with the SEC
initial  reports of ownership and reports of change in ownership of common stock
and other equity securities of the Company. Officers, directors and greater than
ten percent  stockholders  are  required by SEC  regulations  to furnish us with
copies of all Section  16(a) forms they file.  To our  knowledge,  the following
persons have failed to file, on a timely basis, the identified  reports required
by Section  16(a) of the Exchange  Act during the most recent  fiscal year ended
December 31, 2005:

<TABLE>
<CAPTION>

                                                 Number              Transactions not   Known failures to
Name and Relationship                            of late reports     timely reported    file a required form
---------------------                            ----------------    ---------------    --------------------
<S>                                                     <C>                 <C>                <C>
John Bellamy, CEO and Chairman                            2                   2                  0
Oscar Turner, Former CFO and Former Director              1                   1                  0
Ahmed Shaikh, Former President and Former
          COO                                             1                   1                  0
Alan Gelband, 10% Owner                                   4                  12                  0
Kevin Waltzer, Former Director                            1                   0                  1
Tony Weiss, Former Director                               1                   0                  1
David Rights, Former Director                             1                   0                  1
Coleman Peterson, Former Director                         1                   0                  1
Richard S. Han, Former CFO and Former
          Director                                        2                   0                  2
David E. Malone, Former Co-CEO, Former
          President and Former COO                        2                   0                  2
</TABLE>

ITEM 10. EXECUTIVE COMPENSATION.

      The  following   table  sets  forth   information   concerning  the  total
compensation  that we have  paid or that has  accrued  on  behalf  of our  chief
executive  officer  and  other  executive  officers  with  annual   compensation
exceeding  $100,000 during the years ended December 31, 2005, 2004 and 2003 (the
"named executive officers").


                                       27
<PAGE>


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                                                            LONG-TERM
                                                                                           COMPENSATION
                                                                            -------------------------------------------
                                              ANNUAL COMPENSATION                      AWARDS                PAYOUTS
                                      ------------------------------------- ------------------------------ ------------
                                                                  OTHER                    SECURITIES                      ALL
                                                                 ANNUAL     RESTRICTED     UNDERLYING                     OTHER
        NAME AND                       SALARY                    COMPEN-    STOCK          OPTIONS/ SARS      LTIP       COMPEN-
   PRINCIPAL POSITION       YEAR      ($)          BONUS ($)   SATION ($)   AWARD(S) ($)   (#)             PAYOUTS ($)  SATION ($)
------------------------- ----------- ----------- ------------ ------------ -------------- --------------- ------------ -----------
<S>                         <C>       <C>         <C>         <C>              <C>           <C>            <C>         <C>
John Bellamy, Chief         2005      $222,500       -0-      $11,667(1)        -0-            -0-            -0-         -0-
     Executive Officer      2004      $157,500    $100,000    $27,500(2)        -0-            -0-            -0-         -0-
                            2003       $37,500       -0-       $7,500(2)        -0-            -0-            -0-         -0-

Ahmed Shaikh,               2005      $138,889       -0-         -0-            -0-            -0-            -0-         -0-
     Former President       2004      $130,000       -0-      $22,857(3)        -0-       1,998,617(5)        -0-         -0-
     and Former Chief
     Operating Officer

David Malone,               2005      $118,308       -0-         -0-            -0-            -0-            -0-         -0-
     Former Chief
     Operating Officer

Oscar Turner, Former        2005      $109,117    $100,000(4)    -0-            -0-            -0-            -0-         -0-
     Chief Financial        2004       $58,333       -0-      $30,000(3)        -0-       4,496,868(6)        -0-         -0-
     Officer

</TABLE>

    (1) This amount  represents  an  automobile  allowance  and health  benefits
        allowance.

    (2) This amount represents deferred compensation which has not yet been paid
        to Mr. Bellamy

    (3) This  amount  represents   compensation  paid  for  consulting  services
        provided  to the  Company in 2004 by  Messrs.  Shaikh  and  Turner.  The
        amounts were paid in 2005.

    (4) This amount  represents  a bonus  earned by Mr.  Turner  during the year
        ended  December  31,  2005.  Of the total,  $70,000 was paid in 2005 and
        $30,000 was paid in January 2006.

    (5) Includes  749,478  shares of common  stock  issuable  upon  exercise  of
        options of Knockout Holdings,  Inc. and 1,249,139 shares of common stock
        that were issuable upon exercise of options of The Knockout Group,  Inc.
        All options of The Knockout Group, Inc. were exercised prior to Knockout
        Holdings' acquisition of The Knockout Group, Inc. Due to the resignation
        of Mr.  Shaikh in June 2005,  all of his options in  Knockout  Holdings,
        Inc. were cancelled.

    (6) Includes  2,498,260  shares of common stock  issuable  upon  exercise of
        options of  Knockout  Holdings,  Inc.  and  1,998,608  shares  that were
        issuable  upon  exercise  of options of The  Knockout  Group,  Inc.  All
        options of The Knockout  Group,  Inc. were  exercised  prior to Knockout
        Holdings' acquisition of The Knockout Group, Inc. Due to the resignation
        of Mr.  Turner in June 2005,  all of his options in  Knockout  Holdings,
        Inc. were cancelled.

OPTION GRANTS

      The Company did not grant any stock  options  during the fiscal year ended
December 31, 2005.

AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

      The  following  table sets  forth  information  with  respect to the named
executive  officers  concerning the year-end value of "in the money" options and
the value of  unexercised  options as of  December  31,  2005.  No options  were
exercised by the named executive  officers during the fiscal year ended December
31, 2005.  The Company did not have during such fiscal year,  and currently does
not  have,  any  plans  providing  for the  grant of stock  appreciation  rights
("SARs").


                                       28
<PAGE>

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>

         (A)                   (B)                  (C)                  (D)                  (E)
                                                                 NUMBER OF
                                                                 SECURITIES           VALUE OF
                                                                 UNDERLYING           UNEXERCISED
                                                                 UNEXERCISED          IN-THE-MONEY
                                                                 OPTIONS/SARS AT      OPTIONS/SARS AT
                                                                 DECEMBER 31, 2005    DECEMBER 31, 2005
                                                                 (#)                  ($)

                        SHARES ACQUIRED                          EXERCISABLE/         EXERCISABLE/
         NAME           ON EXERCISE (#)     VALUE REALIZED ($)   UNEXERCISABLE        UNEXERCISABLE
----------------------------------------------------------------------------------------------------------
<S>                          <C>                 <C>                <C>                    <C>
Ahmed Shaikh (1)              ---                 ---               135,322 / 0             ---
Oscar Turner (2)              ---                 ---                  ---                  ---

</TABLE>


    (1) Due to the  resignation  of Mr.  Shaikh  in June  2005,  614,156  of the
        options held by Mr. Shaikh were  cancelled,  and as of December 31, 2005
        he owns 135,222 options.
    (2) Due to the  resignation  of Mr. Turner in June 2005,  all of his options
        were cancelled.

COMPENSATION OF DIRECTORS

      Our directors are reimbursed for any  out-of-pocket  expenses  incurred by
them for attendance at meetings of the Board of Directors or committees thereof.

EMPLOYMENT AGREEMENTS

      Our wholly owned subsidiary, The Knockout Group, Inc., has entered into an
employment  agreement  with John  Bellamy,  its  Chief  Executive  Officer.  Mr.
Bellamy's  employment  agreement  was  effective  as of  October 1, 2003 and the
initial  term  continues  until  October 1, 2009.  After the initial  term,  the
agreement may be extended for additional  three-year terms. Under the agreement,
Mr.  Bellamy's  base salary was set at $240,000 for the year ended  December 31,
2005, and was to be increased by 6% each year. Mr. Bellamy volunteered to reduce
his salary to $120,000 per year beginning January 16, 2006 until the Company has
achieved  significant sales revenue.  During this voluntary  reduction of salary
period, Mr. Bellamy's foregone salary will not accrue.  However,  outside of the
voluntary  salary  reduction,  all the terms of his employment  agreement remain
intact. Mr. Bellamy is entitled to receive a target bonus consistent with a plan
to be adopted by us based on achievement of certain performance criteria, and is
to be covered by a term life  insurance  policy of not less than $500,000 and to
be  reimbursed  for up to $5,000 per year of health and  wellness  products  and
services not covered by our benefit plans.  Mr. Bellamy is also entitled to five
weeks of vacation each year and to be reimbursed  for up to $1,000 per month for
expenses associated with his automobile.  In the event Mr. Bellamy is terminated
without cause or he terminates his employment for good reason, he is entitled to
his base salary at the time of termination for the remainder of the initial term
or any renewal  thereof then in effect or twelve months of salary,  whichever is
greater,  payable in a lump sum,  provided  he  executes  a full  release in our
favor.  In the event Mr. Bellamy is terminated for cause,  he is entitled to his
accrued but unpaid base salary and bonus,  if any. The  agreement  also contains
customary provisions for disability, death, confidentiality and non-competition.

ITEM 11.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

      The  following  table sets forth,  as of May 12, 2006 certain  information
with respect to the securities  beneficially owned by: (i) each of our directors
and named executive  officers;  (ii) each person who owns beneficially more than
5% of our voting stock;  and (iii) all  directors  and  executive  officers as a
group. None of the below persons own any shares of Series B Preferred Stock.


                                       29
<PAGE>

<TABLE>
<CAPTION>

                                            Percent of       Series A         Percent of
                                            Common           Preferred        Series A
Name and Address of    Common Stock         Stock            Stock            Preferred Stock
Beneficial             Beneficially Owned   Beneficially     Beneficially     Beneficially
Owner                  (1)                  Owned            Owned            Owned (2)        Percent of Vote(3)
--------------         ------------------   -----------      -------------    --------------   ------------------

<S>                     <C>                  <C>             <C>                  <C>              <C>
John Bellamy            43,091,293 (4)        27.2% (8)       269,320.580          34.8%            27.2%
c/o Knockout                                                         (13)
Holdings, Inc.
100 W. Whitehall
Avenue,
Northlake, IL 60164

Dr. Isaac Horton,       16,528,821 (5)        10.5% (9)        103,305.133         13.0%            10.5%
III
c/o Knockout
Holdings, Inc.
100 W. Whitehall
Avenue,
Northlake, IL 60164

Kurt A. Garrett            184,000 (6)           * (10)          1,150.000             *                *
c/o Knockout
Holdings, Inc.
100 W. Whitehall
Avenue,
Northlake, IL 60164

Robert L. Smith            340,000 (7)           * (11)          2,125.000             *                *
c/o Knockout
Holdings, Inc.
100 W. Whitehall
Avenue,
Northlake, IL 60164

----------------------------------------------------------------------------------------------------------------
All Executive
Officers and
Directors as a Group
(4 persons)             61,346,114           38.8% (12)        280,211.213         35.2%            38.8%
----------------------------------------------------------------------------------------------------------------
</TABLE>

* Less than 1%

      (1)   Applicable  percentage  ownership is based on  12,015,136  shares of
            common  stock  outstanding  as  of  May  12,  2006,   together  with
            securities  exercisable or  convertible  into shares of common stock
            within  60 days of May 12,  2006  for each  stockholder.  Beneficial
            ownership  is  determined  in  accordance  with  the  rules  of  the
            Securities and Exchange  Commission and generally includes voting or
            investment power with respect to securities.

      (2)   Based on  796,568  shares of Series A  Preferred  Stock  issued  and
            outstanding.

      (3)   This column  discloses the percentage of the person's overall voting
            power.  Each  outstanding  share of Series A Preferred Stock has 160
            votes,  each  outstanding  share of Series B Preferred Stock has 160
            votes and each  outstanding  share of common stock has one vote. The
            common stock,  Series A Preferred Stock and Series B Preferred Stock
            vote as a single class.  There is no holder of outstanding  Series B
            Preferred Stock who has more than 5% of the overall voting power.

      (4)   Represents:  (a)  14,415,987  shares of common stock  issuable  upon
            conversion of 90,099.92  shares of Series A Preferred Stock owned by
            Mr.  Bellamy  directly;  (b) 10,080 shares of common stock  issuable
            upon   conversion   of  63  shares  of  Series  A  Preferred   Stock
            beneficially  owned  indirectly by Mr. Bellamy through  ownership of
            his wife,  Katie Green;  and (c)  28,665,226  shares of common stock
            issuable upon conversion of 179,157.66  shares of Series A Preferred
            Stock beneficially owned indirectly by Mr. Bellamy and/or Mrs. Green
            through various trusts.

      (5)   Represents   16,528,821   shares  of  common  stock   issuable  upon
            conversion of 103,305.133 shares of Series A Preferred Stock.

      (6)   Represents  184,000 shares of common stock issuable upon  conversion
            of 1,150 shares of Series A Preferred Stock.

      (7)   Represents  340,000 shares of common stock issuable upon  conversion
            of 2,125 shares of Series A Preferred Stock.

      (8)   Percentage  beneficial  ownership is calculated based on 158,146,656
            shares of common stock outstanding, which assumes conversion in full
            of our  outstanding  Series A Preferred Stock and Series B Preferred
            Stock.  Rules of the  Securities  and  Exchange  Commission  require
            percentage  ownership to be calculated on the basis of the amount of
            outstanding  Common Stock plus,  for each  person,  any common stock
            that  person has the right to  acquire  within 60 days  pursuant  to
            options,  warrants,   conversion  privileges  or  other  rights.  In
            accordance with rules of the Securities and Exchange Commission,  as
            of May  12,  2006,  Mr.  Bellamy  beneficially  owned  78.2%  of our
            outstanding common stock.

                                       30
<PAGE>

      (9)   Percentage  beneficial  ownership is calculated based on 158,146,656
            shares of common stock outstanding, which assumes conversion in full
            of our  outstanding  Series A Preferred Stock and Series B Preferred
            Stock.  Rules of the  Securities  and  Exchange  Commission  require
            percentage  ownership to be calculated on the basis of the amount of
            outstanding  common stock plus,  for each  person,  any common stock
            that  person has the right to  acquire  within 60 days  pursuant  to
            options,  warrants,   conversion  privileges  or  other  rights.  In
            accordance with rules of the Securities and Exchange Commission,  as
            of  May  12,  2006  Mr.  Horton  beneficially  owned  57.9%  of  our
            outstanding common stock.

