##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10KSB



---



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

FOR THE FISCAL YEAR ENDED MARCH 31, 2006

or



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

Commission File No. 001-16185



---

GEOPHARMA, INC.

(Name of small
business issuer in its charter)



---



|                                                                  |  |                                  
|----------------------------------------------------------------- |  | ---------------------------------
|State of Florida                                                  |  | 59-2600232                       
|(State of or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                                  | 
|6950 Bryan Dairy Road, Largo, Florida                             |  | 33777                            
|(Address of Principal Executive Officers)                         |  | (Zip Code)                       

Issuers telephone number: (727) 544-8866



---

Securities registered pursuant
to Section 12(b) of the Exchange Act:

None.

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Capital Stock

(Title of Class)



---

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

Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and
no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  x

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

Issuers revenues for its most recent fiscal year were $49,743,545

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 15, 2006 was $28,588,133. Number of shares outstanding of the Issuers common stock at $.01 par value as of
June 15, 2006 was 9,914,024 (net of 189.617 Treasury Shares).

Documents Incorporated by Reference: None x

Transitional Small Business Disclosure
Format:    Yes ̈No  x



---



---

##### Table of Contents

CAUTIONARY STATEMENTS

Certain oral statements made by management from time to time and certain statements contained in press releases and periodic reports issued by GeoPharma,
Inc. (the Company), as well as those contained herein, that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 and, because such
statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements, including those in Managements Discussion and Analysis of
Financial Condition and Results of Operations, are statements regarding the intent, belief or current expectations, estimates or projections of the Company, its Directors or its Officers about the Company and the industry in which it operates, and
are based on assumptions made by management. Forward-looking statements include without limitation statements regarding: (a) the Companys growth and business expansion, including future acquisitions; (b) the Companys financing
plans; (c) trends affecting the Companys financial condition or results of operations; (d) the Companys ability to continue to control costs and to meet its liquidity and other financing needs; (e) the declaration and
payment of dividends; (f) the Companys use of proceeds from their private placement, and (g) the Companys ability to respond to changes in customer demand and regulations. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that the anticipated results will occur. When issued in this report, the words expects, anticipates, intends, plans, believes,
seeks, estimates, and similar expressions are generally intended to identify forward-looking statements.

Important
factors that could cause the actual results to differ materially from those in the forward-looking statements include, among other items, (i) changes in the regulatory and general economic environment related to the health care, generic drug
and nutraceutical industry; (ii) conditions in the capital markets, including the interest rate environment and the availability of capital; (iii) changes in the competitive marketplace that could affect the Companys revenue and/or
cost and expenses, such as increased competition, lack of qualified marketing, management or other personnel, and increased labor and inventory costs; (iv) changes in technology or customer requirements, which could render the Companys
technologies noncompetitive or obsolete; (v) new product introductions, product sales mix and the geographic mix of sales and (vi) its customers willingness to accept its Internet platform in the future. Further information relating
to factors that could cause actual results to differ from those anticipated is included but not limited to information under the headings Business, and Managements Discussion and Analysis of Financial Conditions and Results
of Operations in this Form 10-KSB as of and for the year ended March 31, 2006. The Company disclaims any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or
otherwise.



2



---

##### Table of Contents

PART I

ITEM 1. DESCRIPTION OF BUSINESS

History

We were incorporated as Energy Factors, Inc., a Florida corporation, in 1985. In August 1998 we changed our name to Innovative Health Products, Inc., in February 2000 we changed our name to Go2Pharmacy.com, Inc., and
in September 2000 we changed our name to Go2Pharmacy, Inc., in anticipation of our merger with the Delaware corporation Go2Pharmacy.com, Inc. Our merger with Go2Pharmacy.com, Inc. was effected simultaneously with the successful completion of our
initial public offering during November 2000. Effective September 6, 2002, we changed our name to Innovative Companies, Inc. and effective May 18, 2004 we changed our name to GeoPharma, Inc. We continue to conduct contract nutritional and
herbal supplement product line manufacturing business under the name Innovative Health Products, Inc.

In April 2000, we formed a
wholly-owned distribution subsidiary named Breakthrough Engineered Nutrition, Inc., a Florida corporation, for the purpose of marketing and distributing our own branded product lines. Breakthrough Engineered Nutrition also conducts distribution
business as DelMar Labs.

In September 2000, we formed a wholly-owned manufacturing subsidiary named Belcher Pharmaceuticals, Inc., a
Florida corporation, for the purpose of conducting over-the counter, and now pharmaceutical, generic drug and Cephalosporin antibiotic product line manufacturing and distribution for ourselves and others.

In March 2001, we Florida-incorporated our pharmacy benefit management company, Go2PBM Services, Inc. Go2PBM Services was created to administer drug
benefits for health maintenance organizations, insurance company plans, preferred provider organizations, self-insured corporate health plans and Taft-Hartley self-insured labor unions. A pharmacy benefit manager is designed to oversee all member
benefits in low risk plans, while taking an exclusively administrative role in higher risk plans. Our administrative services include claim processing, network management and customer service.

In September 2002, we incorporated two wholly-owned Florida corporation distribution companies, IHP Marketing, Inc. and Breakthrough Marketing, Inc., for
the purpose of marketing and distributing additional branded product lines to the public in the future. IHP Marketing also conducts distribution business as Archer Stevens Pharmaceuticals and Breakthrough Marketing conducts distribution business as
Bentley Labs.

In February 2004, we incorporated Belcher Capital Corporation, a Delaware corporation, for the purpose of issuing the shares
of preferred stock as a part of our $10 million private placement.

In August 2005, we formed American Antibiotics LLC, a Florida limited
liability corporation that will manufacture and distribute Beta-Lactam antibiotic pharmaceutical products. GeoPharma owns 51% of American Antibiotics, LLC.

In June 2006, we formed a wholly-owned manufacturing subsidiary named Libi Labs, Inc., a Florida corporation, for the purpose of conducting nutraceutical and cosmeceutical liquid, gel and cream manufacturing for
ourselves and others.

Business Overview

At GeoPharma, Inc. we manufacture, package and/or distribute private label dietary supplements, over-the-counter drugs and health and beauty products for companies worldwide under three of our Florida-incorporated companies, Innovative
Health Products, Inc. , and Belcher Pharmaceuticals, Inc. Innovative Health Products specializes in the development and manufacture of a broad range of nutritional supplements. As a private-label contract manufacturer, we develop and manufacture for
ourselves, and our customers, dietary supplements and health and beauty care products for distribution through various outlets. Belcher Pharmaceuticals, Inc is a state-of-the-art FDA-registered, drug development and manufacturing facility for
generic and over-the-counter (OTC) drugs. Our third Florida corporation, Breakthrough Engineered Nutrition, Inc., develops and markets our own branded dietary supplement product lines and specialty functional products. DexL-10, OxyFirm,
formerly known as Oxylene, are our dietary supplement lines and Lean Protein Bites, CarbSlim Crunch Bites and CarbSlim Cookie Dough Bites are Breakthroughs most popular brands and are distributed nationally and internationally in both
specialty and mass retail outlets. Breakthroughs products are found in such outlets as Wal-Mart, Rite Aid, Albertsons, Kroger and GNC. We also have an established network of brokers and distributors strategically located across the
United States and Canada. Go2PBM Services, Inc. is our pharmacy benefit management company that manages multiple health care plan members and the administration of their related pharmacy claims.



3



---

##### Table of Contents

Overall Business Strategy

We are continuing to build a multi-faceted company able to maximize our efficiencies and capitalize on our synergies through vertical operations. The generic drug segment was started during the fiscal year ended
March 31, 2003. While we are currently working on several Abbreviated New Drug Applications (ANDAs), we have procured three ANDAs from established drug development companies abroad. We have filed the ANDA transfer paperwork with the
FDA. Completion of this transfer process will enable us to start manufacturing and selling these three drugs contingent only on the FDAs approval. The Company may from time to time enter into agreements with third parties with respect to the
development of new products or the purchase of new products and their related technologies. We are also working on certain drug products that may lead us to file value-added drug filings like a 505(b)2. We have in-licensed a novel peptide drug and
have filed a worldwide patent on this peptide; this may lead to the potential development of a new drug thus allowing the Company to file a New Drug Application (NDA).

To manage our operations, we have assembled and maintained a management team with experience in manufacturing, marketing, sales and technology to assist
in leading us to our sales, profit and overall business goals. Our regulatory and analytical departments have been strengthened. Our Regulatory Affairs department has the ability to prepare all the necessary documentation required by the FDA
and any other regulatory agency. In reference to the manufacture and the distribution of generic drugs, numerous licensures have been applied for and obtained, which include a drug enforcement agency (DEA) license, a State of Florida
prescription drug manufacturing permit, State of Florida and other specific states wholesale distribution licenses.

We have upgraded
the analytical laboratory to support all of our development work. Additional analytical and other lab equipment have been added to conduct the required analysis of an active pharmaceutical ingredient (API) in addition to generating data
for the ANDA work. The research, development, stability testing, clinical testing and FDA review process leading up to an approval takes approximately 12  36 months depending on the nature of the drug. Some of the products require little
review or very little laboratory testing and hence may take only one year. In an attempt to further differentiate ourselves from other generic drug development companies, our focus remains on projects that we were able to eliminate the high barriers
to entry based on our strategic alliances and other formed relationships that provide for an API source that would otherwise normally be difficult to source. The current strategy is to continue to work on drug products that can be brought to market
at an even pace, as we believe this approach allows for immediate revenue generation and provides for a possible future, continuous revenue generation stream. Our vertical operations consist of manufacturing and distribution, sales and marketing,
in-house formulation laboratory and other chemical analysis services, customer service and public relations. We will be able to support our own needs as well as those of our customers, from order processing, manufacturing through end-user
distribution. We have streamlined all of our manufacturing facilities in order to continue growing both our generic and over-the-counter drug and nutraceutical manufacturing segments.

