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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

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

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                     For fiscal year ended December 31, 2003

                        COMMISSION FILE NUMBER: 333-51628

                           HEALTH SCIENCES GROUP, INC.
        (Exact name of Small Business Issuer as specified in its Charter)


           COLORADO                                             91-2079221
(State or other jurisdiction of                               (IRS Employer
incorporation or organization)                             Identification No.)


                              Howard Hughes Center
                          6080 Center Drive, 6th Floor
                          Los Angeles, California 90045
                                 (310) 242-6700
                    (Address, and telephone number, including
               area code, of issuer's principal executive offices)


      SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
                         COMMON STOCK, $0.001 PAR VALUE
                                (Title of Class)

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

Check if disclosure of delinquent  filers pursuant to Item 405 of Regulation S-B
is   not  contained  herein,  and   will not   be  contained,  to   the  best of
issuer'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 [_]

Revenues for the fiscal year ended December 31, 2003: $17,771,050

The  aggregate  market value of the voting stock held by  non-affiliates  of the
issuer on April 12,  2004 was  approximately  $8,953,929  based upon the average
reported closing bid and asked price of such shares. As of April 12, 2004, there
were  2,352,948  shares   outstanding  of  the  issuer's  preferred  shares  and
13,750,211 shares outstanding of the issuer's common shares.

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                                TABLE OF CONTENTS

PART I

           Item 1.   Description of Business...............................    3

           Item 2.   Description of Property...............................   16

           Item 3.   Legal Proceedings ....................................   16

           Item 4.   Submission of Matters to a Vote of Security Holders ..   16


PART II

           Item 5.   Market for Issuer's Common Equity
                          and Related Shareholder Matters .................   17

           Item 6.   Management's Discussion and Analysis of
                          Financial Condition.............................    17

           Item 7.   Financial Statements  ...............................    27

           Item 8.   Changes In and Disagreements with Accountants
                          on Accounting and Financial Disclosure .........    27

           Item 8a.  Controls and Procedures..............................    27


PART III

           Item 9.   Directors, Executive Officers, Promoters, and
                          Control Persons; Compliance with
                          Section 16(a) of the Exchange Act...............    29

           Item 10.  Executive Compensation...............................    32

           Item 11.  Security Ownership of Certain Beneficial Owners
                          and Management .................................    33

           Item 12.  Certain Relationships and Related Transactions ......    35

           Item 13.  Exhibits and Reports on Form 8-K ....................    36

           Item 14.  Principal Accountant Fees and Services...............    36


                                      -2-
<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

      Health Sciences Group, Inc. (the "Company"), a Colorado corporation, is an
integrated  provider of innovative  products and services to the  nutraceutical,
pharmaceutical,  and cosmeceutical  industries offering value-added ingredients,
bioactive  formulations,   and  proprietary  technologies  used  in  nutritional
supplements,  functional  foods  and  beverages,  and skin  care  products.  Its
subsidiaries   include  Quality  Botanical   Ingredients   ("QBI"),   a  leading
manufacturer and contract processor of bulk botanical  materials and nutritional
ingredients for the nutraceutical,  pharmaceutical and cosmetic industries; XCEL
Healthcare,  a  fully  licensed,   specialty  compounding  pharmacy  focused  on
delivering  full  service  pharmacology  solutions  to  customers  with  chronic
ailments  that require  long-term  therapy;  and  BioSelect  Innovations,  which
develops and sells products based on  proprietary  technologies  in the areas of
topical and transdermal drug delivery,  cosmeceuticals, and integrative medicine
to a global  network of customers  who  manufacture  and  distribute  compounded
pharmaceuticals, functional foods, skin care products and cosmetics.

      We strive to differentiate ourselves through the use of:

            |X|   Proprietary/patented technologies;

            |X|   Pharmaceutical research and/or clinical trials; and

            |X|   Strategic marketing and distribution partnerships

      We plan to leverage the benefits of our public  status and the  collective
knowledge  and capital  resources of our  executive  management  team,  advisory
board, and strategic resources to internally expand our current operations while
developing the business  strategies,  operations and management of the companies
we acquire.  We expect to provide strategic guidance and operational  support in
areas such as finance,  sales,  distribution,  production and  manufacturing  in
order to maximize earnings potential. We envision creating a collaborative forum
where the promotion of  opportunities  for  synergistic  business  relationships
occurs between and among our subsidiary companies.

CORPORATE BACKGROUND

      The  Company  was  originally  founded  on  June  13,  1996  as  Centurion
Properties  Development  Corporation and remained dormant until October 16, 2000
when  its  name was  changed  to  iGoHealthy.com  and it  began  developing  its
health-related  online shopping mall. On September 10, 2001, the Company changed
its name to  Health  Sciences  Group,  Inc.  to  reflect  its  current  business
strategy.   In  December  2001,  Health  Sciences   successfully  acquired  XCEL
Healthcare,  Inc. and its affiliate BioSelect  Innovations,  Inc., two specialty
pharmaceutical  companies  located in Woodland  Hills,  California.  In February
2003, the Company closed on its  acquisition of Quality  Botanical  Ingredients,
Inc., a  manufacturer  and contract  processor of bulk  botanical  materials and
nutritional ingredients located in South Plainfield, New Jersey.

BUSINESS STRATEGY

      Our objective is to become a recognized leader in providing innovative and
proprietary  products and ingredients that promote a positive health benefit for
a wide variety of consumer needs in the dietary  supplement,  food and beverage,
and  personal  care  segments  of the  nutraceutical  industry.  To achieve  our
objective, we intend to:

      1.    Focus on the  acquisition  of  differentiated  product  companies or
            technologies which offer increasing value creation potential;

      2.    Pursue  deliberate   cross-pollination  of  these  companies  and/or
            technologies  to create novel,  intellectual  property-rich  product
            lines;

      3.    Leverage our current customer base and intra-company supply chain to
            accelerate the market entry of our proprietary products; and

      4.    Form strategic  alliances and partnerships to further accelerate the
            commercialization process.

Growth by Internal Expansion

      We expect to increase  revenues of our current  operations by capitalizing
on key customer relationships through new product introductions,  developing new
customer relationships in our core business,  expanding our business-to-business
marketing  program by increasing  existing product lines,  marketing through new
media  outlets and securing new  distribution  relationships.  We also intend to
strengthen our financial position by effectively managing our cost structure. We
believe we can  successfully  implement our strategy by continuing to capitalize
on our (i) core product development and manufacturing strengths; (ii) ability to
develop innovative  science-based products; (iii) adherence to stringent quality
control  and  assurance   standards;   (iv)   utilization  of  fully  integrated
manufacturing and distribution; and (v) leadership of our experienced management
team.


                                      -3-
<PAGE>


Growth by Synergistic Acquisitions

      The  consistent  growth in the  fragmented  nutraceutical  market  creates
tremendous market opportunities to acquire companies.  Within this market, there
exist companies which have  significant  market potential for their products but
lack the strategic guidance, operational support, and capital resources in order
to maximize  scales of  efficiency in production  and  distribution  channels to
yield higher margins. These companies offer quality products and/or services and
often are well positioned in their respective  markets,  but lack these elements
necessary  to  catapult  them to the next level of growth.  The recent  economic
down-turn and reduced  accessibility  to capital markets,  further  constraining
growth, presents us with an opportunity to make accretive acquisitions.

      Through an expansive network and long-standing  relationships,  management
has access to a steady supply of such quality acquisition candidates. We plan to
leverage the core  competency of our management team and advisory board members,
having experience in mergers and acquisitions,  financings, business valuations,
and  operations,  to effectuate such  transactions.  We expect to take an active
role in  providing  strategic  guidance  and  operational  support.  By applying
operational improvements,  introducing synergistic efficiencies,  and leveraging
economies of scale, management expects to further enhance the Company's earnings
potential.

Our acquisition strategy is to:

      o     acquire  significant  interests and integrate  into a  collaborative
            network;

      o     provide strategic guidance and operational support to our subsidiary
            companies; and

      o     promote synergistic collaboration among our subsidiary companies.

ACQUIRE SIGNIFICANT INTERESTS AND INCORPORATE INTO A COLLABORATIVE NETWORK

      After a potential  target  company is  identified,  we will  negotiate the
acquisition of a significant interest in the company.  Ideally, we strive to own
100% of our subsidiaries, but believe that we can have a positive influence with
lower  ownership  levels.   As  a  condition  to  an  acquisition,   we  require
representation  on the  company's  board of  directors  to ensure our ability to
provide  active  participation  in the  company.  We  strive  to  structure  the
acquisition to permit the subsidiary  companies' management and key personnel to
obtain an equity stake in the Company. As a result of our extensive  experience,
we  believe  that we have the  ability  to  complete  acquisitions  quickly  and
efficiently.

      During  negotiations  with a potential  target  company,  we emphasize the
value of our seasoned management team and advisory board,  collaborative network
where  economies of scale and synergies  can be realized,  and access to capital
from either private sources or the public  markets,  which we believe gives us a
competitive   advantage  over  other  acquirers  in  successfully   consummating
transactions.  Our executive  management team,  advisory board members,  and key
consultants  assist in these  discussions  and other  stages of the  acquisition
process, including the initial evaluation of the target companies as well as due
diligence.

PROVIDE STRATEGIC GUIDANCE AND OPERATIONAL SUPPORT

      After we make an acquisition, we may take an active role in its affairs by
providing both strategic guidance and operational support.  However, the goal is
to seek companies with capable management teams that require little oversight by
us on day-to-day operations:

      Strategic  Guidance.  We  provide  strategic  guidance  to our  subsidiary
      companies  regarding market  positioning,  business model  development and
      market  trends.  In  addition,  we will advise our  subsidiary  companies'
      management on strategic  management and operational  issues.  An exclusive
      focus  on  the  specialty   pharmaceutical/nutraceutical  market  and  the
      knowledge  base  of our  strategic  investors,  executive  management  and
      advisory  board  members  provides us with  valuable  information  that is
      shared with all of our subsidiary companies.

      Operational  Support.  Companies  often have difficulty  obtaining  senior
      executive  level  guidance in the many areas of expertise  that  companies
      need  to be  successful.  We  will  assist  our  subsidiary  companies  by
      providing  access to  skilled  managers  who guide  them in the  following
      functional areas:


                                      -4-
<PAGE>


      Sales and Marketing.  Several members of the advisory board and management
      team  provide  guidance to the  subsidiary  companies'  sales,  marketing,
      product positioning and advertising efforts.

      Manufacturing.  Our  operating  officer  and  advisory  board  members are
      dedicated to helping our  subsidiary  companies  with their  manufacturing
      systems strategies and optimizing their current production lines.

      Finance.  Our  finance  executive  is  dedicated  to  providing  financial
      guidance to our subsidiary  companies in areas such as corporate  finance,
      financial  reporting,  accounting  and treasury  operations.  In providing
      these  services,  we leverage  the skills and  experience  of our internal
      finance  and  accounting  group,  our  subsidiary  companies  and  outside
      consultants.

      Business Development. Companies may be involved in evaluating, structuring
      and  negotiating  joint  ventures,  strategic  alliances,  joint marketing
      agreements,  acquisitions or other transactions.  We provide assistance to
      our subsidiary companies in all these areas. Our management team, advisory
      board,  strategic  investors and  subsidiary  companies all assist in this
      function.

PROMOTE SYNERGISTIC COLLABORATION AMONG SUBSIDIARY COMPANIES

      One  of the  principal  goals  of  the  Company's  network  is to  promote
innovation and collaboration among its subsidiary companies, which should result
in shared  knowledge  and  business  contacts  among them and the  formation  of
strategic  alliances.  Throughout the network we expect to identify  prospective
alliances, make introductions, and assist in strategic planning.

QUALITY BOTANICAL INGREDIENTS, INC. (QBI)

BUSINESS

      QBI  is  engaged  in the  manufacture  and  contract  processing  of  bulk
botanical  materials and  nutritional  ingredients  for personal care and health
product  companies  engaged  in  marketing  and  distributing  products  to  the
nutraceutical, pharmaceutical and cosmetic industries. QBI offers a wide variety
of quality product  selections  including more than 500 herbs,  dried fruits and
vegetables,  an extensive  selection of  concentrated  and  standardized  herbal
extracts,  and  a  wide  array  of  guaranteed  potency  herbs,   bioflavonoids,
antioxidants and beehive products.

Raw Materials

      QBI purchases its raw materials from a variety of growers,  collectors and
brokers.  Generally,  it has not  experienced any shortage of raw materials that
has affected its business other than an occasional  increase in price.  Although
many botanicals are currently in over-supply,  if demand for botanical  products
grows in the future,  the demand  pressure for some products  could outstrip the
capacity of suppliers.  QBI's  standardized  products have  guaranteed  potency,
meaning that the products  contain a  stipulated  amount of active  ingredients.
Management believes that for the most part, it can acquire sufficient  materials
for its standardized line and its inventory can be replaced without  significant
cost increase,  however botanicals are subject to substantial  variations due to
weather, unexpected increase in demand, ground conditions and political problems
in the source country and therefore supply will always be somewhat unpredictable
and an  occasional  short  fall  can be  expected.  QBI  has in  place,  in most
instances,  multiple  geographic  sources  of  raw  material  to  minimize  this
potential problem.  Also, the quality of botanicals varies from season to season
and year to year,  which can  impose a  limitation  on the  ability  to  produce
standardized products and which can result in substantial price changes.

Quality Control

      QBI's facility  contains two  laboratories:  a quality control  laboratory
devoted to the physical and chemical analysis of products measured against QBI's
customer and  compendial  specifications;  and a microbiology  laboratory  which
evaluates   finished   products   for    microbiological    purity.   QBI   uses
state-of-the-art  equipment including a Multi-state Mass Spectrometer (LC/Ms/Ms)
on line  with  numerous  High  Performance  Liquid  Chromatographs  (HPLC),  Gas
Chromatographs (GC), Thin Layer Chromatography (TLC), Infrared Spectroscopy (IR)
and Ultra-violet  Spectrophotometer  (UV). QBI provides complete Certificates of
Analysis and  Material  Safety Data Sheets on all of its  products.  In order to
assure product quality and stability, lot samples are retained for three years.


                                      -5-
<PAGE>


Manufacturing

      The  manufacturing  process  begins and ends in the  laboratory.  Incoming
botanical  materials  are  evaluated  to verify  species,  variety and  quality.
Technicians  then sift  through  the  material  to ensure  there are no  foreign
objects. A powerful  rare-earth magnet is also used to ensure there are no metal
fragments.  The material is then moved by conveyor  belt into the cutter,  which
reduces it to a manageable  particle size. Moved to a special cryogenic chamber,
the material is subjected to an air-swept  pulverizer,  which pounds the chilled
material  against a hard  surface  reducing it to a fine powder.  This  patented
cryogenic  processing  technology  preserves  volatile  herbal  oils and  active
compounds in the materials and allows fine particle  milling of hydroscopic  and
aromatic botanicals.

      Throughout the manufacturing  process the processed  botanical material is
subjected to a series of tests,  which examine physical and chemical  properties
such as active  constituents,  color,  flavor and purity.  The  material is then
either  stored in a finished  state,  available for further  processing  when an
order is  received  or further  processed  involving  blending,  densifying,  or
granulating  the powder  making it ready for  delivery to the  customer who will
then use it in a finished product. Prior to delivery,  each item undergoes final
testing to assure quality.

      The QBI  facility is Kosher  certified  and  operates  under  current Good
Manufacturing  Practices  ("GMPs")  to assure  consistent  high  quality  in the
manufacture  of its  products.  The  facility  and  manufacturing  process  also
routinely undergo audits by customers,  which include  pharmaceutical  and large
consumer product firms.

CUSTOMERS

      QBI services over 300 customers  worldwide,  primarily  manufacturers  and
brokers of natural and  functional  food  products.  These  customers  represent
several industry sectors, including vitamin & minerals, food & beverages, herbal
tea, pharmaceuticals, diet & sports supplements, health & beauty care, and pet &
equine.

NUTRACEUTICAL INDUSTRY OVERVIEW

      The U.S. Nutraceutical Industry can be divided into four segments: Dietary
Supplements,  Functional  Foods &  Beverages,  Natural  and Organic  Foods,  and
Personal Care products.

      The use of dietary  supplements as forms of  alternative or  complementary
medicines is growing in the United  States.  The key factors  driving the growth
include aging populations;  interest in healthy living; emphasis on preventative
measures to control  healthcare  costs;  increased  acceptance of  'alternative'
treatments;  expanding  body of  scientific  and  clinical  research to validate
effectiveness and safety;  and rising acceptance among doctors,  pharmacists and
health professionals.

      Another  leading  factor  fueling  the  interest  in  supplements  is  the
substantial evidence linking poor diet to certain diseases. Both herbal products
and  nutrients  have been found to produce  benefits in many diseases and recent
reviews  have  found  many of  these  to be  efficacious  for the  treatment  of
cardiovascular  disease, mood disorder,  and a host of other medical conditions.
US sales of dietary  supplements  reached $18.8 billion in 2002 or 32 percent of
the total  U.S.  Nutraceutical  market  of $58  billion,  with an annual  growth
forecast at 3-5 percent for the next five years, according to Nutrition Business
Journal.  Consumers  have become more  interested in self-care  and  alternative
medicine.

      According to Nutrition Business Journal,  US sales of Functional Foods and
Beverages  reached  $20  billion  in  2002  or 35  percent  of  the  total  U.S.
Nutraceutical  market of $58  billion,  with an annual  growth  forecast  at 8-9
percent  for the next five years.  Functional  foods and  beverages,  defined as
products which deliver a benefit to health and  well-being  over and above their
nutritional  value,  is the fastest  growing  food  category in many  countries.
Advances in bio-technology  and nutritional  sciences have shed increasing light
on the links between health and nutrition.  The ability of both  specialized and
natural  ingredients to bring specific  benefits is increasingly  recognized and
newly approved  ingredients and claims are being regularly  introduced.  Many of
these products are aimed at enhancing healthy  lifestyles,  aiding prevention of
disease  or aiding  specific  activities.  This  definition  can thus  encompass
products within several  existing food categories,  such as diet and sports,  as
well as covering many broader  aspects.  Some products are aimed at a clear area
of benefit such as heart or joints while others offer  broader  benefits such as
mental energy.


                                      -6-
<PAGE>


      The market for natural and organic foods was, until  recently,  classified
as a niche market.  Today, this segment of the nutraceutical  industry is global
and  growing  at a rapid  pace  driven  by  many  factors,  primarily  increased
awareness by health-conscious  consumers. An increasing number of consumers have
become aware of the quality of food, the ingredients  that the foods contain and
the processes that the foods go through (e.g. treatment with pesticides,  use of
antibiotic  drugs in animal  feed,  food  irradiation).  With 3,000 to 4,000 new
product  introductions each year, this dynamic sector is growing faster than any
other area of the food industry.  Since 1995, sales of natural and organic foods
have increased by more than 20 percent  annually,  with continued  strong growth
expected  for at least the next  decade.  According  to the  Nutrition  Business
Journal, global sales of natural and organic foods were estimated at $28 billion
in 2002 and expected to reach $80 billion by 2007.  The United  States leads the
market in retail  sales of natural and  organic  foods with an  estimated  $14.4
billion in 2002 and  projected to grow annually at a rate of 17-20% from 2003 to
2007.

      The market for personal care products,  including functional cosmetics and
skin care  products,  accounted  for $5  billion  in  sales,  or 8% of the total
market.

COMPETITION

      In the United  States,  companies  selling bulk natural  products  include
domestic natural product manufacturers such as PureWorld,  U.S.  Nutraceuticals,
Hauser and Triarco;  foreign  manufacturers  such as Indena,  Euromed and Martin
Bauer; and a large number of brokers and distributors  selling products that are
manufactured worldwide.  QBI competes with these companies for both the purchase
of natural products and sales of natural product extracts.

      Management  believes   competition  among  manufacturers  of  vitamin  and
supplement  products is based,  among other things,  on price,  timely delivery,
product quality, safety, availability,  product innovation, marketing assistance
and customer  service.  The competitive  position of QBI will likely depend upon
continued  acceptance  of its  products,  its  ability  to  attract  and  retain
qualified  personnel,  future  governmental  regulations  affecting vitamins and
nutritional supplements,  and publication of vitamin product safety and efficacy
studies by the  government  and  authoritative  health and medical  authorities.
Management  believes that its focus on quality and expertise in the  production,
marketing  and sale of bulk  natural  products  will  permit QBI to  effectively
compete in the sale of these products to manufacturers and marketers of consumer
products.

GOVERNMENT REGULATION

      QBI's  business  is subject to  comprehensive  regulation  throughout  the
world.  In the United States,  QBI's  business is regulated by federal  agencies
such as the  Food  and  Drug  Administration  ("FDA"),  the  U.S.  Environmental
Protection Agency ("EPA"), the U.S. Bureau of Alcohol, Tobacco and Firearms, the
U.S. Drug  Enforcement  Agency  ("DEA"),  the U.S.  Departments  of Interior and
Agriculture and various state and local government agencies. QBI is also subject
to regulation under the Occupational Safety and Health Act, the Toxic Substances
Control Act,  the Resource  Conservation  and  Recovery  Act, the Federal  Water
Pollution  Control  Act,  and  other  federal,  state  and  local  statutes  and
regulations.

      Products manufactured or sold by QBI are defined as "Dietary Supplements,"
as defined by the Dietary Supplement Health and Education Act ("DSHEA"), and are
governed by DSHEA.  DSHEA governs claims and  statements of nutritional  support
regarding dietary  supplements.  DSHEA establishes  labeling practices regarding
quality standards for supplements,  including  requirements  concerning  purity,
disintegration  and  compositional  specifications  and  also  amends  nutrition
labeling and nutrient content claim  requirements for dietary  supplements under
the Nutrition Labeling and Education Act of 1990.

      Failure to comply with applicable laws, regulations and permits can result
in  injunctive  actions,  product  seizures,  damages  and  civil  and  criminal
penalties.  Although QBI believes it is in substantial  compliance  with current
applicable  federal,  state  and  local  regulations,  the  FDA,  the  EPA,  the
Departments of the Interior and Agriculture and other governmental  agencies may
in the future change existing  regulations or adopt additional  regulations that
may affect QBI's ability to acquire necessary raw materials, manufacture natural
product extracts or develop or manufacture new products.

      The United States FDA has proposed detailed Good  Manufacturing  Practices
("GMP") for nutritional  supplements but has not yet adopted final  regulations.
Management of QBI believes it complies with GMP as proposed by the FDA.

XCEL HEALTHCARE, INC.

BUSINESS

      XCEL  Healthcare is  fully-licensed  specialty  pharmacy,  which  provides
prescription  drugs and other supplies and services to chronically ill consumers
who  suffer  from  diseases  such  as  cystic  fibrosis,   cancer,  quadra-  and
paraplegias,   multiple   sclerosis  and  liver   disease.   This   specialized,
under-served  customer niche is characterized by low churn,  steady growth,  and
high revenue per individual customer.  These attractive customer characteristics
are driven by changes within the healthcare industry, and more specifically, the
manner in which  pharmacies care for  chronically ill patients.  Chronically ill
patients,  who  traditionally  have been  cared for in a hospital  setting,  are
increasingly reliant on physician  office-based and home-based therapy. Yet, the
expansive needs of these chronically ill patients typically outstrip the product
line,  operational,   financial,  and  logistical  capabilities  of  traditional
providers.


                                      -7-
<PAGE>


      XCEL   specializes  in  compounding   prescription   medications  for  the
customized needs of its patients. It operates in niche illness segments that are
generally  insulated  from the  competition  of the national  discount  pharmacy
chains and large independent pharmacies.

STRATEGY

      XCEL's  objective  is to continue  to grow  rapidly and enhance its market
position  as a  leading  specialty  pharmacy  provider  by  capitalizing  on its
business strengths and pursuing the following strategy:

      o     Continue  to focus  on and  further  penetrate  the  alternate  site
            market. By focusing on the alternate site market,  XCEL has targeted
            growth segments of the health care industry.  It intends to increase
            its  alternate  site market  presence by  expanding  its product and
            service offerings,  increasing its sales and marketing personnel and
            focusing on group accounts.

      o     Accelerate  growth of its higher margin,  patient-specific  pharmacy
            business  by  leveraging   relationships  with  existing  customers.
            Management   believes  that  a  number  of  physicians   that  order
            pharmaceuticals  and  supplies  from XCEL also  treat  patients  who
            require  patient-specific  biopharmaceuticals.   XCEL's  information
            database   identifies   these   cross-selling   opportunities,   and
            management  believes it is  well-positioned  to capture  incremental
            revenue from these customers.

      o     Pursue  acquisitions to complement  existing  product  offerings and
            further  penetrate  markets.  Management  believes  that the  highly
            fragmented  specialty pharmacy industry affords it an opportunity to
            grow through  selective  acquisitions.  By  acquiring  complementary
            businesses,  XCEL can increase its customer base, expand its product
            and geographic scope and leverage its existing infrastructure.

      o     Continue to develop physician and payor networks that enhance XCEL's
            alliance  capabilities with manufacturers.  Management believes that
            with strong physician and payor networks, the relationships with its
            manufacturers will be enhanced, thereby increasing the potential for
            alliances,  which could expand its products,  service and geographic
            scope. In addition,  contracts with payors generate  significant new
            patient volumes and, therefore, revenue growth.

      o     Maintain cost control while investing in infrastructure. XCEL's goal
            is to remain a low-cost provider of specialty  products and services
            yet increase the value-added services it provides to customers, such
            as 24-hour  on-call  support,  patient  counseling  and  specialized
            shipping.

SALES & MARKETING

      XCEL strives to generate new  customers  and  solidify  existing  customer
relationships  through  frequent  direct  marketing  contact that emphasizes its
broad product lines in specialty  markets,  competitive  prices,  and responsive
service.  XCEL targets larger customers with customized  approaches developed by
management  and its key  account  team.  XCEL's  sales  personnel  service  both
in-bound and out-bound  calls and are  responsible  for  assisting  customers in
purchasing  decisions,  answering questions and placing orders.  Sales personnel
also  initiate  out-bound  calls to market  XCEL's  services  to those  customer
accounts identified as being high volume accounts, high order frequency accounts
or cross- selling  opportunity  accounts.  All sales personnel work to establish
long-term  relationships with XCEL's customers through regularly scheduled phone
contact and personalized service, including direct sales calls on key customers.

SPECIALTY PHARMACEUTICAL MARKET OVERVIEW

      The specialty  pharmacy  market is fragmented with several public and many
small private companies  focusing on different  product or customer niches.  Few
companies offer a wide range of pharmaceuticals and related supplies targeted to
multiple  customer  groups,  specifically  office-based  physicians and patients
self-injecting at home.  Historically,  cancer therapy,  renal dialysis and most
other  treatments  for  chronic and  life-threatening  medical  conditions  were
administered  almost  exclusively  in a hospital  inpatient  setting.  In recent
years, the frequency with which these treatments have been administered  outside
the hospital has increased dramatically.


                                      -8-
<PAGE>


      The   service   needs   of    office-based    physicians    and   patients
self-administering  at home differ  markedly from those of the hospital  market,
creating  logistical  challenges and increasing  administrative  costs for those
offices.  Office-based  physicians and clinics  generally order relatively small
quantities of drugs at irregular intervals and do not have inventory  management
systems or sufficient  pharmacy  staffing.  Challenges  facing these  caregivers
include  having  necessary  administrative  and  financial  resources,  managing
relationships with multiple suppliers,  managing  inventories,  billing patients
and third-party payors, and monitoring new clinical developments.  XCEL believes
that the  shift  from  hospital-based  to  office-based  or  home-based  therapy
administration has created a significant opportunity,  particularly with quadra-
and paraplegias,  cystic fibrosis, renal dialysis,  oncology, Multiple Sclerosis
as well as other chronic diseases

COMPETITION

      The  specialty  pharmaceutical  and  medical  supply  industry  is  highly
competitive and is experiencing both horizontal and vertical consolidation.  The
industry is  fragmented,  with several  public and many small private  companies
focusing on different  product or customer  niches.  Some of XCEL's  current and
potential  competitors  include  independent  specialty  distributors;  national
full-line,  full-service  wholesale  drug  distributors  that operate  their own
specialty  distribution  businesses;   retail  pharmacies;   specialty  pharmacy
divisions  of   prescription   benefit   managers;   institutional   pharmacies;
hospital-based  pharmacies;  home healthcare  agencies;  mail order distributors
that distribute  medical  supplies on a regional or national basis;  and certain
manufacturers  that  own  distributors  or  that  sell  their  products  both to
distributors  and directly to users,  including  clinics and physician  offices.
Some of XCEL's  competitors  have greater  financial,  technical,  marketing and
managerial resources than XCEL. While competition is primarily price and service
oriented,  it can also be affected by depth of product line,  technical  support
systems, specific patient requirements and reputation. There can be no assurance
that competitive pressures will not have a material adverse effect on XCEL.

GOVERNMENT REGULATION

      XCEL is subject to extensive  government  regulation,  including  numerous
laws directed at preventing fraud and abuse,  and laws regulating  reimbursement
under various governmental programs, as more fully described below.

      Medicare  and  Medicaid  Reimbursement.  As  part of the  Social  Security
Amendments of 1965,  Congress enacted the Medicare  program,  which provides for
hospital,  physician and other statutorily-defined health benefits for qualified
individuals such as persons over 65 and the disabled. The Medicaid program, also
established  by Congress in 1965,  is a joint  federal  and state  program  that
provides  certain  statutorily-defined  health  benefits  to  financially  needy
individuals who are blind, disabled, aged, or members of families with dependent
children.  In addition,  Medicaid  generally covers  financially needy children,
refugees  and  pregnant  women.  A  substantial  portion  of XCEL's  revenue  is
attributable  to  payments  received  from  third-party  payors,  including  the
Medicare and Medicaid programs.

      MEDICARE  LEGISLATION.  In December 2000, federal  legislators enacted the
Medicare,  Medicaid and SCHIP Benefits  Improvement  and Protection Act of 2000.
Among other items, this legislation  provides the home healthcare  industry with
some relief from the effects of the Balanced Budget Act of 1997, which contained
a number of provisions that are affecting,  or could potentially affect,  XCEL's
Medicare  reimbursement  levels.  The Medicare Balanced Budget Refinement Act of
1999 also mitigated some of the effects of the Balanced Budget Act of 1997.

      The Medicare,  Medicaid and SCHIP Benefits  Improvement and Protection Act
of 2000  provided  reinstatement  in  2001 of the  full  annual  cost of  living
adjustment for durable medical  equipment and provided minimal increases in 2002
for durable  medical  equipment and oxygen.  The Balanced Budget Act of 1997 had
frozen such adjustments for each of the years 1998 through 2002.

      During  2000,  the  Secretary of the U.S.  Department  of Health and Human
Services ("HHS") wrote to the durable medical  equipment  regional  carriers and
recommended,  but did not mandate,  that Medicare  claims  processors base their
payments for covered outpatient drugs and biologicals on pricing schedules other
than the  Average  Wholesale  Price  listing,  which  historically  has been the
industry's  basis for drug  reimbursement.  The  suggested  alternative  pricing
methodology was offered in an effort to reduce  reimbursement levels for certain
drugs to more closely  approximate a provider's  acquisition  cost, but it would
not have covered the costs that homecare pharmacies incur to prepare, deliver or
administer the drugs to patients.  Billing,  collection and other overhead costs
also would have been excluded. Under current government reimbursement schedules,
these  costs  are  not  clearly  defined  but  are  implicitly  covered  in  the
reimbursement  for the drug cost. The  healthcare  industry has taken issue with
the HHS's approach for several reasons,  primarily  because it fails to consider
the  accompanying  costs of  delivering  and  administering  these types of drug
therapies  to  patients  in  their  homes.   Further,  if  providers  choose  to
discontinue  providing  these  drugs due to  inadequate  reimbursement,  patient
access may be jeopardized. The Medicare, Medicaid and SCHIP Benefits Improvement
and  Protection  Act of 2000 delayed the adoption of proposed drug price changes
and  directed  the General  Accounting  Office to conduct a thorough  study,  by
September  2001,  to examine the  adequacy of current  payments and to recommend
revised  payment  methodologies.   The  study  was  completed  but  the  authors
acknowledged  that 1) the limited scope and deadline  associated  with the study
did not allow for a thorough analysis of the homecare pharmacy aspect of covered
services,  2) legitimate  service  components and related costs do exist, and 3)
different methods of determining drug delivery and  administration  payments may
be necessary for different types of drugs.  Currently,  the timing and impact of
such pricing methodology revisions are not known.


                                      -9-
<PAGE>


      In addition, some states have adopted, or are contemplating adopting, some
form of the  proposed  alternate  pricing  methodology  for  certain  drugs  and
biologicals  under the Medicaid program.  In several states,  these changes have
reduced the level of  reimbursement  received by XCEL to an  unacceptable  level
without a  corresponding  offset or increase to compensate for the service costs
incurred.  In those  states,  XCEL has elected to stop  accepting  new  Medicaid
patient  referrals for the affected drugs.  The company is continuing to provide
services  to  patients  already  on  service,  and for those who  receive  other
Medicaid-covered respiratory, home medical equipment or infusion therapies.

      The Balanced Budget Act of 1997 granted  authority to the Secretary of HHS
to increase or reduce the  reimbursement for home medical  equipment,  including
oxygen, by 15% each year under an inherent  reasonableness  procedure.  However,
under the  provisions of the Medicare  Balanced  Budget  Refinement Act of 1999,
reimbursement  reductions proposed under the inherent  reasonableness  procedure
have  been  delayed  pending  (1) a study by the  General  Accounting  Office to
examine  the  use of  the  authority  granted  under  this  procedure,  and  (2)
promulgation  by the  Centers for  Medicare & Medicaid  Services  (formerly  the
Health Care Financing Administration), of a final rule implementing the inherent
reasonableness authority. This regulation has not yet been issued.

      Further,  the Balanced  Budget Act of 1997  mandated  that the Centers for
Medicare & Medicaid  Services conduct  competitive  bidding  demonstrations  for
Medicare  Part B items and services.  The  competitive  bidding  demonstrations,
currently  in  progress,  could  provide  the  Centers  for  Medicare & Medicaid
Services and Congress with a model for implementing  competitive  pricing in all
Medicare  programs.  If such a competitive  bidding system were implemented,  it
could result in lower  reimbursement  rates,  exclude certain items and services
from  coverage  or impose  limits  on  increases  in  reimbursement  rates.  The
administration is seeking authority to implement nationwide  competitive bidding
for all Part B products and services (except physician's services). Congress has
rejected  similar  proposals in the past. It is not clear whether  Congress will
adopt this latest proposal.

      CLAIMS AUDITS.  Durable medical  equipment  regional  carriers are private
organizations that contract to serve as the federal  government's agents for the
processing  of claims  for  items  and  services  provided  under  Part B of the
Medicare program. These carriers and Medicaid agencies also periodically conduct
pre-payment  and  post-payment  reviews  and other  audits of claims  submitted.
Medicare  and  Medicaid  agents  are under  increasing  pressure  to  scrutinize
healthcare  claims more closely.  In addition,  the home healthcare  industry is
generally characterized by long collection cycles for accounts receivable due to
complex and time-consuming requirements for obtaining reimbursement from private
and  governmental  third-party  payors.  Such long collection  cycles or reviews
and/or   similar  audits  or   investigations   of  XCEL's  claims  and  related
documentation  could result in denials of claims for payment  submitted by XCEL.
Further,  the  government  could demand  significant  refunds or  recoupments of
amounts paid by the government for claims which, upon subsequent  investigation,
are  determined by the government to be  inadequately  supported by the required
documentation.