      (10)  Percentage  beneficial  ownership is calculated based on 158,146,656
            shares of common stock outstanding, which assumes conversion in full
            of our  outstanding  Series A Preferred Stock and Series B Preferred
            Stock.  Rules of the  Securities  and  Exchange  Commission  require
            percentage  ownership to be calculated on the basis of the amount of
            outstanding  common stock plus,  for each  person,  any common stock
            that  person has the right to  acquire  within 60 days  pursuant  to
            options,  warrants,   conversion  privileges  or  other  rights.  In
            accordance with rules of the Securities and Exchange Commission,  as
            of  May  12,  2006  Mr.  Garrett  beneficially  owned  1.5%  of  our
            outstanding common stock.

      (11)  Percentage  beneficial  ownership is calculated based on 158,146,656
            shares of common stock outstanding, which assumes conversion in full
            of our  outstanding  Series A Preferred Stock and Series B Preferred
            Stock.  Rules of the  Securities  and  Exchange  Commission  require
            percentage  ownership to be calculated on the basis of the amount of
            outstanding  common stock plus,  for each  person,  any common stock
            that  person has the right to  acquire  within 60 days  pursuant  to
            options,  warrants,   conversion  privileges  or  other  rights.  In
            accordance with rules of the Securities and Exchange Commission,  as
            of May 12, 2006 Mr. Smith beneficially owned 2.8% of our outstanding
            common stock.

      (12)  Percentage  beneficial  ownership is calculated based on 158,146,656
            shares of common stock outstanding, which assumes conversion in full
            of our outstanding Series A Preferred Stock. Rules of the Securities
            and  Exchange   Commission  require   percentage   ownership  to  be
            calculated  on the basis of the amount of  outstanding  common stock
            plus, for each person, any common stock that person has the right to
            acquire  within 60 days  pursuant to options,  warrants,  conversion
            privileges  or  other  rights.  In  accordance  with  rules  of  the
            Securities and Exchange Commission, as of May 12, 2006 all executive
            officers,  and  Directors as a group owned 83.6% of our  outstanding
            common stock.

      (13)  Includes:  (a) 90,099.92 shares of Series A Preferred Stock owned by
            Mr.  Bellamy  directly;  (b) 63 shares of Series A  Preferred  Stock
            beneficially  owned  indirectly by Mr. Bellamy through  ownership of
            his  wife,  Katie  Green;  and (c)  179,157.66  shares  of  Series A
            Preferred Stock  beneficially owned indirectly by Mr. Bellamy and/or
            Mrs. Green through various trusts.

      All of the above  disclaim  any  beneficial  ownership  in shares owned by
other family members. Unless otherwise indicated, the persons named in the table
have sole voting and  investment  power with respect to all shares of common and
preferred stock shown as beneficially owned by them.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The  following  table  shows  information  with  respect  to  each  equity
compensation  plan under which our Common Stock is authorized for issuance as of
the fiscal year ended December 31, 2005.


                                       31
<PAGE>


<TABLE>
<CAPTION>

                                  EQUITY COMPENSATION PLAN INFORMATION
------------------------------------ ------------------------ ----------------------- ---------------------------
PLAN CATEGORY                        NUMBER OF SECURITIES     WEIGHTED AVERAGE        NUMBER OF SECURITIES
                                     TO BE ISSUED UPON        EXERCISE PRICE OF       REMAINING AVAILABLE FOR
                                     EXERCISE OF              OUTSTANDING OPTIONS,    FUTURE ISSUANCE UNDER
                                     OUTSTANDING OPTIONS,     WARRANTS AND RIGHTS     EQUITY COMPENSATION PLANS
                                     WARRANTS AND RIGHTS                              (EXCLUDING SECURITIES
                                                                                      REFLECTED IN COLUMN (A)
------------------------------------ ------------------------ ----------------------- ---------------------------
                                               (A) (B) (C)
------------------------------------ ------------------------ ----------------------- ---------------------------
<S>                                             <C>                     <C>                       <C>
EQUITY COMPENSATION PLANS APPROVED
BY SECURITY HOLDERS                            -0-                     -0-                       -0-
------------------------------------ ------------------------ ----------------------- ---------------------------

------------------------------------ ------------------------ ----------------------- ---------------------------
EQUITY COMPENSATION PLANS NOT
APPROVED BY SECURITY HOLDERS
                                            402,786 *                 $0.20                      -0-
------------------------------------ ------------------------ ----------------------- ---------------------------

------------------------------------ ------------------------ ----------------------- ---------------------------
TOTAL                                       402,786 *                 $0.20                      -0-
------------------------------------ ------------------------ ----------------------- ---------------------------
</TABLE>

      * Includes options  exercisable at a price of $0.20 per share. The options
vest  monthly in equal  amounts over the first three years  following  the grant
date of December 28, 2004.  The options expire on December 28, 2014. On December
28, 2004, options were issued as follows:  2,498,260 to Oscar Turner, our former
Chief Financial Officer,  Principal Accounting Officer,  Treasurer and Director;
223,100 to Tony Weiss, a former Director;  790,446 to Coleman Peterson, a former
Director;  and 749,478 to Ahmed  Shaikh,  our former  President and former Chief
Operating Officer. Due to the resignation of Mr. Turner in June 2005, all of his
options  were  cancelled.  Due to the  resignation  of Mr.  Shaikh in June 2005,
614,156 of the options held by Mr. Shaikh were cancelled, and as of December 31,
2005,  he holds  135,322  options.  Due to the  resignation  of Mr.  Peterson in
October 2005,  581,856 of the options held by Mr. Peterson were cancelled and as
of December 31, 20005,  he held 208,590  options.  Due to the resignation of Mr.
Weiss in October 2005,  164,226 of the options held by Mr. Weiss were  cancelled
and as of December 31, 2005, he held 58,874 options.

      An aggregate of 500,000  shares of Common Stock were reserved for issuance
or available for grant under the 2000 Stock Option Plan.  Options  granted under
the 2000 Stock Option Plan may qualify as  incentive  stock  options  within the
meaning of Section 422 of the Internal  Revenue  Code of 1986,  as amended or as
non-qualified options. No options are currently outstanding under the 2000 Stock
Option Plan.  No options were granted  during 2004,  2003 or 2002. In connection
with our  acquisition  of The  Knockout  Group,  Inc.,  this  plan is no  longer
operative.

      On February 1, 2005,  our  stockholders  approved our 2005 Flexible  Stock
Incentive Plan and authorized  30,000,000 shares of Common Stock for issuance of
stock awards and stock options  thereunder.  The 2005 Incentive Plan was adopted
by and is administered by our Board of Directors. Under the plan, options may be
granted  which are intended to qualify as Incentive  Stock Options under Section
422 of the Internal  Revenue Code of 1986,  as amended or which are not intended
to qualify as  Incentive  Stock  Options  thereunder.  The 2005  Flexible  Stock
Incentive Plan and the right of  participants  to make purchases  thereunder are
intended to qualify as an "employee  stock  purchase  plan" under Section 423 of
the  Internal  Revenue  Code.  The primary  purpose of the 2005  Flexible  Stock
Incentive Plan is to attract and retain highly  qualified  officers,  directors,
key employees, and other persons, and to motivate such officers,  directors, key
employees,  and  other  persons  to serve our  business,  by  providing  them an
opportunity  to  acquire  or  increase  a  direct  proprietary  interest  in our
operations and future success. To date, no securities have been issued under the
2005 Flexible Stock Incentive Plan.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      Our management  believes that all of the below  transactions were on terms
at least as favorable as could have been obtained from unrelated third parties.

ADVANCES BY ARTISTIC COMMUNICATION CENTER

      Artistic  Communication  Center, a multi-media  video and audio production
company,  is principally owned by our Chief Executive Officer,  John Bellamy. In
2003, we agreed to reimburse Artistic  Communication Center for all advertising,
marketing,  licensing,  legal fees, accounting,  consulting,  product design and
development,   travel,   and  other   costs  paid  on  our  behalf  by  Artistic
Communication  Center  prior to our  incorporation  in April  2003.  These costs
amounted to $739,000. We established a payable to Artistic  Communication Center
of  $739,000  in 2003 and  charged it to  selling,  general  and  administrative
expense.  The payable has no  maturity  date but we made  payments of $52,000 in
2005  and  $158,000  in  2004.  Our  outstanding   obligation  due  to  Artistic
Communication  Center  totaled  $246,858  and  $298,938 on December 31, 2005 and
2004,  respectively.  Our  management  believes the terms of the  obligations to
Artistic  Communication  Center are on terms at least as  favorable  as could be
obtained from unrelated third parties.

                                       32
<PAGE>

OCCUPANCY COSTS

      Our  initial  household  and  automotive  infomercials  were  produced  by
Artistic Communication Center. Artistic Communication Center shares office space
at our  Northlake  facility  and pays rent of $1,200 per month  (annual  rent of
$14,500) to us for the space  occupied.  Rental  income  received  from Artistic
Communication  Center totaled $14,500 in 2005 and $9,700 in 2004. Our management
believes that the space rented to Artistic  Communication  Center is on terms at
least as  favorable  as could be obtained  by renting the space to an  unrelated
third party.

INFOMERCIAL PRODUCTION

      Our current  contract  with Artistic  Communication  Center was awarded at
"cost, plus 10%". Through December 31, 2005, we have spent a total of $1,128,000
for two  infomercials.  These  amounts  have been  expensed  as  incurred in our
financial statements. We have an agreement with Artistic Communication Center to
complete the production and editing of the  infomercials at cost plus 10%. As of
December 31, 2005 and 2004 our outstanding  obligation to Artistic Communication
Center was $163,000 and $262,000,  respectively.  The Company  believes that the
terms  of  our  agreement   with  Artistic   Communication   Center  to  produce
infomercials  is on  terms  at least as  favorable  as  could be  obtained  from
independent third parties.

PATENTS & TRADEMARKS

      In exchange for the  contribution  of  trademarks  and the  assignment  of
patents,  we agreed to pay Dr. Horton $400,000;  $200,000 by the end of 2004 and
the remaining  $200,000 over the following twelve months.  At December 31, 2005,
Dr.  Horton  was owed  $33,335.  This  balance  was paid in full  subsequent  to
December 31, 2005.

      In addition,  Dr. Horton received  6,524,787 shares of common stock of The
Knockout Group, Inc. The fair value of these shares of $1.6 million was based on
the fair market  value of the common stock  issued  which was  determined  to be
$0.25 per share.  This amount has been  recorded as an increase in patent assets
reflected on our balance sheet at December 31, 2004.  As part of his  agreement,
Dr. Horton agreed not to develop or contribute any intellectual  property to any
other company,  now or in the future,  that competes in the "cleaning"  products
segment.

      We have also  retained  the  services of Dr.  Horton on an on-going  basis
through a retainer agreement.  In this capacity, Dr. Horton acts as a consultant
to our executive team,  advising us on a broad range of topics including capital
formation, quality control, product development,  business strategy,  licensing,
patent development, and personnel matters. As part of this agreement, Dr. Horton
has agreed to not develop or  contribute  any  intellectual  property  including
patents and trademarks for any other company,  either now or in the future, that
competes in the "cleaning"  products segment.  For these consulting  services in
2004, Dr. Horton received stock options of The Knockout Group,  Inc., which were
valued at $616,000  using a  Black-Scholes  pricing  model.  These  options were
exercised prior to Knockout  Holdings'  acquisition of The Knockout Group,  Inc.
The  Company  also paid Dr.  Horton  approximately  $175,000  and  $351,000  for
consulting fees and board of director fees for the years ended December 31, 2005
and 2004, respectively.

      Dr, Horton previously billed for his consulting services at an hourly rate
of $350 per hour.  Effective  January 16. 2006, Dr. Horton has agreed to a fixed
monthly  retainer  of $2,500,  and he will not bill for the  services he renders
other than the $2,500 monthly retainer.

PRIOR CONSULTING BY OUR FORMER CHIEF FINANCIAL OFFICER

      Prior to joining us as Chief Financial  Officer,  we retained the services
of Oscar Turner in 2004 on a  consulting  basis to assist us in  developing  our
business  plan,  refining  our  financial  model,  fundraising,  development  of
policies and procedures,  and general financial  management.  We paid Mr. Turner
$30,000  for these  services in 2005.  Mr.  Turner  resigned as Chief  Financial
Officer and as one of our directors on June 2, 2005.

                                       33
<PAGE>

EMPLOYEES RELATED TO JOHN BELLAMY

         Eight of our current or former employees and one consultant have family
relationships with John Bellamy, our Chief Executive Officer and Chairman. The
related employees and the current status of their involvement with the company
include the following:

      (1) Katie Green,  the wife of John  Bellamy,  receives a salary of $85,000
per year as our Vice  President of  Administration.  We paid Mrs.  Green $85,000
during 2005 and $85,000 during 2004.

      (2) Alan Bellamy,  brother of John Bellamy,  was employed as our Warehouse
Manager until his  employment  terminated on July 15, 2005 during a reduction in
force. We paid Alan Bellamy $22,045 during 2005 and $14,250 during 2004.

      (3) Althea  Powers,  sister of John Bellamy,  is employed as an Accounting
Clerk. We paid Ms. Powers $17,864 during 2005 and $12,917 during 2004.

      (4) Anthony Bellamy, brother of John Bellamy, received a salary of $48,000
per year as an Account Manager.  Anthony Bellamy  currently serves as an Account
Executive  consultant  earning $35,000 per year. We paid Anthony Bellamy $27,846
during 2005 and $21,000 during 2004.

      (5) Angela Wade,  daughter of John  Bellamy,  receives a salary of $35,000
per year as an Executive  Assistant and Customer Service  Manager.  We paid Mrs.
Wade $35,000 during 2005 and $29,840 during 2004.

      (6) Delores Bellamy, sister of John Bellamy, was employed as an Accounting
Clerk until her  employment  terminated  on July 15, 2005 during a reduction  in
force. We paid Delores Bellamy $18,564 during 2005 and $12,000 during 2004.

      (7) Jabari  Bellamy,  nephew of John  Bellamy,  was employed as a Customer
Service  Representative  until his  employment  was  terminated on July 15, 2005
during a reduction  in force.  We paid Jabari  Bellamy  $12,340  during 2005 and
$6,166 during 2004.

      (8) Naomi Powers,  niece of John Bellamy,  was employed as a  Receptionist
until she was  terminated on July 15, 2005 during a reduction in force.  We paid
Naomi Powers $10,373 during 2005 and $7,569 during 2004.

      In addition,  Timothy Bellamy,  brother of John Bellamy,  was paid $20,658
during 2005 and $13,478  during 2004 for  janitorial  services on an independent
contractor basis.