We are continuing to develop our sales and marketing strategies to build our recognition among national grocery, mass retail, major pharmaceutical drug
distributors and national drug chains, long-term care facilities and other health product consumer organizations, while building brand awareness of our branded and other proprietary products as well as our private label capabilities.

We have developed several proprietary branded product lines within our distribution business segment that are currently being sold nationally. DexL-10 is
a Hoodia-based dietary supplement branded product line that has been clinically proven to suppress ones appetite and thus aids in weight loss. Hooda is a type of cactus that is grown, harvested and imported from Africa. DexL-10 has a number of
SKUs that include an appetite-suppressant product, DexL-10 Complete, an appetite suppressant and energy product, and now a soft chew. We plan on further developing and expanding these lines into other flavors and packaged forms of our unique,
high-protein, sugar-free foods and energy products. Additions to our Lean Protein and CarbSlim product lines will include new flavors, package type and size variations in addition to existing product enhancements. For both our manufacturing and
distribution segments, we market our product lines using our own telemarketing efforts as well as utilizing brokers to increase the awareness and availability of our offerings and capabilities.

We have entered into a contract with CarePlus, to provide pharmacy benefit management services to its members through two of their health plans, through
our wholly-owned subsidiary, Go2PBM Services, Inc. In addition, the agreement allows us to be the organizations private label over-the-counter supplier of healthcare and healthcare related products. We plan on continuing to expand our member
base by marketing our services to other insurance-based health care providers.

Through the development of our generic and over
-the-counter drugs, private label manufacturing, branded distribution products and pharmacy benefit management efforts, we intend to provide wholesale, retail, and institutional customers with an efficient source for their generic and
over-the-counter drug products, nutritional and functional conveniance foods and other pharmacy-related product needs. By vertically integrating our core business operations, we believe we have, and will continue, to achieve increased brand
recognition and exposure, ancillary product and service revenues, and will be able to provide competitively priced products, quick turn around and overall superior customer service.



4



---

##### Table of Contents

Research and Development

Product development remains the core element of our historical as well as current and future growth strategy spanning across all of our existing business segments. Our research and development activities consist
principally of:



| |  |  | the potential for enhancing existing products or formulas,
| | - |  | ----------------------------------------------------------



| |  |  | researching and developing new product formulations and
| | - |  | -------------------------------------------------------



| |  |  | introducing technology to improve production efficiency and enhance product quality.
| | - |  | ------------------------------------------------------------------------------------

The scientific process of developing new products and obtaining FDA approval is complex, costly and time-consuming; there can be no assurance that any saleable products will be developed despite the amount of time and
money spent on research and development. The development of products may be curtailed at any stage of development due to the introduction of competing generic products or for other reasons including changes in laws or regulations or for any other
reason deemed necessary by management. Our generic drug and nutraceutical research and development departments develop new concepts and formulations for our generic and over-the-counter drugs, our branded distribution product lines and our
customers nutraceutical private label products. We carefully select our products we target, keeping in view our competitive advantage, particularly as related to the source of a raw material or API, the total market size and what portion of
the market is potentially available to our Company. Dr. Sekharam, our President, provides guidance and direction for our research and development teams and analytical laboratory personnel as related to product development and product
manufacture. Our lab chemists perform product development, product and process improvements. Our technical staff prepares cost estimates and samples based on those resulting formulations. Prior to the final manufacture of any of our products, the
team prepares documentation of the necessary custom and other operational procedures to be performed. Our chemists and our research and development regulatory staff personnel prepare all the necessary product information for label requirements.

During the fiscal years ended March 31, 2006 and 2005, Belcher Pharmaceuticals has made substantial progress in the animal and human
ANDA areas and has strengthened laboratory staff, adding more analytical equipment and manufacturing machinery. The blending, tableting and liquid manufacturing areas have been expanded in line with our generic drug strategic plans. Belcher has
filed a patent on a novel method to stabilize the drug Levothyroxine. Levothyroxine, sold under the brand names, Abbotts Synthroid® and King Pharmaceuticals Soloxine®/Levoxyl®, is used for humans as well as pets to treat thyroid-related conditions. Levothyroxine is the second most prescribed drug in the United States with over 13 million patients and
according to NDC Health 2002, the combined retail sales for all Levothyroxine sodium tablet products was approximately $ 1.1 billion (2002). Due to unique stability problems associated with this drug, millions of tablets have been recalled per data
received from the FDA. We have solved this problem by using a unique stabilizing method. Using this novel method, the stability of the drug is substantially improved. We will be applying this method to both human as well as animal versions of this
drug. This is expected to offer us a competitive advantage in the market. The human version of levothyroxine sodium is in the advanced stage of development. We have contracted out the bioequivalence work on this drug to a unaffiliated third-party
clinical lab. We also have developed two versions of levothyroxine drugs for the animal market. The development work includes product formulation, stability studies under accelerated and real time conditions, methods and process validation, and
related analytical work required to support the Companys filing with the FDA of an animal ANDA and a human ANDA.

Belcher filed an
animal ANDA on Carprofen, a generic version for Pfizers Rimadyl, an arthritis and joint-ailment product for pets as Pfizers patent expired in 2004. We have successfully completed the development work, the animal studies, have filed with
the FDA and are awaiting their approval. We have signed an exclusive arrangement with a pet drug distributor to market this drug.

On Nov.
24, 2004 the FDA provided 510(K) approval, called PMA approval to market Mucotrol, a concentrated oral gel wafer indicated for the management and relief of pain associated with oral lesions of various etiologies, including oral mucositis/stomatitis
resulting from chemotherapy or radiotherapy; irritation due to oral surgery; traumatic ulcers caused by braces, ill-fitting dentures, or disease; and diffuse apthous ulcers. The 2.2 gram wafer contains compressed powder and slowly dissolves in the
mouth to form a soothing and protective layer over mucosal lesions.

PMA approval is based on a determination by FDA that the PMA contains
sufficient valid scientific evidence to assure that the device is safe and effective for its intended use(s). An approved PMA is, in effect, a private license granting permission to market the device.



5



---

##### Table of Contents

Mucositis is a painful inflammation of the mucosa of the mouth that may occur due to radiation or
chemotherapy. Mucositis afflicts approximately 40% of patients receiving cancer chemotherapy and 75% percent of bone marrow transplant recipients as well as 100% of patients receiving radiotherapy for cancer of the head and neck. It is estimated
that approximately 300,000 cancer patients in the U.S. suffer from mucositis associated with cancer treatments.

Earlier, we submitted
double blind placebo controlled studies on Mucotrol to the FDA for 510(K) approval. Currently, we are continuing the multicenter clinical studies on Mucotrol. We have a marketing agreement with Cura Pharmaceuticals to promote and distribute Mucotrol
in the United States and are negotiating with marketing companies abroad to take Mucotrol to markets outside the United States.

We have
finalized our construction and received our certificate of occupancy in order to manufacture and distribute Cephalasporin products for ourselves and others.

We contract with outside laboratories to conduct bioequivalency studies. Bioequivalency studies must be conducted and documented in conformity with FDA standards (see Government Regulation) and are used to
demonstrate that the rate and extent of absorption of a generic drugs are not different from a corresponding brand name drug. Research and development expenses for fiscal year ended March 31, 2006 totalled approximately $500,000, consisting
primarily of salaries, bioequivalency studies and laboratory supplies. Research and development costs are expensed as incurred. Machinery and laboratory equipment expenditures made during the 2006 fiscal year approximated an additional $1.2 million
which was capitalized and will be depreciated over their useful lives. Research and development expenses for fiscal year ended March 31, 2005 totalled approximately $263,000, consisting primarily of salaries, bioequivalency studies and
laboratory supplies. Research and development costs are expensed as incurred. Machinery and laboratory equipment expenditures made during the 2005 fiscal year approximated an additional $719,000 which was capitalized and will be depreciated over
their useful lives.

Our research and development laboratory is equipped with modern laboratory test equipment, including high pressure
liquid chromatography, atomic absorption spectroscopy, as well as instruments to test different parameters like pH, viscosity, moisture, gradient sizing, ash, melting point, refractive index, tablet hardness, dissolution and disintegration. We also
have a micro lab to test samples for microbiological loads including yeast, bacteria and fungi. The laboratory has stability chambers to test both the long-term and the accelerated shelf life of products. Our laboratory is well equipped to handle
all aspects of generic drug development. We believe that our laboratory facilities are in compliance with all applicable environmental regulations.

Our product development team works closely with the Companys executive management as well as our customers. Working closely with management allows management to monitor adherence to our short-term, mid-term and long-range business
plans; working closely with our customers assists in assuring that we provide value-added features in the final product that satisfies their ultimate needs. As our development response time is critical to capitalizing on consumer trends and
preferences, we focus on meeting end-user needs as quickly as possible. We believe that this type of flexibility and attention to customer needs, while still keeping the overall strategic goals of the Company, results in more valuable and marketable
products.

While we are working on these ANDA projects, we are also working simultaneously on a few long-term projects. These projects may
take considerable time and effort and their commercial payoff depends on several factors on which we may not have full control. Some of these type of research outcomes may help improve existing products. If the outcome of certain projects is not
within the scope of our area of expertise, our proprietary technology developed or discovered may be licensed to other companies for a fee on a royalty basis.

Marketing and Sales

Our marketing and promotion strategy is targeted toward stimulating demand for our products and service
capabilities and by increasing our brand awareness. We currently employ a traditional in-house sales force that markets our branded and private label products directly to wholesale, retail and institutional customers as well our distribution and
broker network. We also utilize product promotions and print media to reach new customers in targeted markets. We intend to increase these efforts significantly in the areas of direct sales, telesales, and traditional and online advertising.