      HIPAA. The Health Insurance  Portability and  Accountability  Act mandates
the adoption of standards for the exchange of electronic  health  information in
an effort to encourage overall administrative  simplification and to enhance the
effectiveness  and efficiency of the healthcare  industry.  Ensuring privacy and
security of patient  information -  "accountability" - is one of the key factors
driving the  legislation.  The other major  factor -  "portability"  - refers to
Congress'  intention  to ensure  that  individuals  can take their  medical  and
insurance records with them when they change employers.

      In December 2000, HHS issued final  regulations  concerning the privacy of
healthcare  information.  These  regulations  regulate the use and disclosure of
individuals' healthcare  information,  whether communicated  electronically,  on
paper or orally. All affected  entities,  including XCEL, are required to comply
with these  regulations by April 14, 2003. The regulations also provide patients
with significant new rights related to  understanding  and controlling how their
health  information  is used or disclosed.  In March 2002,  HHS issued  proposed
amendments to the final regulations,  which, if ultimately  adopted,  would make
XCEL's compliance with certain of the requirements less burdensome.

      In  addition,  in  the  Spring  of  2002,  HHS  issued  final  regulations
concerning  the security of healthcare  information  maintained  or  transmitted
electronically.  Security  regulations  proposed  by HHS in  August  1998  would
require healthcare providers to implement organizational and technical practices
to protect the security of such information.  Once the security  regulations are
finalized,  the company  will have  approximately  two years to comply with such
regulations.


                                      -10-
<PAGE>


      Although the enforcement  provisions of HIPAA have not yet been finalized,
sanctions are expected to include  criminal  penalties and civil  sanctions.  At
this time, the company anticipates that it will be fully able to comply with the
HIPAA regulations that have been issued by their respective mandatory compliance
dates.  Based on the  existing  and  proposed  HIPAA  regulations,  the  company
believes  that the cost of its  compliance  with  HIPAA will not have a material
adverse effect on its business, financial condition or results of operations.

      The  Anti-Kickback  Statute.  As a provider of services under the Medicare
and Medicaid  programs,  XCEL is subject to the Medicare and Medicaid  fraud and
abuse  laws  (sometimes  referred  to as the  "anti-kickback  statute").  At the
federal level, the anti-kickback statute prohibits any bribe, kickback or rebate
in return for the referral of patients,  products or services covered by federal
healthcare  programs.  Federal healthcare  programs have been defined to include
plans and programs  that provide  health  benefits  funded by the United  States
Government,  including  Medicare,  Medicaid,  and TRICARE (formerly known as the
Civilian  Health and Medical Program of the Uniformed  Services),  among others.
Violations  of the  anti-kickback  statute  may  result  in civil  and  criminal
penalties and exclusion from participation in the federal  healthcare  programs.
In addition,  a number of states in which XCEL  operates have laws that prohibit
certain direct or indirect payments  (similar to the  anti-kickback  statute) or
fee-splitting  arrangements between healthcare  providers,  if such arrangements
are  designed to induce or  encourage  the  referral of patients to a particular
provider.  Possible  sanctions  for  violation  of  these  restrictions  include
exclusion from state-funded healthcare programs, loss of licensure and civil and
criminal penalties.  Such statutes vary from state to state, are often vague and
have seldom been interpreted by the courts or regulatory agencies.

      Physician  Self-Referrals.   Certain  provisions  of  the  Omnibus  Budget
Reconciliation Act of 1993, commonly known as "Stark II", prohibit XCEL, subject
to certain  exceptions,  from  submitting  claims to the  Medicare  and Medicaid
programs for "designated  health services" if XCEL has a financial  relationship
with the  physician  making the referral  for such  services or with a member of
such  physician's  immediate  family.  The  term  "designated  health  services"
includes  several  services  commonly  performed or supplied by XCEL,  including
durable  medical  equipment and home health  services.  In addition,  "financial
relationship" is broadly defined to include any ownership or investment interest
or compensation  arrangement pursuant to which a physician receives remuneration
from the  provider  at  issue.  Violations  of Stark  II may  result  in loss of
Medicare  and  Medicaid  reimbursement,   civil  penalties  and  exclusion  from
participation  in the Medicare  and  Medicaid  programs.  In January  2001,  the
Centers for Medicare & Medicaid Services issued the first of two phases of final
regulations  to clarify the meaning and  application  of Stark II.  Phase II was
issued in August,  2002,  however,  Phase I addresses  the  primary  substantive
aspects of the prohibition and several key exceptions.  Significantly, the final
regulations  define previously  undefined key terms,  clarify prior definitions,
and  create   several  new  exceptions   for  certain   "indirect   compensation
arrangements",   "fair  market  value"  transactions,   arrangements   involving
non-monetary  compensation  up to $300,  and  risk-sharing  arrangements,  among
others.  The regulations  also create a new  "knowledge"  exception that permits
providers to bill for items provided in connection with an otherwise  prohibited
referral,  if the provider does not know, and does not act in reckless disregard
or  deliberate  ignorance  of, the  identity  of the  referring  physician.  The
effective date for the bulk of Phase I of the final  regulations  was January 4,
2002.  In addition,  a number of the states in which XCEL  operates have similar
prohibitions on physician  self-referrals.  Finally, recent enforcement activity
and resulting case law developments  have increased the legal risks of physician
compensation arrangements that do not satisfy the terms of an exception to Stark
II, especially in the area of joint venture arrangements with physicians.

      False Claims. The False Claims Act imposes civil and criminal liability on
individuals  or entities that submit false or  fraudulent  claims for payment to
the government. Violations of the False Claims Act may result in treble damages,
civil monetary penalties and exclusion from the Medicare and Medicaid programs.

      The False Claims Act also allows a private  individual  to bring a qui tam
suit on behalf of the government against a healthcare provider for violations of
the  False  Claims  Act.  A qui tam  suit may be  brought  by,  with  only a few
exceptions,  any private  citizen who has material  information of a false claim
that has not yet been  previously  disclosed.  Even if  disclosed,  the original
source of the information leading to the public disclosure may still pursue such
a suit.  Although a corporate insider is often the plaintiff in such actions, an
increasing number of outsiders are pursuing such suits.

      In a qui tam suit, the private  plaintiff is responsible  for initiating a
lawsuit that may eventually lead to the government  recovering money of which it
was  defrauded.  After the private  plaintiff  has  initiated  the lawsuit,  the
government  must  decide  whether to  intervene  in the  lawsuit  and become the
primary  prosecutor.  In the event the government  declines to join the lawsuit,
the private  plaintiff  may choose to pursue the case  alone,  in which case the
private  plaintiff's  counsel  will have primary  control  over the  prosecution
(although  the  government  must be kept apprised of the progress of the lawsuit
and will still  receive at least 70% of any  recovered  amounts).  In return for
bringing the suit on the  government's  behalf,  the statute  provides  that the
private  plaintiff is entitled to receive up to 30% of the recovered amount from
the litigation proceeds if the litigation is successful. Recently, the number of
qui tam suits brought against healthcare  providers has increased  dramatically.
In addition, at least five states - California, Illinois, Florida, Tennessee and
Texas - have enacted  laws  modeled  after the False Claims Act that allow those
states to recover money which was fraudulently obtained by a healthcare provider
from the state (e.g., Medicaid funds provided by the state).


                                      -11-
<PAGE>


      Other  Fraud  and  Abuse  Laws.  The  Health  Insurance   Portability  and
Accountability Act of 1996 created in part, two new federal crimes: "Health Care
Fraud" and "False Statements  Relating to Health Care Matters".  The Health Care
Fraud statute prohibits  knowingly and willfully  executing a scheme or artifice
to defraud any  healthcare  benefit  program.  A violation  of this statute is a
felony and may result in fines and/or imprisonment. The False Statements statute
prohibits  knowingly  and  willfully  falsifying,  concealing  or  covering up a
material  fact by any trick,  scheme or device or making any  materially  false,
fictitious or fraudulent statement in connection with the delivery of or payment
for  healthcare  benefits,  items or services.  A violation of this statute is a
felony and may result in fines and/or imprisonment.

      Recently,   the  federal   government  has  made  a  policy   decision  to
significantly  increase the  financial  resources  allocated  to  enforcing  the
healthcare fraud and abuse laws. In addition, private insurers and various state
enforcement agencies have increased their level of scrutiny of healthcare claims
in an effort to identify and prosecute  fraudulent and abusive  practices in the
healthcare area.

      Internal  Controls.  XCEL maintains  several programs designed to minimize
the  likelihood  that it would  engage in  conduct or enter  into  contracts  in
violation of the fraud and abuse laws.  Contracts of the types  subject to these
laws are reviewed and approved by the corporate  contract  services and/or legal
departments.  XCEL also maintains various educational  programs designed to keep
its managers updated and informed on developments  with respect to the fraud and
abuse laws and to remind all employees of XCEL's policy of strict  compliance in
this area. While XCEL believes its discount  agreements,  billing  contracts and
various fee-for-service arrangements with other healthcare providers comply with
applicable laws and regulations,  XCEL cannot provide any assurance that further
administrative  or  judicial  interpretations  of existing  laws or  legislative
enactment  of new  laws  will not  have a  material  adverse  effect  on  XCEL's
business.

      Healthcare  Reform   Legislation.   Economic,   political  and  regulatory
influences  are  subjecting  the  healthcare  industry  in the United  States to
fundamental  change. The legislative and administrative  branches of the federal
government have formulated healthcare reform proposals. In addition, some of the
states in which XCEL operates  periodically  consider various  healthcare reform
proposals.  XCEL  anticipates  that federal and state  governmental  bodies will
continue  to review and  assess  alternative  healthcare  delivery  systems  and
payment  methodologies  and public  debate of these issues will  continue in the
future.  Due  to  uncertainties   regarding  the  ultimate  features  of  reform
initiatives and their enactment and  implementation,  XCEL cannot predict which,
if any, of such reform  proposals will be adopted or when they may be adopted or
that any such reforms will not have a material adverse effect on XCEL's business
and results of operations.

      Healthcare is an area of extensive and dynamic regulatory change.  Changes
in the law or new interpretations of existing laws can have a dramatic effect on
permissible  activities,  the relative costs  associated with doing business and
the  amount  of  reimbursement  by  government  and  other  third-party  payors.
Recommendations  for changes may result from an ongoing study of patient  access
by the General Accounting Office and from the potential findings of the National
Bipartisan Commission on the Future of Medicare.

BIOSELECT INNOVATIONS, INC.

BUSINESS

      BioSelect Innovations produces a line of topical and transdermal bases for
drug  delivery  and  functional  skin care  products  that are marketed by other
pharmacies.  As an outgrowth of its  expertise  and  experience  in  compounding
prescriptions, BioSelect has developed a number of proprietary formulations that
have patents pending.  These patents address the unique integration of selective
traditional   over-the-counter  generic  drugs  with  complementary  alternative
medications such as vitamins, herbs and other natural nutraceutical supplements.
BioSelect  expects  to become a pioneer  in this  nascent  field of  integrative
medicine.  Slated to be marketed and  distributed  through  alliances with major
pharmaceutical  companies,  this breakthrough in integrative  medicine addresses
heart disease, cold & flu, arthritis, migraine, allergy and other conditions.

STRATEGY

      BioSelect intends to become a leader in the field of integrative medicine,
topical and  transdermal  drug  delivery and the  development  and  marketing of
specialty  pharmaceutical  and  cosmeceutical  products  that are applied to the
skin. Key elements of its business and  commercialization  strategy  include the
following:


                                      -12-
<PAGE>


      Lower Risk  Strategy for Selecting  Product  Candidates  for  Development.
BioSelect  does  not  intend  to  focus  its  product   development  efforts  on
development  of new chemical  entities.  Instead,  it will focus on applying its
proprietary technologies in the following three areas:

      (1)   development of topical and transdermal  formulations of new chemical
            entities  in   partnership   with   innovative   pharmaceutical   or
            biotechnology companies;

      (2)   development  of new, high  performance  cosmeceutical  products that
            address  the skin care needs of the  increasing  number of  affluent
            middle-aged and older people; and

      (3)   development   and   launch   of  a   new   family   of   proprietary
            pharmaceutical/nutraceutical  products through  alliances with major
            pharmaceutical companies.

      Leveraging of Corporate Alliances. BioSelect plans to enter into strategic
alliances with established  pharmaceutical  companies for the development of its
drug delivery  products.  These  alliances  generally  will provide  research or
clinical funding and other support during the product development  process.  Its
partners  generally  will provide  established  and trained  marketing and sales
forces to sell the products.

      Internal  Focus on the  Dermatology  Market.  BioSelect  plans  to  retain
exclusive  or   co-marketing/co-promotion   rights  in  the  United   States  to
dermatological and related uses of the products it develops, while out-licensing
rights for other uses.  Similarly,  whenever possible, it will attempt to retain
commercial rights to dermatological and other specialty  pharmaceutical  uses of
products  developed under partner sponsored research  collaborations.  BioSelect
ultimately  plans to market the  dermatological  and  cosmeceutical  products it
develops,  either through the utilization of contract sales  representatives  or
through the establishment of its own sales force.

      Acquisition  of  Complementary   Products,   Technologies  or  Businesses.
Although  BioSelect  is  focusing  on  in-house  development  of its  innovative
pharmaceutical/nutraceutical products and technologies, it may opportunistically
acquire  products,  technologies or companies with products,  manufacturing  and
distribution capabilities consistent with its commercial objectives.

DRUG DELIVERY MARKET OVERVIEW

      Drug delivery companies develop technologies to improve the administration
of therapeutic  compounds.  These  technologies  are designed to enhance safety,
efficacy,  ease-of-use  and patient  compliance with  prescribed  therapy.  Drug
delivery technologies provide opportunities for pharmaceutical and biotechnology
companies to extend their drug  franchises as well as develop new and innovative
products.

      The vast majority of drugs currently on the market are taken orally or are
administered  by  injection.  Oral drug delivery  methods,  while simple to use,
typically  subject drugs to first-pass  metabolism in the body, which results in
drug degradation in the stomach and further  neutralization  in the liver before
reaching the bloodstream.  In order to achieve efficacy, higher drug dosages are
often  used,   with   increased   risks  of  side  effects.   The  injection  of
pharmaceuticals,  while  avoiding  first-pass  metabolism in the body,  also has
major  limitations,   including  pain,  which  can  lead  to  decreased  patient
acceptance  and  compliance  with  prescribed  therapy.  A  decline  in  patient
compliance  can  increase the risk of medical  complications  and lead to higher
healthcare costs.  Also, the costs of injectable drugs typically are higher as a
result of the additional costs  associated with medical  personnel to administer
the  injections  and the costs  associated  with the  purchase  and  disposal of
syringes.

      Pharmaceutical   and   biotechnology   companies  look  to  drug  delivery
enhancements  as a way of  gaining a  competitive  advantage.  Alternative  drug
delivery technologies,  which avoid first-pass metabolism and are less invasive,
are often sought by  pharmaceutical  and  biotechnology  companies to extend the
period of market  exclusivity  for a branded drug and thus postpone  competition
from  generic  drugs.  In  order  to  maintain  the   competitiveness  of  their
proprietary  drug  candidates,  large  pharmaceutical  companies  seek  delivery
enhancements  that will increase  safety and  efficacy,  reduce side effects and
make administration more convenient.  Further, drug delivery companies can apply
their  technologies  to off-patent  products to formulate  their own proprietary
products,  which they often  commercialize by seeking  marketing  collaborations
with  larger  pharmaceutical   companies  that  have  greater  capabilities  and
resources.

      We believe that developing  safer and more  efficacious ways of delivering
existing  drugs  generally is less risky than  attempting to discover new drugs,
because of the lower product development cost. On average, it takes 15 years for
an experimental new drug to progress from the laboratory to commercialization in
the U.S., with an average cost of approximately  $500 million.  Typically,  only
one in 5,000 compounds entering pre-clinical testing advances into human testing
and only one in five tested in humans is approved.  By contrast,  drug  delivery
companies  typically target drugs that already have been approved,  have a track
record of safety and efficacy and have established  markets for which there is a
proven  medical need.  Consequently,  clinical  trials  related to drug delivery
technologies applied to previously-approved  pharmaceuticals need only show that
carrier  technologies  deliver the drug without  harming the patient or changing
the clinical attributes of the drug.


                                      -13-
<PAGE>


SKIN HEALTH AND RESTORATION MARKET OVERVIEW

      In the United States, dermatologists and plastic surgeons primarily manage
skin health and restoration.  There are approximately 10,000  dermatologists and
6,000 plastic surgeons whose practice includes skin health and restoration. Skin
conditions  are  typically  treated with products  such as  prescription  drugs,
over-the-counter drugs and cosmetics, as well as office-based procedures such as
chemical-based  skin  peels.  In  recent  years,  physicians  have  taken  on an
increasingly  active  role in the  management  of skin  restoration.  This trend
reflects  both  the  increased  use of  existing  in-office  procedures  and the
introduction  of new  procedures  such as laser  skin  resurfacing,  laser  hair
removal and  microdermabrasion,  a procedure where the surface layer of the skin
is physically  removed.  We believe that the growth also  represents  efforts of
skin care  physicians  to  broaden  their  practices  and  sources of revenue to
include   more   cosmetically-based   products   and   procedures.   Third-party
reimbursement policies have limited patient access to dermatologists and imposed
limits  on the  level of  reimbursement  for  physician  procedures,  which  has
resulted in a loss of revenue to physicians. Physicians have tried to compensate
for this lost revenue by focusing on cosmetic  procedures,  which are  typically
elective  and  paid  for  directly  by  the  patients  and  not  subject  to the
reimbursement  restrictions  imposed by  third-party  payors.  Furthermore,  the
aggregate number of physician-mediated  cosmetic procedures,  including non-skin
based procedures such as facelifts,  hair transplants and breast  augmentations,
have grown  significantly in recent years,  resulting in increased office visits
and opportunities for the sale of physician-mediated skin health and restoration
products.

      We believe that the skin health and  restoration  market will  continue to
experience  strong  growth  as  a  result  of  several  factors,  including  the
development  of new  products  and  procedures  for a wider  range  of  cosmetic
treatments and the gradual aging of the U.S.  population.  Older segments of the
population  tend to control large  amounts of  disposable  income and are highly
motivated to improve their personal appearance.

INTEGRATIVE MEDICINE MARKET OPPORTUNITY

      BioSelect  plans  to  launch  a  new  proprietary   family  of  innovative
combination  of OTC drugs  with  natural  remedies  such as  herbs,  botanicals,
vitamins, and other supplements. BioSelect is targeting the nexus of traditional
medications  and  homeopathic  remedies.  Consumers  in  the  mass  market  have
demonstrated  increasing interest in natural health products,  including dietary
supplements,  vitamins and botanical nutraceuticals,  over the past decade. This
interest  level  is  being  met  with  the  increased   availability  of  highly
efficacious pharmacological agents that were previously prescription-restricted.
This growing OTC market  provides a strong  sales,  marketing  and  distribution
channel mechanism through which BioSelect's combined  OTC-nutraceutical products
can  provide  customers  with  unique  ailment  solutions  while  simultaneously
providing significant  financial  opportunities for the many makers of OTC drugs
that are continually seeking new sources of growth. Management believes that its
proposed OTC-nutraceutical combination products have the potential to:

      o     Enhance the health of consumers by combining the advances of science
            with natural remedies;

      o     Provide  consumers  with  a  source  of  nutraceutical   supplements
            promoted by an established, trusted OTC companies;

      o     Enable   BioSelect   and  its   partners  to  expand  the  reach  of
            nutraceuticals   into  the  mass  market  by  combining   them  with
            ubiquitous OTC drugs;

      o     Establish  intellectual  property protection through the combination
            of nutraceuticals with OTC drugs; and

      o     Provide a  pharmaceutical  company with a  high-growth,  high-margin
            product line.

      We believe that products that combine OTC  medications  and  nutraceutical
supplements  provide  a  unique  growth  opportunity.   For  the  pharmaceutical
industry,  which has  traditionally  been reliant on medications  switching from
prescription  status to OTC status to spur growth,  new products,  which combine
"traditional"  medications  and  homeopathic  remedies,  are  expected  to offer
substantial new industry growth opportunities.  For the nutraceutical  industry,
it  is  anticipated  that  the  successful   introduction  of  OTC-nutraceutical
combination   products   supported  by  one  or  more   established,   respected
pharmaceutical companies would lend the industry much needed credibility.

RESEARCH AND DEVELOPMENT

      Research and development  efforts are generally  devoted to four principal
areas:  (1)  development of new  technologies;  (2)  application of our existing
technologies  to new products;  (3) improvement of existing  processes;  and (4)
formulation of existing and new  biologically  active  compounds.  We have spent
approximately $49,000 and $54,000 on Company-sponsored  research and development
in fiscal years ended December 31, 2003 and 2002, respectively.


                                      -14-
<PAGE>


PATENTS AND TRADEMARKS

      BioSelect has  developed a number of  proprietary  formulations  that have
patents pending. These patent claims address the unique integration of selective
traditional   over-the-counter  generic  drugs  with  complementary  alternative
medications such as vitamins, herbs and other natural nutraceutical supplements.
The product  development effort focuses on developing  proprietary  formulations
for  existing  products  and on the  creation of  formulations  for product line
extensions.  The  preservation  and  improvement  of the quality of  BioSelect's
products are also integral parts of its overall strategy.

      BioSelect  maintains  and has applied for patent,  trademark and copyright
protection in the United States relating to certain of its existing and proposed
products   and   processes,   including   CONASE(TM),    COPROFEN(TM),   EPIGEST
ESSENTIALS(TM),    FEMDERM   ESSENTIALS(TM),    FEMGEST   ESSENTIALS(TM),    and
TRANSLIPOBASE(TM).  There can be no  assurance  that  BioSelect  will be able to
successfully protect its intellectual property.

EMPLOYEES

      At 2003, we employed 70 persons at QBI, XCEL,  BioSelect and the corporate
offices,  69  of  which  were  full-time  and  1  part-time.  Employees  include
pharmacists,  technicians,  accounting,  sales  and  marketing,  administrative,
delivery and executive  personnel.  A standard  package of employee  benefits is
provided to all  full-time  employees  in addition to  on-the-job  training  and
advancement  opportunities.  None of the  Company's  employees  are covered by a
collective  bargaining agreement and none are represented by labor unions. We do
not have key man insurance on any employee.

      Our subsidiaries  have entered into Employment  Agreements,  Nondisclosure
and  Non-Competition  Agreements  with each of their  respective  key employees.
These Agreements include provisions for salary increases and stock options based
on revenue and earnings growth that the respective operations may achieve.

      At December 31, 2003,  we have  employment  agreements  with the following
personnel:


<TABLE>
<CAPTION>
                                                                                      Expiration               Annual Base
Employee                              Position                                           Date                     Salary
--------                              --------                                           ----                     ------
<S>                    <C>                                                           <C>                      <C>
Fred Tannous           CEO, Treasurer, Health Sciences Group                         December 2005            $     190,000
Bill Glaser            President, Secretary, Health Sciences Group                   December 2005            $     190,000
Jacob Engel            General Manager, Operations                                   December 2005            $     150,000
Joe Schortz(1)         President and CEO, QBI                                        December 2005            $     150,000
Ronald Gustilo(2)      Director of Operations, XCEL Healthcare                       December 2004            $      93,236
</TABLE>

(1)   As of March 17, 2004, Mr.  Schortz is no longer  employed with QBI and his
      employment agreement with QBI is cancelled.

(2)   As of  January  23,  2004,  Mr.  Gustilo is no longer  employed  with XCEL
      Healthcare,   and  his  employment   agreement  with  XCEL  Healthcare  is
      cancelled.

ITEM 2. DESCRIPTION OF PROPERTY

      Our  executive  offices are located at Howard Hughes  Center,  6080 Center
Drive,  6th Floor,  Los Angeles,  California.  The annual lease payments for the
executive offices totals  approximately  $22,000. The lease agreement expires in
August  2004.  We also lease a 2,400  square foot  facility  in Woodland  Hills,
California for the  operations of XCEL and BioSelect.  The annual lease payments
for  the  Woodland  Hills  facility  totals  approximately  $39,000.  The  lease
agreement  expires in July 2004. With the recent  acquisition of QBI on February
25,  2003,  effective  January 1, 2003,  the Company  assumed the lease on QBI's
53,000  square  foot  warehouse  and  processing   facility   located  in  South
Plainfield,  New Jersey.  The annual lease payments for the New Jersey  facility
totals approximately  $233,000 for the year ended December 31, 2004. The term of
the lease is twenty  five  years  starting  on May 1,  1997.  The  lessor is MRA
Associates,  LLC, a New Jersey limited  liability  company,  a third of which is
beneficially  owned by Joseph R.  Schortz,  the  President  and Chief  Executive
Officer of QBI. The Company  holds an option to purchase  the property  from MRA
Associates for  $2,250,000.  The option expires in 2007.  Each of the respective
companies is responsible for the rental payments from its own operations.


                                      -15-
<PAGE>


ITEM 3. LEGAL PROCEEDINGS

      FIRST MIRAGE,  INC. V. HEALTH SCIENCES  GROUP,  INC., ET. AL. On March 24,
2003,  First Mirage,  Inc. filed an action against the Company,  Bill Glaser and
Transfer Online,  Inc., in the United States District Court,  District of Oregon
(CV 03 382 KI). The complaint contains claims for declaratory  judgment,  breach
of  state  statutory  obligations,  conversion,  intentional  interference  with
economic  relations,  breach of fiduciary  duty, and  negligence.  The complaint
alleges that the defendants  wrongfully  prevented  First Mirage from completing
its sale of 66,337  shares of the  Company's  common stock on the open market by
refusing to reissue the stock  certificate  representing  those shares without a
restrictive legend. The complaint seeks damages in an amount subject to proof at
trial, but not less than $90,000. The complaint also seeks pre and post-judgment
interest, punitive damages, and injunctive relief.

      The  Company  believes  that  because the shares at issue had been sold to
First Mirage by an  affiliate of the Company,  they were subject to the one-year
holding  period set forth in Rule 144  (promulgated  under the Securities Act of
1933),  which had not expired at the time of the proposed sale. The Company thus
believes  that the  complaint is without merit and intends to defend the lawsuit
vigorously.  The  Company,  moreover,  has agreed to  provide a defense  for Mr.
Glaser and Transfer Online, Inc.

      This  litigation is in its early stages and  discovery has not  commenced.
Therefore,  the  Company is unable to opine as to the  probable  outcome of this
matter at this time.

      FORTRESS  SYSTEMS,  INC. V. QUALITY BOTANICAL  INGREDIENTS,  INC. QBI is a
defendant in a suit  seeking  $400,000 in damages  brought by Fortress  Systems,
Inc.,  ("FSI")  Bankruptcy  Trustee.  The  suit  which  is  pending  in the U.S.
Bankruptcy  Court in Omaha,  Nebraska  alleges that certain products sold by QBI
did not meet  specifications  of FSI. While the outcome of the litigation cannot
be predicted at this time, the Company is seeking through  negotiations with the
Sellers of the QBI assets to offset the $400,000 claim against 400,000 shares of
its common  stock  which were issued to the Sellers of the QBI assets as part of
the  consideration  for the purchase of the QBI assets by the Company  under the
QBI Asset Purchase Agreement of November 30, 2003.

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

      None.


                                      -16-
<PAGE>


                                     PART II

ITEM 5. MARKET FOR ISSUER'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

      Our common stock began trading in the OTC Bulletin Board on August 3, 2001
and currently trades under the symbol "HESG". The following table sets forth the
high and low bid price per share  quotations  as  reported  on the OTC  Bulletin
Board of the common stock for the periods  indicated.  These quotations  reflect
inter-dealer prices, without retail mark up, mark down or commission and may not
necessarily represent actual transactions. Actual prices may vary.

FISCAL YEAR ENDING DECEMBER 31, 2003:

                                              High            Low
                                              ----            ---
First Quarter ........................       $1.25           $0.65
Second Quarter .......................       $1.29           $0.71
Third Quarter ........................       $1.21           $0.80
Fourth Quarter .......................       $1.80           $0.90

FISCAL YEAR ENDING DECEMBER 31, 2002:

                                              High            Low
                                              ----            ---
First Quarter ........................       $4.20           $2.70
Second Quarter .......................       $3.35           $1.30
Third Quarter ........................       $2.00           $0.80
Fourth Quarter .......................       $1.05           $0.55


      At March 31,  2003,  we had  approximately  167  holders  of record of our
voting  common  stock;  we  estimate  that the  Company  has  approximately  312
additional  beneficial  holders of our common stock held in names of brokers and
securities depositories,  amounting to 479 shareholders.  Of the current holders
of its common  stock,  Messrs.  Tannous  and Glaser  together  beneficially  own
approximately 34% of the Company.

      We have not paid or declared cash distributions or dividends on our common
stock and do not intend to pay cash dividends in the foreseeable future.  Future
payment of cash dividends  rests within the discretion of the Board of Directors
and is based on our earnings,  financial condition,  capital  requirements,  and
other factors.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

      This  report  contains  forward-looking  statements  within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities  Exchange Act of 1934,  as amended.  Our actual  results could differ
materially from those set forth as a result of general  economic  conditions and
changes in the assumptions used in making such forward-looking  statements.  The
following  discussion  and analysis of our  financial  condition  and results of
operations should be read in conjunction with the audited  financial  statements
and accompanying notes and the other financial  information appearing else where
in this Annual Report on Form 10-KSB. The financial information presented is for
the two year period January 1, 2002 to our fiscal year end, December 31, 2003.

CRITICAL ACCOUNTING POLICIES

      Our  discussion  and  analysis  of results  of  operations  and  financial
condition are based upon our consolidated financial statements,  which have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America (GAAP). The preparation of these consolidated financial
statements  requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent  assets and  liabilities.  We evaluate  our  estimates on an on-going
basis,  including  those  related  to  provisions  for  uncollectible  accounts,
contractual allowance for accounts receivable, inventories, goodwill, intangible
assets,  and contingencies  and litigation.  We base our estimates on historical
experience and on various other  assumptions  that are believed to be reasonable
under  the  circumstances,  the  results  of which  form the  basis  for  making
judgments  about the  carrying  values of assets  and  liabilities  that are not
readily  apparent  from other  sources.  Actual  results  may differ  from these
estimates under different assumptions or conditions.

      Note 2 of the  "Notes to  Consolidated  Financial  Statements"  includes a
summary  of  the  significant  accounting  policies  and  methods  used  in  the
preparation of our consolidated  financial statements.  The following is a brief
description of the more significant accounting policies and methods we use.


                                      -17-
<PAGE>


      Impairment  of Intangible  Long-lived  Assets.  Intangible  assets such as
excess of fair value of net assets  acquired,  patents and formulas could become
impaired and require a write-down  if  circumstances  warrant.  Conditions  that
could cause an asset to become impaired include lower-than-forecasted  revenues,
changes in our business  plans or a significant  adverse  change in the business
climate.  The amount of an  impairment  charge would be based on estimates of an
asset's  fair value as compared  with its book  value.  In  accordance  with the
Financial   Accounting   Standards  Board's  ("FASB")   Statement  of  Financial
Accounting Standards ("SFAS") Nos. 142 and 144 GAAP, we perform a valuation,  at
least  annually  and  whenever  other  circumstances  arise,  of our  intangible
long-lived assets to determine if any impairment exists.

      Contractual  Allowance.  The difference  between our  established  billing
rates and the amount  estimated  by us as  reimbursable  from  health  insurance
companies is the contractual allowance.  The contractual allowance could vary if
there  is a  change  in the  health  insurance  company's  established  policies
relating to covered  services or billing rates.  In evaluating  the  contractual
allowance,  we consider a number of factors,  including the age of the accounts,
changes in collection  patterns and the composition of patient accounts.  Actual
collections of accounts  receivable in subsequent periods may require changes in
the estimated contractual allowance. We review our contractual allowance and, if
warranted, adjust the allowance on a quarterly basis.

      Inventory.  Our inventory consists of herbs and nutritional supplements in
the raw material, blended and processed stages. Herbs and nutritional supplement
inventory is reviewed at least annually for obsolescence or permanent markdowns.
Inventory  also  includes   pharmaceutical  and  over-the-counter   medications.
Inventory is stated at the lower of cost or market. Costs for pharmaceutical and
over-the-counter  products  generally being  determined on a first in, first out
basis while the cost for herbs and nutritional  supplements are determined on an
average cost basis. Pharmaceutical and over-the-counter medications,  which have
expired,  are  returned  for credit or refund at amounts  that  approximate  our
purchase  price.  As a result,  we have no  obsolete  inventory  related  to our
pharmaceutical and over-the-counter medications.

OVERVIEW

      Health  Sciences  Group,  Inc., a Colorado  corporation,  is an integrated
provider  of   innovative   products   and   services   to  the   nutraceutical,
pharmaceutical,  and cosmeceutical  industries offering value-added ingredients,
bioactive  formulations,   and  proprietary  technologies  used  in  nutritional
supplements,  functional  foods and beverages,  and skin care products.  Through
fiscal year 2003, its subsidiaries  consisted of Quality Botanical  Ingredients,
Inc.  ("QBI" or  "nutraceutical  group"),  a leading  manufacturer  and contract
processor of bulk botanical  materials and nutritional  ingredients  supplied to
buyers  in  various  industries  including  pharmaceutical,  nutraceutical,  and
cosmetics;  XCEL Healthcare,  Inc. ("XCEL" or  "pharmaceutical  group"), a fully
licensed,  specialty  compounding  pharmacy  focused on delivering  full service
pharmacology solutions to customers with chronic ailments that require long-term
therapy;  and  BioSelect   Innovations,   Inc.  ("BioSelect"  or  "research  and
development  group"),  which  develops and sells  products  based on proprietary
technologies in the areas of topical and topical and transdermal  drug delivery,
cosmeceuticals,  and  integrative  medicine to a global network of customers who
manufacture  and distribute  compounded  pharmaceuticals,  functional  foods and
beverages, skin care products and cosmetics.

RESULTS OF OPERATIONS

      The results  described herein reflect the  consolidated  operations of the
Company and its three wholly-owned subsidiaries,  Quality Botanical Ingredients,
Inc.,  XCEL  Healthcare,  Inc. and  BioSelect  Innovations,  Inc. As the Company
completed  its  acquisition  of QBI  pursuant  to an  Asset  Purchase  Agreement
effective  January 2003, the results of operations for the  nutraceutical  group
are  included  in the twelve  months of  operations  for the  fiscal  year ended
December 31, 2003.  Included in the twelve months of  operations  for the fiscal
year ended  December  31, 2002  include  those  operations  relating to XCEL and
BioSelect.