GALT VENTURES CORPORATION

      In September  2004,  The Knockout  Group,  Inc.  issued two notes  payable
totaling $1.6 Million to Galt Ventures Corporation.  One of the notes was in the
principal  amount of $600,000 and the other note was in the principal  amount of
$1 Million. Kevin Waltzer, a shareholder and former director,  owns and operates
Galt  Ventures  Corporation.  The notes bear  interest at 10% per annum from the
date the principal  amount of the note was advanced to The Knockout Group,  Inc.
until  re-paid in full.  In December  2004,  the maturity  date of the notes was
extended  until the earlier of March 31, 2005 or the date of exercise of certain
warrants issued in connection  with our acquisition of The Knockout Group,  Inc.
For the year ended December 31, 2004, we incurred  interest  expense  related to
these notes of $49,300.  At December 31, 2004,  the  outstanding  balance on the
notes totaled $1.2 million.  The notes, as amended,  were scheduled to mature on
July 31, 2005. In May 2005, the notes were paid in full. Our management believes
the terms of these notes payable were on terms at least as favorable as could be
obtained from an unrelated third party.

      In connection  with the notes payable to Galt Ventures  Corporation,  Galt
Ventures  Corporation  received  warrants to purchase up to 1,427,840  shares of
common  stock at a price of  $0.0005  per share.  The  warrants  were  valued at
$357,000 using a Black-Scholes option pricing model. The value of these warrants
was  recorded  as a discount  to the note  payable  and was  amortized  over the
original term of the loan.

                                       34
<PAGE>

RELATIONSHIPS OF FORMER DIRECTORS WITH OUR PRIMARY SUPPLIER

      Kevin Waltzer,  one of our principal  shareholders  and a former director,
and David Rights,  one of our shareholders  and a former director,  are minority
shareholders  in  Charleston  Holding,  LLC,  our  primary  supplier  of product
concentrate.  Charleston  Holdings,  LLC supplies  concentrate  to us at a fixed
priced  and under the terms of the  agreement,  we have the right to source  the
product from other suppliers. During the years ended December 31, 2005 and 2004,
we purchased raw materials from Charleston  Holdings,  LLC totaling $153,000 and
$322,000,  respectively.  At December  31, 2005,  the Company had deposits  with
Charleston Holdings,  LLC totaling $58,323. Our management believes the terms of
our agreement with Charleston Holdings, LLC is on terms at least as favorable as
could be obtained from an unrelated third party.

ITEM 13.      EXHIBITS.

EXHIBIT NUMBER                           DESCRIPTION
--------------------------------------------------------------------------------

3.1         Certificate of Incorporation of United Network  Marketing  Services,
            Inc.  (Incorporated  by  reference  to  the  Company's  registration
            statement  on Form  10-SB  (File  No.  000-32007),  filed  with  the
            Securities and Exchange Commission on November 22, 2000)
3.2         Certificate  of  Ownership  and Merger of United  Network  Marketing
            Services,  Inc. and Knockout  Holdings,  Inc. changing the Company's
            name to Knockout  Holdings,  Inc.  (Incorporated by reference to the
            Company's Form 8-K filed with the Securities and Exchange Commission
            on January 12, 2005)
3.3         Amended   and   Restated   By-laws  of   Knockout   Holdings,   Inc.
            (Incorporated  by reference to the Company's Form 8-K filed with the
            Securities and Exchange Commission on March 2, 2005)
4.1         Certificate of Designation, Powers, Preferences and Rights of Series
            A Preferred Stock.  (Incorporated by reference to the Company's Form
            8-K filed with the Securities and Exchange  Commission on January 4,
            2005)
4.2         Certificate of Designation, Powers, Preferences and Rights of Series
            B Preferred Stock.  (Incorporated by reference to the Company's Form
            8-K filed with the Securities and Exchange  Commission on January 4,
            2005)
4.3         Form of Common Stock Purchase  Warrant issued in connection with the
            sale of Series B Preferred Stock  (Incorporated  by reference to the
            Company's Form 8-K filed with the Securities and Exchange Commission
            on January 20, 2005)
4.4         Amended  and  Restated  11%  Senior  Secured  Note  due May 2,  2008
            (Incorporated  by reference to the Company's Form 8-K filed with the
            Securities and Exchange Commission on September 16, 2005)
4.5         Form  of  16.66%  Senior   Convertible   Note  due  March  31,  2007
            (Incorporated  by reference to the Company's Form 8-K filed with the
            Securities and Exchange Commission on September 16, 2005)
10.1        Employment  Agreement,  dated  August  22,  2005,  by and  among the
            Company,  David Malone, John Bellamy and Isaac Horton  (Incorporated
            by reference to the  Company's  quarterly  report on Form 10-QSB for
            the fiscal  quarter ended June 30, 2005,  filed with the  Securities
            and Exchange Commission on August 22, 2005)
10.2        Letter  Agreement,  dated  September  15,  2005,  with David  Malone
            (Incorporated  by reference to the Company's Form 8-K filed with the
            Securities and Exchange Commission on September 16, 2005)
10.3        Employment  Agreement,  dated  August  22,  2005,  by and  among the
            Company, Richard Han, John Bellamy and Isaac Horton (Incorporated by
            reference to the Company's  quarterly  report on Form 10-QSB for the
            fiscal  quarter ended June 30, 2005,  filed with the  Securities and
            Exchange Commission on August 22, 2005)
10.4        Securities  Purchase  Agreement  dated January 10, 2005 among United
            Network Marketing Services, Inc. (n/k/a Knockout Holdings, Inc.) and
            each   purchaser   identified   on  the   signature   pages  thereto
            (Incorporated by reference to Form 8-K filed with the Securities and
            Exchange Commission on January 13, 2005)
10.5        Registration  Rights  Agreement  dated January 10, 2005 by and among
            United Network Marketing  Services,  Inc. (n/k/a Knockout  Holdings,
            Inc.) and each of the investors  signatory thereto  (Incorporated by
            reference  to Form  8-K  filed  with  the  Securities  and  Exchange
            Commission on January 13, 2005)

                                       35
<PAGE>

10.6        Securities  Purchase  Agreement  dated January 17, 2005 among United
            Network Marketing Services, Inc. (n/k/a Knockout Holdings, Inc.) and
            each   purchaser   identified   on  the   signature   pages  thereto
            (Incorporated by reference to Form 8-K filed with the Securities and
            Exchange Commission on January 20, 2005)
10.7        Registration  Rights  Agreement  dated January 17, 2005 by and among
            United Network Marketing  Services,  Inc. (n/k/a Knockout  Holdings,
            Inc.) and each of the investors  signatory thereto  (Incorporated by
            reference  to Form  8-K  filed  with  the  Securities  and  Exchange
            Commission on January 20, 2005)
10.8        Securities Purchase Agreement dated as of May 2, 2005 among Knockout
            Holdings,  Inc. and DCOFI Master LDC  (Incorporated  by reference to
            the  Company's  Form 8-K  filed  with the  Securities  and  Exchange
            Commission on May 6, 2005)
10.9        Registration  Rights Agreement  entered into as of May 2, 2005 among
            Knockout  Holdings,  Inc.  and DCOFI  Master  LDC  (Incorporated  by
            reference to the Company's  Form 8-K filed with the  Securities  and
            Exchange Commission on May 6, 2005)
10.10       Security  Agreement dated as of May 2, 2005 among Knockout Holdings,
            Inc.  and  DCOFI  Master  LDC  (Incorporated  by  reference  to  the
            Company's Form 8-K filed with the Securities and Exchange Commission
            on May 6, 2005)
10.11       Escrow  Agreement  made  as of May 2,  2005  by and  among  Knockout
            Holdings,  Inc.,  DCOFI Master LDC and Continental  Stock Transfer &
            Trust Company  (Incorporated  by reference to the Company's Form 8-K
            filed with the Securities and Exchange Commission on May 6, 2005)
10.12       Purchase Agreement,  dated September 12, 2005, among the Company and
            the Purchasers  identified therein (Incorporated by reference to the
            Company's Form 8-K filed with the Securities and Exchange Commission
            on September 16, 2005)
10.13       Registration  Rights Agreement,  dated September 12, 2005, among the
            Company  and the  Purchasers  identified  therein  (Incorporated  by
            reference to the Company's  Form 8-K filed with the  Securities  and
            Exchange Commission on September 16, 2005)
10.14       Waiver and Consent Agreement,  dated September 12, 2005, between the
            Company and CAMOFI  Master LDC  (Incorporated  by  reference  to the
            Company's Form 8-K filed with the Securities and Exchange Commission
            on September 16, 2005)
10.15*      Lease  Amendment  made as of  December  1, 2005 by and  between  The
            Knockout Group, Inc. and Centerpoint Properties Trust
10.16*      Memorandum of Understanding effective as of February 24, 2004 by and
            between  Sensible  Life  Products,  a division of Laid Back Designs,
            Ltd. and The Knockout Group, Inc.
14.1        Code of Business  Conduct and Ethics  (Incorporated  by reference to
            the Company's annual report on Form 10-KSB for the fiscal year ended
            December 31, 2004, filed with the Securities and Exchange Commission
            on April 15, 2005)
16.1        Letter  from  Goldstein  Golub  Kessler  LLP dated  January 19, 2005
            (Incorporated  by reference to Form 8-K,  filed with the  Securities
            and Exchange Commission on January 19, 2005)
21.1*       List of Subsidiaries
31.1*       Certification  by Chief  Executive  Officer and Principal  Financial
            Officer,  required  by  Rule  13a-14(a)  or  Rule  15d-14(a)  of the
            Exchange Act
32.1*       Certification  by Chief  Executive  Officer and Principal  Financial
            Officer,  required  by  Rule  13a-14(b)  or  Rule  15d-14(b)  of the
            Exchange  Act and  Section  1350 of  Chapter  63 of  Title 18 of the
            United States Code
--------------------------
* Filed herewith.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

AUDIT FEES

      The  aggregate  fees  billed for  professional  services  rendered  by our
independent  registered  public  accounting  firm for the audit of our financial
statements,  for the reviews of the financial  statements included in our annual
report on Form 10-KSB,  and for other services  normally  provided in connection
with  statutory  filings were $134,000 and $115,000 for the years ended December
31, 2005 and December 31, 2004, respectively.

                                       36
<PAGE>

AUDIT-RELATED FEES

      We incurred  fees of $19,000 for the year ended  December  31, 2005 and no
fees for the year ended December 31, 2004 for professional  services rendered by
our principal  accountants that are reasonably related to the performance of the
audit or review of our financial statements and not included in "Audit Fees."

TAX FEES

      The  aggregate  fees  billed for  professional  services  rendered  by our
principal  accountants  for tax  compliance,  tax advice,  and tax planning were
$25,000 and $20,000 for the years ended December 31, 2005 and December 31, 2004,
respectively.   The  services  for  which  such  fees  were  paid  consisted  of
preparation of tax returns.

ALL OTHER FEES

      We did not incur any fees for other professional  services rendered by our
principal  accountants during the years ended December 31, 2005 and December 31,
2004.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

      In accordance  with its Audit  Committee  Charter,  the Audit  Committee's
policy is to expressly pre-approve all audits and permissible non-audit services
provided by our independent  public  accountants  before the independent  public
accountants  are engaged by us to provide any such services.  These services may
include audit services,  audit related services,  tax services and other related
services.  Pre-approval  is  generally  provided  for up to  one  year  and  any
pre-approval is detailed as to the particular service or category of service and
is subject to a specific budget. Our entire Board of Directors currently acts as
our Audit Committee in accordance with the Audit Committee Charter.


                                       37
<PAGE>


                                   SIGNATURES

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

                                              KNOCKOUT HOLDINGS, INC.


          Date: May 18, 2006             By:   /s/ John Bellamy
                                              ----------------------------------
                                              John Bellamy
                                              Chief Executive Officer, Principal
                                              Financial Officer and Principal
                                              Accounting Officer

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

<TABLE>
<CAPTION>

            SIGNATURE                              TITLE                                 DATE
---------------------------------    ----------------------------------------   ------------------------------
<S>                                    <C>                                                <C>

 /s/ John Bellamy                      Chief Executive Officer, Principal                 May 18, 2006
------------------------------               Financial Officer, Principal
John Bellamy                              Accounting Officer and Director

 /s/ Isaac Horton, III                                           Director                 May 18, 2006
------------------------------
Dr. Isaac Horton, III

 /s/ Kurt A. Garrett                                             Director                 May 18, 2006
------------------------------
Kurt A. Garrett

 /s/ Robert L. Smith, Jr.                                        Director                 May 18, 2006
------------------------------
Robert L. Smith, Jr.

</TABLE>


                                       38
<PAGE>


                             KNOCKOUT HOLDINGS, INC.
                        CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 2005 AND 2004

                                TABLE OF CONTENTS


Report of Independent Registered Public Accounting Firm.................... F-2

Consolidated Balance Sheets................................................ F-3

Consolidated Statements of Operations.......................................F-4

Consolidated Statement of Cash Flows....................................... F-5

Consolidated Statement of Stockholders' Equity (Deficit)................... F-6

Notes to Consolidated Financial Statements.......................... F-7 - F-23





                                      F-1
<PAGE>

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Knockout Holdings, Inc
Northlake, Illinois

We have  audited  the  accompanying  consolidated  balance  sheets  of  Knockout
Holdings,  Inc.  as of December  31, 2005 and 2004 and the related  consolidated
statements of operations,  stockholders'  equity, and cash flows for each of the
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audits included consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Knockout Holdings,
Inc. at December 31, 2005 and 2004,  and the results of its  operations  and its
cash flows for the years then ended, in conformity  with  accounting  principles
generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
the Company  will  continue as a going  concern.  As  discussed in Note 1 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from operations and has an accumulated  deficit and working  capital  deficiency
that raise  substantial  doubt about its ability to continue as a going concern.
Management's  plans in regard to these matters are also described in Note 1. The
financial  statements do not include any  adjustment  that might result from the
outcome of this uncertainty.