We plan to hire additional marketing representatives to contact prospective customers including self-insured employers, health maintenance
organizations, and other health benefit provider associations to market our manufacturing capabilities and pharmacy benefit management services in addition to pursuing contractual arrangements with pharmacies related to our future generic drug
manufacturing and distribution. As a manufacturer, we have the facilities, equipment, manufacturing capacity, skilled work force and industry experience to control product processing and minimize product cost



6



---

##### Table of Contents

from order inception to distribution of finished products to our customers. By utilizing our manufacturing capabilities, we intend to build institutional
relationships through high quality and low cost custom product lines. We are continuously seeking ways to expand our manufacturing customer base. We intend to increase our market penetration of private label manufacturing customers increasing our
outside sales and telesales efforts, by reducing manufacturing time with additional fully-automated high-speed manufacturing equipment, by delivering high quality products and by providing research and development support to improve our product
offerings. We will also continue to develop strategic alliances with new manufacturing customers. We intend to increase our ongoing development and marketing of new products in order to capitalize on and create market opportunities in new market
segments. We feel that we can differentiate ourselves from our competitors by providing customers with more value-added products. Consequently, we intend to produce and market additional, as well as enhance currently existing products and dietary
supplements that integrate a variety of compounds to achieve greater bio-availability, effectiveness and product convenience. We differentiate ourselves from other dietary supplement manufacturers by providing faster and more appropriate responses
to our customers. Our development response time for proprietary and private label products is critical to capitalize on consumer trends and preferences. We intend to utilize these trends and preferences to expand our customer base and provide
consumers with the most timely and well adapted products for their needs.

We intend to increase telesales by hiring an in-house telesales
group to prospect for customers for our branded products that we distribute. We have increased our advertising efforts by investing in additional print ads for our branded products by implementing online sales and marketing techniques to increase
brand awareness and direct traffic to our web sites, www.geopharma.com, www.hoodiagordonix.com, www.carbslim.com, www.leanprotein.com and onlineihp.com and by other promotional efforts. This includes purchasing
banner advertising on search engine web sites and Internet directories, as well as direct links from health related web sites. We feel that these efforts are and will continue to compliment our existing and future strategic agreements and
traditional advertising efforts. Some of the sales personnel we expect to hire will devote a substantial portion of their time enhancing relationships with our customers key personnel, informing them of new product developments and industry
trends, and aiding them in designing store displays and merchandising programs for our branded products.

We also increase the flexibility
of our product offerings by extending various credit terms to our customers, subject to our credit approval process. In most cases, where credit terms are granted, we require a prepayment of 50% of the amount of the sales order, with the balance due
within 30 days of shipment. Some of our customers whose sales are to regional and/or national chain stores receive payments from their customers on extended payment terms. In such cases, we grant extended payment terms, when requested, by a
long-standing significant customer.

We believe that the health care, pharmaceutical and dietary supplement industries are fragmented and
currently offer attractive acquisition opportunities. We intend to pursue acquisition opportunities that will broaden our product lines, provide efficiencies in manufacturing through economies of scale, broaden our customer base, complement our
existing businesses and further our overall strategic business goals. However, we have no current plans, arrangements or agreements for any acquisitions.

Principal Suppliers  Nutraceutical and Herbal Supplements

We obtain all of the raw materials for the manufacture of
our products from third party suppliers primarily located within the United States. We do not have contracts with any of our suppliers to provide adequate materials required for our product manufacturing.

Principal Suppliers  Generic Pharmaceuticals

Since the federal drug application process requires specification of raw material suppliers, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. A delay of six months or
more in the manufacture and marketing of the drug involved while a new supplier becomes qualified by the FDA and its manufacturing process is found to meet FDA standards could, depending on the particular product, have a material adverse effect on
the Companys results of operations and financial condition. Generally the Company attempts to minimize the effects of any such situation by providing for, where economically and otherwise feasible, two or more suppliers of raw materials for
the drugs it intends to manufacture. In addition, the Company may attempt to enter into a contract with a raw material supplier in an effort to ensure adequate supply for its products.

Competition

The principal competitive factor in the generic pharmaceutical market is the ability to
be the first company, or among the first companies, to introduce a generic product after the related branded patent expires. Additional competitive factors in the generic pharmaceutical market include:



| |  |  | introduction of other generic drug manufacturers products in direct competition with the Companys products,
| | - |  | -------------------------------------------------------------------------------------------------------------



7



---

##### Table of Contents

| |  |  | consolidation among distribution outlets through mergers and acquisitions and the formation of buying groups,
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | ability of generic competitors to quickly enter the market after patent expiration or exclusivity periods, diminishing the amount and duration of significant profits,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the willingness of generic drug customers, including wholesale and retail customers, to switch among pharmaceutical manufacturers,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | pricing pressure and product deletions by competitors,
| | - |  | ------------------------------------------------------



| |  |  | a companys reputation as a manufacturer of quality products,
| | - |  | -------------------------------------------------------------



| |  |  | a companys level of service (including maintaining sufficient inventory levels for timely deliveries),
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | product appearance and
| | - |  | ----------------------



| |  |  | a companys breadth of product line.
| | - |  | ------------------------------------

Approvals for
new products may have a synergistic effect on a companys entire product line since orders for new products are frequently accompanied by, or bring about, orders for other products available from the same source. We believe that price is a
significant competitive factor, particularly as the number of generic entrants with respect to a particular product increases. As competition from other manufacturers intensifies, selling prices typically decline. We hope to compete by selecting
appropriate products, based on therapeutic segment market sizes and number of competitors manufacturing the products, and by keeping our prices competitive and by providing reliability in the timely delivery, and in the quality, of our products.
Many different manufacturers can sell the same generic drug and hence there will be intense pressure on the pricing. According to the Generic Pharmaceutical Industry Association, generics typically enter the market 30% below the brand price and
decline to 60 or 70% of the brand price after two years. The market for generic drugs is highly competitive. There is intense competition in the generic drug industry in the United States, which is eroding price and profit margins. We compete with
numerous pharmaceutical manufacturers, including both generic and brand-name manufacturers, many of which have been in business for a longer period of time than us, have a greater number of products in the market and have considerably greater
financial, technical, research, manufacturing, marketing and other resources.

Competition related to the contract manufacture of
nutriceuticals in which we operate are also highly competitive. Numerous companies, many of which have greater size, financial, personnel, distribution and other resources than us, compete with us in our development, manufacture, distribution,
wholesaling and retailing businesses. Our branded products face substantial competition from broad line manufacturers, large private label manufacturers, and more recently from large pharmaceutical companies. Increased competition from companies
with greater financial, manufacturing, distribution and marketing capabilities than our own could have a materially adverse affect on our operations. We compete on the basis of product quality, cost and customer service. Our branded products
success depends primarily on our increasing brand recognition across multiple distribution channels, our ability to quickly develop, advertise, market and promote new and existing products with high quality and value, and our efficient distribution
of these products. Our competitors include chain drug stores, such as CVS and Walgreens; prescription benefit managers, such as Express Scripts; warehouse clubs, such as BJs and Costco; mail order pharmacies; major department stores,
such as Macys and Nordstrom; and health, beauty salons, spas and Internet portals with shopping services, such as Yahoo!, Excite, and America Online.

Many of these competitors currently offer online ordering of their products. In addition, many of these online and traditional competitors have longer operating histories, greater brand recognition, and substantially
greater economic, marketing and other resources than we do. These resources may provide some of these competitors with greater opportunities to form joint ventures and favorable vendor agreements as this market develops. In addition, traditional
pharmacies can provide customers with the ability to see and feel products, and may be able to address immediate customer product needs in ways that we cannot.

Trademarks and Intellectual Property

We utilize the federally registered trademarks Lean Protein, Nutrisure, Physician Pharmaceutical12-and Arth-Aid. The Company, as assisted by our president, Dr. Kotha Sekharam, also filed for three additional patents for products
already in the market with patent pending status. We also utilize the registered domain names leanprotein.com, ihp-inc.com, and onlineihp.com. We believe that protecting our trademarks and registered domain names is crucial to our
business strategy of building strong brand name recognition and that such trademarks have significant value in the marketing of our products. Our



8



---

##### Table of Contents

policy is to pursue registrations of all the trademarks associated with our key products. We rely on common law trademark rights to protect our unregistered
trademarks. Common law trademark rights generally are limited to the geographic area in which the trademark is actually used, while a United States federal registration of a trademark enables the registrant to stop the unauthorized use of the
trademark by any third party anywhere in the United States. Furthermore, the protection available, if any, in foreign jurisdictions may not be as extensive as the protection available to us in the United States. Although we seek to ensure that we do
not infringe upon the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual property infringement claims against us. Any infringement claims by third parties against us may have a
materially adverse affect on our business, financial condition, results of operations and cash flows.

Government Regulation

Generic and over-the-counter drugs, dietary supplements and other health and beauty care products are subject to significant government regulation. These
products are regulated by the Food and Drug Administration (FDA), Federal Trade Commission (FTC), Consumer Product Safety Commission, as well as other state and federal regulatory entities. While we use our best efforts to
adhere to the regulatory and licensing requirements, as well as any other requirements affecting our products, compliance with these often requires subjective legislative interpretation. Consequently, we cannot assure that our compliance efforts
will be deemed sufficient by regulatory agencies and commissions enforcing these requirements. Violation of these regulations may result in civil and criminal penalties, which could materially and adversely affect our operations. Recent events have
suggested that the regulatory requirements governing our industry may expand in the near future.

A generic drug is identical, or
bioequivalent, to a brand name drug in dosage form, safety, strength, route of administration, quality, performance characteristics and intended use. Generic drugs can be manufactured after the expiration of patents or exclusivities associated with
the drug. Although generic drugs are chemically identical to their branded counterparts, they are typically sold at substantial discounts from their branded equivalents price.

Brand name drugs, also called innovator drugs, generally are protected by one or more patents. When patents or other periods of exclusivity expire,
manufacturers can submit an ANDA for the approval of a human generic drug and ANDA for an animal drug. The animal ANDA process does not require the drug sponsor to repeat costly animal and clinical research on ingredients or dosage forms already
approved for effectiveness and safety.