<TABLE>
<CAPTION>
                                               SELECTED STATEMENT OF OPERATIONS INFORMATION

                                                        Fiscal Year Ended December 31,
                                                     -------------------------------------
                                                           2003                   2002
                                                     -------------          --------------
<S>                                                  <C>                    <C>
           Net sales                                 $  17,771,050          $    5,537,991
           Gross profit                              $   2,277,013          $    1,488,865
           Net loss                                  $ (7,419,062)          $  (4,283,936)
           Net loss attributable to
             common shareholders                     $ (8,447,276)          $  (4,283,936)
           Net loss per share available
             to common shareholders                  $      (0.76)          $       (0.73)
</TABLE>


                                      -18-
<PAGE>

Fiscal year ended  December 31, 2003 compared to fiscal year ended  December 31,
2002

      NET SALES.  Our consolidated net sales for the fiscal years ended December
31, 2003 and 2002 totaled $17,771,050 and $5,537,991, respectively. The increase
in net sales is due to the  acquisition of QBI,  which was effective  January 1,
2003.  QBI's net sales  accounted for 69.8%,  or  $12,405,971,  of the total net
sales for the year ended December 31, 2003. The remaining  30.2%, or $5,365,079,
of the  total  net  sales is due to sales  from  XCEL.  XCEL's  sales  decreased
slightly  from 2002 due to the decline in demand for its drug  delivery  creams,
while its sales from other pharmaceutical products remained somewhat constant at
approximately  $5,200,000  for the  year  ended  December  2003 as  compared  to
approximately  $5,100,000  for the  year  ended  December  31,  2002.  Decreased
reimbursement  amounts from insurance payors were primarily from the sale of our
compounded  drugs. For the year ended December 31, 2003,  compounded  medication
reimbursements  represented  5.2% of net sales as  compared to 9.6% for the year
ended   December  31,  2002.   As  Medi-Cal,   our  primary   insurance   payor,
reimbursements are decreasing and drug costs are increasing,  the pharmaceutical
group is  analyzing  other  patient  categories  to which the group can  service
effectively  while  achieving  its target gross  profit.  These  groups  include
oncology  and  respiratory  patients.  Additionally,  XCEL is looking to provide
these  services in a more  focused  area such as bed and care and  nursing  home
facilities to allow us to increase sales while keeping our administrative  costs
somewhat constant.

      For the year ended December 31, 2003, the  pharmaceutical  group decreased
its patient  base by  approximately  11% to 823 as compared  with the year ended
December  31,  2002  of  927  patients  and  increased  its   prescriptions   by
approximately  12% for the  year  ended  December  31,  2003.  The  increase  in
prescriptions  is  due to  the  change  in the  way  we  dispense  our  compound
medications,  dispensing  several times per month as compared to once per month,
which provides better service to and safer administration by our customers. Even
though we are dispensing more  prescriptions,  the  reimbursement  cost from the
insurance  payor has decreased,  resulting in slightly lower net sales for XCEL.
In the third quarter of 2003, the group  analyzed its patient  categories it was
servicing and has re-focused its targeted market to specific  patient groups for
which the billed claims have increased  reimbursement amounts from the insurance
payors,  higher gross profit margins and increased medication usage per patient.
This allows us to more effectively service our patients and provide the level of
service they expect from us. The research and  development  group  continues its
development  of cosmetic  products  that utilize  ingredients  and herbs to form
specialized cosmetics bases for the Company's current and future customers.

      COST OF GOODS SOLD.  Cost of goods sold for the years ended  December  31,
2003 and 2002  totaled  $15,494,037  and  $4,049,126,  or 87.2% and 73.1% of net
sales  respectively.  This resulted in gross  profits  totaling  $2,277,013  and
$1,488,865,  or 12.8% and 26.9% of net sales for the years  ended  December  31,
2003 and 2002,  respectively.  Included  in the cost of goods  sold for the year
ended  December  31, 2003 is  approximately  $546,000 of expense due to the high
basis of inventory  on-hand,  which was stepped up at the date of acquisition of
QBI, thereby causing an increase in the cost of goods sold  percentage.  Without
this charge,  the cost of goods sold for the year ended  December 31, 2003 would
have been $14,947,991 or 84.1% of net sales,  which would have resulted in gross
profits of $2,823,059 or 15.9% of net sales.  Due to  accounting  rules,  we are
required to step up the basis of purchased inventory to include the profits that
we would have received if purchased  subsequent to the  acquisition.  Therefore,
the $546,000 is not reflective of future costs that will be included in our cost
of goods sold for QBI.

      Cost of goods sold for the  nutraceutical  group  totaled  $11,125,176  or
89.7% of its sales for the year ended  December  31,  2003,  resulting  in gross
profits totaling  $1,280,795 or 10.3% of its net sales.  Included in the cost of
goods sold for the year ended  December  31, 2003 is  approximately  $546,000 of
expense due to the high basis of inventory  on-hand.  Without  this charge,  the
nutraceutical  group's  cost of goods sold for the year ended  December 31, 2003
would have been $10,579,130 or 85.3% of its net sales, which would have resulted
in gross  profits of  $1,826,841  or 14.7% of net sales.  In 2003, we recorded a
write-down  in  inventory  of  approximately   $500,000  due  to  a  lower  than
anticipated   selling  cost,   which  is  less  than  our  purchase  price.  The
nutraceutical  group anticipates  reducing its cost of goods by obtaining better
pricing terms from its vendors and reducing  stand-by  labor costs and overhead.
Savings from these measures is expected to be approximately $500,000 in the next
year.

      Cost of goods sold for the  pharmaceutical  group totaled  $4,368,861  and
$4,049,126  or 81.4% or 73.1% of its net sales for the years ended  December 31,
2003 and 2002, respectively. The increase in the cost of goods sold is primarily
due to increased  medication costs.  Medication costs increased by approximately
8.4% of net sales for the year ended  December  31,  2003 as  compared  to 2002.
Management is in  negotiations  with its primary vendor to obtain better pricing
on high volume  purchased items.  Additionally,  the group is marketing its drug
delivery creams to potential buyers. When marketed and priced  effectively,  the
compounding creams provide for gross profits of approximately 50%.


                                      -19-
<PAGE>


      SELLING,  GENERAL AND ADMINISTRATIVE.  Total consolidated selling, general
and  administrative  expenses for the fiscal  years ended  December 31, 2003 and
2002 totaled $7,829,092, or 44.1% of net sales, and $5,568,983, or 100.6% of net
sales, respectively. Operating expenses include selling expenses, which consists
of salaries and commissions paid to sales people totaling approximately $920,000
and $29,000 for the fiscal years ended December 31, 2003 and 2002, respectively.
Our operating expenses primarily include the following  approximate  amounts (in
thousands):

<TABLE>
<CAPTION>
                                                               Fiscal Years Ended December 31
                                                -----------------------------------------------------------
                                                          2003                             2002
                                                -------------------------        --------------------------
          Expense                               Amount            % Sales        Amount             % Sales
          -------                               ------            -------        ------             -------
<S>                                            <C>                 <C>          <C>                  <C>
          Salary expenses                      $  2,996            16.9%        $  1,319             23.8%
          Consulting and legal expenses        $  1,706             9.6%        $  3,126             56.5%
          Depreciation and amortization        $    600             3.4%        $    292              5.3%
          Commissions expense                  $    363             2.0%        $     29              0.5%
          Payroll taxes                        $    214             1.2%        $    105              1.9%
          Insurance                            $    161             0.9%        $     50              0.9%
          Accounting fees                      $    152             0.9%        $    105              1.9%
          Other selling, general and
            administrative expenses            $  1,637             9.2%        $    543              9.8%
</TABLE>

      Salary  expenses  decreased  by 6.9% of net  sales  from 2002 to 2003 as a
result of the  acquisition  of QBI,  which  allowed for  increased net sales and
include amounts paid to pharmacists,  sales and office personnel. Salary expense
for QBI totaled  approximately  $1,513,000 for the year ended December 31, 2003.
The remainder of approximately  $1,483,000 represents salary expenses for Health
Sciences,  XCEL and  BioSelect.  Approximately  $552,000  and  $418,000 of total
salary  expenses  were paid by the  issuance  of our common  stock for the years
ended December 31, 2003 and 2002,  respectively,  and, therefore, did not affect
cash out-flows. Included in salary expense for the years ended December 31, 2003
and 2002 is the value of our common stock issued to Messrs.  Tannous and Glaser,
our  officers  and  major   shareholders  of  Health  Sciences,   which  totaled
approximately $300,000 and $409,000,  respectively.  We expect salary expense to
decrease  further as a  percentage  of net sales as our net sales  increase  and
additional companies are added and operational efficiencies are achieved.

      Consulting and legal expenses decreased by 45.4% or $1,420,000 in 2003 and
include fees paid to  consultants  for  investor  relations  services  including
providing financial communication programs, increasing general market awareness,
educating retail brokers and institutional  networks,  assisting management with
the  development  of  strategic  approaches  to  accessing  the  equity and debt
markets, and identifying and reviewing potential acquisition candidates and fees
paid for legal services provided.  Consulting expenses also include fees paid to
consultants  relating to the business  development of Health  Sciences Group and
our  subsidiary  companies,  QBI, XCEL and  BioSelect.  These  services  include
developing corporate strategies,  planning for our anticipated commercialization
of new products,  formulating and evaluating  potential  corporate options,  and
expanding  subsidiary  company  operations  through  an  integrated  process  of
analysis.  In 2002,  warrants valued at approximately  $1,281,000 were issued to
two investment  relations firms for services provided through December 31, 2002.
We did not renew the agreements with the firms but instead looked to alternative
companies to provide the same or better service at a reduced cost. This resulted
in a  reduction  in  consulting  fees for  2003.  Approximately  $1,387,000  and
$2,384,000  of these  costs  were  paid by the  issuance  of our  common  stock,
options,   or  warrants  for  the  years  ended  December  31,  2003  and  2002,
respectively, and therefore, did not affect cash out-flows.

      We expect to continue to increase  market  awareness,  continue to develop
our strategic  approaches,  perform due diligence on acquisition  candidates and
acquire them accordingly.  However, we plan to use internal resources as much as
possible, which will reduce expenses.

      Depreciation and amortization expense increased by approximately  $308,000
to approximately $600,000. Of this amount, approximately $249,000 relates to the
amortization of loan fees  associated with our convertible  debentures and lines
of credit, which were obtained in 2003. Loan fee expenditures for the debentures
and lines of credit totaled approximately  $493,000 and are being amortized over
the life of the related debentures and lines of credit,  which range from 1 to 3
years.  The remainder of the increase of  approximately  $59,000  relates to the
depreciation and amortization of assets acquired with the purchase of QBI.

      Commission expenses increased to approximately $363,000 for the year ended
December  31,  2003 as  compared  to  approximately  $29,000  for the year ended
December  31,  2002.  To  remain  competitive  in the  industry,  QBI,  our  new
subsidiary, pays commission at rates which vary from 5% - 15% over a base amount
of collected  sales.  Different  rates are based on sales levels and  geographic
locations.


                                      -20-
<PAGE>


      Insurance expense charged to selling,  general and administrative expenses
increased  from the prior year as a result of the purchase of QBI. Our insurance
expense allocated to general and administrative  expenses totaled  approximately
$54,000 for QBI. The  remainder  of the  increase is due to increased  insurance
rates at XCEL for liability and workers' compensation insurance.

      Accounting fees totaled approximately  $152,000 and $105,000 for the years
ended  December31,  2003 and 2002,  respectively.  Accounting  fees increased by
approximately  $47,000 as a result of the  acquisition of QBI and the additional
accounting  requirements required by new legislation and accounting  regulations
such as Sarbanes-Oxley.

      Other  selling,  general  and  administrative  expenses  are  those  whose
aggregate  amounts are less than  $150,000 for each of the years ended  December
31, 2003 and 2002 and include such items as  automobile  expenses,  delivery and
freight costs, office supplies and services, rent, travel, and utilities.

      Selling, general and administrative expenses for our subsidiary companies,
QBI, XCEL, and BioSelect, totaled approximately $4,517,000 or 25.4% of net sales
and  $1,704,000 or 30.8% of net sales for the years ended  December 31, 2003 and
2002,  respectively,  resulting  in an  increase  of  approximately  $2,813,000.
Approximately  $3,020,000 of the  operating  expenses in 2003 relate to selling,
general and administrative expenses expended for QBI's operations. We anticipate
reductions  in  operating  expenses  for our  subsidiary  companies as we reduce
salary expense, sales commission rates and allowance for uncollectible accounts.

      OTHER  EXPENSES.  Interest  expense totaled  approximately  $1,074,000 and
$204,000  for the years  ended  December  31,  2003 and 2002,  respectively  and
includes  interest paid on lines of credit,  notes  payable,  capital leases and
amortization of discount on the sale of convertible  debentures and the issuance
of  convertible  preferred  stock.  Amortization  of discounts on debentures and
preferred  stock  represent  the  interest  cost  associated  with  issuing  the
convertible debentures and preferred stock with warrants and the intrinsic value
of the beneficial conversion feature,  which totaled approximately  $704,000 for
the year ended December 31, 2003 and is a non-cash  expenditure.  Other non-cash
expenditures  included  in  interest  expense  total  approximately  $16,000 and
$141,000 for the years ended December 31, 2003 and 2002, respectively and relate
to discounts on notes  payable and the value of the issuance of common stock due
to a price adjustment provision.

      The  change  in fair  value of  warrant  liability  totaled  approximately
$678,000  and  represents  the  change in fair  value of  warrants  issued  with
registration rights to various professionals and the purchasers of our preferred
stock.  At the  date of  issuance,  we did not  have an  effective  registration
statement and, therefore,  recorded the value of the warrants issued at the date
of grant as a  liability.  The change in fair value is included as an expense on
our statement of operations for the year ended December 31, 2003. The fair value
of the warrants  totaled  approximately  $2,293,000 on the date of issuance.  In
October 2003,  one of our  registration  statements  became  effective and, as a
result,  approximately  $652,000  of  the  warrant  liability  was  recorded  in
stockholders'  equity. The balance of approximately  $2,319,000 and any increase
or decrease in fair value will be recorded in  stockholders'  equity at the date
our second registration statement becomes effective. We anticipate the effective
date to be in the second quarter 2004.

      NET LOSS.  Net loss for the fiscal years ended  December 31, 2003 and 2002
totaled  approximately  ($7,419,000) or (41.7%) of net sales and ($4,284,000) or
(77.4%)  of net  sales,  respectively.  Net loss per share of  common  stock was
($0.76)  and  ($0.73) for the fiscal  years  ended  December  31, 2003 and 2002,
respectively.  The increase in net loss is due to  increased  cost of goods from
our new  subsidiary,  QBI,  for the  year  ended  December  31,  2003  including
additional  costs of inventory of  approximately  $1,046,000.  Moreover,  we had
financing  costs totaling  approximately  $1,558,000 for the year ended December
31,  2003.  These  costs  are  associated  with our debt  and  equity  financing
transactions  and  the  issuance  of  registered  shares  without  an  effective
registration statement as previously discussed.

      Approximately  $2,099,000  of the  net  loss  in 2003  resulted  from  the
issuance of our common stock, common stock purchase warrants and options granted
to consultants who provided us with business  development,  public and financial
relations,  and  raising  additional  debt or equity  financing  and  penalties.
Additionally,  approximately $704,000 is due to the amortization of discounts on
our convertible  debentures and the issuance of preferred  stock.  Approximately
$500,000 relates to permanent markdowns on inventory for QBI. We believe this to
be a one-time  charge and do not  anticipate  any future  markdowns in inventory
from our subsidiary.

      Net loss for the fiscal  years  ended  December  31, 2003 and 2002 for the
subsidiary company operations totaled approximately  ($2,634,000) and ($253,000)
or (14.8%) and (4.6%) of net sales, respectively. There can be no assurance that
we will ever achieve profitability or that a stream of revenues can be generated
and sustained in the future.


                                      -21-
<PAGE>


Use  of  earnings  before   interest,   taxes,   depreciation  and  amortization
("EBITDA").

      The use of EBITDA is not a substitute  for U.S.  GAAP measure of financial
performance  and liquidity  reported in accordance  with  accounting  principles
generally  accepted in the United States of America.  The following  comparative
discussion of the results of operations  and financial  condition of our Company
includes, among other factors, an analysis of changes in the operating income of
our Company before  interest,  taxes,  depreciation and amortization in order to
eliminate  the  effect  on the  operating  performance  of  significant  amounts
included in our statements of operations.  Financial analysts generally consider
EBITDA to be an important measure of comparative  operating  performance for the
businesses of our Company and our  subsidiaries,  and when used in comparison to
debt  levels or the  coverage  of  interest  expense as a measure of  liquidity.
However,  EBITDA should be  considered in addition to, not as a substitute  for,
operating  income,  net  income,  cash  flow and  other  measures  of  financial
performance  and liquidity  reported in accordance  with  accounting  principles
generally accepted in the United States of America.  Also, EBITDA, as calculated
by us,  may not be  comparable  to  similarly  titled  measures  used  by  other
companies.

      We analyze the performance of our consolidated statement of operations and
subsidiary  statements of operations as compared to other  companies in the same
industry and to our own subsidiary companies.  Due to the significant amounts of
amortization of intangible assets and interest expense recognized as a result of
the issuance of our debentures and preferred  stock, we attempt to eliminate the
amounts  recognized to provide a more  meaningful  basis for  comparison.  Other
companies in the same  industry  have varying  amount of  intangible  assets and
related amortization and interest expenses making comparative analysis difficult
or impossible  without  eliminating  these expenses.  Therefore,  we remove this
fluctuating  cost to better  analyze and compare the  operations  of the subject
companies.  We believe this to be a useful tool in analyzing the  performance of
our companies,  which allow us to make  operational  decisions and  improvements
within  our  Company,  as  some  of our  subsidiaries  do not  have  substantial
amortization of intangible assets and interest expense.

      EBITDA for the years ended  December  31, 2003 and 2002 on a  consolidated
basis totaled ($5,586,067) and ($3,788,057),  respectively. Included in the cost
of goods sold for the year ended December 31, 2003 is approximately  $546,000 of
expense due to the high basis of inventory on-hand,  which was stepped up at the
date of  acquisition  of QBI,  thereby  causing an increase in the cost of goods
sold. Due to accounting rules, we are required to step up the basis of purchased
inventory  to include  the  profits  that we would have  received  if  purchased
subsequent  to the  acquisition.  Therefore,  the $546,000 is not  reflective of
future  costs that will be included in our cost of goods sold for QBI. We remove
this charge when analyzing the  performance of our subsidiary  companies to each
other and other  companies  within the same industry.  EBITDA for the year ended
December 31, 2003, on a consolidated  basis without this charge to cost of goods
sold would  have been  ($5,040,021)  or  (28.4%)  of net  sales.  EBITDA for our
subsidiary company  operations  totaled  ($1,808,960) and $30,682 or (10.2%) and
0.6% of net sales for the years ended December 31, 2003 and 2002,  respectively.
Earnings  before  interest,   taxes,   depreciation  and  amortization  for  our
subsidiary  company  operations without the stepped up basis in inventory at QBI
to cost of goods sold would  have been  ($1,262,914)  or (7.1%) of net sales for
the year ended December 31, 2003.

The reconciliation of this non-GAAP financial measure is as follows:

<TABLE>
<CAPTION>
                                                    Consolidated Basis                 Subsidiary Company Operations
                                             Fiscal Year            Fiscal Year        Fiscal Year       Fiscal Year
                                                 Ended                  Ended            Ended             Ended
                                           December 31, 2003    December 31, 2002 December 31, 2003  December 31, 2002
                                           -----------------    ----------------- -----------------  -----------------
<S>                                            <C>                <C>                <C>                <C>
          Net loss, as reported                ($7,419,062)       ($4,283,936)       ($2,633,792)       ($  253,465)
          Interest expense, net                  1,073,852            203,818            278,784             10,355
          Depreciation and amortization            759,143            292,061            546,048            273,793
                                               -----------        -----------        -----------        -----------

          EBITDA                                (5,586,067)        (3,788,057)        (1,808,960)            30,683
          Stepped up basis in purchased
            inventory at QBI                       546,046                 --            546,046                 --
                                               -----------        -----------        -----------        -----------

          EBITDA without the stepped up
            basis in purchased inventory
            at QBI                             ($5,040,021)       ($3,788,057)       ($1,262,914)       $    30,683
                                               ===========        ===========        ===========        ===========
</TABLE>



                                      -22-
<PAGE>


CAPITAL RESOURCES AND LIQUIDITY

      ASSETS.  Our current assets totaled  $4,802,130 and $1,267,831 at December
31, 2003 and 2002, respectively. Total assets were $10,900,021 and $5,971,410 at
December  31, 2003 and 2002,  respectively.  The  increase in current  assets is
primarily due to the purchase of assets from QBI. Current assets for QBI totaled
approximately  $4,243,000 at December 31, 2003. At December 31, 2003, our assets
consisted primarily of net patents totaling approximately $3,276,000,  inventory
of approximately  $2,587,000,  net accounts receivable totaling $1,854,000,  net
machinery and equipment of  $1,416,000,  net formula  costs  totaling  $586,000,
excess of cost over fair value of net  assets  acquired  totaling  approximately
$351,000,  cash on hand of $265,000,  and net  agreements  not-to-compete  costs
totaling $119,000.  At December 31, 2002, our assets consisted primarily patents
totaling $3,300,000,  net formula costs totaling of approximately  $631,000, net
accounts  receivable  totaling  $567,000,  excess of cost over fair value of net
assets acquired totaling approximately  $351,000, net agreements  not-to-compete
totaling $249,000 and cash on hand of $169,000.

      LIABILITIES  AND  WORKING  CAPITAL.   Our  current   liabilities   totaled
$6,231,623  and  $1,335,670  at December 31, 2003 and 2002,  respectively.  This
resulted in working capital  deficit of  ($1,429,493)  and ($67,839) at December
31, 2003 and December 31, 2002, respectively.  Total liabilities were $9,981,095
and  $1,501,442  at December  31, 2003 and 2002,  respectively.  The increase in
liabilities is primarily due to the assumption of liabilities  effectuated  with
the purchase of QBI,  which  totaled  approximately  $5,004,000  at December 31,
2003.  Additional  increases  were  due to the  warrant  liability,  the sale of
convertible debentures and the issuance of Series A Preferred Stock, which is to
be settled in our registered common stock. At December 31, 2003, our liabilities
consisted   primarily  of  accounts  payable  and  accrued   expenses   totaling
approximately $2,762,000, lines of credit totaling $3,000,000, warrant liability
totaling $2,319,000, net Series A Convertible Preferred Stock totaling $794,000,
net  convertible   debentures  totaling  $512,000  and  notes  payable  totaling
$321,000.  At December 31, 2002, our liabilities consisted primarily of accounts
payable and accrued expenses totaling approximately $1,021,000 and notes payable
totaling $383,000.

CASH REQUIREMENTS AND ADDITIONAL FUNDING

      We generated  financial  growth  primarily  through cash flows provided by
financing activities.  In 2003 and 2002, financing activities generated net cash
of approximately  $1,578,000 and $784,000.  Net proceeds totaling  approximately
$2,126,000  and $800,000 were received  during the year ended  December 31, 2003
and were derived from the sale of our equity  securities  (preferred and common)
and  convertible  debentures,   respectively.   Cash  flows  used  by  financing
activities  were primarily  payments  issued on our lines of credit  ($311,000),
capital lease obligations  ($222,000),  notes payable ($565,000) and payments on
loan fees  ($250,000).  For the year  ended  December  31,  2002,  net  proceeds
totaling  approximately  and $494,000 resulted from the sale of our common stock
and  approximately  $421,000 was received from Messrs.  Tannous and Glaser,  our
officers and major shareholders.  Cash and cash equivalents increased by $96,000
to approximately  $265,000 in 2003. Cash flows used by financing activities were
primarily for notes payable  ($275,000)  and book  overdraft  ($114,000) for the
year ended December 31, 2002.

Convertible Debentures

      In February 2003, we sold $300,000 of convertible debentures pursuant to a
Securities  Purchase  Agreement to Brivis  Investments,  Ltd.  ("Brivis") and to
Stranco Investments, Ltd. ("Stranco"). Additionally, we issued 571,428 of Common
Stock  purchase  warrants to the debenture  holders.  Each warrant  entitles the
holder to purchase one share of Common Stock at an exercise price of $0.60.  The
warrants  expire in February  2008. The  debentures  accrue  interest at 12% per
annum.  The unpaid  principal and accrued  interest is due on February 24, 2004.
The notes are collateralized by a second position in substantially all assets of
the Company and 1,000,000 shares owned by the officers and major shareholders of
the Company. The debentures can be converted at $0.525.

      Additionally, we granted 85,712 stock purchase warrants to two consultants
unrelated to us, George Matin and FCIM Corp., as consulting services relating to
the convertible debentures sold by the Company. Each warrant entitles the holder
to  purchase  one  share of Common  Stock at an  exercise  price of  $0.60.  The
warrants  expire in February 2008. The estimated  value of the warrants  totaled
approximately  $71,000 at the date of  issuance.  The value of the  warrants was
estimated  using the  Black-Scholes  option  pricing  model  with the  following
assumptions:  average  risk-free  interest  of  2.82%;  dividend  yield  of  0%;
volatility  factor of the expected market price of the Company's Common Stock of
142%; and a term of five years.

      We  previously  registered  the  shares of  Common  Stock  underlying  the
convertible debentures and warrants issued to Brivis,  Stranco, the consultants,
George  Matin and FCIM Corp.,  1,000,000  shares of Common  Stock  belonging  to
Messrs.  Tannous and Glaser,  pledged as collateral to the convertible debenture
holders and 150,000  shares of Common Stock issued to Richardson & Patel LLP for
legal services.  Brivis and Stranco have assigned their rights to Cedar Crescent
Holdings, Inc.


                                      -23-
<PAGE>


      In May 2003 we sold one year, $500,000 12% convertible debentures pursuant
to a  Securities  Purchase  Agreement to  Castlerigg  Master  Investments,  Ltd.
("Castlerigg"), convertible into 588,235 shares of our Common Stock. In addition
we issued to Castlerigg 5 year warrants to purchase 588,235 shares of our Common
Stock,  exercisable at $1.25 per share. In connection with the  transaction,  we
issued identical  warrants for 88,235 shares to Vestcom.  We also entered into a
Registration  Rights  Agreement with Castlerigg  pursuant to which we registered
the  Common  Stock   underlying  the  12%  debentures  and  the  warrants.   The
Registration Rights Agreement with Castlerigg  prohibits us from registering any
other shares for 90 days, as does the Registration  Rights Agreement with Brivis
and Stranco.  These Registration  Rights provisions conflict with our obligation
to register the shares  underlying the Series A Convertible  Preferred Stock and
the warrants issued in connection with the Series A Convertible Preferred Stock.

Line of Credit

      In February 2003, XCEL  Healthcare,  Inc. entered into a Loan and Security
Agreement with a finance company for a maximum line of credit totaling $750,000.
Interest  is due  monthly on the  outstanding  balance at a rate of 3.75%  above
company's  reference  rate. The Loan  Agreement  expires in February 2006 and is
secured by  substantially  all assets of XCEL.  The  finance  company  will make
advances on the loan agreement up to 75% of eligible  accounts  receivable.  The
borrowings are guaranteed by Health Sciences Group and personally  guaranteed by
the majority  stockholders of Health Sciences Group.  The credit line is limited
as to use by XCEL.

      XCEL must maintain the following financial ratio and covenant:


            Minimum working capital ratio = .75 to 1

            XCEL  must be profitable

      Additionally,  we agreed to pay $37,500 and issue  30,000  stock  purchase
warrants to a  consultant  for  services  relating  to the line of credit.  Each
warrant entitles the holder to purchase one share of Common Stock at an exercise
price of $0.95. The warrants expire February 2008.

Private Placement - Series A Convertible Preferred Stock

      In fall 2003,  the Company  completed a Private  Placement  to  accredited
investors for the sale  2,352,948  units of the  Company's  Series A Convertible
Preferred  Stock ("Series A Preferred") and one warrant to purchase one share of
common  stock at a purchase  price of $0.85.  As a result,  the  Company  issued
2,352,948 shares of its 5,000,000  authorized  shares of preferred stock,  which
has a par value of $0.001.  The Series A Preferred stock converts into shares of
the  Company's  common stock at $0.85 per share on the earlier of 1) the request
of the Holder;  2) three years from the closing  date; or 3) if, after two years
from the Closing Date, the Company's  common stock trades at a closing bid price
greater  than  $4.00  for 20  consecutive  days.  The  Holders  of the  Series A
Preferred  stock are entitled to receive  dividends  at 8% per annum  payable in
cash or, at the Company's sole discretion, in registered shares of the Company's
common stock, at the end of each calendar  quarter and three years from the date
of  closing.  Each  warrant  entitles  the holder to  purchase  one share of the
Company's  common  stock at an exercise  price of $1.10 per share.  The warrants
expire three years from the date of closing.  This Private  Placement  was fully
subscribed and the Company issued approximately 2,352,948 units, which generated
net proceeds totaling approximately $1,663,000.

      Additionally,  the Company  granted  941,177  stock  purchase  warrants to
Spencer Trask Ventures,  Inc. for services relating to the sale of the preferred
stock. Each warrant entitles the holder to purchase one share of common stock at
an average exercise price of $1.03. The warrants expire in August 2008.  Spencer
Trask Ventures,  Inc., also received a 3% non-accountable  expense allowance and
500,000 shares of Common Stock for consulting services.

Securities Purchase Agreements

      In February and March 2003, we entered into Securities Purchase Agreements
providing  for the sale of 224,546  units,  comprised  of 224,546  shares of the
Company's  Common Stock and 224,546 Common Stock purchase  warrants at $0.55 per
unit.  The shares are  restricted  pursuant to Rule 144 of the Securities Act of
1933. Each warrant  entitles the holder to purchase one share of Common Stock at
an exercise  price of $1.00.  The  warrants  expire three years from the date of
grant.  Proceeds from the sale of shares and warrants totaled $123,500.  We have
agreed  to  register  the  shares  of  Common  Stock  included  in the units and
underlying the warrants.


                                      -24-
<PAGE>


      In April 2003, we entered into Securities  Purchase  Agreements  providing
for the sale of 110,000  units,  comprised  of 110,000  shares of the  Company's
Common Stock and 110,000 Common Stock  purchase  warrants at $0.90 per unit. The
shares are restricted  pursuant to Rule 144 of the Securities Act of 1933.  Each
warrant entitles the holder to purchase one share of Common Stock at an exercise
price of $1.25.  The  warrants  expire  three years from the date of grant.  Net
proceeds  from the sale of shares and  warrants  through  April 8, 2003  totaled
$93,600.  We have agreed to register the Common Stock  included in the units and
the warrants.

      We believe that cash on hand will be  insufficient to meet our anticipated
needs for working capital, capital expenditures and business development for the
next twelve months.  We are currently in the process of negotiating  the sale of
equity  securities  of up to  $3,000,000  and  anticipate  the  closing  of this
transaction  to be in the  third  quarter  of 2004.  If we are  unable  to raise
additional  funds, we may be forced to curtail or cease  operations.  Even if we
are able to  continue  our  operations,  the  failure  to obtain  debt or equity
financing could have a substantial  adverse effect on our business and financial
results, and we may need to delay the purchase of additional companies. Although
we  have  historically  relied  upon  financing  provided  by our  officers  and
directors to supplement  operations,  they are not legally  obligated to provide
the Company with any additional funding in the future.

      In the future,  we may be required to seek  additional  capital by selling
debt or equity  securities,  selling  assets,  or otherwise be required to bring
cash flows in balance when it approaches a condition of cash insufficiency.  The
sale of additional equity securities, if accomplished, may result in dilution to
our shareholders. We cannot assure shareholders, however, that financing will be
available in amounts or on terms acceptable to us, or at all.

The following table summarizes our contractual obligations at December 31, 2003:

<TABLE>
<CAPTION>
                                                       Less Than       1 to 3        4 to 5          After
Contractual Obligation                    Total        One Year        Years          Years         5 Years
                                       ----------     ----------     ----------     ----------     ----------
<S>                                    <C>            <C>            <C>            <C>            <C>
Long-term debt                         $  321,213     $  197,313     $  123,900     $       --     $       --
Capital lease obligations                 105,586        105,586             --             --             --
Operating leases                        3,979,000        233,000        466,000        466,000      2,814,000
Convertible debentures                    730,000        730,000             --             --             --
Employment contract - Glaser              380,000        190,000        190,000             --             --
Employment contract - Tannous             380,000        190,000        190,000             --             --
Employment contract - Engel               300,000        150,000        150,000             --             --
                                       ----------     ----------     ----------     ----------     ----------
Total contractual cash obligations     $6,195,799     $1,795,899     $1,119,900     $  466,000     $2,814,000
                                       ==========     ==========     ==========     ==========     ==========
</TABLE>

      The capital  lease  obligations  on  equipment,  operating  leases for our
offices and warehouse,  and employment  contracts are operating expenses and are
expected to be paid either with cash generated from operations or from financing
activities. The repayment of principal on the long-term debt will either be paid
by cash generated from operations or from financing activities.  The convertible
debentures are expected to be converted into shares of our common stock pursuant
to the  agreements,  resulting in additional  issuances of our common stock.  In
2003,  cash  used for  operating  activities  totaled  ($1,144,947)  while  cash
generated from financing activities totaled $1,577,747.

      Additionally,  our other principal  commitments consist of agreements with
various  consultants who will provide us with business  development,  public and
financial relations, and raising additional debt or equity financing in exchange
for stock of the  Company or a portion of proceeds  from the sale of stock.  The
amount  due is  based  on the fair  market  price  of our  stock on the date the
transaction is consummated and the value of the transaction.

SUBSEQUENT EVENTS

Loans Payable - Officer/Stockholders

      Two  officers/stockholders  loaned a total of $20,000 to us through  April
12, 2004.  These loans accrue  interest at 8% per annum.  The  principal and any
unpaid interest are due on demand.

Options and Warrants Exercised for Cash

      In January 2004, a business  development firm exercised 125,000 options to
purchase shares of our common stock. Options totaling 62,500 were exercised on a
"cashless basis" and, as a result,  we issued 39,583 shares of our common stock.
The  remaining  62,500  options  generated net proceeds  totaling  approximately
$34,000 and resulted in the issuance of 62,500 shares of our common stock.


                                      -25-
<PAGE>


      In February  2004, an individual  exercised  warrants to purchase  305,555
share  of our  common  stock  at an  exercise  price of  $0.90  per  share.  The
transaction generated net proceeds totaling $275,000.

Forbearance Agreement

      In March 2004, QBI entered into a forbearance  agreement,  which is in the
process of being signed with a financial  institution as to certain  obligations
under a  credit  facility  (Notes  9 and  10).  The  financial  institution  had
previously  expressed  its  desire to no longer  service  accounts  with  credit
facilities that are less than five million dollars and operate in QBI's industry
sector.  Pursuant to the agreement,  the financial institution will forbear from
exercising  its rights and remedies as a result of all  existing and  continuing
defaults  through  August 31, 2004 at which time,  all amounts due the financial
institution  are due and  payable.  The  financial  institution  may  reduce the
maximum  line of credit by $1 million to $3 million  and may reduce the  maximum
amount  related to the  inventory  by $100,000 to $1.7  million.  The  financial
institution  has not  exercised its right to impose these  restrictions  on QBI.
Additionally,  the monthly  payment due to the financial  institution  on a note
payable  shall be increased to $30,000 from $22,793.  The interest  rates on all
current  obligations  will  increase by 2% per annum in excess of the rates that
would  otherwise be  applicable.  The Company is currently in  discussions  with
several financial sources for a replacement credit facility.  Management expects
to have such replacement credit facility in place by August 31, 2004.

Amendment to Loan and Security Agreement

      In March 2004,  XCEL entered  into a First  Amendment to Loan and Security
Agreement with a finance company. Pursuant to the agreement, the maximum line of
credit  has been  reduced by  $450,000  to  $300,000  and the  advance  rate was
increased  by 5% to 80% of XCEL's  eligible  accounts  receivable.  The eligible
accounts  receivable  has been  extended  30 days to 150  days  from the date of
service.  The interest rate increased from 3.75% above XCEL's  reference rate to
approximately 12.8% per annum. Certain other fees were reduced, which offset the
increased interest rate.