/s/ BDO Seidman, LLP

Chicago, Illinois

April 26, 2006


                                      F-2
<PAGE>


                             KNOCKOUT HOLDINGS, INC.
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>


DECEMBER 31,                                                     2005                 2004
----------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>
ASSETS

CURRENT ASSETS
    Cash                                                      $    791,012       $     19,837
    Accounts Receivable, net of allowance for doubtful
    accounts of $126,000 and 0 at December 31, 2005
    and 2004, respectively                                         138,371            133,030
    Inventories                                                    237,346          1,802,060
    Prepaid Expenses and Other Current Assets                      131,146             63,684

----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                             1,297,875          2,018,611
----------------------------------------------------------------------------------------------

FIXED ASSETS, NET                                                  216,559            280,077

PATENTS & TRADEMARKS, Net of amortization of
    $36,757 at December 31, 2004                                        --          3,137,629

DEPOSITS & OTHER NON-CURRENT ASSETS                                153,825            200,848

----------------------------------------------------------------------------------------------
TOTAL ASSETS                                                  $  1,668,259       $  5,637,165
----------------------------------------------------------------------------------------------

LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
    Accounts Payable                                          $    779,127       $  1,938,240
    Accrued Expenses                                             4,048,503            715,044
    Due to Related Party                                           246,858            298,938
    Notes Payable                                                       --          1,200,000
    Convertible Notes Payable, net of unamortized
      discount of $5,343,096 and 0 at
      December 31, 2005 and 2004, respectively                      92,451                 --


----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                        5,166,939          4,152,222
----------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES


STOCKHOLDERS' EQUITY

    Common Stock - Voting, $0.001, 20,000,000 shares
    authorized, 12,015,136 and 8,992,323 issued
    and outstanding respectively                                    12,015              8,992

    Convertible Preferred Stock, $0.001 par value,
    1,000,000 shares authorized

    Series A - 865,000 shares authorized, 796,568 issued
    and outstanding at both December 31,2005 and 2004
    (liquidation preference of $37,351,000)                            797                797

    Series B - 1,000,000 shares authorized, 116,754 to
    be issued (liquidation preference of $5,474,980)                   116                 --
    Additional paid-in capital                                  28,212,978         15,789,717
    Accumulated deficit                                        (31,724,586)       (14,314,563)
----------------------------------------------------------------------------------------------
Total Stockholders' Equity                                      (3,498,680)      $  1,484,943

----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                    $  1,668,259       $  5,637,165
----------------------------------------------------------------------------------------------

</TABLE>

         See accompanying notes to the consolidated financial statements



                                      F-3
<PAGE>


                             KNOCKOUT HOLDINGS, INC.
                      Consolidated Statements of Operations
                  For Periods Ended December 31, 2005 and 2004


<TABLE>
<CAPTION>


                                                                         For Year Ended         For Year Ended
                                                                          December 31,            December 31,
                                                                               2005                  2004
------------------------------------------------------------------------------------------------------------------------

<S>                                                                          <C>                   <C>
Revenue                                                                      $  1,883,202          $    679,008

Cost of Sales                                                                   2,364,474               451,977

------------------------------------------------------------------------------------------------------------------------

Gross Margin                                                                     (481,272)              227,031

Selling, General and Administrative Expenses
     (inclusive of $66,000 and $1,100,000 of
     charges incurred from related party, in 2005
     and 2004 respectively)                                                    10,695,601            11,743,370

Impairment loss                                                                 2,814,072                    --
------------------------------------------------------------------------------------------------------------------------

Operating Loss                                                                (13,990,945)          (11,516,339)

Loss on extinguishment of debt                                                  2,622,101                    --
Interest Expense                                                                  796,976             1,058,363
------------------------------------------------------------------------------------------------------------------------

Net Loss                                                                      (17,410,022)          (12,574,702)

------------------------------------------------------------------------------------------------------------------------
Preferred Stock Dividend                                                       (2,286,759)           (1,610,000)

Net Loss Available to Common Shareholders                                    $(19,696,781)         $(14,184,702)
------------------------------------------------------------------------------------------------------------------------



Basic and diluted loss per common shares                                     $      (1.80)         $      (0.22)
------------------------------------------------------------------------------------------------------------------------

Weighted average common shares outstanding                                     10,944,608            63,727,459
------------------------------------------------------------------------------------------------------------------------

</TABLE>

     See accompanying notes to the consolidated financial statements



                                      F-4
<PAGE>

                             KNOCKOUT HOLDINGS, INC.
                             Statement of Cash Flows
                  For Periods Ended December 31, 2005 and 2004

<TABLE>
<CAPTION>


                                                                         FOR YEAR ENDED       FOR YEAR ENDED
                                                                           DECEMBER 31,        DECEMBER 31,
                                                                              2005                  2004
---------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                   <C>
Cash Flows From Operating Activities
         Net loss                                                           $(17,410,022)         $(12,574,702)
         Adjustments to reconcile net loss to net cash used
         in operating activities
         Impairment Loss                                                       2,814,072                     0
         Depreciation & amortization                                             405,081                82,732
         Provision for Obsolete Inventory                                        550,500                     0
         Provision for Bad Debt                                                  140,000                     0
         Amortization of original issue discount                                 228,835               983,000
         Amortization of financing fees                                          106,553                 5,924
         Loss on Extinguishment of Debt                                        2,622,101                     0
         Stock compensation expense                                              509,000                     0
         Issuance of shares and warrants in exchange for                         246,937             4,589,000
         services received
         Loss on sale of fixed assets                                                248                     0
         Changes in assets and liabilities
              Accounts Receivable                                               (145,341)             (133,030)
              Inventories                                                      1,014,214            (1,802,060)
              Prepaid expenses and other current assets                          (67,461)              (63,684)
              Other Assets                                                        97,977              (189,000)
              Accounts payable                                                (1,159,113)            1,504,328
              Accrued Expenses                                                 2,241,199               632,044

---------------------------------------------------------------------------------------------------------------
         Net cash used in operating activities                                (7,805,220)           (6,965,448)
---------------------------------------------------------------------------------------------------------------

Cash Flows from Investing Activities
         Purchase of fixed assets                                                (19,628)             (314,271)
         Expenditures for patents and trademarks                                       0            (1,137,887)
         Proceeds from sale of fixed assets                                        1,373                     0
---------------------------------------------------------------------------------------------------------------
         Net cash used in investing activities                                   (18,255)           (1,452,158)
---------------------------------------------------------------------------------------------------------------

Cash Flows from Financing Activities
         Proceeds from issuance of preferred stock                             5,485,000             6,680,000
         Payments on Long Term Debt                                           (1,564,453)                    0
         Costs related to issuance of preferred stock                           (354,118)             (439,455)
         Proceeds from issuance of debt                                        5,800,000             2,550,000
         Proceeds from exercise of options and warrants                           30,141                10,016
         Repayments of convertible notes                                               0              (450,000)
         Deferred financing charges paid                                        (248,340)              (17,772)
         Payments of preferred stock dividends                                  (501,500)                    0
         Payment of amount due to related party                                  (52,080)             (158,000)
---------------------------------------------------------------------------------------------------------------
         Net cash provided by financing activities                             8,594,650             8,174,789
---------------------------------------------------------------------------------------------------------------

Net Increase (Decrease) in Cash                                                  771,175              (242,817)

Cash, at beginning of period                                                      19,837               262,654

---------------------------------------------------------------------------------------------------------------
Cash, at end of period                                                      $    791,012          $     19,837
---------------------------------------------------------------------------------------------------------------

Supplemental Disclosures of Cash Flow Information

         Cash paid during the period for interest                                164,000                   423

         Stock issued as consideration for assignment of
         patents                                                                       0             1,631,000

         Conversion of convertible debt  and accrued
         interest to common stock                                                      0               520,000

         Conversion of convertible debt to Series C Preferred Stock                    0               400,000

         Dividends and penalties on Preferred Stock:
           Total dividends and penalties recorded                              1,593,759                     0
            Total paid                                                           501,500                     0
            Total included in accrued liabilities at December 31               1,092,259                     0

</TABLE>


         See accompanying notes to the consolidated financial statements


                                      F-5
<PAGE>


                             KNOCKOUT HOLDINGS, INC.
            Consolidated Statement of Stockholders' Equity (Deficit)

<TABLE>
<CAPTION>

                                                                              Series A    Series A     Series A    Series A
                                                                              Preferred   Preferred   Preferred   Preferred
                                                     Common       Common       Shares       Stock       Shares      Stock
                                                     Shares        Stock    (pre-merger)(pre-merger)(post-merger)(post-merger)
------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>       <C>               <C>         <C>           <C>
BALANCE AT DECEMBER 31, 2003                        61,640,000      $ 2,000            -        $ -            -          $ -

Issuance of Series A Preferred Stock                                          23,644,000    236,440

Issuance of Series B Preferred Stock

Offering Costs from Series A & B
Preferred Stock Issuances

Adjust par value of common stock                                    614,400

Issuance of options to consultants in
exchange for services provided

Issuance of warrants to consultants in
exchange for services provided

Issuance of options to employees in exchange
for services provided

Warrants and options exercised                      19,231,366      192,314

Common shares issued to employees                      625,600        6,256

Common shares issued for patents                      6,524,787      65,248

Warrants issued with notes payable

Beneficial conversion feature on
convertible debt

Conversion of Taylor note payable                    1,629,188       16,292

Issuance of Series C Preferred Stock

Conversion of notes payable to Series C
Preferred Stock

Offering Costs from Series C Preferred Stock

Conversion of Series A, B, & C Preferred
to common stock                                     37,800,000      378,000  (23,644,000)  (236,440)

------------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 28, 2004                       127,450,941   $1,274,509            -        $ -            -          $ -
------------------------------------------------------------------------------------------------------------------------------

Conversion of common stock to Series A
preferred stock in connection with
reverse merger transaction                        (127,450,941)  (1,274,509)                             796,568          797

Shares issued in reverse merger                      8,175,747        8,175

Shares issued for services related to the
reverse merger                                         816,576          817

Net loss for the year ended December 31, 2004

------------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2004                         8,992,323      $ 8,992            -        $ -      796,568        $ 797
------------------------------------------------------------------------------------------------------------------------------

Issuance of Series B Preferred Stock
  (net of issuance costs of $354,118)

Shares and Warrants issued for services                  8,750            9

Exercise of warrants                                 3,014,063        3,014

Compensation expense for stock options

Dividends to Preferred Shareholders

Warrants Issued in Connection with Debt Issuance

Cancellation of Warrants issued with Debt

Contribution of preferred stock by shareholders                                                           82,427           82

Preferred Stock Issued in connection with debt                                                           (82,427)         (82)

Beneficial conversion on convertible debt

Modification of exercise price on warrants

Net Loss for year ended December 31, 2005

------------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2005                        12,015,136     $ 12,015            -        $ -      796,568        $ 797
------------------------------------------------------------------------------------------------------------------------------


<CAPTION>

                                                       Series B     Series B    Series B      Series B
                                                       Preferred    Preferred  Preferred     Preferred       Series C
                                                        Shares       Stock       Shares        Stock        Preferred
                                                     (pre-merger) (pre-merger)(post-merger) (post-merger)     Shares
---------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>          <C>          <C>             <C>           <C>
BALANCE AT DECEMBER 31, 2003                                   -          $ -            -             $ -             -

Issuance of Series A Preferred Stock

Issuance of Series B Preferred Stock                   3,956,000       39,560

Offering Costs from Series A & B
Preferred Stock Issuances

Adjust par value of common stock

Issuance of options to consultants in
exchange for services provided

Issuance of warrants to consultants in
exchange for services provided

Issuance of options to employees in exchange
for services provided

Warrants and options exercised

Common shares issued to employees

Common shares issued for patents

Warrants issued with notes payable

Beneficial conversion feature on
convertible debt

Conversion of Taylor note payable

Issuance of Series C Preferred Stock                                                                           8,600,000

Conversion of notes payable to Series C
Preferred Stock                                                                                                1,600,000

Offering Costs from Series C Preferred Stock

Conversion of Series A, B, & C Preferred
to common stock                                       (3,956,000)     (39,560)                               (10,200,000)

---------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 28, 2004                       1           -          $ -            -             $ -             -
---------------------------------------------------------------------------------------------------------------------------

Conversion of common stock to Series A
preferred stock in connection with
reverse merger transaction                        (1

Shares issued in reverse merger

Shares issued for services related to the
reverse merger

Net loss for the year ended December 31, 2004

---------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2004                                   -          $ -            -             $ -             -
---------------------------------------------------------------------------------------------------------------------------

Issuance of Series B Preferred Stock
  (net of issuance costs of $354,118)                                              116,754           $ 116

Shares and Warrants issued for services

Exercise of warrants

Compensation expense for stock options

Dividends to Preferred Shareholders

Warrants Issued in Connection with Debt Issuance

Cancellation of Warrants issued with Debt

Contribution of preferred stock by shareholders

Preferred Stock Issued in connection with debt

Beneficial conversion on convertible debt

Modification of exercise price on warrants

Net Loss for year ended December 31, 2005

---------------------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2005                                   -          $ -    116,754           $ 116               -
---------------------------------------------------------------------------------------------------------------------------



<CAPTION>


                                                      Series C    Additional        Total
                                                     Preferred     Paid in       Accumulated     Stockholders'
                                                       Stock       Capital         Deficit           Equity
-----------------------------------------------------------------------------------------------------------------
<S>                                                           <C>          <C>    <C>               <C>
BALANCE AT DECEMBER 31, 2003                                  $ -          $ -    $ (1,739,861)     $ (1,737,861)

Issuance of Series A Preferred Stock                                 4,657,846                         4,894,286

Issuance of Series B Preferred Stock                                 1,066,154                         1,105,714

Offering Costs from Series A & B
Preferred Stock Issuances                                             (194,010)                         (194,010)

Adjust par value of common stock                                      (614,400)                                 -

Issuance of options to consultants in
exchange for services provided                                       1,699,500                         1,699,500

Issuance of warrants to consultants in
exchange for services provided                                         620,500                           620,500

Issuance of options to employees in exchange
for services provided                                                  962,000                           962,000

Warrants and options exercised                                        (182,298)                           10,016

Common shares issued to employees                                      149,744                           156,000

Common shares issued for patents                                     1,565,752                         1,631,000

Warrants issued with notes payable                                     670,000                           670,000

Beneficial conversion feature on                                       313,000                           313,000
convertible debt

Conversion of Taylor note payable                                      503,708                           520,000

Issuance of Series C Preferred Stock                       86,000    2,064,000                         2,150,000

Conversion of notes payable to Series C
Preferred Stock                                            16,000      384,000                           400,000

Offering Costs from Series C Preferred Stock                          (291,500)                         (291,500)

Conversion of Series A, B, & C Preferred
to common stock                                          (102,000)                                             -

-----------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 28, 2004                                  $ -  $13,373,996     $ (1,739,861)    $ 12,908,645
-----------------------------------------------------------------------------------------------------------------

Conversion of common stock to Series A
preferred stock in connection with
reverse merger transaction                                           1,273,713                                 -

Shares issued in reverse merger                                         (8,175)                                -

Shares issued for services related to the
reverse merger                                                       1,150,183                         1,151,000

Net loss for the year ended December 31, 2004                                       (12,574,702)     (12,574,702)

-----------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2004                                  $ -  $15,789,717    $ (14,314,563)     $ 1,484,943
-----------------------------------------------------------------------------------------------------------------

Issuance of Series B Preferred Stock
  (net of issuance costs of $354,118)                                5,130,766                         5,130,882

Shares and Warrants issued for services                                246,928                           246,937

Exercise of warrants                                                    27,127                            30,141

Compensation expense for stock options                                 509,000                           509,000

Dividends to Preferred Shareholders                                 (1,593,759)                       (1,593,759)

Warrants Issued in Connection with Debt Issuance                     1,513,199                          1,513,199

Cancellation of Warrants issued with Debt                           (1,513,199)                       (1,513,199)

Contribution of preferred stock by shareholders                            (82)                                -

Preferred Stock Issued in connection with debt                       5,947,281                         5,947,199

Beneficial conversion on convertible debt                            2,141,000                         2,141,000

Modification of exercise price on warrants                              15,000                            15,000

Net Loss for year ended December 31, 2005                                           (17,410,022)     (17,410,022)

-----------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 2005                                  $ -  $28,212,978    $ (31,724,586)    $ (3,498,680)
-----------------------------------------------------------------------------------------------------------------

</TABLE>



         See accompanying notes to the consolidated financial statements


                                      F-6
<PAGE>




                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1. SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION

ORGANIZATION AND BUSINESS

Knockout  Holdings,  Inc.  ("Knockout"  or  the  "Company")  is a  strategically
integrated  marketing company committed to the development of celebrity products
that are safe for human use and environmentally friendly.