To gain FDA approval, a generic drug must (a) contain the same active ingredients as the
innovator drug (inactive ingredients may vary) (b) be identical in strength, dosage form, and route of administration (c) have the same use indications (d) be bioequivalent (e) meet the same batch requirements for identity,
strength, purity, and quality (f) be manufactured under the same strict standards of FDAs good manufacturing practice regulations required for innovator products.

There are generally two types of applications that would be used to obtain FDA approval for pharmaceutical products:

New Drug Application (NDA): Generally, the NDA procedure is required for drugs with active ingredients and/or with a dosage form, dosage
strength or delivery system of an active ingredient not previously approved by the FDA. We do not expect to submit an NDA in the foreseeable future during the fiscal year ended March 31, 2007.

Abbreviated New Drug Application (ANDA): The Waxman-Hatch Act established a statutory procedure for submission of ANDAs to the FDA covering
generic equivalents of previously approved brand-name drugs. Under the ANDA procedure, an applicant is not required to submit complete reports of preclinical and clinical studies of safety and efficacy, but instead is required to provide
bioavailability data illustrating that the generic drug formulation is bioequivalent to a previously approved drug. Bioavailability measures the rate and extent of absorption of a drugs active ingredient and its availability at the site of
drug action, typically measured through blood levels. A generic drug is bioequivalent to the previously approved drug if the rate and extent of absorption of the generic drug are not significantly different from that of the previously approved
brand-name drug.

The FDA may deny an ANDA if applicable regulatory criteria are not satisfied. The FDA may withdraw product approvals if
compliance with regulatory standards is not maintained or if new evidence demonstrating that the drug is unsafe or lacks efficacy for its intended uses becomes known after the product reaches the market. The timing of final FDA approval of ANDA
applications depends on a variety of factors, including whether or not the maker of the applicable branded drug is entitled to the protection of one or more statutory exclusivity periods, during which the FDA is prohibited from approving generic
products. FDA approval is required before each dosage form of any new drug can be marketed. Applications for FDA approval must contain information relating to bio-equivalency, product formulation, raw material suppliers, stability, manufacturing
processes, packaging, labeling and quality control. FDA procedures require full-scale manufacturing equipment to be used to produce test batches for FDA approval. Validation of manufacturing processes by the FDA also is



9



---

##### Table of Contents

required before a company can market new products. The FDA conducts pre-approval and post-approval reviews and plant inspections to enforce these rules.
Supplemental filings are required for approval to transfer products from one manufacturing site to another and may be under review for a year or more. In addition, certain products may only be approved for transfer once new bio-equivalency studies
are conducted.

The FDA issued a final rule on June 18, 2003, which became effective on August 18, 2003, streamlining the generic
drug approval process by limiting a drug company to only one 30-month stay of a generic drugs entry into the market for resolution of a patent challenge. This will help maintain a balance between the innovator companies intellectual
property rights and the desire to get generic drugs on the market in a timely fashion. The rule clarifies the types of patents that innovators must submit for listing and prohibits the submission of patents claiming packaging, intermediates or
metabolite innovations. Patents claiming a different polymorphic form of the active ingredient described in a NDA must be submitted if the NDA holder has test data demonstrating that the drug product containing the polymorph will perform in the same
way as the drug product described in the NDA. The final rule also clarifies the type of patent information required to be submitted and revises the declaration that NDA applicants must provide regarding their patents to help ensure that NDA
applicants submit only appropriate patents.

The final rule is intended to make the patent submission and listing process more efficient,
as well as enhance the ANDA and 505(b)(2) application approval process. The changes are designed to enable consumers to save billions of dollars each year by making it easier for generic drug manufacturers to get safe and effective products on the
market when the appropriate patent protection expires.

In addition to the federal government, various states have laws regulating the
manufacture and distribution of pharmaceuticals, as well as regulations dealing with the substitution of generic drugs for brand name drugs. The Companys operations are also subject to regulation, licensing requirements and inspection by the
states in which its operations are located and/or it conducts business.

Certain activities of the Company may also be subject to FTC
enforcement. The FTC enforces a variety of antitrust and consumer protection laws designed to ensure that the nations markets function competitively, are vigorous, efficient and free of undue restrictions.

We are also is governed by federal and state laws of general applicability, including laws regulating matters of environmental quality, working
conditions and equal employment opportunity.

The manufacture, packaging, labeling, advertising, promotion, distribution and sale of our
dietary supplements manufactured is subject to regulation by numerous governmental agencies, particularly the FDA, which regulates our products under the Federal Food, Drug and Cosmetic Act, and the FTC, which regulates the advertising of our
products under the Federal Trade Commission Act. Our products are also subject to regulation by, among other regulatory agencies, the Consumer Product Safety Commission, the United States Department of Agriculture, the United States Department of
Environmental Regulation and the Occupational Safety and Health Administration. The manufacture, labeling and advertising of our products is also regulated by the Occupational Safety and Health Administration through various state and local agencies
where our products are distributed.

Our manufacture of dietary supplements is subject to significant labeling regulation. Labeling claims
are governed by the Food and Drug Administration, the Federal Food, Drug and Cosmetic Act, and the recent Dietary Supplement Health and Education Act of 1994 (DSHEA). Our manufacture of over-the-counter drugs must comply with all Food and Drug
Administration guidelines and Food and Drug Administration enforced Good Manufacturing Practices (GMP) regulations for those products as set forth in official monographs of the United States Pharmacoepia and other applicable laws enforced by the
Food and Drug Administration. These include manufacturing and product information, such as claims in a products labeling, package inserts, and accompanying literature. The Dietary Supplement Health and Education Act of 1994 guidelines permit
certain dietary supplement labeling claims without prior authorization by the Food and Drug Administration, provided that the manufacturer has substantiation for the claims and complies with certain notification and disclaimer requirements. The
legislation gives dietary supplement manufacturers more freedom to market their products, while providing consumers adequate information for informed decisions on the use of supplements.

Under the Dietary Supplement Health and Education Act of 1994 and previous food labeling laws, supplement manufacturers may use three types of labeling
claims, with the approval of the Food and Drug Administration. These claims include nutrient-content claims, disease claims, and nutrition-support claims, which include structure-function claims. Nutrient-content claims describe the
level of a nutrient in a food or dietary supplement. For example, a supplement containing at least 200 mg of calcium per serving could carry the claim high in calcium. Disease claims show a link between a substance and a disease or
health-related condition. The Food and Drug Administration authorizes disease claims



10



---

##### Table of Contents

based on a direct review of scientific evidence or documentation of established diet-to-health links from highly regarded scientific bodies, such as the
National Academy of Sciences. For example, it is permissible to advertise a link between calcium and a lower risk of osteoporosis, if the supplement contains sufficient amounts of calcium. Nutrition-support claims describe a link between a nutrient
and deficiency diseases that may result from diets lacking the nutrient. For example, the label of a Vitamin C supplement could state that Vitamin C prevents scurvy. When these types of claims are used, the label must mention the prevalence of the
nutrient-deficiency disease in the United States. Finally, structure-function claims refer to the supplements effect on the bodys structure or function, including its overall effect on a persons well-being. For example, a
structure-function claim could state antioxidants maintain cell integrity. Structure-function claims must be accompanied by the disclaimer This statement has not been evaluated by the Food and Drug Administration. This product is
not intended to diagnose, treat, cure, or prevent any disease. Manufacturers who plan to use a structure-function claim on a particular product must inform the Food and Drug Administration of the use of the claim no later than 30 days after
the product is first marketed. The Food and Drug Administration may then advise the manufacturer to change or delete the claim. Claims made for our dietary supplement products may include statements of nutritional support and health and nutrient
content. The Food and Drug Administrations interpretation of what constitutes an acceptable statement of nutritional support may change in the future thereby requiring that we revise our labels. The Food and Drug Administration recently issued
a proposed rule on what constitutes permitted structure/function claims as distinguished from prohibited disease claims. Although we believe our product claims comply with the law, depending on the content of the final regulation, we may need to
revise our labels.

Our advertising of dietary supplement products is also subject to regulation by the Federal Trade Commission under the
Federal Trade Commission Act, in addition to state and local regulation. The Federal Trade Commission Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. The Federal Trade Commission Act
also provides that the dissemination or the causing to be disseminated of any false advertisement pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the Federal Trade
Commissions Substantiation Doctrine, an advertiser is required to have a reasonable basis for all objective product claims before the claims are made. Failure to adequately substantiate claims may be considered either deceptive or
unfair practices. Pursuant to this Federal Trade Commission requirement we are required to have adequate substantiation for all material advertising claims made for our products.

In recent years the Federal Trade Commission has initiated numerous investigations of dietary supplement and weight loss products and companies. The
Federal Trade Commission is reexamining its regulation of advertising for dietary supplements and has announced that it will issue a guidance document to assist supplement marketers in understanding and complying with the substantiation requirement.
Upon release of this guidance document we will be required to evaluate our compliance with the guideline and may be required to change our advertising and promotional practices. We may be the subject of investigation in the future. The Federal Trade
Commission may impose limitations on our advertising of products. Any such limitations could materially adversely affect our ability to successfully market our products. The Federal Trade Commission has a variety of processes and remedies available
to it for enforcement, both administratively and judicially, including compulsory processes, cease and desist orders, and injunctions. Federal Trade Commission enforcement can result in orders requiring, among other things, limits on advertising,
corrective advertising, consumer redress, divestiture of assets, rescission of contracts and such other relief as may be deemed necessary. A violation of such orders could have a material adverse affect on our business, financial condition and
results of operations.

Governmental regulations in foreign countries where our plans to commence or expand sales may prevent or delay
entry into the market or prevent or delay the introduction, or require the reformulation, of certain of our products. Compliance with such foreign governmental regulations is generally the responsibility of our distributors for those countries.
These distributors are independent contractors over whom we have limited control.