RECENTLY ISSUED PRONOUNCEMENTS

      In  November  2002,  FASB  issued  FASB  Interpretation  No.  ("FIN")  45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees  of  Indebtedness  of  Others."  Among  other  things,  the
Interpretation   requires   guarantors  to  recognize,   at  fair  value,  their
obligations  to stand  ready to  perform  under  certain  guarantees.  FIN 45 is
effective for  guarantees  issued or modified on or after  January 1, 2003.  The
Company  does not expect the adoption of this  pronouncement  to have a material
impact to the Company's financial position or results of operations.

      In January  2003,  the FASB  issued  FIN 46,  "Consolidation  of  Variable
Interest Entities, an Interpretation of Accounting Research Bulletin ("ARB") No.
51." This interpretation  clarifies the application of ARB No. 51, "Consolidated
Financial Statements", to certain entities in which equity investors do not have
the  characteristics  of  a  controlling  financial  interest  or  do  not  have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated financial support from other parties. In December 2003,
the FASB revised FASB Interpretation No. 46 ("FIN 46R"), which allowed companies
with certain types of variable interest entities to defer  implementation  until
March 31, 2004.  The Company does not expect the adoption of this  pronouncement
to have a material  impact to the  Company's  financial  position  or results of
operations.

      In April 2003,  the FASB issued SFAS No. 149,  "Amendment of Statement 133
on  Derivative  Instruments  and  Hedging  Activities."  SFAS No. 149 amends and
clarifies  accounting for derivative  instruments,  including certain derivative
instruments  embedded  in other  contracts,  and for  hedging  activities  under
Statement 133. SFAS No. 149 is effective for contracts  entered into or modified
after June 30,  2003 and for  hedging  relationships  designated  after June 30,
2003. The guidance should be applied prospectively.  The Company does not expect
the  adoption  of SFAS No.  149 to have a  material  impact on its  consolidated
financial position, results of operations or stockholders' equity.

      In May  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 clarifies the  accounting  treatment for certain  financial  instruments
with  characteristics  of both  liabilities  and equity and requires  that those
instruments be classified as  liabilities  in statements of financial  position.
SFAS No. 150 is effective  for  financial  instruments  entered into or modified
after May 31, 2003 and  otherwise  is  effective  at the  beginning of the first
interim  period  beginning  after June 15, 2003. The Company does not expect the
adoption of SFAS No. 150 to have a material impact on its consolidated financial
position, results of operations or stockholders' equity.


                                      -26-
<PAGE>


      In December  2003,  the FASB issued  Summary of Statement No. 132 (revised
2003), "Employer's Disclosures about Pensions and Other Post Retirement Benefits
- an amendment to FASB  Statements No. 87, 88, and 106." This statement  revises
employers'  disclosures  about  pension plans and other  postretirement  benefit
plans. However, it does not change the measurement or recognition of those plans
as required by FASB Statements No. 87, "Employers' Accounting for Pensions", No.
88,  "Employers'  Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting
for  Postretirement  Benefits  Other Than  Pensions."  This  statement  requires
additional  disclosures to those in the original Statement 132 about the assets,
obligations,  cash flows,  and net periodic  benefit cost.  This  statement also
calls for certain  information  to be  disclosed  in  financial  statements  for
interim  period.  The  disclosures  required by this statement are effective for
fiscal year ending  after  December  15,  2003.  The Company does not expect the
adoption of this  pronouncement  to have a material  impact on its  consolidated
financial position or results of operations.

      In January 2004,  the FASB issued FASB Staff  Position No. FAS 106-1 ("FSP
106-1"),  "Accounting  and  Disclosure  Requirements  Related  to  the  Medicare
Prescription Drug,  Improvement and Modernization Act of 2003," (the "Act"). FSP
106-1  addresses the accounting  impact of the Act, which was signed into law on
December 8, 2003. Among other features,  the Act introduces a prescription  drug
benefit  under  Medicare  Part D and a federal  subsidy to  sponsors  of retiree
health care plans that provide a benefit that is at least actuarially equivalent
to Medicare Part D. Companies sponsoring affected  postretirement  benefit plans
may elect to defer  recognition  of the  impact of the Act until (1) final  FASB
guidance on accounting for the federal  subsidy  provision of the Act is issued,
or (2) a  significant  event calling for  re-measurement  of a plan's assets and
obligations  occurs.  FSP 106-1 is  effective  for  interim or annual  financial
statements of fiscal years ending after  December 7, 2003.  The adoption of this
accounting  interpretation  is not  expected  to have a  material  impact on the
Company's consolidated financial statements.

                           FORWARD-LOOKING STATEMENTS

      In connection  with the safe harbor  provisions of the Private  Securities
Litigation  Reform  Act of 1995  (the  "Reform  Act"),  the  Company  is  hereby
providing cautionary  statements  identifying important factors that could cause
the  Company's  actual  results to differ  materially  from those  projected  in
forward-looking  statements  (as such term is defined in the Reform Act) made by
or on behalf of the  Company  herein or  orally,  whether in  presentations,  in
response to questions or otherwise.  Any  statements  that  express,  or involve
discussions as to,  expectations,  beliefs,  plans,  objectives,  assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as  "intends,"  "plans,"  "will  result,"  "are expected to," "will
continue," "is  anticipated,"  "estimated,"  "projection" and "outlook") are not
historical facts and may be forward-looking  and,  accordingly,  such statements
involve  estimates,  assumptions,  and  uncertainties  which could cause  actual
results  to  differ  materially  from  those  expressed  in the  forward-looking
statements.  The Company  cautions that actual  results or outcomes could differ
materially from those expressed in any forward-looking  statements made by or on
behalf of the Company. Any forward-looking  statement speaks only as of the date
on which such  statement is made,  and the Company  undertakes  no obligation to
update  any  forward-looking  statement  or  statements  to  reflect  events  or
circumstances  after the date on which such  statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and it
is not  possible  for  management  to  predict  all of  such  factors.  Further,
management  cannot  assess the impact of each such factor on the business or the
extent to which any factor, or combination of factors,  may cause actual results
to differ materially from those contained in any forward-looking statements.

ITEM 7. FINANCIAL STATEMENTS

      Our audited  financial  statements  required by Item 310(a) of  Regulation
S-B, together with the independent  auditors'  reports of Stonefield  Josephson,
Inc. for fiscal years ended 2003 and 2002, begin on page F-1 hereof.

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

      None.


                                      -27-
<PAGE>


ITEM 8A. CONTROLS AND PROCEDURES

      Our Chief Executive Officer,  President,  and Chief Financial Officer (the
"Certifying   Officers")  are  responsible  for   establishing  and  maintaining
disclosure controls and procedures for the Company. The Certifying Officers have
designed  such  disclosure  controls  and  procedures  to ensure  that  material
information is made known to them,  particularly during the period in which this
report was prepared. The Certifying Officers have evaluated the effectiveness of
the Company's  disclosure  controls and procedures as of the date of this report
and believe that the Company's  disclosure controls and procedures are effective
based on the  required  evaluation.  There have been no  significant  changes in
internal controls or in other factors that could  significantly  affect internal
controls  subsequent to the date of their  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.



                                      -28-
<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 name, age, position, and the start date
of each director and executive  officer of Health Sciences  Group,  Inc. and its
subsidiaries  at  December  31,  2003.  There  are no other  persons  who can be
classified as a promoter or controlling person of the Company.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                                                             Position
      Name                         Age                     Title                                            Held Since
---------------------------------------------------------------------------------------------------------------------------
<S>                               <C>       <C>                                                             <C>
 Fred E. Tannous                   37       Co-chairman of the Board, Chief Executive
                                            Officer, and Treasurer                                            2000

 Bill Glaser                       37       Co-chairman of the Board, President, and Secretary                2000

 Jacob M. Engel                    47       General Manager of Operations                                     2003

 Joseph R. Schortz, CPA            54       President and Chief Executive Officer,
                                            Quality Botanical Ingredients, Inc.                               2003

 Allan Himmelstein                 56       President, Quality Botanical Ingredients, Inc.                    2004

 John Park                         43       President and Chief Executive Officer, XCEL
                                            Healthcare, Inc. and BioSelect Innovations, Inc.                  2003

 Ronald A. Gustilo                 39       Director of Operations, XCEL Healthcare, Inc.                     2001

 Dr. Daniel I. Gelber              52       Director of Research & Development,
                                            BioSelect Innovations, Inc.                                       2001

 William T. Walker, Jr.            72       Director                                                          2003
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


Health Sciences Group, Inc.

      FRED E.  TANNOUS  has  been  Co-chairman,  Chief  Executive  Officer,  and
Treasurer, of Health Sciences Group since October 2000. Previously,  Mr. Tannous
was  employed  at DIRECTV,  Inc.  where he was  involved  in various  capacities
including valuing,  structuring,  and executing strategic investments.  Prior to
joining DIRECTV,  a wholly owned subsidiary of Hughes  Electronics  Corporation,
Mr.  Tannous was with the  corporate  treasury  organization  of Hughes where he
assisted in conducting  valuations and effectuating  financing  transactions for
the company's satellite and network  communication  units. From February 1996 to
May 1999,  Mr.  Tannous  served as  Treasurer  and Chief  Financial  Officer  of
Colorado Casino  Resorts,  Inc., a gaming and lodging concern with operations in
Colorado.  In addition  to  overseeing  the  company's  finance  and  accounting
operations,   he  was  accountable  for  all  corporate   finance  and  treasury
activities.  Previously,  as principal of his own  consulting  firm, Mr. Tannous
consulted  to  several  start-up  ventures  in various  industries  where he was
instrumental  in developing  business plans,  advising on business  strategy and
capital structure, and arranging venture financings. Mr. Tannous received an MBA
in finance and  accounting  from the  University of Chicago  Graduate  School of
Business. He also holds a Masters and Bachelors degree in Electrical Engineering
from the University of Southern California.

      BILL  GLASER has been  Co-chairman,  President,  and  Secretary  of Health
Sciences  Group since October 2000.  Mr. Glaser was founder and Chief  Executive
Officer of Zenterprise,  Inc., a comprehensive  investment banking and corporate
consulting  firm which  focused  primarily on capital  formation,  M&A advisory,
business strategy,  marketing, and management consulting services for public and
private companies. From September 1991 to July 1994, Mr. Glaser was a registered
principal of a regional stock brokerage firm where he gained diverse  experience
in  finance,  management,   marketing,  sales,  and  public  company  relations.
Previously,  he was a registered  representative at Drexel, Burnham, Lambert and
Smith Barney.  Mr. Glaser holds a Bachelors degree in finance and economics from
the Ithaca College - School of Business.

      JACOB ENGEL.  In August 2003 we entered into an Employment  Agreement with
Jacob Engel as General  Manager of Operations and as a director,  effective when
we obtain Director and Officers liability insurance.  Messrs. Tannous and Glaser
agreed to vote their shares in favor of Mr. Engel's board position.  Previously,
Mr. Engel was a Director and Chief Operating Officer of a family-owned  business
known  as Gel  Spice  Co,  Inc.,  which  is  engaged  in the  manufacturing  and
distributing of spices and snack foods. The Employment  Agreement with Mr. Engel
provides for an annual  salary of $150,000 and stock options for up to 2,000,000
shares of Common Stock,  issued under our 2003 Stock Option,  Deferred Stock and
Restricted Stock Plan. The options granted to Mr. Engel will be exercisable upon
Mr. Engel attaining certain performance  benchmarks,  at exercise prices ranging
from $1.25 to $2.75 per  share.  Mr.  Engel  invested  $250,000  in our Series A
Convertible  Preferred  Stock.  In October  2003 Mr.  Engel was granted  100,000
shares of common stock in lieu of cash bonuses.


                                      -29-
<PAGE>


      WILLIAM T.  WALKER,  JR. is a Director.  Mr.  Walker was  appointed to the
company's  Board  of  Directors  in May,  2003,  and is the  founder  of  Walker
Associates,  a  corporate  finance  consulting  firm  that  acts as  advisor  to
corporations  and investment  banks, and has served in that capacity since 1985.
Prior to  starting  Walker  Associates,  he was  Executive  Vice  President  and
Managing Director of Investment  Banking for Bateman Eichler,  Hill Richards,  a
regional West Coast NYSE investment  banking firm,  where he directed its merger
into the  Kemper  Insurance  Group.  Mr.  Walker  currently  chairs the board of
SupraLife  International and its subsidiaries,  and serves as a director of King
Thomason Group, Stone Mountain Financial Systems,  Digid Technologies and Desert
Health Products, Inc. He has served as a board member of the Securities Industry
Association,  a Governor of the Pacific  Coast Stock  Exchange,  a member of the
American Stock Exchange  Advisory  Committee,  President of the Bond Club of Los
Angeles,   and  Chairman  of  the  California   District   Securities   Industry
Association.  Mr. Walker  graduated  from Stanford  University and served in the
United States Air Force.

Quality Botanical Ingredients, Inc.

      JOE R.  SCHORTZ,  CPA has been  President and Chief  Executive  Officer of
Quality Botanical Ingredients (QBI), a Delaware Company since its acquisition by
the Company in February  2003.  From 1996,  Mr.  Schortz  was the  president  of
Quality  Botanical  Ingredients,  Inc.,  a New Jersey  Corporation  and has been
instrumental in providing  strategic  guidance and operational  oversight in all
aspects of the business resulting in streamlined  operations,  expanded customer
base, increased revenues and profitability. From 1988 through 1995, as principal
of his accounting  practice,  Mr. Schortz provided  financial  statement and tax
return preparation  services and provided consulting services on various aspects
of the business including capital formation, management information systems, and
financial planning. Mr. Schortz earned a Certified Public Accountants license in
1975, and practiced  public  accountancy from 1971 through 1996. He is currently
active with the  American  Institute of Certified  Public  Accountants  (AICPA),
where he is a member of the Group of 100,  the New Jersey  Society of  Certified
Public  Accountant's  (NJSCPA) and the LCM  Foundation  International,  Inc. Mr.
Schortz  also holds a Bachelor of Science  degree in  Accounting  from  Pfeiffer
College. As of March 17, 2004, Mr. Schortz is no longer employed with QBI.

      ALLAN HIMMELSTEIN has been the President of Quality Botanical  Ingredients
since February 2004. Mr. Himmelstein has over 30 years of management  experience
in the food, chemical, and nutritional  supplement industries.  He is a seasoned
executive  with  experience  in all  facets  of  business  operations  including
executive management,  production,  sales,  marketing and finance.  Prior, Allan
served as President of Martin Bauer Group,  US  operations of Martin Bauer GmbH,
the largest botanical company  worldwide.  Previously,  he was Vice President of
Sales & Marketing of SpiceTec,  a division of ConAgra,  where he was responsible
for  streamlining  operations  and growing  revenues by over 30%.  Also, as Vice
President of Genarom  International,  ConAgra's flavor division, Mr. Himmelstein
was instrumental in making improvements in all aspects of the business including
achieving FDA and USDA compliance.  His other previous positions include serving
as President of Dohler Savory Flavors, an international  flavor manufacturer for
the meat, cheese, and beverage industries;  National Sales Manager of Rohm Tech,
Inc., US  operations of Rohm GmbH, a billion  dollar  chemical  company;  and in
various other sales capacities at Kraft Foods. Mr. Himmelstein holds a Bachelors
of Science degree from the University of Maryland.

XCEL Healthcare, Inc.

      RONALD A.  GUSTILO  has  served as the  Director  of  Operations  where he
oversees the day-to-day  operations of XCEL Healthcare since July 1996, where he
was  responsible  for  implementing  the  operations  plan and long-term  growth
strategy.  Earlier, Mr. Gustilo was Manager and Certified Pharmacy Technician at
NMC  Homecare,  Inc.  In 1992,  he started  his career as a  certified  pharmacy
technician with the Medical Center of North Hollywood in California. Mr. Gustilo
holds  a  Bachelor  of  Science  degree  in  Business  Administration  from  the
University of Phoenix. As of January 23, 2004, Mr. Gustilo is no longer employed
with XCEL Healthcare, Inc.

      MR. JOHN PARK has served as the President and Chief  Executive  Officer of
XCEL Healthcare and BioSelect Innovations, Inc. since October 2003. From 1994 to
2003,  Mr.  Park  served as Director of  Operations  for BioMed  Corporation,  a
developer,  manufacturer  and  distribution  of unique  OTC  pharmaceutical  and
cosmeceutical  products and medical devices.  During his nine-year tenure there,
he  was   responsible   for  supervising  the  engineering  and  development  of
proprietary  technologies  and obtaining FDA, ISO and GMP compliance,  marketing
and  distribution  of the  finished  products.  From  1987  to  1994,  he was an
executive at Texas  Instruments,  where he was  responsible  for integrating and
positioning  its  semiconductor  business.   Previously,  he  worked  for  Exxon
Chemicals  in quality  assurance.  Mr.  Park holds an MBA  degree  from  Houston
Baptist  University,  and was  awarded  undergraduate  and  graduate  degrees in
Materials Sciences from Rice University.


                                      -30-
<PAGE>


BioSelect Innovations, Inc.

      DR.  DANIEL I. GELBER has served as Director of Research  and  Development
for BioSelect  Innovations since July 1996 where he manages product  development
initiatives and oversees the company's specialty  compounding efforts.  Earlier,
Dr. Gelber was Pharmacist Specialist at NMC Homecare,  Inc. Previously,  he held
several  management  positions  in other  segments  of the  industry,  including
radiopharmacy,  nutritional  support,  manufacturing,  operations  and TPN.  Dr.
Gelber is a member of  several  industry  associations  including  the  American
Pharmaceutical    Association,    American   Nutraceutical   Association,    and
International  Academy of  Integrated  Medicine.  As a recognized  leader in his
field,  Dr. Gelber is frequently  asked to participate in educational  endeavors
for  prominent  institutions.  Dr.  Gelber  earned a Doctor of Pharmacy from the
University of Southern California. He also holds a Bachelor of Science degree in
Bacteriology from University of California,  Los Angeles. As of January 1, 2004,
Dr. Gelber is retained as a Consultant on a part-time basis.

Other Key Personnel and Consultants

      STEVEN ANTEBI. In August 2003 we entered into a Consulting  Agreement with
Mr. Steven Antebi. Mr. Antebi is currently president of Novante  Communications,
with which he has been associated  with since 1993. He is primarily  involved in
asset-backed lending and equity investments. Previously, he ran Maple Technology
Ventures,  The Maple Fund and Maple Partners.  From 1973 to 1991, Mr. Antebi was
Managing  Director  at Bear  Stearns'  Los  Angeles  office.  He is  currently a
director of The Holman Group,  and  Clientsoft,  and sits on the board of Cedars
Sinai Hospital.  Pursuant to the Consulting  Agreement,  Mr. Antebi will provide
advice to the  Company  about  financial  and  related  matters  and has agreed,
subject to our obtaining  Directors' and Officers'  insurance,  to become at our
request a Director or Chairman of the Board of  Directors.  Compensation  to Mr.
Antebi  will  be in  the  form  of  Warrants  to  his  corporation,  Blue & Gold
Enterprises  LLC, for up to 2,000,000  shares of common stock,  of which 500,000
are  vested,  the  balance   exercisable  upon  attaining  certain   performance
benchmarks,  at exercise  prices ranging from $1.25 to $2.75 per share,  and are
callable  at $.01 per share  within 90 days of vesting  upon the  occurrence  of
certain  events.  Mr.  Antebi has invested  $250,000 in our Series A Convertible
Preferred Stock.

      SPENCER TRASK  VENTURES,  INC. In August 2003 we entered into a Consulting
Agreement  with Spencer Trask whereby  Spencer Trask will,  apart from acting as
the  Introducing  Agent in connection  with our Series A  Convertible  Preferred
Private  Placement,  for a two-year period,  consult with and advise the Company
with  respect to  financial  planning,  corporate  organization  and  structure,
financial  matters in  connection  with the  operation  of the  business  of the
Company, private and public equity and debt financing, acquisitions, mergers and
other similar business combinations,  management and directors,  and our overall
progress,  needs and  financial  condition.  In connection  with these  advisory
services,  we agreed to issue to Spencer Trask  500,000  shares of Common Stock,
which  shares  will not vest and be  saleable  until after the earlier of a) one
year,  b) the date the average  closing bid price for the Common  Stock has been
$3.00 or more (subject to adjustment  to reflect stock splits,  stock  dividends
and the like) for ten (10) consecutive  trading days, or c) two months after the
date the Company's shares of Common Stock are first traded on the American Stock
Exchange or the NASDAQ  SmallCap  Market;  vesting of the shares will then be at
the rate of 25% per calendar quarter.

Directors

      Directors are elected annually and hold office until the annual meeting of
the  shareholders  of Health  Sciences and until the  successors are elected and
qualified. There are no family relationships among Health Sciences' officers and
directors.  Directors of Health Sciences may receive  compensation as determined
by Health  Sciences  from time to time by vote of the Board of  Directors.  Such
compensation  might  be in the  form  of  stock  options.  Health  Sciences  may
reimburse  directors for expenses incurred in attending meetings of the Board of
Directors.

      While we have not  established an Audit Committee at the present time, the
entire Board of Directors  acts as the Audit  Committee  until such time that an
Audit  Committee  is  formed  and  financial  expert  is  elected.  The Board of
Directors adopted a Code of Ethics on July 10, 2003.


                                      -31-
<PAGE>


ITEM 10. EXECUTIVE COMPENSATION

      The following  table sets forth,  for the fiscal years ended  December 31,
2003 and 2002,  the  compensation  paid or accrued  by the  Company to its below
named officers:


<TABLE>
<CAPTION>
                                                     SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------------------------------------------------------------------
                                                          Annual Compensation                                 Awards
                                  --------------------------------------------------------------------------------------------------
                                                                                        Restricted    Securities
            Name and                                                       Other Annual   Stock       Underlying       All Other
       Principal Position         Year         Salary($)       Bonus($)    Compensation  Awards($)   Options/SARs    Compensation
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>           <C>             <C>           <C>                  <C>            <C>
Fred E. Tannous                  12/31/03      $190,000            --            --      $150,000            --               --
CEO, Treasurer                   12/31/02      $190,000            --            --            --       350,000               --
Health Sciences Group, Inc.
------------------------------------------------------------------------------------------------------------------------------------
Bill Glaser                      12/31/03      $190,000            --            --      $150,000            --               --
President, Secretary             12/31/02      $190,000            --            --            --       350,000               --
Health Sciences Group, Inc.
------------------------------------------------------------------------------------------------------------------------------------
Jacob Engel                      12/31/03      $ 49,615            --            --      $101,000       500,000               --
General Manager of               12/31/02            --            --            --            --            --               --
  Operations
Health Sciences Group, Inc.
------------------------------------------------------------------------------------------------------------------------------------
John Park                        12/31/03      $ 22,115            --            --            --       300,000(1)            --
President & CEO                  12/31/02            --            --            --            --            --               --
XCEL Healthcare, Inc. and
BioSelect Innovations, Inc.
------------------------------------------------------------------------------------------------------------------------------------
Ronald A. Gustilo(2)             12/31/03      $ 93,236            --            --            --            --               --
Director of Operations           12/31/02      $ 84,756      $ 12,552            --      $ 95,760            --               --
XCEL Healthcare, Inc.
------------------------------------------------------------------------------------------------------------------------------------
Daniel I. Gelber(3)              12/31/03      $137,500            --            --            --            --               --
Director of R&D                  12/31/02      $125,000      $ 18,511            --      $ 95,760            --               --
BioSelect Innovations, Inc.
------------------------------------------------------------------------------------------------------------------------------------
Joseph R. Schortz(4)             12/31/03      $160,880            --            --            --            --               --
President & CEO                  12/31/02            --            --            --            --            --               --
Quality Botanical
  Ingredients, Inc.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Mr. Park's options vest equally over a three-year period.

(2)   As of  January  23,  2004,  Mr.  Gustilo  is no longer  employed  with the
      Company.

(3)   As of  January 1, 2004,  Dr. Gelber  is  retained  as a  Consultant  on  a
      part-time  basis with the Company.

(4)   As of March 17, 2004, Mr. Schortz is no longer employed with the Company.

      The table below sets forth information  concerning the exercise of options
during 2003 along with the aggregate 2003 year-end  option holdings of the below
named officers of the Company:


                                      -32-
<PAGE>


         AGGREGATED OPTION EXERCISES IN 2003 AND YEAR-END OPTION VALUES
                                  COMMON STOCK

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                                   Number of securities                Value of  unexercised
                                                                    underlying options                    at in-the-money
                       Shares Acquired           Value               December 31, 2003                      options at
Name                       on Exercise         Realized          Exercisable/Unexercisable               December 31, 2003
-------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>                     <C>               <C>                                   <C>
Fred E. Tannous                 --                 --                  350,000/0                          $287,000
Bill Glaser                     --                 --                  350,000/0                          $287,000
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The  following  table  sets  forth  information  concerning  common  stock
ownership by  beneficial  owners of five percent or more of our common stock and
each of our officers and directors and our officers and directors as a group:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                 Name and Address                               Amount of                      Percent of
Title of Class                   of Beneficial Owner                      Beneficial Ownership (1)               Class
-------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                                      <C>                                  <C>
Common                           Fred E. Tannous
$0.001 par value                 6080 Center Drive, 6th Floor                    2,257,578  (2)                     17.1%
                                 Los Angeles, CA 90045
-------------------------------------------------------------------------------------------------------------------------
Common                           Bill Glaser
$0.001 par value                 6080 Center Drive, 6th Floor                    2,240,397  (2)                     17.0%
                                 Los Angeles, CA 90045
-------------------------------------------------------------------------------------------------------------------------
Common                           William J. Ritger
$0.001 par value                 623 Ocean Avenue                                1,485,630  (3)                     11.0%
                                 Sea Girt, NJ 08750
-------------------------------------------------------------------------------------------------------------------------
Common                           Jacob M. Engel
$0.001 par value                 10 Gel Court                                      909,812  (4)                      6.7%
                                 Monsey, NY 10952
-------------------------------------------------------------------------------------------------------------------------
Common                           Joseph R. Schortz
$0.001 par value                 6080 Center Drive, 6th Floor                      880,800  (5)                      6.9%
                                 Los Angeles, CA 90045
-------------------------------------------------------------------------------------------------------------------------
Common                           John Liviakis
$0.001 par value                 655 Redwood Highway, Suite 255                    848,323  (6)                      6.6%
                                 Mill Valley, CA 94941
-------------------------------------------------------------------------------------------------------------------------
Common                           Blue & Gold Enterprises, LLC
$0.001 par value                 10430 Wilshire Blvd., Suite 203                   809,819  (7)                      5.9%
                                 Los Angeles, CA 90024
-------------------------------------------------------------------------------------------------------------------------
Common                           William T. Walker, Jr.
$0.001 par value                 6080 Center Drive, 6th Floor                       50,000  (8)                      0.4%
                                 Los Angeles, CA 90045
-------------------------------------------------------------------------------------------------------------------------
Common                           All officers and directors                      4,547,975                          33.5%
$0.001 par value                 as a group (three persons)
-------------------------------------------------------------------------------------------------------------------------
Common                           Total shares issued and outstanding            12,839,277  (9)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)   Unless otherwise indicated, the Company believes that all persons named in
      the table have sole voting and investment power with respect to all shares
      beneficially owned by them. Each beneficial  owner's percentage  ownership
      is  determined  by assuming that options or warrants that are held by such
      person and which are exercisable within 60 days of the date of this report
      have been exercised.  However,  the options or warrants are not treated as
      outstanding  for the purposes of  computing  the  percentage  of any other
      person.  The  calculation  is based on  12,839,277  shares of common stock
      outstanding,  not counting  options or warrants,  except with respect to a
      holder of such options or  warrants.  As to such  holder,  his  percentage
      assumes  that the shares  underlying  his options and  warrants  have been
      exercised and are added to the base of  12,839,277  shares of common stock
      outstanding for the purpose of calculations his percentage, and not of any
      other persons in the table.

(2)   Includes options to purchase 350,000 shares at the exercise price of $0.55
      per share, exercisable within 60 days.


                                      -33-
<PAGE>


(3)   Mr. Ritger's  beneficial  ownership presented includes 122,760 shares held
      in the name of The  Research  Works,  127,273  shares  held in the name of
      Seaside Partners, LP and 6,944 shares held in the name of his son, Michael
      Ritger. Also included in Mr. Ritger's beneficial ownership are warrants to
      purchase 644,057 shares at exercise price of $0.90,  exercisable within 60
      days.

(4)   Mr. Engel's  beneficial  ownership  presented  includes  115,694 shares of
      common  stock,  a  financing  warrant to  purchase  294,118  shares at the
      exercise  price of $1.10 per share,  and a consulting  warrant to purchase
      500,000  shares at the exercise  price of $1.25 per share,  both  warrants
      exercisable within 60 days.

(5)   Joe Schortz was President and CEO of Quality Botanical Ingredients,  Inc.,
      which was acquired by the Company on February 25, 2003,  effective January
      1, 2003. Of the 880,800  shares,  a total of 433,333 are held in an escrow
      account  for a period  of one  year  and  subject  to  set-off  conditions
      pursuant to the QBI Asset Purchase  Agreement.  Of the 433,333 shares held
      in escrow, 216,667 are issued to Mr. Schortz and 216,666 are issued to The
      Botanical Trust.  Mr. Schortz has sole voting and dispositive  powers with
      respect to a total of 437,383  shares held by The Botanical  Trust,  a New
      Jersey  Grantor  Trust.  The  sole  beneficiary  of the  Trust  is  Nathan
      Belkowitz. Mr. Schortz may receive additional, if any, which may be issued
      subject to the conditions  described in Footnote (9) below. Shares held by
      Mr. Schortz are subject to a Lock-Up Agreement.

(6)   Mr. Liviakis'  beneficial ownership presented includes 315,000 shares held
      in the name of Liviakis Financial  Communications,  Inc. and 79,598 shares
      held  in the  name  of his  son,  Michael  Liviakis.  Shares  held  by Mr.
      Liviakis, Michael Liviakis and Liviakis Financial Communications, Inc. are
      subject  to  lock-up/leak-out  provisions  as  outlined  in  a  Settlement
      Agreement and Mutual General Release entered into in March 2002.

(7)   Mr. Steven Antebi is the Managing member of Blue & Gold Enterprises,  LLC.
      The  beneficial  ownership  of  Blue &  Gold  Enterprises,  LLC  presented
      includes  15,701 shares of common stock,  a financing  warrant to purchase
      294,118 shares at the exercise price of $1.10 per share,  and a consulting
      warrant to  purchase  500,000  shares at the  exercise  price of $1.25 per
      share, both warrants exercisable within 60 days.

(8)   Mr.  Walker's  beneficial  ownership  includes  options to purchase 50,000
      shares at the  exercise  price of $1.25 per share,  exercisable  within 60
      days.

(9)   Pursuant to an Asset  Purchase  Agreement  dated November 30, 2002 for the
      purchase of the assets of Quality Botanical Ingredients, Inc. ("QBI"), the
      Company was contingently  obligated to issue  additional  shares of Common
      Stock to the Sellers if the average bid price of the  Company's  stock was
      not more than $2.75 per share for fifteen (15) days during the three month
      period of  November  21,  2003  through  January  21,  2004  ("Measurement
      Period") in an amount equal to the lesser of (A)  1,250,000  shares or (B)
      the amount  determined  by  subtracting  from $2.75,  the highest  average
      closing bid price  achieved over a fifteen (15) day moving  average during
      the Measurement Period (the "Highest Price") and multiplying the resulting
      dollar  amount by  1,000,000  and then  dividing the result by the Highest
      Price.  Pursuant to an Amendment  to the Asset  Purchase  Agreement  dated
      September 26, 2003,  the Sellers  agreed to reduce the  1,250,000  maximum
      share amount in the above  formula to 750,000  shares and pursuant to oral
      discussions in March 2004, the Sellers further  indicated they would agree
      to the complete  cancellation of the Company  obligation to issue any such
      additional  shares.  The Asset  Purchase  Agreement  also provided for the
      issuance of up to 250,000 shares of the Company's  Common Stock if certain
      performance  benchmarks  were to be achieved  during the twelve (12) month
      period from  February 21, 2003 through  February 21, 2004.  The Sellers of
      the QBI  assets  have also  orally  agreed to forego  any such  additional
      performance  shares which the Company  believes they would not in any case
      have  been  entitled  to  receive  under the  benchmarks  set in the Asset
      Purchase Agreement.

EXECUTIVE COMPENSATION

      The  Company  has  employment  agreements,   nondisclosure/non-competition
agreements and severance agreements with the following executive officers:

Health Sciences Group, Inc.

      FRED  E.  TANNOUS.  Pursuant  to an  Employment  Agreement,  which  became
effective January 1, 2002, and is scheduled for expiration on December 31, 2005,
Mr.  Tannous  has  served  and  continues  to serve as  Health  Sciences'  Chief
Executive Officer and Treasurer.  The Agreement  provides that Mr. Tannous is to
receive an annual salary of not less than $190,000,  subject to increases at the
discretion of the company's  Board of  Directors.  During fiscal year 2002,  Mr.
Tannous has accepted deferred payment of such compensation.  Mr. Tannous is also
entitled to participate in the Health Sciences' annual bonus,  incentive,  stock
and other  benefit  programs  generally  available to executive  officers of the
Company.  The agreement also provides for (i) reasonable access to the Company's
accountants for personal financial planning, (ii) an automobile allowance, (iii)
reimbursement  of certain  other  expenses  and (iv) an  indemnification  of Mr.
Tannous on an after-tax basis in the event he incurs an excise tax under Section
4999 of the Internal Revenue Code.

      BILL GLASER.  Pursuant to an Employment Agreement,  which became effective
January 1, 2002,  and is scheduled  for  expiration  on December  31, 2005,  Mr.
Glaser has served  and  continues  to serve as Health  Sciences'  President  and
Secretary. The Agreement provides that Mr. Glaser is to receive an annual salary
of not less  than  $190,000,  subject  to  increases  at the  discretion  of the
company's  Board of Directors.  During fiscal year 2002, Mr. Glaser has accepted
deferred  payment  of  such  compensation.   Mr.  Glaser  is  also  entitled  to
participate in the Health  Sciences'  annual bonus,  incentive,  stock and other
benefit programs generally  available to executive officers of the Company.  The
agreement also provides for (i) reasonable  access to the Company's  accountants
for  personal  financial   planning,   (ii)  an  automobile   allowance,   (iii)
reimbursement  of certain  other  expenses  and (iv) an  indemnification  of Mr.
Glaser on an after-tax  basis in the event he incurs an excise tax under Section
4999 of the Internal Revenue Code.


                                      -34-
<PAGE>


      JACOB ENGEL.  In August 2003 we entered into an Employment  Agreement with
Jacob Engel as General Manager of Operations.  The Employment Agreement with Mr.
Engel  provides  for an annual  salary of $150,000  and stock  options for up to
2,000,000 shares of Common Stock,  issued under our 2003 Stock Option,  Deferred
Stock and  Restricted  Stock  Plan.  The  options  granted to Mr.  Engel will be
exercisable upon Mr. Engel attaining certain performance benchmarks, at exercise
prices ranging from $1.25 to $2.75 per share. Mr. Engel invested $250,000 in our
Series A Convertible  Preferred  Stock.  In October 2003,  Mr. Engel was granted
100,000 shares of common stock in lieu of cash bonuses.