Knockout is currently  engaged in the business of selling cleaning products that
are based on a proprietary  technology.  The company operates under an exclusive
license  agreement  with  George  Foreman   ("Licensor"),   the  two-time  World
Heavyweight  boxing  champion and sells its products  primarily  through  retail
stores throughout the U.S. The Company's products currently consist of household
and automotive cleaning products for retail and industrial use.

RECAPITALIZATION AND MERGER

On  December  28,  2004,  United  Network  Marketing  Services,  Inc. a Delaware
corporation  and a publicly  traded  company  with nominal  operating  activity,
acquired  The  Knockout  Group,  Inc.  by  issuing  796,568  shares  of Series A
preferred stock of United Network Marketing  Services to the stockholders of The
Knockout Group, Inc. in exchange for all of the issued and outstanding shares of
The Knockout  Group,  Inc. Prior to the  transaction,  United Network  Marketing
Services had no  significant  operations and subsequent to the completion of the
transaction changed its name to Knockout Holdings, Inc.

For financial  reporting  purposes,  this  transaction has been reflected in the
accompanying  financial  statements as a recapitalization of The Knockout Group,
Inc. and the financial statements reflect the historical  financial  information
of The Knockout Group,  Inc.,  which was incorporated in Delaware in April 2003.
Therefore, for accounting purposes, the shares recorded as issued in the reverse
merger are the 8,175,747 shares owned by United Network Marketing Services, Inc.
shareholders prior to the reverse merger.

Each share of the post  merger  Series A  Preferred  Stock of the  Company  will
automatically convert into 160 shares of common stock of the Company immediately
after the Company  amends its  Certificates  of  Incorporation  to authorize the
issuance of a sufficient number of shares to complete the conversion.

BASIS OF PRESENTATION

The accompanying consolidated 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.  Through  August  2004,  the
company  operated as a development  stage company.  For the years ended December
31, 2005 and 2004,  the Company  incurred net losses of $17.4  million and $12.6
million,  respectively.  Cash used in operating  activities was $7.8 million and
$7.0 million for the years ended December 31, 2005 and 2004, respectively. As of
December 31, 2005, the company had an accumulated deficit of $31.7 million and a
working  capital  deficiency  of $3.9  million,  and is in default  of  interest
payments  required  under its  current  debt  agreements.  These  factors  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
The Company's ability to continue as a going concern is ultimately  dependent on
its ability to obtain additional funding and increase sales to a level that will
allow it to operate profitably and sustain positive operating cash flows.

In December 2005, the Company  completed  their  development of a commercial and
institutional  line of  cleaning  products,  and  adopted a strategy to focus on
governmental  and industrial  sales during 2006.  The Company  believes there is
adequate  demand  for its  products.  The  Company is also in  discussions  with
commercial  banks  and  other  financing  sources  to  provide  working  capital
financing to fund expected inventory and receivables growth.  However,  there is
no  assurance  that the Company  will  continue to be  successful  in  obtaining
additional  funding  in the  future or  improving  its  operating  results.  The
financial  statements do not include any adjustments to reflect  possible future
effects on the  recoverability  and  classification of assets or the amounts and
classifications  of liabilities  that may result from the possible  inability of
the Company to continue as a going concern.


                                      F-7
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The  accompanying  consolidated  financial  statements  include the  accounts of
Knockout  Holdings,  Inc. and its wholly-owned  subsidiary,  The Knockout Group,
Inc.  All  significant   intercompany   balances  and  transactions   have  been
eliminated.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United  States  (GAAP)  requires  management  to make
estimates and assumptions  that affect the reported  amounts in the consolidated
financial statements and the related  disclosures.  These estimates are based on
management's  best  knowledge  of current  events and  actions  the  Company may
undertake  in the future.  Estimates  are used in  accounting  for,  among other
items,  consumer and trade promotion accruals,  stock options,  useful lives for
assets subject to depreciation  and  amortization,  future cash flows associated
with impairment testing for long-lived assets and accrued liabilities.

REVENUE RECOGNITION

Revenue  is  derived  primarily  from  product  sales  and  is  recorded  net of
provisions for discounts, returns, rebates to customers and other adjustments as
can be reasonably  determined.  The Company  recognizes  revenue when all of the
fundamental  criteria for revenue recognition have been met.  Specifically,  the
sales price is fixed and determined, title to the product, ownership and risk of
loss transfer to the customer,  and collectibility is reasonably assured. All of
these criteria are present at the time of product shipment.

COST OF PRODUCTS SOLD

Cost of products sold consists primarily of the cost of finished goods purchased
directly  from  third-party  manufacturers.  Cost of products sold also includes
inbound  freight costs,  internal  transfer  costs,  and  warehousing  and other
shipping  and handling  activity  related to  producing  products.  Shipping and
handling costs invoiced to customers are included in net sales.

SELLING, GENERAL AND ADMINISTRATIVE

Selling,   general  and  administrative  expense  primarily  includes  marketing
expenses,  including the cost of media, advertising,  infomercial production and
related costs; selling expenses;  research and development costs; administrative
and other indirect overhead costs; and other miscellaneous operating items.

The Company has produced  infomercials  to market its household  and  automotive
product lines.  In accordance  with SOP 93-7 entitled  "Reporting on Advertising
Costs." infomercial production costs have been expensed as incurred.

For the years ended December 31, 2005 and 2004, the Company recorded advertising
expense of $1,221,400 and $48,000,  respectively.  In addition,  for years ended
December 31, 2005 and 2004, the Company recorded research & development  expense
of $235,600 and $50,000, respectively.

CONCENTRATION OF RISK

The Company  utilizes  outside vendors and third party providers to manufacture,
warehouse,  and distribute its products. The markets for contract manufacturing,
warehousing,  and  order  fulfillment  are well  developed  in the U.S.  and the
Company  believes it could readily  contract with other  providers on comparable
terms, with limited, or no disruption to its business.


                                      F-8
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The company has an  exclusive  license  agreement to market and  distribute  its
botanical disinfectant product, which can only be obtained from a sole provider.
The current contract covers a three-year  period beginning  February 24, 2004 to
February 23, 2007.  There can be no assurance that this contract will be renewed
or renewed on terms and conditions comparable to the existing agreement.

ACCOUNTS RECEIVABLE

Accounts  receivable  consist  of  amounts  due to the  Company  from our normal
business  activities.  When  necessary,  the Company  maintains an allowance for
doubtful accounts to reflect the expected  collectibility of accounts receivable
based on past collection history and specific risks identified in the portfolio.
After all attempts to collect  against the  receivable  fail,  the receivable is
written  off  against the  allowance.  An  allowance  for  doubtful  accounts of
$126,000   and  0  were  deemed   necessary  at  December  31,  2005  and  2004,
respectively.

INVENTORY VALUATION

Inventories  are stated at the lower of cost,  as  determined  by the  first-in,
first-out (FIFO) method, or market.

INCOME TAXES

The Company  recognizes  deferred  tax assets and  liabilities  for the expected
future tax  consequences of temporary timing  differences  between the financial
statement and tax basis of assets and liabilities at the applicable  enacted tax
rates.  In  addition,  the  amounts  of future  tax  benefits  are  reduced by a
valuation  allowance  to the extent such  benefits  are not expected to be fully
utilized.

PROPERTY AND EQUIPMENT

Property and equipment  consists  primarily of office  furniture and  equipment,
computer  hardware and software,  and product molds.  All property and equipment
are recorded at cost,  which  includes  the cost of delivery  and  installation.
Depreciation  is computed  using the  straight-line  method  over the  estimated
useful lives of the assets ranging from three to seven years.

TRADEMARKS, PATENTS AND LICENSING FEE

Intangible assets consist of trademarks, patents and a license agreement related
to the Company's  Knock-Out(R)  branded products.  The trademark and patents are
recorded at acquisition  cost,  plus legal and other  expenses  related to their
creation.  Included in the  Company's  patents  totaling  $2,143,000,  are three
patents filed with the U.S. Patent and Trademark Office, of which one patent has
been granted.  The Company has eleven patents currently  pending  approval.  The
trademark and pending patents were amortized using the straight-line method over
estimated useful lives of 20 and 17 years, respectively.

In the fourth quarter of 2004, the Company extended its licensing agreement with
licensor for the worldwide use of the licensor's name,  approved  likeness,  and
signature. The agreement was extended to an eight-year agreement with an initial
term of five years and a three-year option period, which requires the Company to
pay a retention  bonus of $1.5 million after year five.  The agreement  provides
for an  initial  payment  of $1.0  million,  which  was paid by the  Company  at
year-end 2004. The initial  payment was capitalized by the Company and was being
amortized using the straight-line method over the five-year initial term.

Due to recurring  losses and negative  cash flows from  operations,  in 2005 the
Company evaluated its trademarks,  patents and licensing fee for impairment.  To
date, the Company has not been successful in achieving its financial projections
and cash flow  estimates.  Fair value was estimated using a discounted cash flow
method.  Entry  into the  retail  market has  required  a  significantly  higher
investment  than we had  initially  anticipated.  As a result  and  based on our
performance   to  date  and  the  lack  of  history  of  meeting  our  financial
projections, we determined that the trademarks,  patents, and licensing fee were
impaired  and recorded an  impairment  charge of $2.8 million for the year ended
December 31, 2005.

                                      F-9
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


IMPAIRMENT OF LONG-LIVED ASSETS

The Company records  impairment  losses on long-lived  assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted  cash flows  expected to be generated by those assets are less than
the carrying amount of those items.  The Company's cash flow estimates are based
on limited operating history and have been adjusted to reflect management's best
estimate of future market and operating  conditions.  The net carrying values of
assets deemed not recoverable are reduced to fair value. The Company's estimates
of fair value represent management's best estimates based on industry trends.


STOCK-BASED COMPENSATION

The Company  accounts for stock-based  compensation  plans under FAS No. 123 (R)
Accounting for  Stock-Based  Compensation  (FAS 123). As a result,  compensation
expense  is  determined  based on the  fair  value of the  options  or  warrants
granted.  The  Company  determines  fair  value by  applying  the Black  Scholes
option-pricing model.

NET LOSS PER SHARE

The Company  computes  loss per share under  Statement of  Financial  Accounting
Standards No. 128, "Earnings Per Share." The statement requires  presentation of
two amounts;  basic and diluted loss per share. Basic loss per share is computed
by dividing the loss available to common  stockholders  by the weighted  average
common shares outstanding.  Dilutive earnings per share would include all common
stock  equivalents  unless  anti-dilutive.  The  Company  has not  included  the
outstanding options,  warrants,  or convertible  preferred stock as common stock
equivalents because the effect would be anti-dilutive.

The following  table sets forth the shares issuable upon exercise of outstanding
options and warrants and  conversion of preferred  stock that is not included in
the basic and diluted net loss per share available to common stockholders:


December 31,                                                 2005          2004
================================================================================
Shares issuable upon exercise of outstanding options        402,786    4,261,284
Shares issuable upon exercise of outstanding warrants     7,050,775      925,000
Shares issuable upon conversion of preferred stock      146,282,956  127,450,880
Shares issuable upon conversion of convertible debt      10,871,094            -
--------------------------------------------------------------------------------

Total                                                   164,607,611  132,637,164
================================================================================

RECENT ACCOUNTING PRONOUNCEMENTS

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections"  ("SFAS  154"),  which  replaces  APB Opinion  No. 20,  "Accounting
Changes," and SFAS No. 3,  "Reporting  Accounting  Changes in Interim  Financial
Statements." SFAS 154 requires retroactive application of a change in accounting
principle to prior period financial statements unless it is impracticable.  SFAS
154 also  requires  that a change  in method of  depreciation,  amortization  or
depletion for long-lived,  non-financial  assets be accounted for as a change in
accounting  estimate  resulting  from a change in  accounting  principle.  It is
effective for accounting  changes and corrections of errors made in fiscal years
beginning after December 15, 2005.  Depending on the type of accounting  change,
the  adoption  of SFAS  154  may  have a  material  impact  on our  consolidated
financial statements.


                                      F-10
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3. RELATED PARTY TRANSACTIONS

ADVANCES BY ARTISTIC COMMUNICATION CENTER

Artistic  Communication Center ("ACC"), a multi-media video and audio production
company,  is principally  owned by the Company's Chief Executive  Officer,  John
Bellamy. In 2003, the Company agreed to reimburse Artistic  Communication Center
for all advertising,  marketing, licensing, legal fees, accounting,  consulting,
product design and  development,  travel,  and other costs paid on behalf of the
Company  prior to its  incorporation  in April  2003.  These  costs  amounted to
$739,000.  The  company  established  a payable to ACC of  $739,000  in 2003 and
charged it to selling,  general and administrative  expense.  The payable has no
maturity date but the Company made payments of $52,000, $158,000 and $282,000 in
2005, 2004 and 2003,  respectively.  The Company's outstanding obligation due to
ACC totaled $246,858 and $298,938 on December 31, 2005 and 2004, respectively.