We manufacture certain products pursuant to contracts
with customers who distribute the products under their own or other trademarks. Such private label customers are subject to government regulations in connection with their purchase, marketing, distribution and sale of such products. We are subject
to government regulations in connection with our manufacturing, packaging and labeling of such products. Our private label customers are independent companies and their labeling, marketing and distribution of their products is beyond our control.
The failure of these customers to comply with applicable laws or regulations could have a materially adverse effect on our business, financial condition, results of operations and cash flows.

We may be subject to additional laws or regulations by the Food and Drug Administration or other federal, state or foreign regulatory authorities, the
repeal of laws or regulations which we consider favorable, such as the Dietary Supplement Health and Education Act of 1994, or more stringent interpretations of current laws or regulations, from time to time in the future. We are unable to predict
the nature of such future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would



11



---

##### Table of Contents

have on our business in the future. The Food and Drug Administration or other governmental regulatory bodies could, however, require the reformulation of
certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation of the properties of certain products, expanded or
different labeling and scientific substantiation. Any or all of such requirements could have a materially adverse affect on our business, financial condition, results of operations and cash flows.

Innovative Health Products nutraceutical facility was inspected by the Department of Agriculture and the FDA in November 2004, and although we did
receive an FDA 483, a written list of observations, were found to be generally in compliance with current Good Manufacturing Practices (GMP) and do not believe the observations were material. We have taken appropriate corrective actions based on the
FDA inspection findings.

Belcher Pharmaceuticals facility was inspected by the FDA, the DEA and the Department of Agriculture all of which
found us generally in compliance. As we have in the past, we will continue our strong focus on compliance activities at all levels of our Company in support of our current and future strategic growth plans .

As a public company, the Company is subject to certain provisions to the recently enacted Sarbanes-Oxley Act of 2002 and all of its amendments. This Act
contains a variety of provisions affecting public companies, including requiring an evaluation of its internal disclosure controls and procedures surrounding the Companys executive management, personnel, and the summarization and control over
accurate financial reporting. The Company is not required to be in compliance with the applicable provisions of the Sarbanes-Oxley Act until its fiscal year ending March 31, 2008.

Manufacturing

Our primary
manufacturing facility is located in 33,222 square feet in Largo, Florida. We use this location for our executive offices and for the manufacturing, packaging and warehousing of products, laboratory services, research and development, marketing and
final distribution. Our manufacturing facilities at this site utilize high-speed encapsulating, tableting, packaging and other production line equipment. The facility is large enough to handle bulk orders, but versatile enough to provide quick
response to customer needs. This site also houses our graphic arts department, which assists us and our customers print layout and graphic needs.

Our second manufacturing facility has expanded its location adding 10,000 square feet to the already existing 10,000 square feet of leased space in Largo, Florida. This facility is registered with the United States
Food and Drug Administration and is used for our laboratory services, research and development, manufacture, packaging and distribution of our over-the-counter, generic drug and cosmetic products. Subsequent to March 31, 2006, the Company
received their certificate of occupancy to operate in that additional 10,000 square foot facility in order to manufacture Cephalosporin products.

Our warehousing facility is located in 30,000 square feet of leased space in Largo, Florida. We use this location for our warehousing of our distribution segments finished goods in addition to housing additional manufacturing
packaging. During the fiscal year ended March 31, 2006, the Company has contracted to build a state-of-the-art generic drug manufacturing facility within this 30,000 square feet of leased space. The certificate of occupancy to operate is
expected to be received during July 2006.

Our Beta-Lactam leased facility is located within 100,000 square feet of leased space in
Baltimore, Maryland. This facility is registered with the United States Food and Drug Administration and is used for our laboratory services, research and development, manufacture, packaging and distribution of Beta-Lactam products.

Currently, we can manufacture approximately 900 million tablets and capsules annually. For the fiscal year ended March 31, 2006, we operated at
approximately 60% of our total capacity. Our manufacturing facilities normally operate two shifts per day, five days per week. Certain packaging lines or capsule and tablet production lines run longer as demand warrants. We operate flexible
manufacturing lines that can shift output efficiently among various pieces of equipment depending upon factors such as batch size, tablets or capsule count, and labeling requirements. We strive to fulfill and ship all orders within 30-60 days. While
we believe we can double our sales volume without expanding our current facilities, we will expand our manufacturing capacities upon receiving Food and Drug Administration registration for production of generic and other over-the-counter drugs. An
increase in production would require additional space and personnel for warehousing and shipping operations, but would not necessarily require substantial capital investment. Our manufacturing revenues are generated by fulfilling sales orders
received from our customers within an average turn-around time ranging from 30-60 days. Consequently, we experience a backlog for future revenues at all times. As of March 31, 2006 and 2005, we had approximately $6,000,000 and $3,879,000,
respectively, in backlog manufacturing sales orders.



12



---

##### Table of Contents

Private Label Products-Manufacturing

Sales of our manufactured private label products accounted for approximately 36% of our total consolidated revenues, or $17.9 million for the year ended March 31, 2006 and approximately 41.4% of our total
consolidated revenues, or $11.7 million for the year ended March 31, 2005. We currently manufacture products for over 400 private label customers in 47 states in the United States and ship to several countries internationally. Our private label
business has a widely distributed revenue base. For the year ended March 31, 2006, we had sales of 5% or more of total consolidated revenues to two of our nonaffiliate private label customers, Spectrum Group, of which accounted for 12.2% and
Direct Marketing, Inc. which accounted for 5% of total consolidated revenues. For the year ended March 31, 2005, we had sales of 5% or more of total consolidated revenues to one of our nonaffiliate private label customers, Spectrum Group, of
which accounted for 11.2% of total consolidated revenues. For the year ended March 31, 2006 and 2005, we did not have sales of 5% or more of total consolidated revenues to any company that is a party to an exclusive manufacturing agreement with
us.

Pharmaceutical

Sales of our
pharmaceutical products accounted for approximately 1% of our total consolidated revenues, or $486,000 for the year ended March 31, 2006 and approximately 3.9% of our total consolidated revenues, or $1.1 million for the year ended
March 31, 2005. For the year ended March 31, 2005, we had sales of 5% or more of total consolidated revenues to one of our nonaffiliate private label customers, Proactive Labs, of which accounted for 11.2% of total consolidated revenues.
For the year ended March 31, 2006 and 2005, we did not have sales of 5% or more of total consolidated revenues to any company that is a party to an exclusive manufacturing agreement with us.

Branded Products-Distribution

Sales of our branded
product lines sold within our distribution segment accounted for approximately 29.7% of our total consolidated revenues, or $14.7 million for the year ended March 31, 2006 as compared to approximately 14.2% of our total consolidated revenues,
or $4.0 million for the year ended March 31, 2005. For the year ended March 31, 2006, one customer exceeded 5% of our consolidated revenues, General Nutrition Distribution with 15.3%. For the year ended March 31, 2005, our
distribution product line has a widely distributed revenue base whereas for the year ended March 31, 2005, no one customer accounted for more than 5% of total consolidated revenues.

Pharmacy Benefit Management

Sales generated from our pharmacy benefit management subsidiary
accounted for approximately 33.3% of our total consolidated revenues, or $16.5 million for the year ended March 31, 2006 and accounted for 40.5% of our total consolidated revenues, or $11.4 million for the year ended March 31, 2005. 100%
of the Companys pharmacy benefit management revenues are derived from a contract with CarePlus Health, an affiliate of the Company based on a relationship with Joseph Zappala, a former board member who resigned from the Companys board on
December 3, 2004.

Employees

As
of March 31, 2006 we had 150 employees as compared to 103 employees as of March 31, 2005. Of these 150 employees as of March 31, 2006, four were engaged in marketing and sales, 121 were devoted to production, laboratory and
distribution and 25 were responsible for management and administration. As compared to these 103 employees as of March 31, 2005, where four were engaged in marketing and sales, 83 were devoted to production, laboratory and distribution and 16
were responsible for management and administration. None of our employees are covered by a collective bargaining agreement. We believe we have good relations with our employees. Employees are permitted to participate in employee benefit plans of the
Company that may be in effect from time to time, to the extent eligible, and employees may be entitled to receive an annual bonus as determined at the sole discretion of the Companys Board of Directors based on the Boards evaluation of
the employees performance and the financial performance of the Company.

Risk Factors

New or Amended Government Regulation Could Adversely Impact Our Business and Operations: We may be subject to additional laws or regulations by the
Food and Drug Administration or other federal, state or foreign regulatory authorities, subject to the repeal of laws or regulations which we consider favorable, such as the Dietary Supplement Health and Education Act of 1994, or subject to more
stringent interpretations of current laws or regulations, from time to time in the future. We are unable to predict the nature of such future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would have on our business in the future. We also can not predict what effect these regulations, and the related publicity from promulgation of such regulations, could have on consumer
perceptions related to the nutraceutical market in which we operate. The Company,



13



---

##### Table of Contents

and its customers, depend on positive publicity as it relates to the efficacy and overall health benefits derived from certain products we manufacture for
others. This could have a materially adverse affect on our business, financial condition, results of operations and cash flows. The Food and Drug Administration has also announced that it is considering promulgating new Good Manufacturing Practices
regulations, specific to dietary supplements. Such regulations, if promulgated, may be significantly more rigorous than currently applicable regulations and contain quality assurance requirements similar to Good Manufacturing Practices regulations
for drug products. Therefore, we may be required to expend additional capital resources on upgrading manufacturing processes and/or equipment in the future in order to comply with the law. The Food and Drug Administration or other governmental
regulatory bodies could require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation
of the properties of certain products and expanded or different labeling and scientific substantiation. Any or all of such requirements could have a materially adverse affect on our business, financial condition, results of operations and cash
flows. Our failure to comply with applicable Food and Drug Administration regulatory requirements could result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and possible criminal prosecutions.