Quality Botanical Ingredients, Inc.

      JOE R. SCHORTZ,  CPA.  Pursuant to an Employment  Agreement,  which became
effective January 1, 2003, and is scheduled for expiration on December 31, 2005.
Mr.  Schortz has served and continues to serve as President and Chief  Executive
Officer for Quality  Botanical  Ingredients.  The  Agreement  provides  that Mr.
Schortz is to receive an annual salary of not less than $150,000 plus  incentive
compensation  equal to two percent  (2%) of QBI's net pre-tax  operating  income
during the fiscal  year.  Mr.  Schortz  is also party to a  Non-Competition  and
Confidentiality  Agreement  with QBI.  Mr.  Schortz is also  entitled to receive
other benefit programs generally  available to executive  officers.  As of March
17, 2004, Mr. Schortz is no longer  employed with the Company and his Employment
Agreement is cancelled.

XCEL Healthcare, Inc.

      RONALD A.  GUSTILO.  Pursuant to an  Employment  Agreement,  which  became
effective  December 14, 2001,  and is scheduled  for  expiration on December 31,
2004,  Mr.  Gustilo has served and  continues to serve as Director of Operations
for XCEL Healthcare,  Inc. The Agreement provides that Mr. Gustilo is to receive
an annual salary of not less than $85,000, subject to increases by 10% per annum
based on the combined  gross  revenues  earned by XCEL and BioSelect in a fiscal
year  increasing by at least 30% over the prior fiscal year. Mr. Gustilo is also
entitled to receive an annual bonus, incentive, stock and other benefit programs
subject to achievement of key  pre-determined  milestones  tied to annual growth
rates in revenues and net income.  Mr. Gustilo is party to  Confidentiality  and
Non-Competition  Agreement and with XCEL and BioSelect.  As of January 23, 2004,
Mr. Gustilo is no longer employed with the Company and his Employment  Agreement
is cancelled.

BioSelect Innovations, Inc.

      DR. DANIEL I. GELBER.  Pursuant to an Employment  Agreement,  which became
effective  December 14, 2001,  and is scheduled  for  expiration on December 31,
2004,  Dr.  Gelber has served and continues to serve as Director of Research and
Development  for BioSelect  Innovations,  Inc. The  Agreement  provides that Dr.
Gelber is to  receive  an annual  salary of not less than  $125,000,  subject to
increases by 10% per annum based on the combined gross  revenues  earned by XCEL
and BioSelect in a fiscal year  increasing by at least 30% over the prior fiscal
year. Dr. Gelber is also entitled to receive an annual bonus,  incentive,  stock
and  other  benefit  programs  subject  to  achievement  of  key  pre-determined
milestones tied to annual growth rates in revenues and net income. Dr. Gelber is
party  to  Confidentiality  and  Non-Competition  Agreement  and  with  XCEL and
BioSelect.  As of January 1, 2004,  Dr. Gelber is retained as a Consultant  with
the Company on a part-time basis and his Employment Agreement is cancelled.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      With the recent acquisition of QBI on February 25, 2003, effective January
1, 2003, the Company assumed the lease on QBI's 53,000 square foot warehouse and
processing  facility located in South  Plainfield,  New Jersey.  The term of the
lease  is  twenty  five  years  starting  on  May 1,  1997.  The  lessor  is MRA
Associates,  LLC, a New Jersey limited  liability  company,  a third of which is
beneficially  owned by  Joseph  R.  Schortz,  the  former  President  and  Chief
Executive  Officer of QBI. The Company  holds an option to purchase the property
from MRA Associates for $2,250,000. The option expires in five years.



                                      -35-
<PAGE>


      The  following  is a schedule  of years of  approximately  future  minimum
annual rental  payments  required  under the operating  lease as of December 31,
2003:

           Year ending December 31,
             2004                                             $      233,000
             2005                                                    233,000
             2006                                                    233,000
             2007                                                    233,000
             2008                                                    233,000
             Thereafter                                            2,814,000
                                                              --------------

                                                              $    3,979,000
                                                              ==============

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

a.    Reports on Form 8-K Filed During the Company's Fourth Fiscal Quarter

      None.

b.    Exhibits

      The  exhibits  required  to be  filed by Item  601 of  Regulation  S-B are
      incorporated herein by reference to the Exhibit Index of this report.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The following table presents fees for  professional  services  rendered by
Stonefield  Josephson,  Inc.  for the audit of the  Company's  annual  financial
statements  for  fiscal  years  2003 and  2002,  for  reviews  of the  financial
statements included in the Company's quarterly reports on Form 10-QSB for fiscal
years 2003 and 2002, respectively and fees billed for other services rendered by
Stonefield  Josephson,  Inc.  Additionally,  included in the following  table is
approximately $14,000 of fees billed by Amper,  Politziner & Mattia P.C. for its
review of the Company's  Registration Statement on Form SB-2, which included the
balance  sheet of QBI at December 31, 2001,  the date that was audited by Amper,
Politziner & Mattia.

                                           2003             2002
                                         --------        --------
               Audit fees                $114,684        $ 93,307
               Audit related fees          28,602           6,000
               Tax fees                     8,459           5,314
               All other fees                  --              --
                                         --------        --------

                                         $151,745        $104,621
                                         ========        ========

      Audit  related fees  represent  the review of the  Company's  Registration
Statements on Form SB-2.

      All  fees  described  above  were  pre-approved  by  the  Company's  Audit
Committee.

      The Audit Committee does not currently have any pre-approval policies.


                                  EXHIBIT INDEX
            Exhibit
              No.         Description of Exhibit

             2.1(10)      Asset Purchase Agreement between QBI Delaware, the
                          Company, QBI New Jersey, Corrola and Schortz dated
                          November 30, 2002

             2.2(10)      First Amendment to the Asset Purchase Agreement dated
                          December 30, 2002

             2.3(10)      Second Amendment to the Asset Purchase Agreement dated
                          January 31, 2003

             2.4(10)      Third Amendment to the Asset Purchase Agreement dated
                          February 20, 2003

             3.1(1)       Articles of Incorporation

             3.2(1)       By-laws

             3.3(1)       Amendment to the Articles of Incorporation of
                          iGoHealthy.com

             4.1(1)       Specimen of Common Stock Certificate

             4.2(1)       Form of Stock Subscription Agreement

             4.2(2)       Form of Stock Subscription Agreement


                                      -36-
<PAGE>

             4.3(1)       Form of Private Placement Subscription Agreement

             4.3.1(1)     Private Placement Subscription Agreement signature
                          page for Harbinder Singh Branch

             4.3.2(1)     Private Placement Subscription Agreement signature
                          page for Kenneth Arthur Butterfield

             4.3.3(1)     Private Placement Subscription Agreement signature
                          page for Patrick Moriarity

             4.3.4(1)     Private Placement Subscription Agreement signature
                          page for Patrick Moriarity, Jr.

             4.3.5(1)     Private Placement Subscription Agreement signature
                          page for Eilish Levine

             5.1(1)       Opinion Letter issued by Vanderkam & Sanders

             5.1(2)       Opinion Letter issued by Vanderkam & Sanders

             5.1(3)       Opinion and consent of Vanderkam & Sanders re: the
                          legality of the shares being registered

             10.1(1)      Contract for Services Agreement between Stephen Davis
                          and iGoHealthy.com, Inc.

             10.1(5)      Stock Purchase Agreement by and between International
                          Pharmaceutical Group, LLC and iGoHealthy.com, Inc.
                          dated as of September 7, 2001

             10.1(10)     Continuing Unconditional Corporate Guaranty of the
                          Company dated February 25, 2003.

             10.2(1)      Domain Name Sale and Assignment Agreement between
                          HealthyUSA, Inc. and iGoHealthy.com, Inc.

             10.3(1)      Promissory Note between HealthyUSA, Inc. and
                          iGoHealthy.com, Inc.

             10.4(1)      Web Site Development and Services Agreement between
                          Fluidesign and iGoHealthy.com, Inc.

             10.6(11)     Settlement Agreement and Mutual General Release
                          between Founding Advisors, Inc. and Health Sciences
                          group, Inc. dated February 27, 2003

             10.7.1(11)   Securities Purchase Agreement by and between Health
                          Sciences Group, Inc. and Brivis Investments, Ltd. and
                          Stranco Investments, Ltd. dated February 22, 2003

             10.7.2(11)   Convertible Debenture Agreement issued to Brivis
                          Investment, Ltd.

             10.7.3(11)   Convertible Debenture Agreement issued to Stranco
                          Investment, Ltd.

             10.7.4(11)   Stock Purchase Warrant issued to Brivis Investment,
                          Ltd.

             10.7.5(11)   Stock Purchase Warrant issued to Stranco Investment,
                          Ltd.

             10.7.6(11)   Stock Purchase Warrant issued to FCIM Corporation

             10.7.7(11)   Stock Purchase Warrant issued to George Matin

             10.7.8(11)   Registration Rights Agreement

             10.7.9(11)   Security Agreement made by and between Health Sciences
                          Group, Inc., XCEL Healthcare, Inc., BioSelect
                          Innovations, Inc. and Brivis Investments, Ltd.,
                          Stranco Investments, Ltd.

             10.7.10(11)  Pledge and Security Agreement by and Between Fred E.
                          Tannous, Bill Glaser and Brivis Investments, Ltd.,
                          Stranco Investments, Ltd.

             10.7.11(11)  Escrow Agreement Between Health Sciences Group, Inc.
                          and Brivis Investments, Ltd. and Stranco Investments,
                          Ltd.

             10.8.1(11)   Loan and Security Agreement between XCEL Healthcare,
                          Inc. and Meridian Commercial Healthcare Finance, LLC.

             10.8.2(11)   Indemnification Agreement by Fred E. Tannous

             10.8.3(11)   Indemnification Agreement by Bill Glaser

             10.8.4(11)   Corporate Guaranty made by Health Sciences Group, Inc.
                          in favor of Meridian Commercial Healthcare Finance,
                          LLC.

             10.8.5(11)   Subordination Agreement among XCEL Healthcare, Inc.,
                          Mac Rosenstein and Meridian Commercial Healthcare
                          Finance, LLC.

             10.8.6(11)   Subordination Agreement among XCEL Healthcare, Inc.,
                          Moe Gelber and Meridian Commercial Healthcare Finance,
                          LLC.

             10.8.7(11)   HIPAA Business Associate Addendum by and between XCEL
                          Healthcare, Inc. and Meridian Commercial Healthcare
                          Finance, LLC.

             10.9(13)     Spencer Trask Stock Purchase Warrant, 385,530 shares

             10.10(13)    Spencer Trask Stock Purchase Warrant, 385,529 shares

             10.11(13)    Spencer Trask Consulting Agreement, July 7, 2003

             10.12(13)    Spencer Trask Amendment to Consulting Agreement, No.
                          1, August 7, 2003

             10.12.1(13)  Modification of Spencer Trask Warrants, Form of,
                          August 2003

             10.13(13)    Executive Employment Agreement, dated August 11, 2003,
                          with Jacob Engel

             10.13.1(13)  Stock Option Agreement, Jacob Engel, 2,000,000 shares,
                          August 11, 2003

             10.14(13)    12% Debenture, May 21, 2003, Castlerigg Master
                          Investments, Ltd.

             10.15(13)    Securities Purchase Agreement, May 21, 2003,
                          Castlerigg Master Investments, Ltd.

             10.16(13)    Registration Rights Agreement, May 21, 2003,
                          Castlerigg Master Investments, Ltd

             10.17(13)    Warrant to Purchase 588,235 shares of Common Stock,
                          Castlerigg Master Investments, Ltd.

             10.18(13)    Warrant to Purchase 88,235 shares of Common Stock,
                          Vestcom

             10.19(13)    Security Agreement, May 21, 2003, Castlerigg Master
                          Investments, Ltd.

             10.20(13)    Consulting Agreement, August 1, 2003, Steven Antebi


                                      -37-
<PAGE>


             10.21(13)    Warrant Certificate, 2,000,000 shares, Steven Antebi,
                          August 1, 2003

             10.22(13)    2003 Stock Option, Deferred Stock & Restricted Stock
                          Plan

             10.23(13)    Form of Subscription Agreement for Series A
                          Convertible Preferred Stock

             10.24(13)    Registration Rights Agreement for Series A Convertible
                          Preferred Stock, Form of

             10.25(13)    Common Stock Purchase Warrant, Form of, for Series A
                          Convertible Preferred Stock Offering

             10.26(13)    Indemnity Agreement, August 1, 2003 with Jacob Engel,
                          Fred Tannous, Bill Glaser and William T. Walker

             16.1(6)      Letter from Singer Lewak Greenbaum and Goldstein, LLP,
                          dated October 31, 2001, to the Securities and Exchange
                          Commission

             16.1(8)      Recession Agreement between Health Sciences Group and
                          International Pharmaceutical Group, LLC, dated April
                          6, 2002

             16.2(8)      Letter of Resignation from the Board of Directors of
                          Health Sciences Group, Inc. by Harbinder Singh Brach
                          dated April 6, 2002

             21.1         XCEL Healthcare, Inc., a California corporation

             21.2         BioSelect Innovations, Inc., a Nevada corporation

             21.3         Quality Botanical Ingredients, Inc., a Delaware
                          corporation

             23.1(1)      Consent of Singer Lewak Greenbaum & Goldstein LLP,
                          Certified Public Accountants

             23.1(2)      Consent of Singer Lewak Greenbaum & Goldstein LLP,
                          Certified Public Accountants

             23.1(3)      Consent of Singer Lewak Greenbaum & Goldstein, LLP

             23.1(9)      Consent of Stonefield Josephson, Inc., Certified
                          Public Accountants

             23.2(1)      Consent of Counsel (See Exhibit 5.1)

             23.2(2)      Consent of Counsel (See Exhibit 5.1)

             23.2(3)      Consent of Vanderkam & Sanders (included in Exhibit
                          5.1)

             31.1*        Certification of Chief Executive Officer Pursuant to
                          the Securities Exchange Act of 1934, Rules 13A-14 and
                          15D-14 as Adopted Pursuant to Section 302 of the
                          Sarbanes-Oxley Act of 2002

             31.2*        Certification of Principal Financial Officer Pursuant
                          to the Securities Exchange Act of 1934, Rules 13A-14
                          and 15D-14 as Adopted Pursuant to Section 302 of the
                          Sarbanes-Oxley Act of 2002

             32.1*        Certification of the Chief Executive Officer pursuant
                          to 18 U.S.C. Section 1350, as adopted pursuant to
                          Section 906 of the Sarbanes-Oxley Act of 2002.

             32.2*        Certification of the Principal Financial Officer
                          pursuant to 18 U.S.C. Section 1350, as adopted
                          pursuant to Section 906 of the Sarbanes-Oxley Act of
                          2002.

             99.1(3)      2001 Employee Stock Option Plan for iGoHealthy.com,
                          Inc.

             99.1(4)      Amendment and Restatement of the 2001 Employee Stock
                          Option Plan for iGoHealthy.com, Inc.

             99.1(5)      Press release dated October 24, 2001

             99.1(10)     Press Release dated February 26, 2003.

             99.1(7)      Stock Purchase and Share Exchange Agreement by and
                          among Health Sciences Group, Inc., Fred E. Tannous and
                          Bill Glaser on one hand and XCEL Healthcare, Inc.,
                          BioSelect Innovations, Inc. and respective
                          shareholders dated December 14, 2001.

             99.2(7)      Employment Agreement by and between XCEL Healthcare,
                          Inc. and Daniel I. Gelber, dated December 14, 2001.

             99.3(7)      Employment Agreement by and between XCEL Healthcare,
                          Inc. and Ron A. Gustilo, dated December 14, 2001.

             99.4(7)      Employment Agreement by and between XCEL Healthcare,
                          Inc. and Richard L. Kleinberger, dated December 14,
                          2001.

             99.5(7)      Confidentiality and Non-Competition Agreement by and
                          between XCEL Healthcare, Inc. and Daniel I. Gelber,
                          dated December 14, 2001.

             99.6(7)      Confidentiality and Non-Competition Agreement by and
                          between XCEL Healthcare, Inc. and Ron A. Gustilo,
                          dated December 14, 2001.

             99.7(7)      Confidentiality and Non-Competition Agreement by and
                          between XCEL Healthcare, Inc. and Richard L.
                          Kleinberger, dated December 14, 2001.

             99.8(7)      Escrow Agreement by and among Health Sciences Group,
                          Inc., XCEL Healthcare, Inc., BioSelect Innovations,
                          Inc., the respective shareholders, and Pollet &
                          Richardson, dated December 14, 2001.

             99.9(7)      Press release dated December 17, 2001.

             99.10(12)    Form of Securities Purchase Agreement dated December
                          20, 2002 used in connection with private placement.

             99.11(12)    Form of Stock Purchase Warrant used in connection with
                          private placement.

             99.12(12)    Form of Registration Rights Agreement dated December
                          20, 2002 used in connection with private placement.

             99.13(12)    Term Sheet for April 2003 private placement


                                      -38-
<PAGE>


             99.14(12)    Form of Registration Rights Agreement for April 2003
                          private placement

             99.15(12)    Form of Stock Purchase Warrant for April 2003 private
                          placement

             99.16(12)    Form of Subscription Agreement for April 2003 private
                          placement

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

(1)   Filed as an exhibit to our registration statement on Form SB-2 filed on
      December 11, 2000 (File No. 333-51628) and herein incorporated by
      reference.

(2)   Filed as an exhibit to our registration statement on Form SB-2 filed on
      January 22, 2001 (File No. 333-51628) and herein incorporated by
      reference.

(3)   Filed as an exhibit to our registration statement filed on Form S-8 filed
      on July 16, 2001and herein incorporated by reference.

(4)   Filed as an exhibit to our Post-Effective Amendment No. 1 to Form S-8
      Registration Statement filed on December 14, 2001and herein incorporated
      by reference.

(5)   Filed as an exhibit to our current report on Form 8-K filed on October 24,
      2001 and herein incorporated by reference.

(6)   Filed as an exhibit to our current report on Form 8-K filed on November 1,
      2001 and herein incorporated by reference.

(7)   Filed as an exhibit to our current report on Form 8-K filed on December
      31, 2001 and herein incorporated by reference.

(8)   Filed as an exhibit to our current report on Form 8-K filed on May 13,
      2002 and herein incorporated by reference.

(9)   Filed as an exhibit to our Post-Effective Amendment No. 2 to Form S-8
      Registration Statement filed on May 24, 2002 and herein incorporated by
      reference.

(10)  Filed as an exhibit to our current report on Form 8-K filed on March 11,
      2003 and herein incorporated by reference.

(11)  Filed as an exhibit to our Annual Report on Form 10-KSB, for fiscal year
      ended December 31, 2002, filed on April 16, 2003, and herein incorporated
      by reference.

(12)  Filed as an exhibit to our Registration Statement on Form SB-2 filed on
      May 20, 2003 (File No. 333-105407) and herein incorporated by reference.

(13)  Filed as an exhibit to our Registration Statement (pre-effective Amendment
      No. 1) on Form SB-2 filed on October 16, 2003 (File No. 333-105407) and
      herein incorporated by reference.

*     Filed herewith



                                      -39-
<PAGE>


                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act
of 1934, as amended, the issuer has duly caused this report to be signed on our
behalf by the undersigned, thereunto duly authorized this 12th day of April,
2004.


                               HEALTH SCIENCES GROUP, INC.

                               By: /s/ Fred E. Tannous
                                   Fred E. Tannous
                                   Chief Executive Officer,
                                   Principal Financial Officer, and Co-chairman

      Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
issuer in the capacities and on the dates indicated.


April 12, 2004                By: /s/ Fred E. Tannous
                                  --------------------------------------------
                                  Fred E. Tannous
                                  Chief Executive Officer,
                                  Principal Financial Officer, and Co-chairman


April 12, 2004                By: /s/ Bill Glaser
                                  --------------------------------------------
                                  Bill Glaser
                                  President, Secretary, and Co-chairman


April 12, 2004                By: /s/ David Johnson
                                  --------------------------------------------
                                  David Johnson
                                  Controller




April 12, 2004                By: /s/ William T. Walker, Jr.
                                  --------------------------------------------
                                  William T. Walker, Jr.
                                  Director


                                      -40-
<PAGE>

                                                     HEALTH SCIENCES GROUP, INC.
                                      INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                                      DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                Page
                                                                                ----
<S>                                                                         <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                               F-1

CONSOLIDATED FINANCIAL STATEMENTS

      Consolidated Balance Sheets                                                F-2

      Consolidated Statements of Operations and Other  Comprehensive Loss        F-3

      Statements of Stockholders' Equity                                      F-4 - F-8

      Consolidated Statements of Cash Flows                                  F-9 - F-10

      Notes to Consolidated Financial Statements                             F-11 - F-39
</TABLE>



<PAGE>


                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Health Sciences Group, Inc. and Subsidiaries
Los Angeles, California

We have audited the accompanying  consolidated balance sheets of Health Sciences
Group,  Inc. and  Subsidiaries as of December 31, 2003 and 2002, and the related
consolidated   statements   of   operations   and  other   comprehensive   loss,
stockholders'  equity and cash flows for the two year period ended  December 31,
2003. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain reasonable  assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Health
Sciences Group,  Inc. and Subsidiaries as of December 31, 2003 and 2002, and the
results of their  consolidated  operations and their consolidated cash flows for
the two year period ended  December  31, 2003,  in  conformity  with  accounting
principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated  financial statements,  the Company's net loss and negative working
capital  raise  substantial  doubt  about its  ability  to  continue  as a going
concern.  Management's plans concerning these matters are also discussed in Note
2. The  consolidated  financial  statements do not include any adjustments  that
might result from the outcome of this uncertainty.


/s/  STONEFIELD JOSEPHSON, INC.
-------------------------------
CERTIFIED PUBLIC ACCOUNTANTS

Santa Monica, California
March 15, 2004


                                      F-1
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  December 31,      December 31
                                                                                     2003              2002
                                                                                  ------------      ------------
<S>                                                                               <C>               <C>
                            ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                       $    265,060      $    169,024
  Accounts receivable, net of provision for uncollectible
    accounts and contractual allowance                                               1,854,339           567,047
  Inventory                                                                          2,586,739           156,953
  Prepaid expenses                                                                      95,992            93,655
  Deferred acquisition cost                                                                 --           281,152
                                                                                  ------------      ------------

            Total current assets                                                     4,802,130         1,267,831

MACHINERY, FURNITURE AND EQUIPMENT, net of accumulated depreciation
  and amortization                                                                   1,416,227           131,796

SECURITY DEPOSITS HELD                                                                  92,890                --
LOAN FEES, net of accumulated amortization                                             242,515             1,333
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED                                  350,546           350,546
INTANGIBLE ASSETS, net of accumulated amortization                                   3,995,713         4,219,904
                                                                                  ------------      ------------

                                                                                  $ 10,900,021      $  5,971,410
                                                                                  ============      ============


              LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

  Accounts payable and accrued expenses                                           $  2,761,665      $  1,021,349
  Lines of credit                                                                    2,999,511            73,150
  Current maturities of notes payable                                                  197,313           217,572
  Obligations under capitalized leases                                                 105,586            21,799
  Other current liabilities                                                            167,548             1,800
                                                                                  ------------      ------------

            Total current liabilities                                                6,231,623         1,335,670

CONVERTIBLE DEBENTURES PAYABLE, net of unamortized discount of $217,794                512,206                --
NOTES PAYABLE, less current maturities                                                 123,900           165,772
WARRANT LIABILITY                                                                    2,319,169                --
SERIES A CONVERTIBLE PREFERRED STOCK, net of unamortized discount of $869,203          794,197                --
                                                                                  ------------      ------------

            Total liabilities                                                        9,981,095         1,501,442
                                                                                  ------------      ------------

STOCKHOLDERS' EQUITY:
  Common stock; $0.001 par value, 50,000,000 shares
    authorized, 12,739,277 and 9,164,183 shares issued and
    outstanding at December 31, 2003 and 2002, respectively                             12,739             9,164
  Additional paid-in capital                                                        13,947,598         9,518,570
  Cost of treasury shares                                                              (52,500)               --
  Prepaid compensation expense                                                        (515,170)               --
  Accumulated other comprehensive loss                                                      --            (3,087)
  Accumulated deficit                                                              (12,473,741)       (5,054,679)
                                                                                  ------------      ------------

          Total stockholders' equity                                                   918,926         4,469,968
                                                                                  ------------      ------------

                                                                                  $ 10,900,021      $  5,971,410
                                                                                  ============      ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.


                                      F-2
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS AND
                                                        OTHER COMPREHENSIVE LOSS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     Year ended         Year ended
                                                                  December 31, 2003  December 31, 2002
                                                                  -----------------  -----------------
<S>                                                                  <C>               <C>
SALES, net                                                           $ 17,771,050      $  5,537,991

COST OF GOODS SOLD                                                     15,494,037         4,049,126
                                                                     ------------      ------------

GROSS PROFIT                                                            2,277,013         1,488,865
                                                                     ------------      ------------

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
  Salary expense - cash portion                                         2,443,555           900,898
  Salary expense - value of stock issued to employees - non-cash          552,265           417,812
  Legal and consulting expenses - cash portion                            318,996           742,849
  Legal and consulting expenses - value of stock, options and
    warrants issued - non-cash                                          1,386,631         2,383,516
  Depreciation and amortization                                           600,255           292,060
  Research and development                                                 48,650            54,050
  Other selling, general and administrative expenses                    2,478,740           777,798
                                                                     ------------      ------------

TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                      7,829,092         5,568,983
                                                                     ------------      ------------

LOSS FROM OPERATIONS                                                   (5,552,079)       (4,080,118)
                                                                     ------------      ------------

OTHER (EXPENSE) AND INCOME:

Interest expense recorded as amortization of discounts
  on convertible debentures                                              (582,206)               --
Interest expense recorded as amortization of discounts
  on convertible preferred stock                                         (121,945)               --
Interest expense on all other obligations                                (369,701)         (203,818)
Change in fair value of warrant liability                                (677,763)               --
Other expense                                                            (211,408)               --
Other income                                                               96,040                --
                                                                     ------------      ------------

TOTAL OTHER EXPENSE                                                    (1,866,983)         (203,818)
                                                                     ------------      ------------

LOSS BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES                  (7,419,062)       (4,283,936)

PROVISION FOR INCOME TAXES                                                     --                --
                                                                     ------------      ------------

NET LOSS                                                               (7,419,062)       (4,283,936)

PREFERRED DIVIDENDS                                                    (1,028,214)               --
                                                                     ------------      ------------

NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS                           (8,447,276)       (4,283,936)

OTHER COMPREHENSIVE LOSS -
  unrealized loss on marketable securities                                     --            (1,425)
                                                                     ------------      ------------

TOTAL COMPREHENSIVE LOSS                                             $ (8,447,276)     $ (4,285,361)
                                                                     ============      ============

NET LOSS PER SHARE AVAILABLE TO
  COMMON SHAREHOLDERS - basic and diluted                            $      (0.76)     $      (0.73)
                                                                     ============      ============

WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING - basic and diluted                                      11,101,217         5,835,319
                                                                     ============      ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-3
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                   Common stock               Additional        Cost of         Prepaid
                                           -----------------------------       paid-in         treasury       compensation
                                              Shares           Amount          capital          shares          expense
-----------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>              <C>              <C>             <C>
Balance at January 1, 2002                   6,808,684      $     6,809      $ 5,895,738      $        --     $  (145,833)

Return of Company's common stock
  in exchange for investment in equity
  securities                                (1,700,000)          (1,700)        (843,277)              --              --

Issuance of common stock
  for services                                 678,518              679        1,777,340               --              --

Prepaid compensation expense
  issued as shares to stockholders                  --               --               --               --         145,833

Stock options exercised for cash               105,000              105          118,645               --              --

Stock options exercised by officers of
  the Company on a "cashless" basis             91,962               92              (92)              --              --

Issuance of common stock
  for cash                                     392,929              393          374,607               --              --

Issuance of common stock pursuant
  to price adjustment provision                 94,444               94           92,461               --              --

Stock options issued in exchange
  for services                                      --               --          614,077               --              --

Stock options exercised by officers
  of the Company in exchange for
  notes payable                                400,000              400           99,600               --              --
</TABLE>

<TABLE>
<CAPTION>
                                                 Other                              Total
                                              comprehensive      Accumulated     stockholders'
                                                  loss            deficit          equity
--------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>              <C>
Balance at January 1, 2002                     $    (1,662)     $  (770,743)     $ 4,984,309

Return of Company's common stock
  in exchange for investment in equity
  securities                                            --               --         (844,977)

Issuance of common stock
  for services                                          --               --        1,778,019

Prepaid compensation expense
  issued as shares to stockholders                      --               --          145,833

Stock options exercised for cash                        --               --          118,750

Stock options exercised by officers of
  the Company on a "cashless" basis                     --               --               --

Issuance of common stock
  for cash                                              --               --          375,000

Issuance of common stock pursuant
  to price adjustment provision                         --               --           92,555

Stock options issued in exchange
  for services                                          --               --          614,077

Stock options exercised by officers
  of the Company in exchange for
  notes payable                                         --               --          100,000
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-4
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                 Common stock             Additional      Cost of      Prepaid
                                          ----------------------------     paid-in       treasury    compensation
                                            Shares           Amount        capital        shares       expense
------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>              <C>           <C>             <C>
Issuance of common stock to officers
  of the Company in exchange for
  note payable and accrued interest         707,229            707        388,270             --             --

Issuance of common stock to officers
  of the Company as compensation            744,056            744        408,487             --             --

Issuance of common stock in exchange
   for note payable                         193,066            193        163,913             --             --

Issuance of common stock pursuant
  to a settlement agreement                 648,295            648        400,101             --             --

Issuance of warrants in connection
  with notes payable                             --             --         28,700             --             --

Unrealized loss on investment in
  marketable securities                          --             --             --             --             --

Net loss                                         --             --             --             --             --
                                         ---------------------------------------------------------------------------

Balance at December 31, 2002              9,164,183          9,164      9,518,570             --             --

Issuance of common stock for cash           472,413            472        326,681             --             --
</TABLE>

<TABLE>
<CAPTION>
                                              Other                            Total
                                           comprehensive    Accumulated     stockholders'
                                               loss          deficit          equity
-------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>              <C>
Issuance of common stock to officers
  of the Company in exchange for
  note payable and accrued interest               --              --         388,977

Issuance of common stock to officers
  of the Company as compensation                  --              --         409,231

Issuance of common stock in exchange
   for note payable                               --              --         164,106

Issuance of common stock pursuant
  to a settlement agreement                       --              --         400,749

Issuance of warrants in connection
  with notes payable                              --              --          28,700

Unrealized loss on investment in
  marketable securities                       (1,425)             --          (1,425)

Net loss                                          --      (4,283,936)     (4,283,936)
                                         -----------------------------------------------

Balance at December 31, 2002                  (3,087)     (5,054,679)      4,469,968

Issuance of common stock for cash                 --              --         327,153
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-5
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                               Common stock             Additional     Cost of         Prepaid
                                         ---------------------------     paid-in      treasury       compensation
                                          Shares           Amount        capital       shares          expense
-------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>             <C>           <C>           <C>            <C>
Stock purchase warrants exercised for
  cash                                        126,286           126       135,394            --             --

Issuance of common stock in exchange
  for certain assets and the assumption
  of certain liabilities of AAA Health
  Products, Inc.                            1,100,000         1,100       889,900            --             --

Issuance of common stock
  for services                                624,384           624       563,508            --             --

Issuance of common stock in advance
  of service provided                         615,000           615       544,860            --       (545,475)

Amortization of value of common stock
  issued in advance of service provided            --            --            --            --        173,725

Return of common stock issued for
  services and retained in treasury                --            --            --       (52,500)            --

Issuance of common stock in
  exchange for note payable                    40,000            40        25,160            --             --

Issuance of common stock pursuant
  to a settlement agreement                    51,705            52        31,705            --             --

Debentures converted into shares of
  common stock                                100,000           100        69,900            --             --

Issuance of common stock to debenture
  holders as penalties                         19,636            20        30,416            --             --
</TABLE>

<TABLE>
<CAPTION>
                                              Other                        Total
                                           comprehensive   Accumulated  stockholders'
                                               loss         deficit       equity
---------------------------------------------------------------------------------------------
<S>                                        <C>             <C>          <C>
Stock purchase warrants exercised for
  cash                                           --            --          135,520

Issuance of common stock in exchange
  for certain assets and the assumption
  of certain liabilities of AAA Health
  Products, Inc.                                 --            --          891,000

Issuance of common stock
  for services                                   --            --          564,132

Issuance of common stock in advance
  of service provided                            --            --               --

Amortization of value of common stock
  issued in advance of service provided          --            --          173,725

Return of common stock issued for
  services and retained in treasury              --            --          (52,500)

Issuance of common stock in
  exchange for note payable                      --            --           25,200

Issuance of common stock pursuant
  to a settlement agreement                      --            --           31,757

Debentures converted into shares of
  common stock                                   --            --           70,000

Issuance of common stock to debenture
  holders as penalties                           --            --           30,436
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-6
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              Common stock         Additional         Cost of      Prepaid
                                                        -----------------------     paid-in          treasury    compensation
                                                         Shares       Amount        capital           shares       expense
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>          <C>                <C>         <C>
Issuance of common stock to Series A
  convertible preferred stockholders
  as penalties                                           95,987             96        129,486              --             --

Issuance of common stock to Series A
  convertible preferred stockholders
  as dividends                                           29,683             30         39,970              --             --

Issuance of common stock to officers
  of the Company for services                           300,000            300        299,700              --             --

Dividends earned on Series A Preferred
  Stock issued                                               --             --     (1,068,214)             --             --

Value of discount attributable to the beneficial
  conversion feature from the sale of preferred
  stock                                                      --             --      1,008,852              --             --

Stock options issued in advance of services
  provided                                                   --             --         75,336              --        (75,336)

Amortization of value of stock options issued
  in advance of service provided                             --             --             --              --         67,447

Common stock purchase warrants issued
  in exchange for services                                   --             --        705,387              --             --

Common stock purchase warrants issued in
  advance of services provided                               --             --        304,913              --       (304,913)
</TABLE>

<TABLE>
<CAPTION>
                                                              Other                        Total
                                                           comprehensive   Accumulated  stockholders'
                                                               loss          deficit       equity
-----------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>            <C>
Issuance of common stock to Series A
  convertible preferred stockholders
  as penalties                                                    --             --        129,582

Issuance of common stock to Series A
  convertible preferred stockholders
  as dividends                                                    --             --         40,000

Issuance of common stock to officers
  of the Company for services                                     --             --        300,000

Dividends earned on Series A Preferred
  Stock issued                                                    --             --     (1,068,214)

Value of discount attributable to the beneficial
  conversion feature from the sale of preferred
  stock                                                           --             --      1,008,852

Stock options issued in advance of services
  provided                                                        --             --             --

Amortization of value of stock options issued
  in advance of service provided                                  --             --         67,447

Common stock purchase warrants issued
  in exchange for services                                        --             --        705,387

Common stock purchase warrants issued in
  advance of services provided                                    --             --             --
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-7
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                Common stock               Additional         Cost of
                                                        -------------------------------     paid-in          treasury
                                                           Shares             Amount        capital           shares
----------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>           <C>          <C>                <C>         <C>
Amortization of value of common stock purchase
  warrants issued in advance of services                         --               --               --               --