INFOMERCIAL PRODUCTION

The Company  retained ACC to produce its household and  automotive  infomercials
for television broadcast.  The Company's current contract with ACC provides that
ACC will be compensated on the basis of "cost,  plus 10%." Through  December 31,
2005, the Company has incurred costs related to infomercial  production of $1.16
million,  of which $1.03 million has been paid. The Company  incurred expense of
$66,000  and  $1,100,000  for the  years  ended  December  31,  2005  and  2004,
respectively,  for services provided by ACC. At December 31, 2005, the remaining
unpaid balance of $132,000 is included in accrued  liabilities.  At December 31,
2004 $262,000 due to ACC was included in accrued liabilities.

OCCUPANCY COSTS

In  addition,  ACC  occupies  space at the  Company's  100 W.  Whitehall  Avenue
location and pays monthly rent of $1,211.  The monthly rent has been  determined
based on space  utilization  and  includes  ACC's pro rata share of common  area
costs,  insurance,  and real estate taxes.  Rental income  received from ACC has
been recorded as a reduction of selling, general, and administrative expenses in
the amount of $14,500 and $9700 for the years ended  December 31, 2005 and 2004,
respectively.

PATENTS & TRADEMARKS

In  consideration  for the  assignment of trademarks  and pending  patents,  the
Company  agreed to pay Dr. Isaac Horton,  III, the Company's  Vice  Chairman,  a
total of $400,000 as of  December  31,  2004.  Dr.  Horton was paid  $200,000 in
January,  2005 and an  additional  $166,665  during the  remainder  of 2005.  At
December 31, 2005,  $33,335  remained to be paid, and this amount is included in
accounts  payable.  (The $33,335 was subsequently paid to Dr. Horton by February
1, 2006.) In addition,  Dr. Horton received  6,524,787 shares of common stock of
The  Knockout  Group,  Inc.  The fair value of these  shares of $1.6 million was
based on the fair market value of the common  stock issued which was  determined
to be $0.25 per share.  This  amount has been  recorded as an increase in patent
assets  reflected in the Balance  Sheet.  As part of his  agreement,  Dr. Horton
agreed not to develop  or  contribute  any  intellectual  property  to any other
company, now or in the future, that competes in the "cleaning" products segment.

Dr. Horton acts as a consultant to the Company's  executive  officers,  advising
the Company on capital formation, quality control, product development, business
strategy,  licensing,  patent  development,  and  personnel  matters.  For these
consulting  services,  Dr. Horton  received stock options of The Knockout Group,
Inc. in 2004, which were valued at $616,000 using a Black-Scholes pricing model.
These options were  exercised  prior to Knockout  Holdings'  acquisition  of The
Knockout Group, Inc. The Company also paid Dr. Horton approximately $175,000 and
$351,000  for  consulting  fees and board of  director  fees for the years ended
December 31, 2005 and 2004, respectively.


                                      F-11
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


GALT VENTURES CORPORATION

Since 1999,  Kevin  Waltzer,  a principal  shareholder of the Company and former
member  of the  Company's  Board of  Directors,  has  been  Chairman,  CEO,  and
President of Galt Ventures  Corporation  (Galt), a company that provides venture
capital to development and later stage enterprises.  Following the completion of
the Merger  transaction,  Galt  controlled  approximately  24% of the  Company's
voting stock.  At December 31, 2005 and 2004, the Company had 0 and $1.2 million
of notes payable due to Galt, respectively.

CHARLESTON HOLDINGS, LLC

Kevin Waltzer,  a principal  shareholder of the Company and former member of the
Company's Board of Directors, and David Rights, a shareholder of the Company and
former  member  of  the  Company's   Board  of  Directors,   are  also  minority
shareholders  in  Charleston  Holdings,  LLC,  the  primary  supplier of product
concentrate  to the Company.  Charleston  Holdings  supplies  concentrate to the
Company at a fixed priced and under the terms of the agreement,  the Company has
the right to source  the  product  from  other  suppliers.  During  years  ended
December 31, 2005 and 2004, the Company  purchased raw materials from Charleston
Holdings totaling $153,000 and $322,000, respectively.

NOTE 4. COMMITMENTS AND CONTINGENCIES

LEASES

The Company  currently  leases  office and warehouse  space at 100 W.  Whitehall
Avenue  in   Northlake,   Illinois.   The  Company   occupied  the  space  on  a
month-to-month  basis from  April 1, 2004 to July 31,  2004.  Subsequently,  the
lease term was amended to a three-year  period  beginning August 1, 2004 to July
31,  2007.  Effective  December  1, 2005,  the lease was  amended,  considerably
reducing the space being leased,  and covering the remaining  twenty month lease
period (from December 1, 2005 to July 31, 2007).

During year-end  December 31, 2005 and 2004, the Company's total operating lease
expense  amounted to $1,057,000  and $331,000  respectively.  In addition to the
base rent, the Company is responsible for additional rent for common area costs,
insurance  and real estate  taxes.  For the  remainder  of the lease  term,  the
Company's minimum annual base lease payments are as follows:

            2006              $180,000
            2007              $105,000

MINIMUM ROYALTY PAYMENTS

In November of 2004, the Company entered into an eight year, exclusive licensing
agreement with licensor to represent the Company's Knock-Out(R) line of cleaning
products  worldwide.  The  agreement is an extension to a prior  agreement  with
licensor and includes an initial  term of five years,  with a three-year  option
period,  which  requires  the Company to pay a retention  bonus of $1.5  million
after year five. The agreement  provides for an initial payment of $1.0 million,
which was paid by the Company at year-end 2004. The Company is also obligated to
make  periodic  royalty  payments to Mr.  Foreman  based on a percentage  of net
revenue. Royalty expense was $164,000 in 2004. Royalty expense was $2,000,000 in
2005, representing the minimum due to Mr. Foreman for year 1 of the contract. At
December 31, 2005 $1,968,800 of this expense is included in accrued  liabilities
and $31,200 is included  in accounts  payable.  The Company is in default on the
payment of the $1,968,800 payment relating to the 2005 royalties.


                                      F-12
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The minimum annual royalty payments required under the contract are as follows:

         Years 1-5         $2,000,000
         Year  6           $3,000,000
         Year  7           $3,500,000
         Year  8           $4,000,000

NOTE 5. INVENTORIES

Inventories consisted of the following:

December 31,             2005        2004
---------------------------------------------
Raw materials       $     44,375  $   491,891
Work in process             -         109,110
Finished goods           192,971    1,201,059
---------------------------------------------
Total Inventories   $    237,346  $ 1,802,060
=============================================

NOTE 6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

December 31,                       2005        2004
======================================================
Office Equipment                $ 182,541    $ 179,679
Computer Equipment                 11,220         -
Office Furniture                   36,206       32,569
Molds                              48,000       48,000
Software                           65,804       65,804
------------------------------------------------------
Total Property and Equipment      343,771      326,051
Less accumulated depreciation    (127,212)     (45,975)
------------------------------------------------------
Total, Net                      $ 216,559    $ 280,077
======================================================

NOTE 7. INTANGIBLE ASSETS

Intangible Assets consist of the following:

December 31,                        2005          2004
==========================================================
License Fee  (Note 4)           $     -        $ 1,000,000
Patents                               -          2,102,745
Trademark                             -             71,641
----------------------------------------------------------
Total Intangible Assets               -          3,174,386
Less accumulated amortization         -           (36,757)
----------------------------------------------------------
Total, Net                      $     -        $ 3,137,629
==========================================================


                                      F-13
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Due to recurring  losses and negative  cash flows from  operations,  in 2005 the
Company evaluated its trademarks,  patents and licensing fee for impairment.  To
date, the Company has not been successful in achieving its financial projections
and cash flow  estimates.  Fair value was estimated using a discounted cash flow
method.  Entry  into the  retail  market has  required  a  significantly  higher
investment  than we had  initially  anticipated.  As a result  and  based on our
performance   to  date  and  the  lack  of  history  of  meeting  our  financial
projections, we determined that the trademarks,  patents, and licensing fee were
impaired  and recorded an  impairment  charge of $2.8 million for the year ended
December 31, 2005.

NOTE 8. REGULATORY AUTHORITIES

Substantially all aspects of the Company's  marketing  operations are subject to
oversight and  regulation  by federal,  state and local  agencies  including the
Federal Trade Commission (FTC) and  Environmental  Protection  Agency (EPA). FTC
regulations  are  primarily  governed  under  Section  5 of  the  Federal  Trade
Commission  Act  prohibiting  deceptive  advertising.  Various  state  and local
governments  have  comparable  fair practice  laws,  which are applicable to the
Company.  In addition,  the  infomercial  industry has set up guidelines for the
truth  and  substantiation  of  infomercial  claims  and  products  through  its
self-regulation  trade association,  Electronic Retailing  Association (ERA), of
which the  Company is a member.  The  Company  believes  that all of its current
infomercials comply with applicable FTC standards and the ERA guidelines.

The EPA is charged by Congress to regulate  and enforce the  environmental  laws
passed by Congress.  The Company must produce  their  products in EPA  certified
manufacturing  facilities.  All  manufacturers  contracted  by the  Company  are
certified by the EPA.

NOTE 9. ACCRUED EXPENSES

Accrued expenses consist of the following amounts for 2005 and 2004:

December 31,                          2005        2004
=========================================================
Royalty fees (Note 4)            $ 1,968,800   $        -
Dividends and penalties payable    1,092,800            -
Interest on Notes Payable            297,000            -
Consulting                                 -   $   71,250
Professional Fees                    123,000      277,500
Infomercial Production (Note 3)      131,500      253,218
Vacation and personnel related       106,300       56,250
Accrued rent                         177,800            -
Advertising and marketing             83,000            -
Other                                 69,103       56,826
---------------------------------------------------------
Total                            $ 4,048,503   $  715,044
=========================================================

NOTE 10. INCOME TAXES

The  reconciliation  of income tax expense  (benefit) to the amount  computed by
applying the federal statutory rate is as follows:


Period ended December 31,                              2005            2004
===============================================================================
Income tax (benefit) at federal statutory rate   $ (5,918,000)   $  (4,275,000)
State taxes                                          (870,000)        (612,000)
Other nondeductible expenses (primarily
        Start-up costs in 2003)                       (67,000)         108,000
Change in Valuation Allowance                       6,855,000        4,779,000
-------------------------------------------------------------------------------
Income tax expense (benefit)                     $         --    $         --
===============================================================================


                                      F-14
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Significant components of the Company's deferred tax asset are as follows:


December 31                                              2005           2004
===============================================================================
            Net operating loss                      $  9,190,000    $ 3,761,000
            Stock Compensation                         1,670,000      1,402,000
            Patents and Trademarks                     1,097,000             --
            Other                                         67,000          6,000
            Valuation Allowance                      (12,024,000)    (5,169,000)
-------------------------------------------------------------------------------
    Total net deferred tax asset                    $         --    $        --
===============================================================================

The Company has incurred net operating  losses of  approximately  $23.0 million,
which  can  be  carried  forward  for  up to  twenty  years  under  current  IRS
regulations.  The majority of the Company's  net operating  loss expires in 2024
and 2025.

NOTE 11. NOTES PAYABLE

11% CONVERTIBLE NOTE PAYABLE

In May 2005, the Company  issued a $3,000,000  senior secured note payable to an
accredited investor.  The terms of this debt originally called for interest at a
rate of 11% with  interest  payable  quarterly.  The  first  fifteen  months  of
interest,  totaling $417,000 was placed in escrow and was being disbursed to the
holder of the note as quarterly  payments become due. The principal on this note
is due in monthly  installments of  approximately  $143,000  beginning in August
2006 through May 2008.

In conjunction with the issuance of the note, the investor  received a five year
warrant to  exercise up to 700,000  shares of the  Company's  common  stock at a
price of $0.01  per  share.  The  warrants  valued at  $1,513,199  using a Black
Scholes option pricing model with the following assumptions:

             Fair value of common stock             $2.17
             Volatility                              100%
             Risk free rate                         3.76%

The value of these  warrants  was recorded as a discount to the note and will be
amortized  over the term of the loan using the  effective  interest  method.  In
August 2005,  the holder agreed to allow the Company to cancel these warrants in
exchange for 4,375 shares of the Company's  Series A Preferred  Stock which were
contributed to the Company by its Chief Executive Officer,  John Bellamy. As the
fair value of the preferred  shares issued to the debt holder  approximated  the
fair value of the warrants  issued,  there was no  adjustment of the discount to
the note originally recorded.

In September 2005, the Company issued new debt which required the consent of the
holders of the 11% debt.  As a result,  the Company  entered into an amended and
restated agreement with the 11% debt holders, which (1) granted the debt holders
the right to  convert  at their  option  the  principal  amount of the note into
shares of the Company's common stock at a conversion price of $0.50 (2) required
funds in the amount of $364,453  which were being held in escrow to pay interest
to be  released  to  the  debt  holders  as a  pre-payment  of  the  outstanding
principal,  (3)  required a  shareholder  of the Company to transfer to the debt
holders  18,750  shares  of  Series  A  preferred  stock  with a fair  value  of
$2,250,000 (4) reduced the exercise price of 364,720 warrants to purchase common
stock  from $0.50 to $0.30 and (5)  terminated  the 11% debt  holders'  security
interest in substantially all of the assets of the Company.

As the modifications to this debt were considered substantial in accordance with
the guidance in EITF 96-19, the Company  accounted for these  modifications as a
debt  extinguishment  and  recognized  a  loss  on  extinguishment  of  debt  of
$2,622,101,  which was attributable to (a) the difference between the fair value
of the  modified  debt  instrument  and the  carrying  value of the former  debt
instrument (b) the fair value of the preferred  stock issued in connection  with
the debt  extinguishment,  (c) the incremental increase in the fair value of the
warrants of $15,000 as a result of the reduction in the exercise price,  and (d)
the write-off of deferred financing fees related to the original debt agreement.

                                      F-15
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The revised debt agreement was initially recorded at its estimated fair value of
$1,525,000 and will be accreted up to its redemption  value of $2,635,547  using
the effective interest method.