Product Acceptance into the Generic Drug Market:Certain manufacturers of brand name drugs and/or their affiliates have introduced
generic pharmaceutical products equivalent to their brand name drugs at relatively lower prices or partnered with generic companies to introduce generic products. Such actions have the effect of reducing the potential market share and profitability
of generic products developed by the Company and may inhibit it from developing and introducing generic pharmaceutical products comparable to certain brand name drugs. This price competition has led to an increase in customer demand for downward
price adjustments by the manufacturers of generic pharmaceutical products, including the Company, for certain products that may have planned to manufacture in the future. There can be no assurance that such price reductions for these products or
others, will not continue, or even increase, and therefore could have a material adverse effect on the Companys revenues, gross margins, income generated from operations and cash flows.

The Unavailability of Raw Materials When Needed Could Adversely Impact Our Business and Operations: Since the federal drug application process
requires specification of raw material suppliers as related to the production of generic drugs, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. A delay of six months or more in
the manufacture and marketing of the drug involved while a new supplier becomes qualified by the FDA and its manufacturing process is found to meet FDA standards could, depending on the particular product, have a material adverse effect on the
Companys results of operations and financial condition. Generally the Company attempts to minimize the effects of any such situation by providing for, where economically and otherwise feasible, two or more suppliers of raw materials for the
drugs it manufactures.

FDA Approvals: The Company plans to submit generic drug human and animal ANDA for the FDAs approval to
manufacture generic drugs for animals and humans in the future. The Company can not predict, nor guarantee, that the FDA will approve any or all applications submitted, nor can the Company predict when such applications will be reviewed or approved.
Failure for the FDA to approve certain generic drug products as they are submitted by the Company could have an adverse effect on future revenues, cash flows and financial position.

We Can Not Predict the Effects of Terrorism on the Economy or on our Company: The terrorist attacks on September 11, 2001, exacerbated an
already fragile economic situation and have added to a growing level of uncertainty and caution in the marketplace. The adverse impacts to our business may include, but are not limited to, a delay in placing or a decrease in the size of orders, a
lengthening of sales cycles and increased credit risks. We can give no estimate of how long these effects may last. The occurrence of any future terrorist activity will further exacerbate these effects.

The Unavailability of Additional Funds When Needed Could Adversely Impact Our Business and Operations: Management believes that cash expected to
be generated from operations, current cash reserves, and existing financial arrangements will be sufficient for the Company to meet its capital expenditures and working capital needs for its operations as presently conducted. In addition, the
Company may require more significant capital to expand operations or complete cash based acquisitions. If cash flows from operations, current cash reserves and available credit facilities are not sufficient, it will be necessary for the Company to
seek additional financing. There can be no assurance that such financing would be available in amounts and on terms acceptable to the Company.

Litigation: In December 2004 and January 2005 five securities class action lawsuits were filed in the Federal District Court, Southern District of New York against GeoPharma and certain of its officers, alleging violations of federal
securities laws in connection with certain press releases issued by the Company relating to Belcher Pharmaceuticals planned introduction of Mucotrol: Mat eVentures v. Kotha Sekharam and GeoPharma, Inc. (SDNY 04 Civ. 9463); Moshayedi v.
GeoPharma, Inc., Jugal Taneja, Mihir Taneja, and Kotha Sekharam (SDNY 04 Civ. 9736); Sarno v. Mihir Taneja, Kotha Sekharam, and GeoPharma, Inc. (SDNY 04 Civ. 9975); Farwell v. Kotha Sekharam and GeoPharma, Inc. (SDNY 05 Civ.



14



---

##### Table of Contents

188); and Taylor v. Kotha Sekharam and GeoPharma, Inc. (SDNY 05 Civ. 258). Plaintiffs, on behalf of themselves and all others similarly situated, seek
unspecified damages allegedly suffered in connection with their respective purchases and sales of the Companys securities during the Class period. On March 9, 2005 the Court consolidated the actions and appointed lead plaintiff and lead
counsel. On April 18, 2005 plaintiffs filed a Consolidated Amended Class Action Complaint. On June 6, 2005 defendants filed a Motion to Dismiss the action. By Opinion and Order dated September 30, 2005 the Court granted
defendents motion and dismissed the action without prejudice, with leave to replead. On October 24, 2005 plaintiffs filed a Consolidated Second Amended Class Action Complaint in the action. The Company again moved to dismiss the Second
Amended Consolidated Complaint, and after the issues were fully briefed by the parties, by Opinion and Order dated January 27, 2006 the Court again dismissed Plaintiffs action, this time with prejudice.

The company received a letter dated April 11, 2005 addressed to its Board of Directors, constituting a shareholder demand pursuant to Florida
Statute Sec. 607.07401 from a San Diego law firm representing an alleged shareholder of GeoPharma, Inc. Such letter demanded that the company commence legal proceedings against each Board member and each officer of the company for alleged breaches
of fiduciary duty arising out of and/or evidenced by the same actions and circumstances involved in the class action referred to above. At its Board meeting of June 7, 2005, the Board of Directors appointed a committee of independent directors
to investigate the allegations outlined in such letter and as such, the investigation is currently underway. On December 29, 2005, Imelda Hoeft, derivatively on behalf of the Company, instituted an action in the Circuit Court of the 6th
Judicial Circuit in and for Pinellas County, Florida against the Company and all the Companys officers and directors asserting claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and
unjust enrichment. The action sought unspecified damages and other relief. On April 21, 2006, plaintiff agreed to dismiss the action, and filed with the Court a Notice of Voluntary Dismissal without Prejudice.

On April 11, 2003 the company filed a lawsuit against Joseph Zappala, a member of the companys Board of Directors in the Sixth Judicial
Circuit in and for Pinellas County, Florida. The lawsuit sought to rescind a purported agreement between the company and Mr. Zappala, breach of a consulting agreement between the company and Mr. Zappala and related claims involving those
agreements. Mr. Zappala denied the material allegations against him and has filed a counterclaim against the Company for breach of the consulting agreement.

On April 20, 2004, the Company and Mr. Zappala entered into an agreement (Settlement Agreement) pursuant to which each party expressly disclaimed any liability and each party released the other
(and all related parties) from all claims, and liabilities arising from the Merger Agreement, the Consulting Agreement and/or the subject matter of the Companys lawsuit against Mr. Zappala and Go2 (Lawsuit), and the parties
agreed to dismiss the Lawsuit with prejudice. As provided by the Settlement Agreement: (i) Mr. Zappala transferred ownership of 500,000 shares of the Companys common stock to the Company; (ii) the Consulting Agreement was
terminated without further liability to either party; and (iii) Mr. Zappala agreed, that during his tenure as a Director of the Company, he would not sell his remaining shares of Company common stock, unless another Director of the Company
sells shares of Company common stock. The Company filed Form 8-K on April 26, 2004. On December 3, 2004, Mr. Zappala resigned from the Companys board of directors.

Litigation concerning patents and proprietary rights is possible and often expensive. Pharmaceutical companies with patented brand products are
increasingly suing companies that produce generic forms of their patented brand name products for alleged patent infringement or other violations of intellectual property rights, which may delay or prevent the entry of such generic products into the
market. There is a risk that a branded pharmaceutical company may sue the filing person for alleged patent infringement or other manufacturing, developing and/or selling the same generic pharmaceutical products may similarly file lawsuits against
the Company or its strategic partners claiming patent infringement or invalidity. Such litigation is time consuming, and could result in a substantial delay in, or prevent, the introduction and/or marketing of products, which could have a material
adverse effect on the Companys business, financial condition and results of operations.

Our Insurance Coverage May not be
Sufficient to Cover All Risk Exposure: The Company has maintained its insurance coverages for its directors and officers, general liability insurance, and product liability insurance at levels deemed adequate by the Companys Board of
Directors. The Company can not guarantee that these same levels of insurance, at premiums acceptable to the Company, will be available in the future. As related to product liability insurance, a reduction in coverage or an exclusion for one or more
key raw materials, may adversely affect our ability to continue our business as currently conducted. In addition, a loss of one or more of any of these insurance policies, or a claim-related loss in excess of insured limits will adversely affect our
ability to continue our business as currently conducted.



15



---

##### Table of Contents

ITEM 2. DESCRIPTION OF PROPERTY

Our primary manufacturing facility is located in 33,222 square feet of space in Largo, Florida. We use this location for our executive offices and for the manufacturing, packaging and warehousing of products,
laboratory services, research and development, marketing and final distribution and for Breakthrough Engineered Nutritions administrative and sales office. This site also houses our graphic arts department, which assists us and our
customers print layout and graphic needs. We leased this facility from an affiliate, Dynamic Health Products, Inc, pursuant to a ten year triple-net lease that was due to expire on September 30, 2009, at a monthly rental of approximately
$18,333, subject to annual inflationary adjustments. On October 28, 2004, we purchased this leased facility from our affiliate for $1.925 million based on an independent appraisal.

Our second manufacturing facility has expanded its location adding 10,000 square feet to the already existing 10,000 square feet of leased space in
Largo, Florida. Belcher Pharmaceuticals uses this facility for the manufacture and packaging of over-the-counter, pharmaceutical and generic drug products. This facility is registered with the United States Food and Drug This facility is registered
with the United States Food and Drug Administration. Subsequent to March 31, 2006, the Company received their certificate of occupancy to operate in that additional 10,000 square foot facility in order to manufacture Cephalosporin products. We
lease this facility from an unrelated third party pursuant to a fiveyear lease currently at a monthly rental of approximately $11,500 subject to annual inflationary adjustments.

Our warehousing facility is located in 30,000 square feet of leased space in Largo, Florida. We use this location for our warehousing of our distribution
segments finished goods in addition to housing additional manufacturing packaging. During the fiscal year ended March 31, 2006, the Company has contracted to build a state-of-the-art generic drug manufacturing facility within this 30,000
square feet of leased space. The certificate of occupancy to operate is expected to be received during July 2006. It is leased from an unrelated third party pursuant to a fiveyear lease triple-net lease currently at a monthly rental of
approximately $16,500 subject to annual inflationary adjustments.