Value of common stock purchase warrants
  issued in connection with a line of credit                     --               --           24,056               --

Net value of common stock purchase warrants
  issued in connection with convertible debentures               --               --          292,018               --

Realized loss on sale of marketable securities                   --               --               --               --

Net loss                                                         --               --               --               --
                                                     -----------------------------------------------------------------------
Balance at December 31, 2003                             12,739,277     $     12,739     $ 13,947,598     $    (52,500)
                                                     =======================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                        Prepaid            Other                               Total
                                                      compensation      comprehensive      Accumulated      stockholders'
                                                        expense             loss             deficit           equity
------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>              <C>                <C>              <C>
Amortization of value of common stock purchase
  warrants issued in advance of services                   169,382                --               --           169,382

Value of common stock purchase warrants
  issued in connection with a line of credit                    --                --               --            24,056

Net value of common stock purchase warrants
  issued in connection with convertible debentures              --                --               --           292,018

Realized loss on sale of marketable securities                  --             3,087               --             3,087

Net loss                                                        --                --       (7,419,062)       (7,419,062)
                                                     -------------------------------------------------------------------------
Balance at December 31, 2003                          $   (515,170)     $         --     $(12,473,741)     $    918,926
                                                     =========================================================================
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-8
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            Year ended       Year ended
                                                                       December 31, 2003  December 31, 2002
                                                                       -----------------  -----------------
<S>                                                                    <C>                <C>
CASH FLOWS USED FOR OPERATING ACTIVITIES:
  Net loss                                                                $(7,419,062)     $(4,283,936)
  ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
    USED FOR OPERATING ACTIVITIES:
      Stock options and warrants issued for services                        1,003,531          614,077
      Depreciation and amortization                                           759,143          292,061
      Change in fair value of warrant liability                               677,763               --
      Issuance of common stock for services rendered                          600,462        1,778,019
      Amortization of discount on debentures                                  582,206               --
      Purchased inventory expensed in the current year                        546,046               --
      Markdown on value of Inventory                                          502,064               --
      Issuance of common stock to officers as compensation                    300,000          409,231
      Provision for contractual allowance and uncollectible accounts          232,292           29,641
      Issuance of common stock to preferred shareholders as penalties         129,582               --
      Amortization of discount on preferred stock issued                      121,945               --
      Issuance of common stock as settlement expense                           31,757          400,749
      Issuance common stock to debenture holders as penalties                  30,436               --
      Amortization of note payable discount                                    15,718           12,983
      Realized loss on sale of investment in securities                         3,320               --
      Issuance of common stock as financing costs                               3,200               --
      Loss on sale of asset                                                      (370)              --
      Prepaid compensation expense                                                 --          145,833
      Issuance of common stock pursuant to price adjustment                        --           92,555
      Issuance of common stock to officers as interest                             --           50,977

  CHANGES IN ASSETS AND LIABILITIES:
    (INCREASE) DECREASE IN ASSETS:

      Accounts receivable                                                     633,715         (226,775)
      Inventory                                                               708,596          (39,884)
      Prepaid expenses and other current assets                                91,223         (374,281)
      Security deposits refunded                                               14,876               --

    INCREASE (DECREASE) IN LIABILITIES:

      Accounts payable and accrued expenses                                  (572,792)         502,938
      Dividends payable                                                        19,362               --
      Other current liabilities                                              (159,960)              --
                                                                          -----------      -----------

          Net cash used for operating activities                           (1,144,947)        (595,812)
                                                                          -----------      -----------

CASH FLOWS USED FOR INVESTING ACTIVITIES:
  Purchase of furniture and equipment                                         (94,472)         (19,353)
  Purchase of subsidiary net of cash acquired                                (242,292)              --
                                                                          -----------      -----------

          Net cash used for investing activities                             (336,764)         (19,353)
                                                                          -----------      -----------
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-9
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                              Year ended        Year ended
                                                                          December 31, 2003  December 31, 2002
                                                                          -----------------  -----------------
<S>                                                                       <C>                <C>
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
  Net proceeds from the issuance of common stock                                462,673          493,750
  Net proceeds from the issuance of preferred stock                           1,663,400               --
  Proceeds from stockholders                                                         --          420,606
  Proceeds from notes payable                                                        --          277,106
  Payments on notes payable                                                    (565,483)        (275,336)
  (Payments on) proceeds from line of credit                                   (310,615)             150
  Payments on capital lease obligations                                        (222,183)         (18,571)
  Book overdraft                                                                     --         (113,516)
  Proceeds from convertible debentures                                          800,000               --
  Payments for loan fees                                                       (250,045)              --
                                                                            -----------      -----------

          Net cash provided by financing activities                           1,577,747          784,189
                                                                            -----------      -----------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                        96,036          169,024
CASH AND CASH EQUIVALENTS, beginning of year                                    169,024               --
                                                                            -----------      -----------

CASH AND CASH EQUIVALENTS, end of year                                      $   265,060      $   169,024
                                                                            ===========      ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Interest paid                                                             $   289,867      $   155,027
                                                                            ===========      ===========
  Income taxes paid                                                         $        --      $        --
                                                                            ===========      ===========

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Value of stock options and warrants issued in exchange for services       $ 1,084,179      $   614,077
                                                                            ===========      ===========
  Value of common stock issued for services                                 $   927,737      $ 1,778,019
                                                                            ===========      ===========
  Value of common stock issued for AAA Health Products, Inc.                $   891,000      $        --
                                                                            ===========      ===========
  Value of warrants and beneficial conversion feature issued to
    debenture holders                                                       $   800,000      $        --
                                                                            ===========      ===========
  Value of common stock issued to officers of the Company as
     compensation                                                           $   300,000      $   409,231
                                                                            ===========      ===========
  Value of warrants issued as loan fees                                     $   167,685      $        --
                                                                            ===========      ===========
  Value of common stock issued to preferred shareholders as
    penalties                                                               $   129,582      $        --
                                                                            ===========      ===========
  Debentures converted into common stock                                    $    70,000      $        --
                                                                            ===========      ===========
  Value of common stock issued to preferred shareholders as
    dividends                                                               $    40,000      $        --
                                                                            ===========      ===========
  Value of common stock issued pursuant to Settlement Agreement             $    31,757      $   400,749
                                                                            ===========      ===========
  Value of common stock issued to debenture holders as penalties            $    30,436      $        --
                                                                            ===========      ===========
  Note payable converted to common stock                                    $    22,000      $   164,106
                                                                            ===========      ===========
  Value of common stock issued as finance costs                             $     3,200      $        --
                                                                            ===========      ===========
  Exchange of investment in equity securities for common stock              $        --      $   844,977
                                                                            ===========      ===========
  Note payable to officers of the Company converted
    to common stock                                                         $        --      $   488,977
                                                                            ===========      ===========
  Accounts payable converted to note payable                                $        --      $   126,000
                                                                            ===========      ===========
  Value of common stock issued as price adjustment                          $        --      $    92,555
                                                                            ===========      ===========
  Value of warrants issued in connection with notes payable                 $        --      $    28,700
                                                                            ===========      ===========
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-10
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
-------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION

      Health Sciences Group,  Inc. (the "Company") was incorporated in the state
      of  Colorado  on  June  13,  1996  as  Centurion  Properties   Development
      Corporation.  The Company remained dormant until October 16, 2000 when its
      name was  changed to  iGoHealthy.com,  Inc. On  September  10,  2001,  the
      Company  changed  its name to Health  Sciences  Group,  Inc.  The  Company
      acquires and integrates into a collaborative network,  companies operating
      in the fields of pharmaceuticals, nutraceuticals and cosmeceuticals.

      Effective  December 14, 2001, the Company acquired 100% of the outstanding
      stock  of  XCEL  Healthcare,  Inc.,  a  California  corporation,  and  the
      outstanding shares of BioSelect  Innovations,  Inc., a Nevada corporation,
      for  approximately  $4.4  million  pursuant to a Stock  Purchase  and Sale
      Agreement.

      On February 24, 2003, effective January 1, 2003, the Company completed its
      acquisition of Quality  Botanical  Ingredients,  Inc. pursuant to an Asset
      Purchase  Agreement  for  approximately  $1.5  million  (Note 3).  Quality
      Botanical  Ingredients is a leading manufacturer and contract processor of
      bulk botanical materials and nutritional ingredients supplied to buyers in
      various industries including pharmaceutical, nutraceutical and cosmetics.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation

      These  consolidated  financial  statements  include  the  accounts  of the
      Company and its wholly owned subsidiaries,  Quality Botanical Ingredients,
      Inc. ("QBI"),  XCEL Healthcare,  Inc. ("XCEL") and BioSelect  Innovations,
      Inc.   ("BioSelect").   All  material  inter-company  accounts  have  been
      eliminated in consolidation.

      Classes of Stock

      The  Company's  Articles  of  Incorporation,  as amended,  authorized  the
      issuance of up to  55,000,000  shares of stock,  consisting  of  5,000,000
      shares of  Convertible  Preferred  Non-voting  Equity stock and 50,000,000
      shares of common stock, which have a par value of $0.001.

      Convertible Preferred Stock

      Convertible  Preferred  Non-voting  Equity  stock  will  have  par  terms,
      preferences  and  conversion  features  as  determined  by  the  Board  of
      Directors at the time of the  issuance of any such  shares.  In July 2003,
      the Board of Directors  executed and filed a Certificate  of  Designation,
      Preferences  and Rights of Series A Convertible  Preferred  Stock with the
      State of Colorado,  which  authorized the issuance of 2,352,948  shares of
      Series A convertible  preferred stock (Note 14). There were no convertible
      preferred shares issued as of December 31, 2002.

      Basis of Presentation

      As reflected in the accompanying  consolidated  financial statements,  the
      Company has  losses,  negative  cash flows from  operations  and  negative
      working capital. These matters raise substantial doubt about the Company's
      ability to continue as a going concern.

      In  view  of  the   matters   described   in  the   preceding   paragraph,
      recoverability  of a major portion of the recorded  asset amounts shown in
      the accompanying  consolidated  balance sheets is dependent upon continued
      operations of the Company, which, in turn, is dependent upon the Company's
      ability to continue to raise capital and generate positive cash flows from
      operations.  The  consolidated  financial  statements  do not  include any
      adjustments  relating to the recoverability and classification of recorded
      asset amounts or amounts and  classifications of liabilities that might be
      necessary should the Company be unable to continue its existence.


                                      F-11

<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      Basis of Presentation, Continued

      Management  plans to take,  or has  taken,  the  following  steps  that it
      believes  will be  sufficient  to provide the Company  with the ability to
      continue in existence.

            o     Through  February 2004,  the Company has raised  approximately
                  $300,000   from  the  sale  of  equity  funds  (Note  18)  and
                  anticipates   raising   additional   equity  funds  of  up  to
                  $2,000,000 that will be used to fund any capital shortfalls.

            o     Management is decreasing  expenses by using internal resources
                  to perform due diligence and other acquisition  related duties
                  on future acquisitions.

            o     Management has streamlined its operation and is developing new
                  products, which are anticipated to have increased gross profit
                  margins.

      Use of Estimates

      The  preparation of consolidated  financial  statements in conformity with
      accounting  principles  generally accepted in the United States of America
      requires  management  to make  estimates and  assumptions  that affect the
      reported  amounts of assets and  liabilities  and disclosure of contingent
      assets  and  liabilities  at  the  date  of  the  consolidated   financial
      statements  and the reported  amounts of revenues and expenses  during the
      reporting  periods.  The  Company's   significant  estimates  include  the
      contractual  allowance on accounts receivable and life and estimated value
      of intangible assets for recoverability.  Actual results could differ from
      those estimates.

      Fair Value of Financial Instruments

      For certain of the Company's  financial  instruments,  including  accounts
      receivable,  accounts payable and accrued  expenses,  the carrying amounts
      approximate  fair  value due to their  relatively  short  maturities.  The
      amounts owed on its lines of credit, notes payable and capital leases also
      approximate fair value because current interest rates and terms offered to
      the Company are at current market rates.

      Cash and Cash Equivalents

            Equivalents

            Cash equivalents are comprised of certain highly liquid  investments
            with maturity of three months or less when purchased.

            Concentration

            The Company  maintains its cash in bank deposit  accounts,  which at
            times,  may exceed  federally  insured  limits.  The Company has not
            experienced any losses in such account.

      Concentration of Credit Risk

      Financial   instruments   that   potentially   subject   the   Company  to
      concentrations  of credit risk are  accounts  receivable  arising from the
      Company's normal business activities. QBI routinely assesses the financial
      strength of its customers and, based upon factors  surrounding  the credit
      risk,  establishes  an  allowance  for  uncollectible  accounts  and, as a
      consequence,  believes that its accounts  receivable  credit risk exposure
      beyond such allowance is limited. Sales are comprised of approximately 390
      customers  for the year ended  December  31,  2003.  Included  in accounts
      receivable  are amounts due from 185  customers at December 31, 2003.  QBI
      had no customers that represent  sales greater than 10% of total sales for
      the year ended December 31, 2003.

      XCEL obtains payments from various  insurance  payors.  Prior to shipment,
      XCEL obtains  documentation and authorization from the appropriate sources
      to  ensure  payment  will be  received.  If the  claim  is  denied  by the
      insurance payor as a non-covered  item, the patient is responsible for the
      charge.  Substantially all of XCEL's accounts  receivable are due from two
      governmental  agencies.  Included in accounts  receivable is approximately
      $327,000 and $400,000 due from these two agencies at December 31, 2003 and
      2002, respectively.



                                      F-12
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      Inventory

      Inventory  consists  of  herbs  and  nutritional  supplements  in the  raw
      material,  blended and processed stages. Herbs and nutritional  supplement
      inventory  is reviewed at least  annually  for  obsolescence  or permanent
      markdowns  and  adjustments,  if any,  are included in cost of goods sold.
      Inventory also includes  pharmaceutical and over-the-counter  medications.
      Inventory   is  stated  at  the  lower  of  cost  or  market.   Costs  for
      pharmaceutical and over-the-counter products generally being determined on
      a first  in,  first out  basis  while  the cost for herbs and  nutritional
      supplements  are determined on an average cost basis.  Pharmaceutical  and
      over-the-counter medications,  which have expired, are returned for credit
      or refund at amounts that approximate the purchase price. As a result, the
      Company  has no  obsolete  inventory  related  to its  pharmaceutical  and
      over-the-counter medications.

      Machinery, Furniture and Equipment

      Machinery,  furniture,  equipment and leasehold improvements are stated at
      cost. Depreciation is provided on a straight-line basis over the estimated
      useful lives of the assets as follows:

                                                             Estimated useful
                                                              life (in years)
                                                              ---------------
                     Building leasehold improvements              10
                     Machinery and equipment                    5 - 10
                     Furniture and fixtures                     5 - 10
                     Computer software and systems              3 - 5
                     Vehicles                                     5

      Leasehold  improvements are amortized on the straight-line method over the
      term  of the  lease  or  estimated  useful  life,  whichever  is  shorter.
      Expenditures  for  maintenance  and repairs are charged to  operations  as
      incurred, while renewals and betterments are capitalized.

      Loan Fees

      Loan fees are capitalized  and are amortized using the effective  interest
      rate  method  over  the  life  of the  loans  (1 - 3  years).  Accumulated
      amortization  totaled  approximately  $273,000  and $6,000 at December 31,
      2003 and 2002,  respectively.  Amortization expense totaled  approximately
      $267,000  and  $6,000  for the years  ended  December  31,  2003 and 2002,
      respectively.

      Excess of Cost Over Fair Value of Net Assets Acquired

      Excess of cost over fair value of net  tangible  assets  acquired  arising
      from the  acquisition  of XCEL  and  BioSelect  was  first  attributed  to
      patents, formulas, agreements not-to-compete and website development based
      upon  their  estimated  fair  value  at the  date  of  acquisition.  These
      intangible  assets are being amortized over their estimated  useful lives,
      which range from 3-19 years.  Excess of cost over fair value of net assets
      acquired  will  be  reviewed  for  impairment  pursuant  to the  Financial
      Accounting  Standards Board's ("FASB")  Statement of Financial  Accounting
      Standards ("SFAS") No. 142.

      The Company  accounts for its  intangible  assets under the  provisions of
      SFAS No. 142, "Goodwill and Other Intangible  Assets".  In accordance with
      SFAS No. 142,  intangible  assets with a definite  life are  accounted for
      impairment  under SFAS No. 144 and intangible  assets with indefinite life
      are accounted for impairment  under SFAS No. 142. In accordance  with SFAS
      No.  142,  goodwill,  or the  excess of cost over fair value of net assets
      acquired, is no longer amortized but is tested for impairment using a fair
      value  approach at the  "reporting  unit" level.  A reporting  unit is the
      operating  segment,  or a business one level below that operating  segment
      (referred to as a component) if discrete financial information is prepared
      and regularly  reviewed by management at the component  level. The Company
      recognizes  an  impairment  charge  for any  amount by which the  carrying
      amount of a reporting  unit's goodwill exceeds its fair value. The Company
      uses discounted cash flows to establish fair values. When available and as
      appropriate,  comparative market multiples to corroborate  discounted cash
      flow results is used.  When a business within a reporting unit is disposed
      of,  goodwill is  allocated to the gain or loss on  disposition  using the
      relative fair value methodology.



                                      F-13
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      Intangible and Long-Lived Assets

      In October 2001, the FASB issued SFAS No. 144,  "Accounting for Impairment
      of  Disposal  of  Long-Lived  Assets",  which  supercedes  SFAS  No.  121,
      "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
      Assets to Be Disposed Of", and the accounting  and reporting  provision of
      APB Opinion No. 30,  "Reporting  the Results of  Operations-Reporting  the
      Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
      and Infrequently Occurring Events and Transactions", for the disposal of a
      segment  of  a  business.   This   statement   also  amends  ARB  No.  51,
      "Consolidated  Financial  Statements",   to  eliminate  the  exception  to
      consolidation for a subsidiary for which control is likely to be impaired.
      SFAS No. 144 requires  that  long-lived  assets to be disposed of by sale,
      including  those of discontinued  operations,  be measured at the lower of
      carrying  amount or fair  value  less cost to sell,  whether  reported  in
      continuing operations or in discontinued operations. SFAS No. 144 broadens
      the reporting of  discontinued  operations to include all components of an
      entity  with  operations  that can be  distinguished  from the rest of the
      entity and that will be  eliminated  from the  ongoing  operations  of the
      entity  in a  disposal  transaction.  SFAS  No.  144  also  establishes  a
      "primary-asset"  approach to determine the cash flow estimation period for
      a group of assets and  liabilities  that represents the unit of accounting
      for a long-lived  asset to be held and used.  This  statement is effective
      for fiscal years beginning after December 15, 2001. The Company's adoption
      did not have a material  impact to the  Company's  financial  position  or
      results of operations.

      Revenue Recognition

      Net sales are recorded when  products are  delivered to the customer.  QBI
      processes raw materials based on customer  specifications.  QBI determines
      the sales price of the products and assesses the credit  worthiness of the
      customer prior to shipment. The revenue recognition criteria are completed
      prior to shipment.

      XCEL's  net sales are  recorded  at its  established  rates on an  accrual
      basis, net of the provision for contractual allowances when pharmaceutical
      products are shipped.  A valid  prescription and authorization for payment
      must be received by XCEL for the customer prior to shipment,  representing
      the contract  between the  customer's  insurance  company and XCEL. On the
      date the product is shipped, the insurance payor is billed for the sale as
      the  service  has been  provided  to the  customer  and,  at which  point,
      collectibility  is assured.  Contractual  allowances  include  differences
      between  established  billing rates and amounts estimated by management as
      reimbursable from third-party payors and others for products shipped.

      Research and Development Costs

      Research and development  costs consist of  expenditures  for the research
      and development of patents and new products, which cannot be capitalized.

      Advertising Costs

      The Company  expenses  advertising  costs as incurred.  Advertising  costs
      totaled  approximately $16,000 and $2,800 for the years ended December 31,
      2003 and 2002, respectively.

      Shipping and Handling Costs

      The Company expenses  shipping and handling costs as incurred and includes
      the expense in cost of goods sold for its Nutraceutical  subsidiary and in
      selling,  general  and  administrative  expenses  for  its  Pharmaceutical
      subsidiary. Shipping and handling costs totaled approximately $433,000 and
      $58,000 for the years ended December 31, 2003 and 2002, respectively.

      Income Taxes

      Deferred income taxes result primarily from temporary  differences between
      financial  and tax  reporting.  Deferred  tax assets and  liabilities  are
      determined based on the differences  between the financial statement bases
      and tax bases of  assets  and  liabilities  using  enacted  tax  rates.  A
      valuation  allowance  is recorded  to reduce a deferred  tax asset to that
      portion that is expected to more likely than not be realized.


                                      F-14
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      Net Loss Per Share

      The Company uses SFAS No. 128,  "Earnings Per Share" for  calculating  the
      basic and  diluted  loss per share.  Basic loss per share is  computed  by
      dividing  net loss  attributable  to common  stockholders  by the weighted
      average  number of common  shares  outstanding.  Diluted loss per share is
      computed  similar to basic loss per share except that the  denominator  is
      increased  to include the number of  additional  common  shares that would
      have been  outstanding if the potential  common shares had been issued and
      if the additional  common shares were  dilutive.  At December 31, 2003 and
      2002, the outstanding number of potentially dilutive common shares totaled
      approximately  1,256,000 and 1,606,000 shares,  respectively.  However, as
      the Company has net losses, their effect is anti-dilutive and has not been
      included in the diluted  weighted  average  earnings per share as shown on
      the Consolidated Statements of Operations.

      Pro Forma Information for Stock Options Issued to Employees

      SFAS No. 123, "Accounting for Stock-Based  Compensation,"  establishes and
      encourages  the use of the fair  value  based  method  of  accounting  for
      stock-based  compensation  arrangements  under which  compensation cost is
      determined using the fair value of stock-based  compensation determined as
      of the date of grant  and is  recognized  over the  periods  in which  the
      related  services are rendered.  The statement  also permits  companies to
      elect to continue  using the current  intrinsic  value  accounting  method
      specified  in  Accounting   Principles   Board  ("APB")  Opinion  No.  25,
      "Accounting  for Stock Issued to  Employees,"  to account for  stock-based
      compensation.  The Company has  elected to use the  intrinsic  value based
      method  and has  disclosed  the pro forma  effect of using the fair  value
      based method to account for its stock-based compensation. The Company uses
      the fair value method for options granted to non-employees. If the Company
      had elected to recognize compensation expense based upon the fair value at
      the grant date for awards under the Stock Option Plan  consistent with the
      methodology prescribed by SFAS No. 123, the Company' net loss and loss per
      share would be reduced to the pro forma  amounts  indicated  below for the
      years ended December 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                                           December 31, 2003    December 31, 2002
                                                           -----------------    -----------------
<S>                                                           <C>                 <C>
          Net loss attributable to common
            shareholders, as reported                         $(8,447,276)        $(4,283,936)
          Stock compensation calculated under SFAS 123           (478,867)           (340,295)
                                                              -----------         -----------
          Pro forma net loss attributable to
            common shareholders                               $(8,926,143)        $(4,624,231)
                                                              ===========         ===========

          Net loss per share available to common
            shareholders - basic and diluted
               As reported                                    $     (0.76)        $     (0.73)
                                                              ===========         ===========
               Pro forma                                      $     (0.80)        $     (0.79)
                                                              ===========         ===========
</TABLE>


      Pro forma information using the Black-Scholes  method at the date of grant
      based on the  following  assumptions:  average risk free  interest rate of
      2.10% for 2003 and 2.70%  for 2002;  dividend  yield of 0% for each of the
      years 2003 and 2002;  average  volatility  factor of the  expected  market
      price of the  Company's  common  stock of 133.6%  for 2003 and  121.7% for
      2002;  and an expected life of the options of 3 years for each of the 2003
      and 2002.

      This  option   valuation   model  requires  input  of  highly   subjective
      assumptions.   Because  the   Company's   employee   stock   options  have
      characteristics  significantly different from those of traded options, and
      because changes in the subjective input  assumptions can materially affect
      the fair value of estimate,  in management's  opinion,  the existing model
      does not  necessarily  provide a reliable  single measure of fair value of
      its employee stock options.



                                      F-15
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      Recent Accounting Pronouncements

      In  November  2002,  FASB  issued  FASB  Interpretation  No.  ("FIN")  45,
      "Guarantor's   Accounting  and  Disclosure  Requirements  for  Guarantees,
      Including  Indirect  Guarantees of  Indebtedness  of Others."  Among other
      things,  the  Interpretation  requires  guarantors to  recognize,  at fair
      value,   their  obligations  to  stand  ready  to  perform  under  certain
      guarantees.  FIN 45 is effective for  guarantees  issued or modified on or
      after  January 1, 2003.  The Company  does not expect the adoption of this
      pronouncement  to  have  a  material  impact  to the  Company's  financial
      position or results of operations.

      In January  2003,  the FASB  issued  FIN 46,  "Consolidation  of  Variable
      Interest  Entities,  an  Interpretation  of Accounting  Research  Bulletin
      ("ARB") No. 51." This interpretation  clarifies the application of ARB No.
      51,  "Consolidated  Financial  Statements",  to certain  entities in which
      equity  investors  do  not  have  the  characteristics  of  a  controlling
      financial interest or do not have sufficient equity at risk for the entity
      to  finance  its  activities  without  additional  subordinated  financial
      support  from other  parties.  In December  2003,  the FASB  revised  FASB
      Interpretation  No. 46 ("FIN 46R"),  which allowed  companies with certain
      types of variable  interest entities to defer  implementation  until March
      31, 2004.  The Company does not expect the adoption of this  pronouncement
      to have a material impact to the Company's  financial  position or results
      of operations.

      In April 2003,  the FASB issued SFAS No. 149,  "Amendment of Statement 133
      on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
      clarifies  accounting  for  derivative   instruments,   including  certain
      derivative  instruments  embedded  in  other  contracts,  and for  hedging
      activities  under  Statement  133. SFAS No. 149 is effective for contracts
      entered into or modified after June 30, 2003 and for hedging relationships
      designated   after  June  30,  2003.   The  guidance   should  be  applied
      prospectively. The Company does not expect the adoption of SFAS No. 149 to
      have a material impact on its consolidated financial position,  results of
      operations or stockholders' equity.

      In May  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
      Financial   Instruments  with  Characteristics  of  both  Liabilities  and
      Equity."  SFAS No. 150  clarifies  the  accounting  treatment  for certain
      financial  instruments with characteristics of both liabilities and equity
      and requires  that those  instruments  be  classified  as  liabilities  in
      statements of financial position.  SFAS No. 150 is effective for financial
      instruments  entered into or modified  after May 31, 2003 and otherwise is
      effective at the beginning of the first  interim  period  beginning  after
      June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to
      have a material impact on its consolidated financial position,  results of
      operations or stockholders' equity.

      In December  2003,  the FASB issued  Summary of Statement No. 132 (revised
      2003),  "Employer's  Disclosures  about Pensions and Other Post Retirement
      Benefits  - an  amendment  to FASB  Statements  No. 87, 88, and 106." This
      statement  revises  employers'  disclosures  about pension plans and other
      postretirement  benefit plans. However, it does not change the measurement
      or  recognition  of those  plans as required  by FASB  Statements  No. 87,
      "Employers'  Accounting for Pensions",  No. 88, "Employers' Accounting for
      Settlements  and  Curtailments  of Defined  Benefit  Pension Plans and for
      Termination   Benefits",   and  No.  106,   "Employers'   Accounting   for
      Postretirement  Benefits Other Than  Pensions."  This  statement  requires
      additional  disclosures  to those in the original  Statement 132 about the
      assets,  obligations,  cash flows,  and net periodic  benefit  cost.  This
      statement also calls for certain  information to be disclosed in financial
      statements for interim period. The disclosures  required by this statement
      are effective for fiscal year ending after  December 15, 2003. The Company
      does not  expect the  adoption  of this  pronouncement  to have a material
      impact on its consolidated financial position or results of operations.

      In January 2004,  the FASB issued FASB Staff  Position No. FAS 106-1 ("FSP
      106-1"),  "Accounting and Disclosure  Requirements Related to the Medicare
      Prescription Drug,  Improvement and Modernation Act of 2003," (the "Act").
      FSP 106-1  addresses the  accounting  impact of the Act,  which was signed
      into law on December 8, 2003.  Among other features,  the Act introduces a
      prescription  drug benefit under Medicare Part D and a federal  subsidy to
      sponsors of retiree  health care plans that  provide a benefit  that is at
      least  actuarially  equivalent  to Medicare Part D.  Companies  sponsoring
      affected  postretirement  benefit plans may elect to defer  recognition of
      the impact of the Act until (1) final FASB guidance on accounting  for the
      federal subsidy provision of the Act is issued, or (2) a significant event
      calling for remeasurement of a plan's assets and obligations  occurs.  FSP
      106-1 is effective  for interim or annual  financial  statements of fiscal
      years  ending  after  December 7, 2003.  The  adoption of this  accounting
      interpretation  is not expected to have a material impact on the Company's
      consolidated financial statements.


                                      F-16
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------


NOTE 3 - BUSINESS ACQUISITION

      On February 25, 2003,  effective January 1, 2003, the Company formed a new
      subsidiary,  Quality Botanical  Ingredients,  Inc., a Delaware corporation
      that purchased substantially all assets and assumed certain liabilities of
      Quality Botanical  Ingredients,  Inc., a New Jersey corporation (now known
      as AAA  Health  Products,  Inc.)  ("AAA")  pursuant  to an Asset  Purchase
      Agreement (the  "Agreement") for approximately  $1.5 million.  Included in
      the purchase  price was the issuance of 1,200,000  shares of the Company's
      common stock,  which  includes  433,333 shares placed in an escrow account
      and 200,000  shares  issued to  consultants  for services  provided to the
      Company relating to the acquisition as well as approximately $394,000 paid
      to attorneys and a business  acquisition  firm for due diligence  services
      related to the acquisition of QBI. Pursuant to the Agreement,  the Company
      contributed $200,000 to AAA, which was used as payment to AAA's creditors.
      The value of the  1,200,000  shares  totaled  $972,000 and was  determined
      based on the average  closing  market price of the Company's  common stock
      over the two-day period before and after the terms of the acquisition were
      agreed to and  announced.  Shares  placed in escrow  totaling  333,333 are
      subject to set-off of any  accounts  receivable  remaining  after 150 days
      from  the  closing  date.  The  remaining   100,000   shares,   valued  at
      approximately  $81,000, are subject to settlement of any indemnity claims.
      Additional shares, not to exceed 1,250,000,  of the Company's common stock
      will be issued to the seller  should the  closing  price of the  Company's
      common  stock not  achieve  certain  levels  after 1 year from the closing
      date.  In January  2004,  the Company and AAA  entered  into an  Amendment
      Agreement to limit the maximum amount of additional  shares to 750,000,  a
      decrease of 500,000 shares.  An additional  200,000 shares shall be issued
      to the seller upon  reaching  certain  levels of gross  revenues and gross
      operating margins as compared to its 2001 financial  results.  The Company
      also contributed $400,000 to AAA, of which,  $350,000 was used to pay down
      AAA's line of credit and the remaining $50,000 was paid as a loan fee.

      In  February  2003,  the  newly  formed  subsidiary  entered  into  a loan
      agreement  with a  financial  institution  for a  maximum  line of  credit
      totaling $4  million,  pursuant to the  purchase  agreement  (Note 9). The
      funds were used to payoff AAA's line of credit with the same  institution.
      Additionally,  the  newly  formed  subsidiary  assumed  notes  payable  of
      $387,481 and $63,194 with a financial institution (Note 10).

      In  keeping  with the  Company's  focus to be an  integrated  provider  of
      innovative products and services to the nutraceutical, pharmaceutical, and
      cosmeceutical  industries,  the assets  and  business  purchased  from QBI
      allows  the  Company  to  process  domestic  and  imported  botanical  and
      nutraceutical raw materials into nutritional  supplement  components which
      are sold to  manufactures  throughout the world.  The acquisition has been
      accounted  for  as  a  purchase  transaction  pursuant  to  SFAS  141  and
      accordingly, the acquired assets and liabilities assumed being recorded at
      their estimated fair values at the date of acquisition. The net book value
      of the acquired assets and liabilities assumed approximated the fair value
      at the date of purchase.  Therefore,  there was no excess of cost over net
      book value recorded.

      The following  table  summarizes  the estimated  fair values of the assets
      acquired and liabilities assumed at the date of acquisition:


                                                  At January 31, 2003
                                                  -------------------
          Current assets                            $ 6,484,289
          Machinery, furniture and equipment          1,504,748
          Other long-term assets                        113,071
                                                    -----------
               Total assets acquired                  8,102,108
                                                    -----------

          Current liabilities                        (6,155,387)
          Long-term debt                               (461,646)
                                                    -----------
               Total liabilities assumed             (6,617,033)
                                                    -----------

               Net assets acquired                  $ 1,485,075
                                                    ===========


                                      F-17
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------


NOTE 3 - BUSINESS ACQUISITION (CONTINUED)

      The  following  pro-forma  summary  presents the  consolidated  results of
      operations  of the  Company  as if the  acquisition  had  occurred  at the
      beginning of 2003 and 2002 fiscal years. Amounts are in thousands,  except
      per share amounts.

<TABLE>
<CAPTION>
                                                         For the year ended  For the year ended
                                                          December 31, 2003   December 31, 2002
                                                          -----------------   -----------------
                                                              (audited)          (unaudited)
<S>                                                            <C>              <C>
          Net sales                                            $ 17,771         $ 19,856
          Gross profit                                            2,277            4,967
          Net loss attributable to common shareholders           (8,447)          (4,187)
          Net loss per available to common shareholders           (0.76)           (0.72)
</TABLE>


NOTE 4 - STOCK OPTIONS ISSUED TO EMPLOYEES

      The Company has adopted the 2001 Employee  Stock Option Plan (the "Plan").
      The  Plan  authorizes  the  issuance  of up to  2,000,000  shares  of  the
      Company's  common stock pursuant to the exercise of options  granted there
      under. The Board of Directors  administers the Plan, selects recipients to
      whom  options  are  granted  and  determines  the  number  of shares to be
      awarded.  Options  granted  under  the  Plan  are  exercisable  at a price
      determined by the Board of Directors at the time of grant, but in no event
      less than fair market value.

      Pro forma  information  regarding the effects on operations as required by
      SFAS No. 123 and SFAS No. 148, has been  determined  as if the Company had
      accounted  for its employee  stock  options under the fair value method of
      those  statements.  As allowed  under the  guidance of SFAS No.  123,  the
      Company has elected to follow Accounting  Principles Board Opinion No. 25,
      "Accounting  for  Stock  Issued to  Employees"  (APB No.  25) and  related
      interpretations  in accounting for its employee  stock  options.  Employee
      stock option compensation  expense totaled  approximately  $60,000 for the
      year ended  December 31,  2002.  The amount was  calculated  by taking the
      difference  between the fair market  value of the options and the exercise
      price  at  the  date  of  grant.   There  was  no  employee  stock  option
      compensation  expense  required to be recognized under APB 25 for the year
      ended  December  31, 2002  because  the  exercise  price of the  Company's
      employee stock options equals the market price of the underlying  stock on
      the date of grant.