The  Company  has not made  quarterly  interest  payments  on a timely  basis in
accordance  with the 11% Convertible  Note Payable loan agreement,  for quarters
ended September 30, 2005 and December 31, 2005, and as a result,  the Company is
in default of the loan  agreement.  The failure to pay interest  when due on the
11%  Senior  Secured  Note also  caused a default on the  Company's  outstanding
16.66% Senior Convertible Notes. As a result of these defaults, the debt holders
have the right at any time to  declare  the full  principal  amount of the debt,
together with interest and other amounts owing in respect  thereof,  immediately
due and payable in cash.  If the holder of our  outstanding  11% Senior  Secured
Note  exercises its right to  accelerate  our payment  obligations,  we would be
required to repay 115% of the outstanding  principal amount and,  beginning five
days after the date of default of  October  5,  2005,  the  interest  rate would
accrue at the rate of 20% per annum or such  lower  maximum  amount of  interest
permitted to be charged under  applicable law. If the holders of our outstanding
16.66% Senior  Convertible  Notes exercise their right to accelerate our payment
obligations,  we would be required to pay interest on the outstanding  principal
and unpaid interest plus interest thereon beginning seven trading days after the
date of default of October 5, 2005 at the lower of 18% per annum or the  highest
rate permitted by law. If any of our debt holders exercise their rights we could
be forced into bankruptcy.  As a result of this default,  the Convertible  Notes
Payable  balance,  comprised of both the 11%  Convertible  Notes Payable and the
16.66%  Convertible  Note  Payable,  which totals  $92,451  (net of  unamortized
discount of $5,343,096) as of December 31, 2005, is shown as a current liability
on December 31, 2005 balance sheet.  At December 31, 2005,  $157,000 is included
in Accrued Expenses, representing unpaid interest on the 11% Note Payable.

The note is  considered to have a beneficial  conversion  feature since the fair
market value of the common stock  issuable upon  conversion of the note exceeded
the value  allocated to the note on the date of the issuance of the restated and
amended notes. On the date of issuance,  the note was convertible into 5,271,094
shares of common  stock,  which at the then  current  market  price of $0.75 per
share was worth  $3,953,321.  The  difference  between  the market  value of the
shares  issuable  upon  conversion  and the value  allocated to the Term Loan of
$1,525,000 is considered to be the value of the beneficial  conversion  feature.
The value of the  beneficial  conversion  feature (which is capped at the amount
allocated to the debt of $1,525,000) has also been recorded as a discount to the
term note and will be  amortized  over the term of the loan using the  effective
interest method.

16.66% CONVERTIBLE NOTE PAYABLE

On  September  12, 2005,  the Company  issued a 16.66%  convertible  note for an
aggregate  principal amount of $2.8 million.  Principal and interest are payable
in one  balloon  payment on March 31,  2007.  The Company is required to receive
consent from at least 50% of the holders to incur any additional indebtedness so
long as any of the notes are outstanding.

In  connection  with the  issuance of this debt,  a  shareholder  of the Company
contributed  59,302  shares of  preferred  stock to the Company  which were then
issued to the 16.66% debt holders.  The proceeds received were allocated between
the  preferred  stock and debt based on the relative fair value of the preferred
stock and debt.  $2,184,000  was  allocated  to the  preferred  stock  which was
recorded  as a discount on the note and will be  amortized  over the term of the
loan using the effective interest method.

The note is  considered to have a beneficial  conversion  feature since the fair
market value of the common stock  issuable upon  conversion of the note exceeded
the  value  allocated  to the note on the date of the  issuance.  On the date of
issuance, the note was convertible into 5,600, 000 shares of common stock, which
at the then current  market price of $0.75 per share was worth  $4,200,000.  The
difference  between the market value of the shares  issuable upon conversion and
the value  allocated to the Term Loan of $616,000 is  considered to be the value
of the beneficial  conversion  feature.  The value of the beneficial  conversion
feature  (which is capped at the amount  allocated to the debt of $616,000)  has
also been recorded as a discount to the term note and will be amortized over the
term of the loan using the effective interest method.

                                      F-16
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The Company also entered into a registration  rights  agreement  under which the
Company  agreed to prepare a registration  statement  covering the resale of the
Company's  common  stock  issuable  upon  conversion  of the notes and shares of
Series A Preferred  Stock. In the event that the  registration  statement is not
declared  effective  within 120 days of the closing,  the Company is required to
issue to the holders as  liquidated  damages,  4,166  shares of common stock per
$50,000 of principal of the notes for each 30 days of such failure.

As discussed  above,  the Company is in default of the 16.66%  Convertible  Note
Payable.  At December  31,  2005,  $140,000  is  included  in Accrued  Expenses,
representing unpaid interest on the 16.66% Note Payable.

GALT NOTES PAYABLE

In September  2004,  the Company  entered into two notes  payable  totaling $1.6
million with Galt. These notes bear interest at a rate of 10% per annum and were
initially due on December 23, 2004. In December  2004, the agreement was amended
to extend the  maturity  date until the earlier of March 31, 2005 or the date of
exercise of certain  warrants  issued in connection  with the Company's  reverse
merger  transaction  discussed in Note 1. For the year ended  December 31, 2004,
the Company  incurred  interest  expense  related to these notes of $49,300.  At
December 31, 2004, the outstanding balance on the notes totaled $1.2 million. In
the first quarter of 2005, the Company paid $450,000 on the outstanding note due
to Galt,  reducing the balance to $750,000.  In connection  with these payments,
the maturity date of the  remaining  balance was extended from March 31, 2005 to
July 31, 2005. The notes were scheduled to mature on July 31, 2005. In May 2005,
the notes were paid in full.

In connection with the notes payable,  Galt received  warrants to purchase up to
1,427,840  shares of the Company's common stock at a price of $0.0005 per share.
The warrants were valued at $357,000 using a Black-Scholes  option pricing model
(see Note 14).  The value of these  warrants  was  recorded as a discount to the
note payable and was amortized over the original term of the loan.

TAYLOR CONVERTIBLE NOTE PAYABLE

In November  2004, the Company  entered into a convertible  note with the Taylor
Group in the amount of $500,000. This loan accrued interest at a rate of 20% per
annum and was scheduled to mature on August 3, 2005.  This note was  convertible
into 1,535,719 shares of common stock at the option of the holder. In connection
with the note  payable,  the note  holder  received  warrants  to purchase up to
801,246 shares of the Company's  common stock at a price of $0.01 per share. The
warrants were valued at $200,000 using a Black-Scholes option pricing model (see
Note 14).  The value of these  warrants  was  recorded as a discount to the note
payable and was amortized over the term of the loan.

The Taylor note payable is  considered to have a beneficial  conversion  feature
since the fair market value of the common stock issuable upon  conversion of the
note  payable  exceeded  the value  allocated to the note payable on the date of
issuance.  On the  date of  issuance,  the note  payable  was  convertible  into
1,535,719 shares of common stock. The difference between the market value of the
shares  issuable upon  conversion and the value allocated to the note payable is
considered to be the value of the beneficial  conversion  feature.  The value of
the  beneficial  conversion  feature of  $200,000  has also been  recorded  as a
discount to the note payable and was amortized over the term of the loan.

In  December  2004,  the note  holder  elected to convert  the note  payable and
accrued  interest of $20,000 into 1,629,191 shares of common stock and exercised
the warrants for 801,246  shares of the Company's  common stock.  At the time of
conversion,  the  remaining  unamortized  debt  discount was charged to interest
expense.


                                      F-17
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


OTHER CONVERTIBLE NOTES

In November 2004, the Company  entered into  convertible  promissory  notes with
select  individuals as a means to provide bridge  financing until  completion of
the Series C Preferred Stock issuance.  These notes totaled $450,000 and accrued
interest at a rate of 10% per annum and matured in May 2005. In connection  with
the note  payable,  note  holders  received  warrants  to purchase up to 450,000
shares of the Company's common stock at a price of $0.01 per share. The warrants
were valued at $113,000  using a  Black-Scholes  option  pricing model (see Note
14). The value of these  warrants was recorded as a discount to the note payable
and was amortized over the term of the loan.

The convertible  promissory notes are considered to have a beneficial conversion
feature since the fair market value of the common stock issuable upon conversion
of the note payable  exceeded the value allocated to these  promissory  notes on
the date of  issuance.  On the  date of  issuance,  the  promissory  notes  were
convertible  into  1,800,000  shares of common stock,  which at the then current
market price of $0.25 per share was worth $450,000.  The difference  between the
market value of the shares  issuable upon  conversion and the value allocated to
the Term  Loan of  $337,000  is  considered  to be the  value of the  beneficial
conversion feature.  The value of the beneficial  conversion feature of $113,000
has also been recorded as a discount to the note payable and was amortized  over
the term of the loan.

These notes were  convertible at the option of the holder into shares offered in
the Series C  offering.  The holders  elected to convert  the total  balance due
under these notes of $400,000 into 1.6 million shares of the Company's  Series C
preferred  stock.  The  Company  repaid  $50,000  of the notes  related  to this
offering along with $5,625 in interest expense in 2004.

SCHEDULE OF DEBT MATURITIES

 The following  table  summarizes the Company's debt  obligations as of December
31, 2005:

<TABLE>
<CAPTION>

                                            Total             2006            2007           2008
                                            ------           ------           ----           ----
<S>                                        <C>             <C>             <C>             <C>
Long Term Notes Payable (a):
          11% Senior Secured Note due
               May 2, 2008                 $2,635,547      $  715,000      $1,716,000      $  204,547
          16.66% Convertible Notes due
               March 31, 2007              $2,800,000              --      $2,800,000

TOTAL                                      $5,435,547      $  715,000      $4,516,000      $  204,547

</TABLE>

(a)   As  discussed  in  the  11%  Convertible  Notes  Payable  and  the  16.66%
      Convertible  Note  Payable  sections  above,  the Company is in default of
      interest  payments  required under our 11%  Convertible  Note Payable debt
      agreement. Furthermore, the default under the 11% Convertible Note Payable
      debt agreement  also causes us to be in default of our 16.66%  Convertible
      Note Payable debt agreement.  As a result,  the Convertible  Notes Payable
      balance of $92,451  (net of  unamortized  discount  of  $5,343,096)  as of
      December  31, 2005 is shown as a current  liability  on December  31, 2005
      balance  sheet.  The Long Term Notes Payable  presented  above reflect the
      original due dates of the underlying notes.

NOTE 12. EQUITY TRANSACTIONS

MERGER WITH UNITED NETWORK MARKETING SERVICES, INC.

On December 28, 2004, The Knockout Group,  Inc. (The Group)  completed a reverse
acquisition of United  Network  Marketing  Services,  Inc. a publicly held shell
company,  resulting  in  a  public  trading  market  for  Knockout's  stock.  In
connection with this merger, all of The Group's outstanding  preferred stock was
converted to The Group's common stock. Then, all of The Group's common stock was
exchanged  for  shares of the shell  Company's  Series A  preferred  stock at an
exchange  rate of 1 share of  Series A  preferred  stock  for each 40  shares of
common stock.

                                      F-18
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The new issue Series A preferred  stock  automatically  converts to common stock
after the Company  amends its  certificate  of  incorporation  to authorize  the
issuance of a sufficient  number of shares of common stock so that each share of
this preferred stock may be converted into 160 shares of common stock.

The  purchasers of the post merger Series A Preferred  shares have a liquidation
preference of $46.89 per share, which on an exchange basis equates to $0.293.

The investment  banking firm which assisted the Company with this reverse merger
transaction  received  816,576  shares of common  stock in exchange for services
provided  related to the merger  transaction.  As the fair  market  value of the
services was not readily determinable, the value recorded for these services was
based  on the fair  market  value  of the  common  stock  issued  which  totaled
$1,151,000.  This  amount is included  in  selling,  general and  administrative
expenses for the year ended December 31, 2004.

STOCK SPLIT

On December 6, 2004, The Group declared a 4.6 to 1 stock split. In addition,  in
connection  with the reverse  merger  discussed  in Note 1, the  Group's  common
shareholders  converted  their  common  shares into Series A preferred  stock of
United  Network  Marketing  Services on an exchange basis of 40 shares of common
stock  of the  Group  for 1 share  of  Series  A  preferred  of  United  Network
Marketing.  Once the  authorized  common shares of the  post-merger  Company are
increased, this Series A Preferred Stock will convert at a rate of 160 shares of
common  stock for each share of the  Series A  Preferred  Stock.  As a result of
this,  shareholders  of the  Company  will  effectively  end up with 4 shares of
common stock of the  post-merger  Company for each share of common stock held in
the pre-merger Company. All share amounts included in these financial statements
have been retroactively restated to reflect the impact of these stock splits.

INITIAL COMMON STOCK ISSUANCE

In April 2003, in connection with the start-up of The Group,  61,640,000  common
shares  (after  adjusting  for stock  splits)  were sold for  proceeds of $2,000
(founders' stock).

ORIGINAL SERIES A CONVERTIBLE PREFERRED STOCK

In February 2004, The Group completed a definitive securities purchase agreement
with Galt whereby The Group issued 23,644,000 shares of Series A preferred stock
in exchange for $4.9 million in gross proceeds.

On March 2004,  the Company  issued the  original  Series A holders  warrants to
purchase  5,750,000  shares  of  common  stock  at $0.28  per  share  which  was
subsequently  repriced to $0.0005 on December 6, 2004. In  connection  with this
grant of warrants and the subsequent  reduction in exercise  price,  the Company
has recorded a non-cash  deemed dividend of $1.4 million.  The Company  recorded
the deemed dividend on the date of issuance by offsetting charges and credits to
additional paid in capital. The deemed dividend increases the loss applicable to
common  shareholders in the calculation of basic and diluted net loss per common
share for the year ended December 31, 2004.

The  Series A was  convertible  at any time into  shares  of  common  stock at a
conversion  rate of one share of common for each  share of Series A  convertible
preferred.  On December 20, 2004, the Series A preferred  stock was converted to
23,644,000 shares of common stock and the warrants to purchase  5,750,000 shares
of common stock were exercised.

ORIGINAL SERIES B CONVERTIBLE PREFERRED STOCK

In February 2004, The Group completed a definitive securities purchase agreement
with an  investor  whereby  The  Group  issued  3,956,000  shares  of  Series  B
convertible preferred stock in exchange for $1.1 million in gross proceeds.