Our Beta-Lactam leased facility is located within 100,000 square feet of
leased space in Baltimore, Maryland. This facility is registered with the United States Food and Drug Administration and is used for our laboratory services, research and development, manufacture, packaging and distribution of Beta-Lactam products.
It is leased from an unrelated third party pursuant to a tenyear lease currently at a monthly rental of approximately $45,000 subject to annual inflationary adjustments.

ITEM 3. LEGAL PROCEEDINGS

In December 2004 and January 2005 five securities class action
lawsuits were filed in the Federal District Court, Southern District of New York against GeoPharma and certain of its officers, alleging violations of federal securities laws in connection with certain press releases issued by the Company relating
to Belcher Pharmaceuticals planned introduction of Mucotrol: Mat eVentures v. Kotha Sekharam and GeoPharma, Inc. (SDNY 04 Civ. 9463); Moshayedi v. GeoPharma, Inc., Jugal Taneja, Mihir Taneja, and Kotha Sekharam (SDNY 04 Civ. 9736); Sarno v.
Mihir Taneja, Kotha Sekharam, and GeoPharma, Inc. (SDNY 04 Civ. 9975); Farwell v. Kotha Sekharam and GeoPharma, Inc. (SDNY 05 Civ. 188); and Taylor v. Kotha Sekharam and GeoPharma, Inc. (SDNY 05 Civ. 258). Plaintiffs, on behalf of themselves and all
others similarly situated, seek unspecified damages allegedly suffered in connection with their respective purchases and sales of the Companys securities during the Class period. On March 9, 2005 the Court consolidated the actions and
appointed lead plaintiff and lead counsel. On April 18, 2005 plaintiffs filed a Consolidated Amended Class Action Complaint. On June 6, 2005 defendants filed a Motion to Dismiss the action. By Opinion and Order dated September 30,
2005 the Court granted defendents motion and dismissed the action without prejudice, with leave to replead. On October 24, 2005 plaintiffs filed a Consolidated Second Amended Class Action Complaint in the action. The Company again moved
to dismiss the Second Amended Consolidated Complaint, and after the issues were fully briefed by the parties, by Opinion and Order dated January 27, 2006 the Court again dismissed Plaintiffs action, this time with prejudice.

The company received a letter dated April 11, 2005 addressed to its Board of Directors, constituting a shareholder demand pursuant to Florida
Statute Sec. 607.07401 from a San Diego law firm representing an alleged shareholder of GeoPharma, Inc. Such letter demanded that the company commence legal proceedings against each Board member and each officer of the company for alleged breaches
of fiduciary duty arising out of and/or evidenced by the same actions and circumstances involved in the class action referred to above. At its Board meeting of June 7, 2005, the Board of Directors appointed a committee of independent directors
to investigate the allegations outlined in such letter and as such, the investigation is currently underway. On December 29, 2005, Imelda Hoeft, derivatively on behalf of the Company, instituted an action in the Circuit Court of the 6th
Judicial Circuit in and for Pinellas County, Florida against the Company and all the



16



---

##### Table of Contents

Companys officers and directors asserting claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and
unjust enrichment. The action sought unspecified damages and other relief. On April 21, 2006, plaintiff agreed to dismiss the action, and filed with the Court a Notice of Voluntary Dismissal without Prejudice.

On April 11, 2003 the company filed a lawsuit against Joseph Zappala, a member of the companys Board of Directors in the Sixth Judicial
Circuit in and for Pinellas County, Florida. The lawsuit sought to rescind a purported agreement between the company and Mr. Zappala, breach of a consulting agreement between the company and Mr. Zappala and related claims involving those
agreements. Mr. Zappala denied the material allegations against him and has filed a counterclaim against the Company for breach of the consulting agreement.

On April 20, 2004, the Company and Mr. Zappala entered into an agreement (Settlement Agreement) pursuant to which each party expressly disclaimed any liability and each party released the other
(and all related parties) from all claims, and liabilities arising from the Merger Agreement, the Consulting Agreement and/or the subject matter of the Companys lawsuit against Mr. Zappala and Go2 (Lawsuit), and the parties
agreed to dismiss the Lawsuit with prejudice. As provided by the Settlement Agreement: (i) Mr. Zappala transferred ownership of 500,000 shares of the Companys common stock to the Company; (ii) the Consulting Agreement was
terminated without further liability to either party; and (iii) Mr. Zappala agreed, that during his tenure as a Director of the Company, he would not sell his remaining shares of Company common stock, unless another Director of the Company
sells shares of Company common stock. The Company filed Form 8-K on April 26, 2004. On December 3, 2004, Mr. Zappala resigned from the Companys board of directors.

From time to time we are subject to litigation incidental to our business including possible product liability claims. Such claims, if successful, could
exceed applicable insurance coverage.

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

None.



17



---

##### Table of Contents

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Market For
Securities

The Companys $.01 par value common stock, is listed on the NASDAQ Capital Market under the symbol GORX and
on the Boston Stock Exchange under the symbol GORX. The Company began its initial trading November 14, 2000; its high and low sales prices for the past two fiscal years, by quarter-ended date, are as follows:



|                   |  |      |       |     |   |     
|------------------ |  | ---- | ----- | --- | - | ----
|                   |  | High |       | Low
|June 30, 2004      |  | $    | 7.00  |     | $ | 4.10
|September 30, 2004 |  | $    | 5.89  |     | $ | 2.85
|December 31, 2004  |  | $    | 11.25 |     | $ | 3.36
|March 31, 2005     |  | $    | 5.45  |     | $ | 2.53
|June 30, 2005      |  | $    | 3.11  |     | $ | 1.54
|September 30, 2005 |  | $    | 5.00  |     | $ | 1.76
|December 31, 2005  |  | $    | 5.38  |     | $ | 2.92
|March 31, 2006     |  | $    | 4.89  |     | $ | 3.57

As of June 15, 2006, there were approximately 2,642 stockholders of record according to ADP
and our stock transfer agent, Registrar and Transfer Company, Inc. located in Cranford, New Jersey.

Dividend Policy

As of March 31, 2006, our subsidiary, Belcher Capital Corporation paid $0 using a combination of cash and the Companys common stock and as of
March 31, 2005, our subsidiary, Belcher Capital Corporation paid $203,333 using a combination of cash and the Companys common stock, in preferred dividends as related to the 6%, Series A, $5 million convertible preferred stock issued to
Laurus Master Fund, Ltd. Dividends are due the first of every month. The 6% Series A, $5 million convertible preferred stock was issued on February 10, 2004 as a part of a private placement. During December 2004, the holders of the Series A
preferred stock converted all of their outstanding shares in exchange for 800,000 shares of the Companys, $.01 par value, common stock.

As of March 31, 2006, we paid $300,000 and as of March 31, 2005, we paid $318,429 using the Companys $.01 par value common stock, in preferred dividends as related to the 6%, Series B, $5 million convertible preferred stock
issued to MidSummer Capital and Omicron Capital Master Funds. Dividends are due the first day of the last month of every quarter. The 6% Series B, $5 million convertible preferred stock was issued during March 2004 as a part of a private placement.

We have not paid any cash dividends on our common stock and we currently intend to retain any future earnings to fund the development and
growth of our business. Any future determination to pay dividends on our common stock will depend upon our results of operations, financial condition and capital requirements, applicable restrictions under any credit facilities or other contractual
arrangements and such other factors deemed relevant by the Companys board of directors.



18



---

##### Table of Contents

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

The statements contained in this Report that are not historical are forward-looking statements, including statements regarding the Companys
expectations, intentions, beliefs or strategies regarding the future. Forward- looking statements include the Companys statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking
statements included in this Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. It is important to note that the Companys actual
results could differ materially from those in such forward-looking statements. Additionally, the following discussion and analysis should be read in conjunction with the Financial Statements and notes thereto appearing elsewhere in this Report. The
discussion is based upon such financial statements which have been prepared in accordance with U.S. Generally Accepted Accounting Principles and the Standards of the Public Company Accounting Oversight Board (United States).