      The number and weighted  average exercise prices of options granted are as
      follows:

<TABLE>
<CAPTION>
                                                         December 31, 2003                    December 31, 2002
                                                     ---------------------------         ---------------------------
                                                                        Average                           Average
                                                                        Exercise                          Exercise
                                                       Number            Price            Number           Price
                                                       ------            -----            ------           -----
<S>                                                  <C>               <C>               <C>             <C>
          Outstanding at beginning of the year          751,000        $    0.68          500,000        $    0.25
          Granted during the year                     1,905,000             1.73          766,000             0.69
          Exercised during the year                          --               --          500,000             0.25
          Terminated during the year                    950,000             0.90           15,000             1.40
          Exercisable at end of the year              1,336,000             1.54          731,000             0.61
          Outstanding at end of the year              1,706,000             0.98          751,000             0.68
</TABLE>


                                      F-18
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------


NOTE 4 - STOCK OPTIONS ISSUED TO EMPLOYEES (CONTINUED)

      A summary of the options by ranges at December 31, 2003 are as follows:


<TABLE>
<CAPTION>
                                           Weighted-                 Weighted-            Weighted-           Weighted
Range of           Remaining                Average                   Average              Average             Average
Exercise            Number                Contractual                  Fair                Number             Exercise
 Prices           Outstanding            Life (Years)                  Value             Exercisable            Price
--------------------------------------------------------------------------------------------------------------------------
<S>               <C>                   <C>                      <C>                     <C>               <C>
$0 to $1            750,000                   2.0                $     0.58                  700,000       $    0.55
 1 to 2             926,000                   2.8                      1.24                  616,000            1.30
 2 to 3                   -                     -                         -                        -               -
 3 to 4              30,000                   1.2                      3.10                   20,000            3.10
</TABLE>

      A summary of the options by ranges at December 31, 2003 are as follows:

<TABLE>
<CAPTION>
                                           Weighted-                 Weighted-            Weighted-           Weighted
Range of           Remaining                Average                   Average              Average             Average
Exercise            Number                Contractual                  Fair                Number             Exercise
 Prices           Outstanding            Life (Years)                  Value             Exercisable            Price
---------------------------------------------------------------------------------------------------------------------------
<S>               <C>                    <C>                     <C>                     <C>               <C>
$0 to $1            700,000                   3.0                $     0.47                  700,000       $    0.55
 1 to 2             21,000                    9.7                      1.14                   21,000            1.33
 2 to 3                -                       -                         -                         -              -
 3 to 4             30,000                    2.3                      2.67                   10,000            3.10
</TABLE>

NOTE 5 - ACCOUNTS RECEIVABLE

      A summary is as follows:

<TABLE>
<CAPTION>
                                                   December 31, 2003   December 31, 2002
                                                   -----------------   -----------------
<S>                                                <C>                 <C>
          Accounts receivable                          $2,160,402        $  650,477
          Less allowances for doubtful
            accounts and contractual allowances           306,063            83,430
                                                       ----------        ----------

                                                       $1,854,339        $  567,047
                                                       ==========        ==========
</TABLE>

      Bad debt expense charged to operations totaled approximately  $252,000 for
      the year ended  December 31, 2003. The Company had no bad debt expense for
      the year ended December 31, 2002.

NOTE 6 - INVENTORY

      A summary is as follows:

<TABLE>
<CAPTION>
                                                                 December 31,     December 31,
                                                                    2003              2002
                                                                 ------------     ------------
<S>                                                              <C>              <C>
          Raw materials                                          $1,525,421        $       --
          Work in process                                            18,525                --
          Finished goods                                            949,738                --
          Pharmaceutical and over-the-counter medications           142,432           156,953
                                                                 ----------        ----------

                                                                  2,636,116           156,953
          Less reserves                                              49,377                --
                                                                 ----------        ----------

                                                                 $2,586,739        $  156,953
                                                                 ==========        ==========
</TABLE>

      Included  in cost of goods sold for the year ended  December  31,  2003 is
      approximately  $500,000 of  permanent  markdowns  and  obsolete  inventory
      related to its purchased raw materials and finished goods. The Company had
      no markdowns or obsolete inventory for the year ended December 31, 2002.


                                      F-19
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 7 - MACHINERY, FURNITURE AND EQUIPMENT

      A summary is as follows:


<TABLE>
<CAPTION>
                                                                    December 31,     December 31
                                                                       2003              2002
                                                                    ------------     -----------
<S>                                                                 <C>              <C>
          Machinery and equipment                                   $  655,243        $       --
          Machinery and vehicles held under capital leases             248,023            50,000
          Furniture and office equipment                               159,069            48,612
          Computer software and equipment                              130,478            47,095
          Leasehold improvements                                       582,239            79,505
                                                                    ----------        ----------

                                                                     1,775,052           225,212

          Less accumulated depreciation, including
            approximately $139,000 and $18,000 for
            equipment and vehicles held under capital leases           358,825            93,416
                                                                    ----------        ----------

                                                                    $1,416,227        $  131,796
                                                                    ==========        ==========
</TABLE>

      Depreciation expense charged to operations totaled approximately  $268,000
      and $85,000,  including  approximately  $121,000 and $17,000 for equipment
      and vehicles  held under capital  lease  obligations,  for the years ended
      December 31, 2003 and 2002, respectively.

NOTE 8 - INTANGIBLE ASSETS

      A summary is as follows:

                                               December 31,     December 31,
                                                  2003              2002
                                               ----------        ----------
          Patents                              $3,300,000        $3,300,000
          Formulas                                680,000           680,000
          Agreements not-to-compete               390,000           390,000
          Website development                      77,288            77,288
                                               ----------        ----------

                                                4,447,288         4,447,288
          Less accumulated amortization           451,575           227,384
                                               ----------        ----------
                                               $3,995,713        $4,219,904
                                               ==========        ==========

      Amortization expense totaled  approximately  $224,000 and $198,000 for the
      years ended December 31, 2003 and 2002, respectively. Amortization expense
      for the  years  ending  December  31,  2004  and 2005 is  estimated  to be
      approximately  $228,000 and $157,000,  respectively,  $179,000 for each of
      the subsequent  years ending through  December 31, 2016 and  approximately
      $133,000 thereafter.

      Patents

      Patents  consist  of  the  assigned  fair  market  value  at the  date  of
      acquisition  arising  from the  purchase of  BioSelect.  Patent  costs are
      amortized  on  a   straight-line   basis  over  their  economic  lives  of
      approximately 19 years and are reviewed for impairment  whenever the facts
      and   circumstances   indicate  that  the  carrying   amount  may  not  be
      recoverable.

      Formulas

      Formulas  consist  of the  assigned  fair  market  value  at the  date  of
      acquisition arising from the purchase of XCEL. Formulas are amortized on a
      straight-line  basis over their  estimated  economic lives of 15 years and
      are reviewed for impairment whenever the facts and circumstances  indicate
      that the carrying amount may not be recoverable.



                                      F-20
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 8 - INTANGIBLE ASSETS (CONTINUED)

      Agreements Not-to-Compete

      Certain  stockholders  and former  employees  of the Company  entered into
      non-competition  agreements.  The  agreements  have been recorded at their
      fair  market  value at the date of purchase of XCEL.  The  agreements  are
      amortized on a straight-line  basis over their estimated economic lives of
      3 years.

      Website Development

      The Company  capitalizes  certain software  development  costs,  which are
      amortized using the  straight-line  method over the estimated useful lives
      of the software, not to exceed three years.

NOTE 9 - LINES OF CREDIT

      In February  2003,  QBI  entered  into an Amended  and  Restated  Loan and
      Security Agreement (the "Loan Agreement") with a finance institution for a
      maximum line of credit totaling $4,000,000. Interest is due monthly on the
      outstanding  balance at a rate of 1.50% above the prime rate as  published
      in the Wall Street  Journal.  At December 31, 2003,  the interest rate was
      5.5%.  The Loan  Agreement  expires  in  October  2004 and is  secured  by
      substantially  all  assets of QBI.  The  financial  institution  will make
      advances on the loan agreement up to 80% of QBI's accounts receivable to a
      maximum  of $4  million  and 55% of  QBI's  inventory  to a  maximum  $1.8
      million.  The  borrowings  are  guaranteed  by the Company and  personally
      guaranteed by the majority shareholders of the Company. The credit line is
      limited as to use by QBI. At December 31, 2003,  the balance of the credit
      line totaled approximately $2,791,000.

      QBI must maintain the following financial ratios:

            o     Net income            > $500,000 *

            o     Net worth             > $1,700,000 *

                * QBI is in default of these  covenants at December 31, 2003 and
                  has entered into a forbearance agreement (Note 18).

      In February  2003,  XCEL entered into a Loan and Security  Agreement  (the
      "Loan  Agreement")  with a finance  company  for a maximum  line of credit
      totaling $750,000. Interest is due monthly on the outstanding balance at a
      rate of 3.75% above XCEL's  reference  rate.  At December  31,  2003,  the
      interest rate was 7.85%.  The Loan Agreement  expires in February 2006 and
      is secured by  substantially  all assets of XCEL. The finance company will
      make advances on the loan agreement up to 75% of XCEL's eligible  accounts
      receivable.  The  borrowings  are guaranteed by the Company and personally
      guaranteed by the majority shareholders of the Company. The credit line is
      limited as to use by XCEL. At December 31, 2003, the balance of the credit
      line totaled approximately $135,000.

      XCEL must maintain the following financial ratio and covenant:

            o     Minimum working capital ratio .75 to 1

            o     XCEL must be profitable*

                * XCEL is in default of this covenant at December 31, 2003.

      Additionally,  the Company paid $37,500 and issued  30,000 stock  purchase
      warrants to a consultant for services relating to the line of credit. Each
      warrant  entitles the holder to purchase one share of the Company's common
      stock at an exercise price of $0.95.  The warrants  expire  February 2008.
      The estimated value of the warrants totaled  approximately  $24,000 at the
      date of issuance  and is included in loan fees.  The value of the warrants
      was  estimated  using the  Black-Scholes  option  pricing  model  with the
      following assumptions: average risk-free interest of 2.75%; dividend yield
      of 0%;  volatility  factor of the expected  market price of the  Company's
      common stock of 142%; and a term of 5 years.



                                      F-21
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------


NOTE 9 - LINES OF CREDIT (CONTINUED)

      In additional to the loan  agreement  with the finance  company,  XCEL may
      borrow up to $75,000  under a revolving  line of credit  agreement  with a
      financial institution,  which has an automatic annual renewal, expiring in
      March  2005.  The  line can be  withdrawn  at the  financial  institutions
      option.  Interest  is payable at 2.5% above the prime  interest  rate.  At
      December 31, 2003, the interest rate was 6.5%. Certain stockholders of the
      Company  guarantee  the  agreement.  At December  31,  2003 and 2002,  the
      balance was $73,150.

      Interest expense on the lines of credit totaled approximately $201,000 and
      $5,000 for the years ended December 31, 2003 and 2002, respectively.

NOTE 10 - NOTES PAYABLE

      A summary is as follows:

<TABLE>
<CAPTION>
                                                                              December 31,     December 31,
                                                                                 2003             2002
                                                                              ------------     ------------
<S>                                                                           <C>              <C>
          Note payable, financial institution, secured by substantially
            all assets of QBI, monthly payments of $22,793 plus interest
            at the prime rate plus 2.5% per annum, 6.5% at December 31,
            2003, through July 2004 (Notes 3 and 18)                            $159,551        $     --
          Note payable, individual, interest at 11% per annum,
            unsecured, subordinated to a $750,000 line of credit
            agreement (Note 9)                                                   116,146         116,146
          Note payable, consulting firm, interest at 10% per
            annum, unsecured, due in monthly installments of
            $12,000 through February 2004                                         23,178         126,000
          Note payable, financial institution, secured by
            substantially all assets of QBI, monthly payments of $4,861
            plus interest at the prime rate plus 3% per annum, 7.0%, at
            December 31, 2003, through March 2004 (Note 3)                        14,583              --
          Note payable, individual, interest at 10% per annum,
            unsecured, subordinated to a $750,000 line of credit
            agreement (Note 9)                                                     7,755           9,915
          Note payable, individual, interest at 13% per annum,
            unsecured, due May 2002                                                   --          55,000
          Note payable with stock purchase warrants (Note 14),
            less discount of $20,500, individual, stated interest at 12%
            per annum, unsecured, due February 2003, guaranteed by the
            officers and major stockholders of the Company                            --          44,750
          Note payable with stock purchase warrants (Note 14),
            less discount of $8,200, individual, stated interest at 12%
            per annum, unsecured, due March 2003, guaranteed by the
            officers and major stockholders of the Company                            --          16,533
          Note payable, individual, interest at 12% per annum,
            unsecured, due September 2003                                             --          15,000
                                                                                --------        --------

                                                                                 321,213         383,344
          Less current maturities                                                197,313         217,572
                                                                                --------        --------

                                                                                $123,900        $165,772
                                                                                ========        ========
</TABLE>


                                      F-22
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 10 - NOTES PAYABLE (CONTINUED)

      The following is a summary of the principal  amounts payable over the next
      two years:

                    Years ending
                    December 31
                    -----------
                         2004                                   $ 197,313
                         2005                                     123,900
                                                                ---------

                                                                $ 321,213
                                                                =========


      Interest  expense  on notes  payable  totaled  approximately  $63,000  and
      $51,000  including  amortization  of discounts on notes  payable  totaling
      approximately  $16,000 and $13,000 for the years ended  December  31, 2003
      and 2002, respectively.

NOTE 11 - OBLIGATIONS UNDER CAPITALIZED LEASES

      The Company incurred capital lease obligations for equipment and vehicles.
      Aggregate monthly payments of $16,532, including average interest at 13.2%
      per annum,  are due through various dates expiring  through July 2004, and
      are secured by the related equipment and vehicles.

      The following is a summary of the principal  amounts payable over the next
      year:

          Total minimum lease payments through December 31, 2004     $113,545
          Less amount representing interest                             7,959
                                                                     --------

      Present value of net minimum lease payments                     105,586
          Less current maturities                                     105,586
                                                                     --------
                                                                     $      -
                                                                     ========

      Interest  expense totaled  approximately  $34,000 and $4,000 for the years
      ended December 31, 2003 and 2002, respectively.

NOTE 12 - CONVERTIBLE DEBENTURES

      12% Convertible Debenture, Principal Amount $300,000

      In February  2003,  the Company sold  $300,000 of  convertible  debentures
      pursuant to a Securities  Purchase  Agreement.  Additionally,  the Company
      issued 571,428 of common stock purchase warrants to the debenture holders.
      Each warrant  entitles the holder to purchase one share of common stock at
      an exercise  price of $0.60.  The warrants  expire in February  2008.  The
      debentures  accrue  interest at 12% per annum.  The unpaid  principal  and
      accrued  interest  was due on February  24,  2004.  In January  2004,  the
      Company and debenture holder entered into an amendment agreement to extend
      the due date of the convertible debentures to February 24, 2005. The notes
      are collateralized by a second position in substantially all assets of the
      Company and shares  owned by the officers  and major  shareholders  of the
      Company.  Commencing  July 24, 2003,  the  debentures  can be converted at
      $0.525 per share.  The proceeds were allocated first to the warrants based
      on their relative fair value, which totaled  approximately  $174,000 using
      Black-Scholes   option  pricing  model.  The  remainder  of  approximately
      $126,000 was allocated to the beneficial conversion feature.

      The discount attributable to the value of the warrants as calculated using
      the  Black-Scholes  pricing  model and the value of the equity  conversion
      features  exceeded the face value of the  convertible  notes. As a result,
      the  notes  were  fully  discounted  and  the  discount  was  recorded  as
      additional  paid-in  capital.  The discount  will be  amortized  using the
      effective  interest  rate method over one year  resulting  in an effective
      interest  rate in  excess  of  100%.  Upon  conversion  of the  debt,  any
      unamortized debt issue costs will be charged to expense.


                                      F-23
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------


NOTE 12 - CONVERTIBLE DEBENTURES (CONTINUED)

      12% Convertible Debenture, Principal Amount $300,000, Continued

      Additionally,  the Company  granted 85,712 stock purchase  warrants to two
      consultants for services relating to these convertible  debentures sold by
      the  Company.  Each  warrant  entitles the holder to purchase one share of
      common  stock at an  exercise  price of  $0.60.  The  warrants  expire  in
      February 2008. The estimated value of the warrants  totaled  approximately
      $71,000 at the date of issuance and is included in loan fees. The value of
      the warrants was estimated  using the  Black-Scholes  option pricing model
      with the  following  assumptions:  average  risk-free  interest  of 2.82%;
      dividend yield of 0%;  volatility  factor of the expected  market price of
      the Company's common stock of 142%; and a term of 5 years.

      In November  2003, the Company issued 19,636 shares of its common stock to
      the debenture  holder for penalties  due. The value of the shares  totaled
      approximately   $30,000  and  is   included   in   selling,   general  and
      administrative  expenses.  The penalty  payment was due as the Company did
      not obtain an effective  registration statement in the time frame required
      in the agreement.  The registration  statement became effective in October
      2003.

      In November 2003, one of the consultants exercised stock purchase warrants
      resulting  in the  issuance  of 14,286 of the  Company's  common  stock in
      exchange for a subscription receivable. Net proceeds totaled approximately
      $9,000 and was received in 2004.

      In November  2003,  the  debenture  holder  converted  $27,500 of the note
      payable into 50,000  shares of the Company's  common  stock.  As a result,
      approximately  $7,000 of unamortized  discount  relating to the portion of
      the note  converted was expensed at the date of conversion and is included
      in interest expense.

      12% Convertible Debenture, Principal Amount $500,000

      In May 2003, the Company sold $500,000 of convertible  debentures pursuant
      to a  Securities  Purchase  Agreement.  Additionally,  the Company  issued
      588,235 of common stock purchase warrants to the debenture  holders.  Each
      warrant  entitles  the holder to purchase  one share of common stock at an
      exercise price of $1.25.  The warrants  expire in May 2008. The debentures
      accrue  interest  at 12% per  annum.  The  unpaid  principal  and  accrued
      interest  was due on May 21,  2004.  In  January  2004,  the  Company  and
      debenture  holder  entered into an  amendment  agreement to extend the due
      date  of the  convertible  debentures  to May  21,  2005.  The  notes  are
      collateralized by substantially all assets of the Company,  subject to all
      prior liens and  security  interests.  Commencing  October 18,  2004,  the
      debentures can be converted at the daily volume weighted  average price of
      the Company's common stock for the 5 days prior to the conversion date but
      not lower than $0.85 per share.  The proceeds were allocated  first to the
      warrants based on their relative fair value,  which totaled  approximately
      $229,000  using  Black-Scholes  option  pricing  model.  The  remainder of
      approximately $271,000 was allocated to the beneficial conversion feature.

      The discount attributable to the value of the warrants as calculated using
      the  Black-Scholes  pricing  model and the value of the equity  conversion
      features  exceeded the face value of the  convertible  notes. As a result,
      the  notes  were  fully  discounted  and  the  discount  was  recorded  as
      additional  paid-in  capital.  The discount  will be  amortized  using the
      effective  interest  rate method over one year  resulting  in an effective
      interest  rate in  excess  of  100%.  Upon  conversion  of the  debt,  any
      unamortized debt issue costs will be charged to expense.

      Additionally,  the Company  granted  88,235 stock  purchase  warrants to a
      consultant for services relating to these  convertible  debentures sold by
      the  Company.  Each  warrant  entitles the holder to purchase one share of
      common stock at an exercise  price of $1.25.  The  warrants  expire in May
      2008. The estimated value of the warrants totaled approximately $72,000 at
      the date of  issuance  and is  included  in loan  fees.  The  value of the
      warrants was estimated using the  Black-Scholes  option pricing model with
      the following  assumptions:  average risk-free interest of 2.58%; dividend
      yield  of 0%;  volatility  factor  of the  expected  market  price  of the
      Company's common stock of 134%; and a term of 5 years.


                                      F-24
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                         NOTES TO CONSOLIDATED  FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 12 - CONVERTIBLE DEBENTURES (CONTINUED)

      12% Convertible Debenture, Principal Amount $500,000, Continued

      The warrants issued to all debenture  holders and consultants  require the
      Company to settle the contracts by the delivery of registered  shares.  At
      the date of issuance,  the Company did not have an effective  registration
      statement  related to the shares  that could be issued  should the warrant
      holders  exercise the warrants.  As the  contracts  must be settled by the
      delivery of registered  shares and the delivery of the  registered  shares
      are not controlled by the Company, pursuant to EITF 00-19, "Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's  Own Stock",  the relative net value of the warrants at the date
      of issuance was recorded as a warrant  liability on the balance  sheet and
      the  change  in fair  value  from  the  date of  issuance  to the date the
      registration  statement  became  effective,  which was  October  2003,  is
      included in other (expense) income.  The value of the warrants on the date
      the registration statement became effective totaled approximately $651,000
      and was reclassified from warrant liability to additional  paid-in capital
      as required by the EITF. The change in fair value of the warrants from the
      date of issuance to October 2003 increased by approximately $114,000.

      In November  2003,  the  debenture  holder  converted  $42,500 of the note
      payable into 50,000  shares of the Company's  common  stock.  As a result,
      approximately  $21,000 of  unamortized  discount  relating  to the portion
      converted  was  expensed  at the date of  conversion  and is  included  in
      interest expense.

      Interest  expense  on the  convertible  debentures  totaled  approximately
      $649,000,  including  amortization of discounts on convertible  debentures
      payable  totaling  approximately  $582,000 for the year ended December 31,
      2003.  The  Company had no interest  expense  relating to the  convertible
      debentures for the year ended December 31, 2002.

NOTE 13 - EMPLOYEE BENEFIT PLAN

      XCEL sponsors an employee benefit plan,  pursuant to Section 401(k) of the
      Internal Revenue Code, whereby participants may contribute a percentage of
      compensation, but not in excess of the maximum allowed under the Code. The
      plan allows the Company to make matching  contribution  totaling 3% of the
      participants'  contribution and an additional percentage at the discretion
      of the Board of Directors.  Matching  contributions  totaled approximately
      $1,000  and  $25,300  for the year  ended  December  31,  2003  and  2002,
      respectively.

NOTE 14 - STOCKHOLDERS' EQUITY

      Convertible Preferred Stock

      Private Placement - Series A Convertible Preferred Stock

      In July 2003,  the Company  commenced a Private  Placement  to  accredited
      investors, which closed in September 2003, for the sale 2,352,948 units of
      the Company's Series A Convertible  Preferred Stock ("Series A Preferred")
      and one warrant to purchase one share of common stock at a purchase  price
      of  $0.85.  As a  result,  the  Company  issued  2,352,948  shares  of its
      5,000,000  authorized shares of preferred stock,  which has a par value of
      $0.001.  The Series A  Preferred  stock shall  convert  into shares of the
      Company's common stock at the purchase price per unit on the earlier of 1)
      the request of the Holder; 2) three years from the closing date; or 3) if,
      after two years from the closing date,  the Company's  common stock trades
      at a closing bid price  greater than $4.00 for 20  consecutive  days.  The
      Holders of the  Series A  Preferred  stock  shall be  entitled  to receive
      dividends  at 8% per annum at the end of each  calendar  quarter and three
      years from the date of closing  payable in cash or, at the Company's  sole
      discretion,  in  registered  shares of the Company's  common  stock.  Each
      warrant  entitles the holder to purchase one share of the Company's common
      stock at an exercise price of $1.10 per share.  The warrants  expire three
      years  from  the  date  of  closing.  This  Private  Placement  was  fully
      subscribed and the Company issued  approximately  2,352,948  units,  which
      generated net proceeds totaling approximately $1,663,000.

      The proceeds were first  allocated to the warrants based on their relative
      fair value, which totaled  approximately  $991,000 using the Black-Scholes
      option  pricing  model.  The  remainder of  approximately  $1,009,000  was
      allocated to the beneficial conversion feature.


                                      F-25
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------


NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

Convertible Preferred Stock, Continued

      Private Placement - Series A Convertible Preferred Stock, Continued

      The discount attributable to the value of the warrants as calculated using
      the Black-Scholes pricing model and the value of the beneficial conversion
      feature exceeded the sales price of the shares. As a result, the preferred
      shares were fully discounted.  The shares are convertible at the option of
      the  holder at  issuance  and,  pursuant  to EITF  98-5,  "Accounting  for
      Convertible   Securities   with   Beneficial   Conversation   Features  or
      Contingently  Adjustable  Conversion Ratios", the discount attributable to
      the  beneficial  conversation  feature  of  approximately  $1,009,000  was
      immediately  expensed  in a manner  similar to a  dividend  at the date of
      issuance  and is  included  in  preferred  dividends  on the  face  of the
      statement of  operations.  The  remaining  discount,  attributable  to the
      warrants,  will be amortized using the effective interest rate method over
      3 years.  The amortization of discounts on the issuance of the convertible
      preferred stock totaled approximately $122,000 at December 31, 2003 and is
      included in interest expense.

      Further,  the preferred shares are convertible  into registered  shares of
      the  Company's  common  stock.  Pursuant  to EITF 00-19,  "Accounting  for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock",  approximately $794,000, the net value of the shares
      at December 31, 2003, has been recorded as a long term liability until the
      Company has obtained an effective registration statement relating to these
      shares. Upon the completion of the registration  statement,  the net value
      of the shares shall be recorded as additional paid-in capital.

      The Company  granted  941,177 stock purchase  warrants to a consultant for
      services  relating  to the  sale  of the  preferred  stock.  Each  warrant
      entitles  the holder to purchase  one share of common  stock at an average
      exercise price of $1.03. The warrants expire in August 2008. The estimated
      value  of the  warrants  totaled  approximately  $845,000  at the  date of
      issuance.  The value of the warrants was estimated using the Black-Scholes
      option  pricing model with the following  assumptions:  average  risk-free
      interest of 3.17%;  dividend yield of 0%; average volatility factor of the
      expected market price of the Company's common stock of 133%; and a term of
      5 years.

      The warrants issued to all preferred  shareholders and consultants require
      the Company to settle the contracts by the delivery of registered  shares.
      A  registration  statement  was filed with the SEC in January  2004 and is
      currently being reviewed.  However, from the date of issuance, the Company
      did not have an  effective  registration  statement  related to the shares
      that could be issued should the warrant holders exercise the warrants.  As
      the contracts must be settled by the delivery of registered shares and the
      delivery  of the  registered  shares are not  controlled  by the  Company,
      pursuant to EITF 00-19,  "Accounting for Derivative Financial  Instruments
      Indexed to, and  Potentially  Settled in, a Company's Own Stock",  the net
      value of the  warrants at the date of issuance  was  recorded as a warrant
      liability on the balance  sheet and the change in fair value from the date
      of  issuance to December  31,  2003 has been  included in other  (expense)
      income.   The  change  in  fair  value  of  the   warrants   increased  by
      approximately $564,000 for the year ended December 31, 2003.

      Dividends earned through December 31, 2003 totaled approximately  $59,000.
      In December  2003, the Company issued 29,683 shares of its common stock to
      preferred  shareholders for dividends due. The value of the shares totaled
      $40,000 and was based on the Company's closing market price at the date of
      issuance.

      Additionally  in December  2003,  the Company  issued 95,987 shares of its
      common stock to preferred shareholders for penalties due. The value of the
      shares totaled approximately  $130,000, was based on the Company's closing
      market price at the date of issuance  and is included in selling,  general
      and  administrative  expenses.  The penalty payment was due as the Company
      did not  obtain an  effective  registration  statement  in the time  frame
      required in the agreement with the shareholders.


                                      F-26
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

      Common Stock

      Return of Common Stock for Investment in Equity Securities

      In September 2001 and October 2001, the Company purchased 8,753,797 shares
      (approximately  24.34%) of common  stock of Biofarm  S.A.  ("Biofarm"),  a
      listed  pharmaceutical  company  on  the  Romanian  Stock  Exchange,  from
      International  Pharmaceutical Group, LLC ("IPG") in exchange for 1,700,000
      shares of the Company's  common stock.  Subsequently,  Biofarm  issued new
      shares by  incorporating  revaluation  reserves,  which were calculated in
      accordance with Romanian  accounting law. As a result, the total number of
      shares owned by the Company  increased from 8,753,797 shares to 14,432,064
      shares.

      The purchase of the stock was  accomplished by an exchange of common stock
      between the Company and its major shareholder. Therefore, the value of the
      transaction was recorded at the historical  cost of the major  shareholder
      pursuant to APB No. 29.

      On January  1,  2002,  the  Company  and IPG  agreed to rescind  the Stock
      Purchase Agreement  previously  executed on September 7, 2001. Pursuant to
      the Rescission Agreement, the Company and IPG determined that Mr. Harry S.
      Branch,  the Managing  Member of IPG,  either  individually  or through an
      affiliate,   could  not  facilitate  the   acquisition  of  the  remaining
      outstanding  shares of Biofarm by the Company.  Also,  with respect to the
      deployment of the Company's new strategic direction,  Branch was unable to
      provide operational or advisory services.  On April 26, 2002, IPG returned
      the 1,700,000 shares of its common stock valued at approximately  $845,000
      to the  Company  who  retired  the  shares as part of the  Stock  Purchase
      Agreement. In accordance with APB No. 29, paragraph 23, the rescission was
      accounted for as a nonreciprocal transfer and the value of the transaction
      was determined  using the net book value of the investment being returned,
      which  included the original  value of the Company's  common shares issued
      valued at  approximately  $698,000 plus  additional cash and income earned
      from  the  investment  totaling  approximately  $147,000.  As  this  is  a
      non-monetary  transaction  between  related  parties,  no gain or loss was
      recorded.

      Securities Sold

      In June 2002,  the Company  entered into a Securities  Purchase  Agreement
      providing for the sale of 100,000  units,  comprised of 100,000  shares of
      the Company's  common stock and 100,000 common stock purchase  warrants at
      $1.75 per unit.  The shares  are  restricted  pursuant  to Rule 144 of the
      Securities Act of 1933.  Each warrant  entitles the holder to purchase one
      share of common stock at an exercise price of $3.00.  The warrants  expire
      on June 9, 2004.  Proceeds  from the sale of shares and  warrants  totaled
      $175,000.  The purchase agreement calls for additional issuances of shares
      if at any time through December 2002 the Company issues  additional shares
      of common  stock in a capital  raising  transaction  at a price  less than
      $1.75 per unit. Consequently,  an additional 94,444 shares of common stock
      was issued. The value of the additional shares was determined based on the
      Company's  closing  market  price  on the date of the  transaction,  which
      totaled approximately $93,000 and is included in interest expense.

      In September  2002, the Company  commenced a Private  Placement of 100,000
      units of the  Company's  common stock and warrants at a purchase  price of
      $0.90 per unit.  The Private  Placement  is exempt  from the  registration
      provisions  of the  Securities  Act of 1933 and is being  offered and sold
      only to accredited  investors.  To date, the Company issued 111,111 units,
      which generated net proceeds totaling $100,000.  Each warrant entitles the
      holder  to  purchase  one share of common  stock at an  exercise  price of
      $1.30. The warrants expire three years from the date of grant.

      In December  2002,  the Company  issued 181,818 shares of its common stock
      and  warrants  at a purchase  price of $0.55 per share.  The  issuance  is
      exempt from the registration  provisions of the Securities Act of 1933 and
      is being  offered and sold only to  accredited  investors.  The shares are
      restricted  pursuant to Rule 144 of the  Securities  Act of 1933. The sale
      generated  net proceeds of $100,000.  Each warrant  entitles the holder to
      purchase  one share of common  stock at an  exercise  price of $1.00.  The
      warrants expire three years from the date of grant.

      In February and March 2003, the Company entered into  Securities  Purchase
      Agreements  providing for the sale of 224,546 units,  comprised of 224,546
      shares of the  Company's  common stock and 224,546  common stock  purchase
      warrants at $0.55 per unit. The shares are restricted pursuant to Rule 144
      of the  Securities  Act of 1933.  Each  warrant  entitles  the  holder  to
      purchase  one share of common  stock at an  exercise  price of $1.00.  The
      warrants expire three years from the date of grant. Proceeds from the sale
      of shares and warrants totaled $123,500.


                                      F-27
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

      Common Stock, Continued

      Securities Sold, Continued

      During the second  quarter of 2003,  the  Company  entered  into  Security
      Purchase  Agreements  providing for the sale of 194,551 units comprised of
      194,551  shares of the  Company's  common  stock and 194,551  common stock
      purchase  warrants at an average  price of $1.06 per unit.  The shares are
      restricted  pursuant  to Rule  144 of the  Securities  Act of  1933.  Each
      warrant  entitles  the holder to purchase  one share of common stock at an
      average  exercise price of $1.23. The warrants expire three years from the
      date of grant.  Net proceeds from the sale of shares and warrants  totaled
      $158,800.

      In July 2003,  the  Company  entered  into  Security  Purchase  Agreements
      providing  for the sale of 58,823 units  comprised of 58,823 shares of the
      Company's common stock and 58,823 common stock purchase  warrants at $0.85
      per unit. The shares are restricted pursuant to Rule 144 of the Securities
      Act of 1933.  Each  warrants  entitles the holder to purchase one share of
      common  stock at an exercise  price of $1.25.  The  warrants  expire three
      years  from the date of grant.  Net  proceeds  from the sale of shares and
      warrants totaled $50,000.

      Stock Retirement

      In December 2003, the Company  repurchased and retired 5,507 shares of its
      common stock for approximately $5,000.

      Stock Issuances to Professionals

      In February and March 2002,  the Company  issued  101,500 shares of common
      stock to a business development firm in exchange for business development,
      acquisition  and  administrative  services  valued  at  $369,500.  Of this
      amount, $234,500 was expensed in the current year, $101,000 is assigned to
      the  acquisition  costs of QBI and $34,000 is assigned to the  acquisition
      costs of XCEL and BSI as they represents payments to a consultants for the
      valuation of the three  subsidiaries.  The shares have been recorded based
      on the Company's closing market price on the date of issuance.

      In April and May 2002,  the Company  issued 406,000 shares of common stock
      to a business  development  firm in  exchange  for  business  development,
      acquisition  and  investor   relation  services  valued  at  approximately
      $1,280,000. Of this amount,  approximately $1,190,000 has been expensed in
      the year  ended  December  31,  2002 and  approximately  $90,000  has been
      assigned to the  acquisition of QBI. The shares were recorded based on the
      Company's closing market price on the date of issuance.

      In November  2002,  the Company issued 125,000 shares of common stock to a
      public  and  financial  relations  firm  for  services.   The  shares  are
      restricted  pursuant to Rule 144 of the  Securities Act of 1933. The value
      of the shares totaled  approximately  $88,000 and was determined  based on
      the Company's fair market value on the date of issuance.

      In December  2002, the Company issued 38,418 shares of its common stock to
      two consultants for legal and consulting services.  The shares were valued
      at  approximately  $32,000 based on the Company's  closing market price on
      the date of issuance.

      In February  2003,  the Company  issued  8,761 shares of common stock to a
      business  development  firm for services.  The value of the shares totaled
      approximately  $5,300 at the date of issuance and was determined  based on
      the  fair  market  value  of the  Company's  common  stock  at the date of
      issuance.

      In February  2003, the Company issued 162,201 shares of common stock to an
      attorney for services,  of which 153,632 shares are restricted pursuant to
      Rule 144 of the  Securities  Act of 1933.  The value of the shares totaled
      approximately  $91,000,  determined  based on the fair market value of the
      Company's  common  stock  at  the  date  of  issuance.   Of  this  amount,
      approximately  $56,000 is  capitalized  as loan costs and the remainder of
      approximately $35,000 has been expensed.