                                      F-19
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In March 2004,  the Company  issued the  original  Series B holders  warrants to
purchase   690,000  shares  of  common  stock  at  $0.28  per  share  which  was
subsequently  repriced to $0.0005 on December 6, 2004. In  connection  with this
grant of warrants and the subsequent  reduction in exercise  price,  the Company
has recorded a non-cash  deemed dividend of $0.2 million.  The Company  recorded
the deemed dividend on the date of issuance by offsetting charges and credits to
additional paid in capital. The deemed dividend increases the loss applicable to
common  shareholders in the calculation of basic and diluted net loss per common
share for the year ended December 31, 2004.

The  Series B was  convertible  at any time into  shares  of  common  stock at a
conversion rate of one share of common for each share of Series A preferred.  On
December  21,  2004,  the Series B preferred  stock was  converted  to 3,956,000
shares of common  stock and the  warrants to purchase  690,000  shares of common
stock were exercised.

In connection with the issuance of the original Series A and B preferred  stock,
the Group incurred direct  issuance costs of $194,010,  which were recorded as a
reduction of the gross proceeds received.

WARRANTS ISSUED TO CONSULTANTS IN EXCHANGE FOR SERVICES

During 2005 and 2004, The Group issued warrants to purchase  150,000 and 475,000
shares,  respectively,  of its common stock to consultants as  compensation  for
services  received.  As the fair market value of these  services was not readily
determinable,  these  services were valued based on the fair market value of the
warrants at the time of  issuance,  which ranged from $1.45 to $1.75 per warrant
in 2005, and from $0.16 to $1.37 per warrant in 2004. The weighted  average fair
value of these warrants was $1.55 in 2005 and $1.31 in 2004.  These warrants had
a term of ten  years and  exercise  prices  ranging  from  $0.293 to $1.00.  The
Company  recognized  total  non-cash  expense of $232,500  and $621,000 in years
ended  December  31, 2005 and 2004,  respectively,  relating to the  issuance of
these warrants.  The fair market value of these warrants was calculated  using a
Black-Scholes pricing model (see Note 14).

COMMON SHARES ISSUED IN EXCHANGE FOR PATENTS

During fiscal 2004, The Group issued 6,524,787 shares of its common stock to the
Vice Chairman of the Company as partial payment for the right to utilize certain
patents.  As the fair market  value of the patent was not readily  determinable,
the value  recorded  for the patents  was based on the fair market  value of the
common stock  issued,  which was $0.25 per share using a  Black-Scholes  pricing
model using the same assumptions as outlined in Note 14.

WARRANTS AND OPTIONS EXERCISED

During 2004, The Group received  proceeds of $10,016 as a result of the exercise
of options  and  warrants to purchase  19,231,366  shares of The Group's  common
stock.

During 2005, the Group received  proceeds of $30,141 as a result of the exercise
of warrants to  purchase  3,014,063  shares of the  Group's  common  stock.  The
warrants were exercised at a strike price of $.01 per share.

At December  31, 2005 and 2004,  there were  7,050,775  and 925,000  outstanding
warrants to purchase  common stock with  exercise  prices  ranging from $0.01 to
$0.50 and a weighted  average  exercise price of $0.35 and $0.17 at December 31,
2005 and  2004,  respectively.  See Note 14 for  discussion  of the  outstanding
options at December 31, 2005 and 2004.

SERIES B CONVERTIBLE PREFERRED STOCK FINANCING

On January 14,  2005,  the Company  completed  an offering of Series B Preferred
Stock to accredited  investors pursuant to Section 4(2) of the Securities Act of
1933,  as  amended,  and Rule  506,  promulgated  there  under.  As part of this
offering,  the Company issued 116,754 shares of Series B Preferred Stock,  $.001
par value per share and  warrants  to  purchase  up to  1,868,071  shares of the
Company's common stock at an exercise price of $2.25 per share, netting proceeds
of $5.1 million. On July 12, 2005 the Company amended these warrants, as well as
the warrants to purchase  1,020,000  shares of the Company's  common stock at an
original  exercise  price of $2.25 per  share  issued  to the  investors  of The
Knockout  Group's  Series C Preferred  Stock,  by reducing the exercise price to
$.50 per share.  As a result of this  repricing,  the Company  recorded a deemed
dividend of approximately $693,000 in the third quarter of 2005.

                                      F-20
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The  stated  per  share  value of the  Series  B  Preferred  Stock is  $46.8933.
Dividends  at an  initial  rate of 10% which  increased  to 20% in July 2005 are
payable  quarterly  on January 1, April 1, July 1 and  October 1. As of December
31, 2005,  the Company  incurred  dividends  on the Series B Preferred  Stock of
$793,500, of which $246,000 was paid prior to December 31, 2005. As the Series B
Preferred  Stock was not  redeemed by the Company,  cancelled or converted  into
common  stock prior to 180 days from the date the Series B  Preferred  Stock was
under the terms of the Series B Preferred  Stock  agreement,  the dividend  rate
increased to 20% of the stated value per annum. Any accrued and unpaid dividends
will entail a late fee equal to 18% per annum.

As part of this  offering,  the  Company  agreed  to  prepare  and file with the
Securities and Exchange  Commission (SEC) a registration  statement covering the
resale of the common stock  issuable  upon the  conversion of Series B preferred
Stock and upon  exercise of the  warrants on or before 90 days after the closing
date and to have the registration  statement declared effective by the SEC on or
before 90 days after the filing of the  registration  statement  (or 120 days if
the  registration  statement is reviewed by the SEC).  If the Company  failed to
file the registration  statement timely or have it declared effective timely, it
was obligated to pay  liquidated  damages equal to 1% of the aggregate  purchase
price  for the  first  30  days  and an  additional  1% for  each 30 day  period
subsequent thereto until the earlier of (a) such date the registration statement
is  declared  effective  and (b) the  securities  may be sold  pursuant  to Rule
144(k).

Upon liquidation,  dissolution or winding up of the business, the Series B ranks
senior to all other  series or classes of Knockout  preferred  or common  stock.
Immediately  after the  Company  amends  its  Certificate  of  Incorporation  to
increase the number of authorized shares of common stock, each share of Series B
will automatically  convert into common stock at a conversion rate of 160 shares
of common stock for each share of Series B Preferred Stock.

The  Company has  recorded  offering  costs of  $354,118  as a reduction  of the
proceeds  from the  sale of the  Series  B  Preferred  Stock.  In  addition,  in
connection  with this  transaction,  the Company  issued  5,547,000  warrants to
purchase common shares at various  exercise prices ranging from $0.01 to $0.2933
per share to its investment advisor.

Series C Convertible Preferred Stock

In December 2004, The Knockout Group completed an offering of Series C Preferred
Stock which was  converted  into common stock of The Knockout  Group in December
2004  (and  then  Series  A  Preferred  Stock  of  Knockout  Holdings,  Inc.) in
connection with the reverse merger with United Network Marketing Services,  Inc.
The offering raised $2,550,000 in gross proceeds.  The company recorded offering
costs of $291,500 as a reduction of the  proceeds  from the sale of the Series C
Preferred  Stock in 2004.  Under  the terms of this  offering,  the terms of the
Series C offering  were  adjustable  in the event  that the  Series B  investors
received more favorable  terms with respect to dividends and warrants than those
offered to Series C investors.  As the original terms of the Series C investment
did not  provide  for  warrants,  Series  C  investors  were  issued  a total of
1,020,000 warrants in January 2005 in connection with the Series B financing. As
of December 31, 2005,  the Company  accrued  dividends on the Series C Preferred
Stock at a rate of 20% per annum and thereby accrued  dividends of $385,000,  of
which $130,000 was paid prior to December 31, 2005.

As part of this  offering,  the  Company  agreed  to  prepare  and file with the
Securities and Exchange  Commission (SEC) a registration  statement covering the
resale of the common stock issuable upon  conversion of Series C Preferred Stock
and  upon  exercise  of the  warrants  on or  before  March  28,  2005.  If such
registration  statement  is not  filed on or  before  March  28,  2005 or if the
registration  statement is not  declared  effective by the SEC on or before June
28, 2005 (or July 28, 2005 if the  statement  is reviewed by the SEC),  then the
Company must pay liquidated  damages equal to 1% of the aggregate purchase price
for the first 30 days and an  additional  1% for each 30 day  period  subsequent
thereto  until  the  earlier  of (a) such  date the  registration  statement  is
declared effective or (b) the securities may be sold pursuant to Rule 144 (k).

                                      F-21
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


During  fiscal year ended  December 31, 2005,  the Company  incurred  liquidated
damages associated with Series B and C stock of $415,258 for failure to file and
have a registration  statement declared effective on a timely basis. $125,500 of
the  $415,258  had been paid during  2005,  and  $289,758 is included in Accrued
Liabilities  at  December  31,  2005.  These  penalties  have been  recorded  as
additional dividends to shareholders.

COMMON SHARES ISSUED TO CONSULTANTS AND EMPLOYEES IN EXCHANGE FOR SERVICES

During fiscal 2005 and 2004, the Group issued 8,750 and 625,600 shares of common
stock,  respectively,  in exchange for services. As the fair market value of the
services was not readily  determinable,  the value recorded for the services was
based on the fair market value of the common stock issued which totaled  $14,437
and $156,000.for the years ended December 31, 2005 and 2004, respectively.

NOTE 13. VOTING SECURITIES

The Company's  authorized  capital consists of 20,000,000 shares of Common Stock
and  1,000,000  shares of Preferred  Stock,  of which  865,000  shares have been
designated as Series A Preferred  Stock and 135,000 shares have been  designated
as Series B Preferred  Stock.  Each share of Series A  Preferred  Stock and each
share of Series B Preferred Stock is convertible into 160 shares of Common Stock
of the Company.  At the close of business on December 31, 2005,  the Company had
12,015,136  shares of Common Stock  issued and  outstanding,  796,568  shares of
Series A Preferred  Stock issued and  outstanding and 116,754 shares of Series B
Preferred Stock issued and outstanding.  The Series A Preferred Stock and Series
B Preferred Stock will automatically convert into Common Stock immediately after
the Company amends its Certificate of Incorporation to authorize the issuance of
a  sufficient  number  of  shares  of  Common  Stock so that all  shares  of the
Company's  outstanding  Preferred Stock may be converted into Common Stock.  The
Company's  Common Stock and Preferred  Stock vote as a single  class,  as if the
Preferred Stock had been converted into Common Stock. The Company's Common Stock
and Preferred  Stock are the only classes of its securities  outstanding  having
the right to vote for the election of  directors  of the Company.  Each share of
Common Stock entitles its record holder to one vote, and each share of Preferred
Stock entitles its record holder to approximately 160 votes.

NOTE 14. STOCK OPTIONS

The following table summarizes the options granted, exercised and outstanding at
December 31, 2005:

<TABLE>
<CAPTION>

                                                                                   Weighted
                                                                                    Average
                                                                 Exercise Price    Exercise
                                                     Shares         Per Share        Price
----------------------------------------------------------------------------------------------
<S>                                              <C>                    <C>              <C>
Outstanding at December 31, 2003                          --                --             --
Granted                                           14,823,564     0.0005 - 0.20           0.06
Exercised                                        (10,562,280)           0.0005           0.00
Forfeited                                                 --                --             --

----------------------------------------------------------------------------------------------
Outstanding at December 31, 2004                   4,261,284                --           0.20
Granted                                                   --                --             --
Exercised                                                 --                --             --
Forfeited                                         (3,858,498)               --             --
--
----------------------------------------------------------------------------------------------
Outstanding at December 31, 2005                     402,786                --           0.20
==============================================================================================
Options exercisable at December 31, 2005             402,786                --             --
==============================================================================================

</TABLE>


                                      F-22
<PAGE>

                             KNOCKOUT HOLDINGS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In 2005, the Company adopted a 2005 Amended  Flexible Stock Incentive Plan which
provides that 30 million  shares of the Company's  common stock may be delivered
under  the  Plan  to  certain  employees  of the  Company  and  to  non-employee
directors, consultants and advisors.

The Company recognized  compensation expense of $0.5 million and $2.7 million in
connection  with the fair value of options  issued to employees and  consultants
for  the  years   ended   December   31,  2005  and  2004,   respectively.   The
weighted-average  (using  grant  date fair  value) of stock  options  granted to
employees during the year, and the weighted-average used to determine those fair
values using a modified  Black-Scholes  option  pricing  model for stock options
under Statement of Financial Accounting Standards No. 123 are as follows:

            Weighted average fair value per option         $0.57

            Significant assumptions (weighted average)
                 Risk-free interest rate at grant date     3.43%
                 Expected stock price volatility            100%
                 Expected dividend payout                   None
                 Expected option life (years)             10 YRS



The  weighed  average  remaining  contractual  life on  outstanding  options  at
December 31, 2004 is approximately 9 years. All outstanding  options at December
31, 2005 and 2004 have an exercise price of $0.20.

NOTE 15. LEGAL PROCEEDINGS

      On December 9, 2005, former Knockout Holdings, Inc. executive David Malone
filed a demand for  arbitration  with JAMS, The  Resolution  Experts in Chicago,
Illinois,  Case No.  1340005682.  In the demand,  Mr. Malone asserts a claim for
breach of contract  against  Knockout  Holdings,  Inc.,  John  Bellamy and Isaac
Horton in relation to his  termination  of  employment.  Mr. Malone alleges that
Knockout Holdings, Inc. terminated him without cause and, therefore,  Mr. Malone
is  entitled  to his base salary for 12 months  ($240,000.00),  an annual  bonus
equal to 50% of his base salary,  prorated  ($34,800) and additional  percentage
compensation  equal to 1 1/2% of Excess Gross Sales  pursuant to the  employment
agreement.  Further,  Mr. Malone is seeking a  declaration  that pursuant to the
employment  agreement  he is  entitled to stock  options to  purchase  8,500,000
shares of common  stock from Mr.  Bellamy and Mr.  Horton who agreed to offer up
their own stock options contingent upon certain conditions being met pursuant to
the  employment   agreement.   Knockout  Holdings,   Inc.  denies  Mr.  Malone's
allegations  and  denies  that he is  entitled  to  recover  any  sums  from the
respondents.  Knockout  Holdings,  Inc.  believes  it  terminated  Mr.  Malone's
employment  for cause  pursuant to the terms of his  employment  agreement.  The
respondents  filed a response to the  arbitration  demand on March 29, 2006. The
parties are  scheduled  to exchange  discovery-relevant  documents  by April 19,
2006. The discovery cut-off date is May 26, 2006 and the arbitration  hearing is
set for July 11 and 12, 2006.  At this time,  the Company and its legal  counsel
are unable to assess the outcome of this matter.





                                      F-23