                                      F-28
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

      Common Stock, Continued

      Stock Issuances to Professionals, Continued

      In March 2003,  the Company  entered  into an  agreement  with an investor
      relations firm to provide services through September 11, 2003. The Company
      issued 90,000 shares of the  restricted  common stock to the consultant as
      consideration  for the  services to be  provided.  The value of the shares
      issued  totaled  approximately  $66,000  at the date of  issuance  and was
      determined based on the fair market value of the Company's common stock at
      the date of  issuance.  The value of the shares is  included  in  selling,
      general and administrative expenses.

      In June 2003,  the Company  issued  12,041  shares of common  stock to two
      business  development  firms  for  services.  The  shares  are  restricted
      pursuant  to Rule  144 of the  Securities  Act of 1933.  The  value of the
      shares  totaled  approximately  $7,000  at  the  date  of  issuance,   was
      determined based on the fair market value of the Company's common stock at
      the  date  of  issuance   and  is   included   in  selling,   general  and
      administrative expenses.

      In July  2003,  the  Company  issued  10,000  shares of common  stock to a
      business development firm for services. The shares are restricted pursuant
      to Rule 144 of the Securities Act of 1933. The value of the shares totaled
      approximately  $11,000 at the date of issuance and was determined based on
      the  fair  market  value  of the  Company's  common  stock  at the date of
      issuance.

      In September 2003, the Company issued 501,200 shares of common stock to an
      attorney and a business  development and financing firm for services.  The
      shares are restricted  pursuant to Rule 144 of the Securities Act of 1933.
      The value of the  shares  totaled  approximately  $451,000  at the date of
      issuance  and  was  determined  based  on the  fair  market  value  of the
      Company's  common  stock  at  the  date  of  issuance.   Of  this  amount,
      approximately  $95,000 was expensed  for the year ended  December 31, 2003
      and approximately  $356,000 is included in prepaid compensation expense as
      this relates to business development and financing services to be provided
      through August 2006.

      In October 2003,  the Company  issued 58,822 shares of its common stock to
      two law firms for  services  provided to the  Company.  Restricted  shares
      totaled  29,411  pursuant to Rule 144 of the  Securities  Act of 1933. The
      remainder  of 29,411 was issued as free trading  shares.  The value of the
      shares  totaled  approximately  $68,000  at the date of  issuance  and was
      determined based on the fair market value of the Company's common stock at
      the date of issuance.

      In October 2003, the Company issued 12,000 shares of its common stock to a
      business development firm for services. The shares are restricted pursuant
      to Rule 144 of the Securities Act of 1933. The value of the shares totaled
      approximately $12,000 and was determined based on the closing price of the
      Company's common stock at the date of issuance.

      In November  2003, the Company issued 15,000 shares of its common stock to
      a business  development  consultant for services.  The value of the shares
      totaled  approximately  $23,000  and was  determined  based on the closing
      price of the  Company's  common  stock at the  date of  issuance.  Of this
      amount,  approximately  $8,000 was expensed in the year ended December 31,
      2003 and approximately $15,000 is included in prepaid compensation expense
      as this relates to business development services to be provided in 2004.

      In December  2003,  the Company  issued 750 shares of its common  stock to
      Company office support staff for services. The value of the shares totaled
      approximately  $1,100 at the date of issuance and was determined  based on
      the closing price of the Company's common stock at the date of issuance.

      In December  2003, the Company issued 50,000 shares of its common stock to
      a law corporation for legal services provided to the Company. The value of
      the shares totaled  approximately  $69,000 on the date of issuance and was
      determined  based on the fair value of the  company's  common stock at the
      date of issuance.


                                      F-29
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

      Common Stock, Continued

      Conversion of Notes Payable

      In December  31,  2002,  the Company  entered  into an  agreement to issue
      193,066  shares of common stock in exchange  for a note  payable  totaling
      $164,106.  The value of the shares  was  determined  based on the  closing
      price of the Company's common stock on the date of issuance.

      In March  2003,  the  Company  issued  40,000  shares of  common  stock in
      exchange for a note payable due an individual  totaling $25,200  including
      interest expense totaling  $3,000.  The shares are restricted  pursuant to
      Rule 144 of the  Securities  Act of 1933.  The  value  of the  shares  was
      determined based on the fair market value of the Company's common stock at
      the date of issuance.

      Settlement Agreement

      In October 2002,  the Company  issued  500,000 shares of common stock to a
      former  consultant  for  public  and  financial  relations  pursuant  to a
      Settlement and Release Agreement entered into in September 2002.  Pursuant
      to the  agreement,  the former  consultant  is  entitled  to receive up to
      200,000  additional  shares of the  Company's  common stock based on 8% of
      shares issued  subsequent to the date of the  agreement.  As a result,  an
      additional  148,295 shares of common stock was issued to the consultant in
      2002 and the  remaining  51,705 shares of common stock were issued in June
      2003. The shares are restricted pursuant to Rule 144 of the Securities Act
      of 1933.  Moreover,  the settlement  agreement limits the number of shares
      that  the  consultant  may  sell in any  calendar  month  to  0.33% of the
      outstanding  shares of the  Company at the date of sale.  The value of the
      shares issued in 2002 and 2003 totaled approximately $401,000 and $32,000,
      respectively,  and was  estimated  based on the Company's  closing  market
      price on the date the shares were due the consultant.

      Stock Issuances to Officers

      In May 2002,  Messrs.  Tannous  and  Glaser,  officer/shareholders  of the
      Company,  exercised  100,000 options to purchase common stock. The options
      were exercised on a "cashless"  basis and as a result,  the Company issued
      91,962 shares of its common stock.

      In November 2002, Messrs.  Tannous and Glaser exercised 400,000 options to
      purchase  common  stock at an exercise  price of $0.25 in  exchange  for a
      reduction of obligation due the officer/shareholders totaling $100,000.

      In December 2002, the Company issued 707,229 shares of its common stock to
      Messrs.  Tannous  and  Glaser  in  exchange  for  notes  payable  due  the
      officer/shareholders  totaling  $338,000  plus interest  expense  totaling
      approximately  $51,000.  The shares are restricted pursuant to Rule 144 of
      the Securities  Act of 1933. The value of the shares was determined  based
      on the price of the most recent private placement for similar  instruments
      issued by the Company to  non-employees,  which  approximates  the closing
      price  of the  Company's  common  stock on the  date of  issuance,  less a
      discount for the restrictive nature of the common stock.

      In December 2002, the Company issued 744,056 shares of its common stock to
      Messrs.  Tannous and Glaser in lieu of cash as  compensation  and benefits
      earned,  which totaled  approximately  $409,000 at December 31, 2002.  The
      shares are restricted  pursuant to Rule 144 of the Securities Act of 1933.
      The  value of the  shares  was  determined  based on the price of the most
      recent private placement for similar  instruments issued by the Company to
      non-employees,  which  approximates  the  closing  price of the  Company's
      common stock on the date of issuance,  less a discount for the restrictive
      nature of the stock.

      In October 2003,  the Company issued 300,000 shares of its common stock to
      Messrs.  Tannous and Glaser as compensation and benefits earned. The value
      of the shares  totaled  $300,000  based on the Company's fair value at the
      date of issuance.  The shares are  restricted  pursuant to Rule 144 of the
      Securities Act of 1933.


                                      F-30
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

      Common Stock, Continued

      Stock Issuances to Employees

      In July 2002,  the Company  issued  5,000 shares of its common stock to an
      employee for services rendered.  The shares were valued at $6,500 based on
      the Company's closing market price on the date of issuance.

      In November  2002,  the Company issued 2,600 shares of its common stock to
      employees for services  rendered.  The shares were valued at approximately
      $2,000  based  on the  Company's  closing  market  price  on the  date  of
      issuance.

      In January 2003,  the Company  issued 19,250 shares of its common stock to
      two employees as compensation. Of the total amount of shares issued, 6,250
      shares are restricted  pursuant to Rule 144 of the Securities Act of 1933.
      The value of the shares totaled  approximately  $14,000 and was determined
      based on the fair market value of the  Company's  common stock at the date
      of issuance.

      In February  2003, an employee  exercised  options and the Company  issued
      132,507 shares of its common stock to the employee for services  performed
      in 2003.  The  value of  shares  totaled  approximately  $113,000  and was
      determined  based on the fair market value of the  Company's  stock at the
      date of issuance.  In September 2003, the employee  returned 50,000 shares
      of common stock to the Company.  The shares, which were valued at $52,500,
      are placed in treasury.  The treasury shares were valued based on the fair
      market value of the Company's common stock at the date of the return.  The
      remainder,  of approximately $60,500, is included in selling,  general and
      administrative expenses for the year ended December 31, 2003.

      In October 2003,  the Company issued 131,852 shares of its common stock to
      two  employees  for  services  provided.  The value of the shares  totaled
      approximately  $129,000,  which was determined  based on the fair value of
      the  Company's  common  stock  at the date of  issuance.  The  shares  are
      restricted pursuant to Rule 144 of the Securities Act of 1933.

      In December  2003, the Company issued 35,000 shares of its common stock to
      an employee for services.  The value of the shares totaled $49,000,  which
      was the determined  based on the fair value of the Company's  common stock
      at the date of issuance.

      Warrants Issued to Note holders

      In December 2002, the Company issued 70,000 stock purchase warrants to two
      note  holders  (Note 10).  The  warrants  entitle  the holders to purchase
      70,000 shares of the Company's common stock at an exercise price of $1.00.
      The warrants are exercisable  immediately and expire in December 2005. The
      estimated value of the warrants totaled  approximately $49,000 at the date
      of issuance and is included in additional  paid-in  capital.  The value of
      the warrants was estimated  using the  Black-Scholes  option pricing model
      with the  following  assumptions:  average  risk-free  interest  of 2.39%;
      dividend yield of 0%;  volatility  factor of the expected  market price of
      the Company's  common stock of 167%;  and a term of 3 years.  The value of
      the warrants was  allocated to the notes based on the relative  fair value
      of the proceeds received,  which totaled $28,700.  This amount is recorded
      as a discount on notes payable and is being  amortized over the period the
      obligation is outstanding,  using a method that approximates the effective
      interest   method.   Amortization  of  notes  payable   discount   totaled
      approximately  $16,000 and $13,000 for the years ended  December  31, 2003
      and 2002, respectively, and is included in interest expense.


                                      F-31
<PAGE>

                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

      Common Stock, Continued

      Options and Warrants Issued to Professionals

      On April 9, 2002,  the Company  granted  three  business  development  and
      operations  consultants  each an option to purchase  25,000  shares of its
      common stock at an exercise price of $1.25 per share in  consideration  of
      services  provided to the Company  through  April 8, 2003.  The  estimated
      value of the options totaled approximately  $120,000 at the date of grant.
      Of  this   amount,   approximately   $90,000  was  expensed  in  2002  and
      approximately  $30,000 was expensed in 2003.  The value of the options was
      estimated using the Black-Scholes  option pricing model with the following
      assumptions: risk-free interest of 2.55%; dividend yield of 0%; volatility
      factor of the expected market price of the Company's common stock of 116%;
      and a term of 1 month.  The options were  exercised  in April 2002,  which
      generated net proceeds to the Company totaling $93,750.

      In July 2002,  the  Company  granted a financial  communications  firm and
      attorney options to purchase a total of 255,000 shares of its common stock
      at exercise prices ranging between $0.83 and $6.17,  in  consideration  of
      services  provided to the Company  through April 2003. The estimated value
      of the options totaled  approximately  $429,000 at the date of grant.  The
      value of the options was estimated using the Black-Scholes  option pricing
      model with the following assumptions: average risk-free interest of 3.06%;
      dividend yield of 0%;  volatility  factor of the expected  market price of
      the Company's  common stock of 143%; and a term of 2 years.  Approximately
      $185,000 and $244,000 were  expensed in the years ended  December 31, 2003
      and 2002,  respectively.  In December  2002,  the Company  terminated  the
      agreement  with the financial  communications  firm. As a result,  100,000
      options,  originally valued at approximately  $185,000, were cancelled. In
      July 2002, a consultant exercised options in exchange for 30,000 shares of
      the Company's common stock, which generated net proceeds totaling $25,000.

      In August 2002, the Company granted a general advisory  consultant options
      to purchase  66,666  shares of its common  stock at an  exercise  price of
      $0.96, in consideration of services provided to the Company. The estimated
      value of the options totaled  approximately  $59,000 at the date of grant.
      The value of the  options was  estimated  using the  Black-Scholes  option
      pricing model with the following assumptions: risk-free interest of 2.19%;
      dividend yield of 0%;  volatility  factor of the expected  market price of
      the Company's common stock of 143%; and a term of 2 years.

      In September 2002, the Company granted an investor  relations firm options
      to purchase  500,000  shares of its common  stock at an exercise  price of
      $1.00,  in  consideration  of services  provided  to the  Company  through
      February 2004. The estimated  value of the options  totaled  approximately
      $424,000  at the date of grant.  The value of the  options  was  estimated
      using  the   Black-Scholes   option   pricing  model  with  the  following
      assumptions: risk-free interest of 2.14%; dividend yield of 0%; volatility
      factor of the expected market price of the Company's common stock of 143%;
      and a term of 5 years.  In  December  2002,  the  Company  terminated  the
      agreement. As a result, 300,000 options, valued at approximately $233,000,
      were  cancelled.  Approximately  $191,000  was  expensed in the year ended
      December  31,  2002,   which   represents   200,000  options  that  remain
      outstanding.

      In January 2003,  the Company  entered into an agreement  with a financial
      relations firm to provide services through July 2003. The agreement grants
      the consultant  options to purchase 125,000 shares of the Company's common
      stock at an exercise  price of $0.55 per share.  The options  vest equally
      over a six month period and expire three years from the date of grant. The
      estimated  value  of the  options  totaled  approximately  $54,000  and is
      included in selling, general and administrative expenses. The value of the
      options was estimated  using the  Black-Scholes  option pricing model with
      the following  assumptions:  average risk-free interest of 2.00%; dividend
      yield  of 0%;  volatility  factor  of the  expected  market  price  of the
      Company's common stock of 140%; and a term of 3 years.


                                      F-32
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

      Common Stock, Continued

      Options and Warrants Issued to Professionals, Continued

      In February 2003,  the Company issued 30,000 stock purchase  warrants to a
      consultant  for services  relating to XCEL's line of credit (Note 9). Each
      warrant  entitles  the holder to purchase  one share of common stock at an
      exercise price of $0.95.  The warrants expire February 2008. The estimated
      value  of the  warrants  totaled  approximately  $24,000  at the  date  of
      issuance.  The value of the warrants was estimated using the Black-Scholes
      option  pricing model with the following  assumptions:  average  risk-free
      interest of 2.75%; dividend yield of 0%; volatility factor of the expected
      market price of the Company's common stock of 142%; and a term of 5 years.

      In May  2003,  the  Company  entered  into an  agreement  with a  business
      development  firm to provide services through May 2004. The Company issued
      options to purchase  25,000  shares of the  Company's  common  stock at an
      exercise  price of $1.25  per  share.  The  options  vested on the date of
      issuance  and expire  three  years from the date of grant.  The  estimated
      value  of  the  options  total  approximately  $22,000.  Of  this  amount,
      approximately $14,000 was expensed in the year ended December 31, 2003 and
      approximately  $8,000 is included in prepaid  compensation expense as this
      relates to services  to be provided in 2004.  The value of the options was
      estimated using the Black-Scholes  option pricing model with the following
      assumptions:  average risk-free  interest of 1.93%;  dividend yield of 0%;
      volatility  factor of the expected  market price of the  Company's  common
      stock of 136%; and a term of 3 years.

      In May 2003,  the  Company  entered  into an  agreement  with a  financial
      advisory and investment banking firm to provide services through May 2004.
      Pursuant to the agreement,  the Company issued stock purchase  warrants to
      purchase 125,000 shares of the Company's common stock at an exercise price
      of $0.001 per share. The warrants vested in May 2003 and expire five years
      from  the  date of  grant.  The  estimated  value  of the  warrants  total
      approximately  $122,000.  Further,  the Company  issued  additional  stock
      purchase  warrants to purchase 58,400 shares of the Company's common stock
      at an  exercise  price of $0.001  per  share.  The  value of the  warrants
      totaled  approximately  $59,000.  The value of the warrants was  estimated
      using  the   Black-Scholes   option   pricing  model  with  the  following
      assumptions:  average risk-free  interest of 2.58%;  dividend yield of 0%;
      volatility  factor of the expected  market price of the  Company's  common
      stock of 160%;  and a term of 5  years.  In  December  2003,  the  Company
      terminated its agreement with the firm.

      In June  2003,  the  Company  entered  into an  agreement  with a business
      development firm to provide services through August 2003.  Pursuant to the
      agreement,  the Company issued stock purchase  warrants to purchase 50,000
      shares of the  Company's  common  stock at an exercise  price of $1.00 per
      share.  The  warrants  vest  equally  over a three month period and expire
      three years from the date of grant.  The  estimated  value of the warrants
      total  approximately  $30,000  and is  included  in  selling,  general and
      administrative expenses for the year ended December 31, 2003. The value of
      the warrants was estimated  using the  Black-Scholes  option pricing model
      with the  following  assumptions:  average  risk-free  interest  of 1.58%;
      dividend yield of 0%;  volatility  factor of the expected  market price of
      the Company's common stock of 135%; and a term of 3 years.

      In October 2003, the Company issued stock purchase warrants to an attorney
      for legal  services to purchase  150,000  shares of its common stock at an
      exercise price of $1.21 per share in consideration of services provided to
      the Company.  The  estimated  value of the options  totaled  approximately
      $176,000  at the date of grant and is  included  in  selling,  general and
      administrative expenses for the year ended December 31, 2003. The value of
      the options was estimated  using the  Black-Scholes  option  pricing model
      with the  following  assumptions:  risk-free  interest of 3.17%;  dividend
      yield  of 0%;  volatility  factor  of the  expected  market  price  of the
      Company's  common stock of 131%; and a term of 10 years. In December 2003,
      a portion of the warrants  were  exercised  and, as a result,  the Company
      issued 112,000 shares of its common stock, which generated net proceeds to
      the Company totaling approximately $136,000.


                                      F-33
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

      Common Stock (Continued)

      Options and Warrants Issued to Consultants (Continued)

      In October 2003, the Company issued stock purchase  warrants to a business
      development,  acquisition  and strategic  planning  consultant to purchase
      500,000  shares of the its common  stock at an exercise  price of $1.25 in
      consideration for services provided to the Company. The estimated value of
      the  options  totaled  approximately  $471,000 at the date of grant and is
      included in  selling,  general and  administrative  expenses  for the year
      ended December 31, 2003. The value of the options was estimated  using the
      Black-Scholes  option  pricing  model  with  the  following   assumptions:
      risk-free  interest of 2.36%;  dividend yield of 0%;  volatility factor of
      the expected  market price of the  Company's  common stock of 131%;  and a
      term of 3 years.

      In  November  2003,  the  Company  issued  stock  purchase  warrants  to a
      financial  public  relations  firm to purchase  144,000  shares of the its
      common stock at an exercise price of $1.00 in  consideration  for services
      provided to the Company  through  October 31, 2004. The estimated value of
      the options totaled  approximately  $153,000 at the date of grant. Of this
      amount,  approximately $17,000 was expensed in the year ended December 31,
      2003 and  approximately  $136,000  is  included  in  prepaid  compensation
      expense as this  relates to services to be provided in 2004.  The value of
      the options was estimated  using the  Black-Scholes  option  pricing model
      with the  following  assumptions:  risk-free  interest of 1.35%;  dividend
      yield  of 0%;  volatility  factor  of the  expected  market  price  of the
      Company's common stock of 131%; and a term of 3 years.

      The  number  and  weighted  average  exercise  prices of the  options  and
      warrants issued to consultants are as follows:

<TABLE>
<CAPTION>
                                                  December 31, 2003                  December 31, 2002
                                              --------------------------       ----------------------------
                                                                Average                           Average
                                                               Exercise                          Exercise
                                               Number           Price            Number           Price
                                               ------           -----            ------           -----
<S>                                         <C>              <C>              <C>              <C>
 Outstanding at beginning of the year          854,596        $    1.66               --        $      --
 Granted during the year                     6,317,492             1.01        1,492,929             1.71
 Exercised during the year                     126,286             1.14          105,000             1.13
 Terminated during the year                    183,400               --          533,333             1.89
 Exercisable at end of the year              6,862,402             1.08          854,596             1.66
 Outstanding at end of the year              6,862,402             1.07          854,596             1.66
</TABLE>

      The following table  summarizes  information on stock options and warrants
      outstanding and exercisable issued to consultants at December 31, 2003:

<TABLE>
<CAPTION>
                                                         Weighted-                  Weighted-               Weighted-
 Range of                   Remaining                     Average                    Average                 Average
 Exercise                    Number                     Contractual                   Fair                  Exercise
  Prices                   Outstanding                 Life (Years)                   Value                   Price
------------------------------------------------------------------------------------------------------------------------
<S>                       <C>                         <C>                        <C>                      <C>
 $0 to $1                  2,507,402                         3.1                 $      .82                $      .89
  1 to 2                   4,255,000                         3.2                       1.15                      1.23
  2 to 3                           -                           -                          -                         -
  3 to 4                      50,000                          .3                       3.86                      3.86
  4 to 5                      50,000                          .3                       4.63                      4.63
</TABLE>


                                      F-34
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 14 - STOCKHOLDERS' EQUITY (CONTINUED)

      Common Stock (Continued)

      Options and Warrants Issued to Consultants (Continued)

      The following table  summarizes  information on stock options and warrants
      outstanding and exercisable issued to consultants at December 31, 2002:

<TABLE>
<CAPTION>
                            Weighted-                    Weighted-                  Weighted-                   Weighted-
 Range of                   Remaining                     Average                    Average                     Average
 Exercise                    Number                     Contractual                   Fair                      Exercise
  Prices                   Outstanding                 Life (Years)                   Value                       Price
--------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                         <C>                       <C>                       <C>
 $0 to $1                     66,667                          .7                 $     0.67                $       0.96
  1 to 2                     587,929                         3.5                       0.52                        0.86
  2 to 3                           -                           -                          -                            -
  3 to 4                     150,000                         1.5                       1.19                        3.29
  4 to 5                      50,000                         1.6                       1.97                        4.63
</TABLE>


NOTE 15 - INCOME TAXES

      For federal  income tax return  purposes,  the Company has  available  net
      operating loss  carryforwards  of approximately  $7,899,000,  which expire
      through 2023 and are available to offset future income tax liabilities.

      Deferred income taxes reflect the net tax effects of temporary differences
      between  the  carrying  amounts of assets and  liabilities  for  financial
      reporting   purposes  and  the  amounts  used  for  income  tax  purposes.
      Significant   components  of  the   Company's   deferred  tax  assets  and
      liabilities at December 31, 2003 are as follows:


          Deferred tax asset -
            net operating loss carry forwards                   $ 3,159,600
          Deferred tax liabilities -
            intangible assets                                    (1,523,000)
                                                                -----------

          Net deferred assets before valuation allowance          1,636,600
          Valuation allowance                                    (1,636,600)
                                                                -----------

           Net deferred tax asset                               $        --
                                                                ===========

      The  reconciliation  of the  effective  income  tax  rate  to the  Federal
      statutory rate is as follows:

<TABLE>
<CAPTION>
                                                                         December 31,     December 31,
                                                                            2003              2002
                                                                         ------------     ------------
<S>                                                                      <C>              <C>
          Federal and state income tax rate                                 (34.0%)         (34.0%)
          State income taxes, net federal benefit                            (6.0%)          (6.0%)
                                                                         ------------     ------------

          Total expected provision                                          (40.0%)         (40.0%)

          Permanent differences (discounts associated with warrants
            and beneficial conversion feature amortization and
            change in fair value of  warrant liability)                       9.6%            1.9%
          Loss for which no benefit is available                             30.4%           38.1%
                                                                         ------------     ------------

          Effective income tax rate                                          0.0 %           0.0 %
                                                                         ============     ============
</TABLE>


                                      F-35
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 16 - COMMITMENTS AND CONTINGENCIES

      Leases

      The Company leases its office and warehouse facilities under various lease
      agreements  expiring  through  April  2022.  Only one of these  agreements
      extend  greater than one year.  This agreement  calls for minimum  monthly
      rental payments of approximately  $21,000 with escalation clauses based on
      the Consumer Price Index effective  during certain  milestone dates of the
      lease  agreement.  Rental  expense  under  Company's  rental the operating
      leases totaled  $368,000 and $56,000 for the years ended December 31, 2003
      and 2002, respectively.

      The following is a schedule by years of approximate  future minimum rental
      payments  required under  operating  leases that have initial or remaining
      lease terms in excess of one year as of December 31, 2003:

                 Year ending December 31,
                     2004                                    $   233,000
                     2005                                        233,000
                     2006                                        233,000
                     2007                                        233,000
                     2008                                        233,000
                     Thereafter                                2,814,000
                                                             -----------

                                                             $ 3,979,000
                                                             ===========

      Employment Agreements

      In December 2001, XCEL and BSI entered into  employment  agreements with 3
      stockholders  of the  Company to pay an annual  base  salary of  $125,000,
      $125,000  and  $85,000  through  December  2004.  The  agreements  include
      provisions for salary increases and stock options based on earnings growth
      the XCEL and BSI may achieve.  The agreements were terminated during 2003.
      Under these agreements,  salary expense totaled approximately $370,000 and
      $392,000 for the years ended December 31, 2003 and 2002, respectively.

      Effective January 1, 2002, the Company entered into employment  agreements
      with its corporate  officers/stockholders  of the Company to pay an annual
      base salary of $190,000 plus a bonus based on key  milestone's the Company
      may achieve.  The agreements  expire December 31, 2005. In 2003, under the
      agreements,   salary   expense  for  the   officers/stockholders   totaled
      approximately  $684,000,  including 300,000 shares of the Company's common
      stock valued at $300,000. The  officers/stockholders  converted the amount
      due at December  31,  2002 to 744,056  shares of common  stock,  which was
      valued at approximately $409,000 (Note 14).

      In February 2003, QBI entered into an employment agreement with an officer
      of QBI to pay an annual base salary of $150,000  plus a bonus based on the
      performance  of QBI through  February  2006.  The agreement  also included
      provisions for salary increases and stock options based on earnings growth
      the Company may achieve.  Under this  agreement,  salary  expense  totaled
      approximately  $221,000,  which  includes  the  issuance of stock  options
      valued at  approximately  $60,000 for the year ended December 31, 2003. In
      February 2004, this agreement was terminated.

      In August 2003, the Company  entered into an employment  agreement with an
      individual to pay an annual base salary of $150,000  through December 2005
      plus a bonus of 2% based on the earnings of QBI before the  computation of
      income taxes and based on the  performance of the employee.  The agreement
      also includes  provisions for salary  increases and stock options based on
      earnings  growth the Company may  achieve.  Under this  agreement,  salary
      expense totaled  approximately  $151,000,  including 100,000 shares of the
      Company's  common stock valued at $101,000 for the year ended December 31,
      2003 (Note 14).


                                      F-36
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 16 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

      Legal Proceedings

      On March 24, 2003, First Mirage, Inc. filed an action against the Company,
      Bill Glaser and  Transfer  Online,  Inc.,  in the United  States  District
      Court,  District of Oregon (CV 03 382 KI). The complaint  contains  claims
      for  declaratory   judgment,   breach  of  state  statutory   obligations,
      conversion,  intentional  interference with economic relations,  breach of
      fiduciary duty, and negligence.  The complaint alleges that the defendants
      wrongfully  prevented  First  Mirage  from  completing  its sale of 66,337
      shares of the  Company's  Common  Stock on the open  market by refusing to
      reissue  the  stock  certificate   representing  those  shares  without  a
      restrictive  legend.  The complaint  seeks damages in an amount subject to
      proof at trial,  but not less than $90,000.  The complaint  also seeks pre
      and post-judgment interest, punitive damages, and injunctive relief.

      The  Company  believes  that  because the shares at issue had been sold to
      First  Mirage by an  affiliate  of the  Company,  they were subject to the
      one-year  holding  period  set  forth in Rule 144  (promulgated  under the
      Securities Act of 1933), which had not expired at the time of the proposed
      sale.  The Company thus  believes  that the complaint is without merit and
      intends to defend the  lawsuit  vigorously.  The  Company,  moreover,  has
      agreed to provide a defense for Mr. Glaser and Transfer Online, Inc.

      This  litigation is in its early stages and  discovery has not  commenced.
      Therefore,  the Company is unable to opine as to the  probable  outcome of
      this  matter at this time nor has any amount  been  accrued  for  possible
      loss.

      QBI is a  defendant  in a suit  seeking  $400,000  in  damages  brought by
      Fortress Systems,  Inc.,  ("FSI")  Bankruptcy  Trustee.  The suit which is
      pending  in the U.S.  Bankruptcy  Court in Omaha,  Nebraska  alleges  that
      certain products sold by QBI did not meet specifications of FSI. While the
      outcome of the litigation cannot be predicted at this time, the Company is
      seeking through  negotiations with the Sellers of the QBI assets to offset
      the $400,000  claim against  400,000 shares of its common stock which were
      issued to the Sellers of the QBI assets as part of the  consideration  for
      the purchase of the QBI assets by the Company under the QBI Asset Purchase
      Agreement of November 30, 2003 (Note 3).

NOTE 17 - SEGMENT INFORMATION

      The Company has four  business  units that have  separate  management  and
      reporting  infrastructures that offer different products and services. The
      business  units  have  been  aggregated  into  four  reportable  segments:
      Corporate,  Nutraceutical,  Pharmaceutical,  and Research and Development.
      The Corporate  group is the holding company and oversees the operations of
      the other business units. The Corporate group also arranges  financing and
      strategic guidance for the entire  organization.  The Nutraceutical  group
      processes  domestic and imported  botanical raw materials into nutritional
      supplement  components,  which are sold to manufacturers  primarily in the
      United States.  The Pharmaceutical  group provides in-home  pharmaceutical
      products,  primarily in Southern California.  The Research and Development
      group develops future and present products in the fields of drug delivery,
      vitamins and minerals, and cosmetic pharmaceuticals.

      The accounting policies of the segments are the same as those described in
      the summary of significant  accounting  policies (Note 2). The Company had
      no intersegment  sales for the years ended December 31, 2003 and 2002. The
      Company's  reportable  segments are  strategic  business  units that offer
      different products and services.  They are managed separately because each
      business  requires  different  technology  and marketing  strategies.  The
      Company  evaluates  the  performance  of its operating  segments  based on
      income  from  operations,   before  income  taxes,   accounting   changes,
      non-recurring items and interest income and expense.


                                      F-37
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------


NOTE 17 - SEGMENT INFORMATION, CONTINUED

      Summarized  financial  information  concerning  the  Company's  reportable
      segments is shown in the following  table for the year ended  December 31,
      2003 (in thousands):

<TABLE>
<CAPTION>
                                                                                           Research and
                                           Corporate      Nutraceutical    Pharmaceutical   Development      Consolidated
                                           ---------      -------------    --------------   -----------      ------------
<S>                                       <C>              <C>              <C>              <C>              <C>
          Sales, net                      $     --         $ 12,406         $  5,365         $     --         $ 17,771
          Loss before income taxes        $ (4,785)        $ (2,051)        $   (491)        $    (92)        $ (7,419)
          Deprec. and amort               $    213         $    218         $    304         $     24         $    759
          Interest expense, net           $    795         $    232         $     47         $     --         $  1,074
          Identifiable Assets             $    230         $  5,599         $  1,915         $  3,156         $ 10,900
</TABLE>

           Summarized financial information concerning the Company's reportable
           segments is shown in the following table for the year ended December
           31, 2002 (in thousands):

<TABLE>
<CAPTION>
                                                                                                  Research and
                                           Corporate        Nutraceutical     Pharmaceutical      Development       Consolidated
                                           ---------        -------------     --------------      -----------       ------------
<S>                                       <C>                <C>               <C>                <C>                <C>
          Sales, net                      $       --         $       --        $    5,538         $       --         $    5,538
          Loss before income taxes        $   (4,031)        $       --        $     (225)        $      (28)        $   (4,284)
          Deprec. and amort               $       18         $       --        $      274         $       --         $      292
          Interest expense, net           $      166         $       --        $       38         $       --         $      204
          Identifiable Assets             $      459         $       --        $    2,212         $    3,300         $    5,971
</TABLE>


NOTE 18 - SUBSEQUENT EVENTS

      Loans Payable - Officer/Stockholders

      Two officers/stockholders loaned a total of $20,000 to the Company through
      February  29,  2004.  These loans  accrue  interest  at 8% per annum.  The
      principal and any unpaid interest are due on demand.

      Options and Warrants Exercised for Cash

      In January 2004, a business  development firm exercised 125,000 options to
      purchase  shares of the Company's  common stock.  Options  totaling 62,500
      were exercised on a "cashless basis" and, as a result,  the Company issued
      39,583 shares of its common stock. The remaining 62,500 options  generated
      net proceeds totaling  approximately  $34,000 and resulted in the issuance
      of 62,500 shares of the Company's common stock.

      In February  2004, an individual  exercised  warrants to purchase  305,555
      share of the  Company's  common  stock at an  exercise  price of $0.90 per
      share. The transaction generated net proceeds totaling $275,000.

      Forbearance Agreement

      In March 2004, QBI entered into a forbearance  agreement,  which is in the
      process  of  being  signed  with a  financial  institution  as to  certain
      obligations  under a  credit  facility  (Notes 9 and  10).  The  financial
      institution  had  previously  expressed  its  desire to no longer  service
      accounts with credit  facilities  that are less than five million  dollars
      and  operate in QBI's  industry  sector.  Pursuant to the  agreement,  the
      financial institution will forbear from exercising its rights and remedies
      as a result of all existing and  continuing  defaults  through  August 31,
      2004 at which time, all amounts due the financial  institution are due and
      payable.  The financial  institution may reduce the maximum line of credit
      by $1 million to $3 million and may reduce the maximum  amount  related to
      the inventory by $100,000 to $1.7 million.  The financial  institution has
      not exercised its right to impose these restrictions on QBI. Additionally,
      the monthly  payment due to the  financial  institution  on a note payable
      shall be  increased  to $30,000 from  $22,793.  The interest  rates on all
      current  obligations  will increase by 2% per annum in excess of the rates
      that  would   otherwise  be  applicable.   The  Company  is  currently  in
      discussions  with  several  financial  sources  for a  replacement  credit
      facility.


                                      F-38
<PAGE>


                                    HEALTH SCIENCES GROUP, INC. AND SUBSIDIARIES
                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                          YEARS ENDED DECEMBER 31, 2003 AND 2002
--------------------------------------------------------------------------------

NOTE 18 - SUBSEQUENT EVENTS, CONTINUED

      Amendment to Loan and Security Agreement

      In March 2004,  XCEL entered  into a First  Amendment to Loan and Security
      Agreement with a finance company.  Pursuant to the agreement,  the maximum
      line of credit has been  reduced by $450,000  to $300,000  and the advance
      rate was increased by 5% to 80% of XCEL's  eligible  accounts  receivable.
      The eligible  accounts  receivable  has been  extended 30 days to 150 days
      from the date of service.  The interest  rate  increased  from 3.75% above
      XCEL's reference rate to approximately 12.8% per annum. Certain other fees
      were reduced, which offset the increased interest rate.



                                      F-39