SELECTED QUARTERLY DATA



|                                                           |  |                              |            |   |                |   |            |               |  |   |               |   |  |   |            |  
|---------------------------------------------------------- |  | ---------------------------- | ---------- | - | -------------- | - | ---------- | ------------- |  | - | ------------- | - |  | - | ---------- | -
|                                                           |  | Quarter ended: June 30, 2005 |            |   | Sept. 30, 2005 |   |            | Dec. 31, 2005 |  |   | Mar. 31, 2006 |  
|Net sales                                                  |  | $                            | 11,770,746 |   |                | $ | 12,221,708 |               |  | $ | 12,369,321    |   |  | $ | 13,381,770 |  
|Gross profit                                               |  | $                            | 3,285,298  |   |                | $ | 2,779,340  |               |  | $ | 3,297,397     |   |  | $ | 3,094,929  |  
|SGA                                                        |  | $                            | 2,453,465  |   |                | $ | 2,594,337  |               |  | $ | 2,188,404     |   |  | $ | 2,464,987  |  
|Depreciation & amortization                                |  | $                            | 161,635    |   |                | $ | 172,926    |               |  | $ | 195,947       |   |  | $ | 218,024    |  
|Other income/ (expense), net                               |  | $                            | (7,252     | ) |                | $ | 712,201    |               |  | $ | (113,780      | ) |  | $ | (311,021   | )
|Income tax benefit/ (expense)                              |  | $                            | (72,000    | ) |                | $ | (212,000   | )             |  | $ | (567,193      | ) |  | $ | (229,607   | )
|Preferred dividends                                        |  | $                            | 75,000     |   |                | $ | 75,000     |               |  | $ | 75,000        |   |  | $ | 75,000     |  
|Net income/(loss) available to common shareholders         |  | $                            | 515,946    |   |                | $ | 513,604    |               |  | $ | 364,518       |   |  | $ | 95,129     |  
|Basic earnings (loss) per share                            |  | $                            | 0.06       |   |                | $ | 0.06       |               |  | $ | 0.04          |   |  | $ | 0.01       |  
|Basic weighted average number of common shares outstanding |  |                              | 8,746,145  |   |                |   | 8,901,724  |               |  |   | 9,005,134     |   |  |   | 9,041,106  |  
|                                                           |  |                              |            |  
|SELECTED QUARTERLY DATA                                    |  |                              |            |   |                |   |            |               |  |   |               |   |  |   |            |  
|                                                           |  |                              |            |  
|                                                           |  | Quarter ended: June 30, 2004 |            |   | Sept. 30, 2004 |   |            | Dec. 31, 2004 |  |   | Mar. 31, 2005 |  
|Net sales                                                  |  | $                            | 6,913,616  |   |                | $ | 6,039,352  |               |  | $ | 6,930,721     |   |  | $ | 8,346,551  |  
|Gross profit                                               |  | $                            | 1,627,377  |   |                | $ | 1,351,455  |               |  | $ | 964,586       |   |  | $ | 1,835,075  |  
|SGA                                                        |  | $                            | 1,197,917  |   |                | $ | 1,321,911  |               |  | $ | 1,538,271     |   |  | $ | 2,013,312  |  
|Depreciation & amortization                                |  | $                            | 144,975    |   |                | $ | 147,230    |               |  | $ | 156,038       |   |  | $ | 157,454    |  
|Other income/ (expense), net                               |  | $                            | (103,134   | ) |                | $ | 76,733     |               |  | $ | (104,825      | ) |  | $ | (53,749    | )
|Income tax benefit/ (expense)                              |  | $                            | (14,442    | ) |                | $ |           |               |  | $ |              |   |  | $ | 216,340    |  
|Preferred dividends                                        |  | $                            | 150,833    |   |                | $ | 170,095    |               |  | $ | 125,833       |   |  | $ | 75,000     |  
|Net income/(loss) available to common shareholders         |  | $                            | 16,076     |   |                | $ | (211,048   | )             |  | $ | (960,381      | ) |  | $ | (248,101   | )
|Basic earnings (loss) per share                            |  | $                            | 0.00       |   |                | $ | (0.03      | )             |  | $ | (0.12         | ) |  | $ | (0.02      | )
|Basic weighted average number of common shares outstanding |  |                              | 7,713,899  |   |                |   | 7,724,475  |               |  |   | 8,188,452     |   |  |   | 8,111,851  |  

Managements Discussion and Analysis of Financial Condition and Results of Operations

We derive our revenues from developing, manufacturing and distributing a wide variety of cosmetics, over-the-counter, pharmaceutical and generic drugs,
and prescription and non-prescription products. We also derive revenues from the distribution of our branded product lines, CarbSlim, Lean Protein and from our branded dietary supplement product lines that this year include Hoodia DexL-10 as well as
from distributing others product lines which include Sea Vegg. In addition, we derive revenues from the services provided in connection with pharmacy benefit management. Service revenues are billed and recognized once the service has been
provided. The PBMs revenues are comprised of amounts billed and recognized based on the number of eligible plan members enrolled in the HMO insurance programs, plan member claims caused by the fulfillment of an eligible HMO members drug
prescription and related administration costs for pharmacys fulfilling drug prescriptions for the number of members and the number of claims for the period.

Cost of goods sold is comprised of direct manufacturing and manufacturing and distribution material product costs, contracted service fees, direct personnel compensation and other statutory benefits and indirect costs
relating to labor to support product manufacture, distribution and the warehousing of production and other manufacturing overhead. In addition, for the distribution segment, the cost of all free goods for the purpose of product introduction or other
incentive-based product costs are also charged. The PBM cost of sales amounts recognized represent the direct and indirect costs of the prescription drug claims arising from the pharmacys fulfillment of HMO member drug prescriptions that were
filled, completed and received by eligible HMO insurance plan members for the period.



19



---

##### Table of Contents

Research and development expenses that benefit us and that benefit our customers are charged against
either cost of goods sold or included within selling, general and administrative expenses as incurred dependent upon whether the R&D relates to direct product materials expended, direct laboratory and manufacturing production costs or whether it
relates to indirect or more facility and administrative type costs representing indirect salaries.

Selling, general and administrative
expenses include management and general office salaries, advertising and promotional expenses, depreciation and amortization, insurance expenses, legal and accounting costs, sales and marketing and other indirect operating costs.

Interest expense, net, consists of interest expense associated with borrowings to finance capital equipment expenditures and other working capital needs
and non-cash interest expense as related to amortization of the Companys convertible debt discount as partially offset by interest income earned on our funds held at banks.

Other income (expense) net, consists of amounts received from an insured loss that occurred on August 27, 2002, where a commercial building where
one of our manufacturing facilities is located, was involved in a fire. Although this fire was not in our leased space, nor was the fire caused by the Company or any of its related parties, our facility was exposed to and incurred smoke and water
damage. The company that had the fire is not a related party. Innovative has adequate insurance coverage that covers replacement cost of the facilities contents which includes inventory and leasehold improvements, in addition to business
interruption insurance which covers lost profits based on certain coverage formulas and policy limits. As of March 31, 2006, the final financial assessment has been made by our Company and by our insurance company which resulted in additional
proceeds of approximately $1.3 million of which approximately $800,000 was recognized and recorded as other income.

Upon consummation of
the merger of the Florida corporation, Go2Pharmacy, Inc. and the Delaware corporation, Go2Pharmacy.com, Inc. on November 7, 2000, the Company charged $23,625,000 to marketing expense representing the issuance of 3,000,000 shares of the
Companys stock at the initial public offering price of $7.875. This was reflected in the Companys financial statements as a noncash, nonrecurring marketing expense and was included in the operations of the Company for the year ended
March 31, 2001 and is carried forward in subsequent years as a charge within shareholders equity.

Results of Operations

The following table sets forth selected consolidated statements of operations data as a percentage of revenues for the periods indicated.



|                                                                                       |  |                     |    |  |       |   
|-------------------------------------------------------------------------------------- |  | ------------------- | -- |  | ----- | --
|                                                                                       |  | Year EndedMarch 31, |   
|                                                                                       |  | 2006                |    |  | 2005  |   
|Revenues                                                                               |  | 100.0               | %  |  | 100.0 | % 
|                                                                                       |  |                     |    |  |       |   
|Cost of goods sold (excluding depreciation and amortization)                           |  | 75.0                | %  |  | 79.5  | % 
|                                                                                       |  |                     |    |  |       |   
|Gross profit                                                                           |  | 25.0                | %  |  | 20.5  | % 
|                                                                                       |  |                     |    |  |       |   
|Selling, general and administrative expenses (including depreciation and amortization) |  | 21.0                | %  |  | 23.7  | % 
|                                                                                       |  |                     |    |  |       |   
|Other income (expense), net                                                            |  | 0.6                 | %  |  | (.7   | )%
|                                                                                       |  |                     |    |  |       |   
|Income (loss) before income taxes and preferred dividends                              |  | 6.0                 | %  |  | (3.8  | )%
|                                                                                       |  |                     |    |  |       |   
|Income tax (expense) / benefit                                                         |  | (2.2                | )% |  | .1    | % 
|                                                                                       |  |                     |    |  |       |   
|Preferred dividends                                                                    |  | 0.6                 | %  |  | 1.9   | % 
|                                                                                       |  |                     |    |  |       |   
|Net income (loss)                                                                      |  | 3.0                 | %  |  | (5.0  | )%
|                                                                                       |  |                     |    |  |       |   

Fiscal Year Ended March 31, 2006, Compared to Fiscal Year Ended March 31, 2005

Revenues. Total consolidated revenues increased approximately $21.5 million, or 76.2%, to approximately $49,744,000 for the fiscal
year ended March 31, 2006, as compared to approximately $28,230,000 for the fiscal year ended March 31, 2005.

Manufacturing
revenues increased approximately $6.2 million, or 53.3%, to approximately $17.9 million for the fiscal year ended March 31, 2006, as compared to approximately $11.7 million for the corresponding period. Overall, manufacturing capacities and
capabilities continue to be increased as we have added additional more advanced, higher speed production equipment. Our customer base and their relate order volumes are increasing also.



20



---

##### Table of Contents

Distribution revenues increased approximately $10.7 million or 268.4% to approximately $14.7 million for
the fiscal year ended March 31, 2006, as compared to $4.0 million for the fiscal year ended March 31, 2005. Overall, sales prices vary for all product lines dependent upon a customers individual as well as aggregate purchase volumes
in addition to the number of distribution points of sale and advertising dollars projected to be spent. For the fiscal year ended March 31, 2006, 15,031 cases of Hoodia DexL-10 were sold versus no cases sold for the fiscal year ended
March 31, 2005 based on the product introduction and the transfer of the brand from an unrelated third party during February 2006. For the fiscal year ended March 31, 2006, 9,301 cases of CarbSlim were sold versus 53,552 cases sold for the
fiscal year ended March 31, 2005, a 82.6% case-sale decrease. CarbSlim is comprised of ten SKUs, two sizes of: peanut butter crunch, chocolate caramel crunch, mint, peanut butter cookie dough, chocolate chip cookie dough. The Lean Protein Bites
product line is comprised of four SKUs, milk chocolate, white chocolate, peanut butter and lemon. For the fiscal year ended 2006, 3,805 total cases were sold as compared to the fiscal year ended 2005, where 7,534 total cases were sold, a case-sale
decline of approximately 49.5%. The decrease in both food product case sales are due to the decrease in the number of national and regional distribution points in addition to the Company has shifted its focus more towards their branded dietary
supplements rather than its food product lines based on more favorable margins. The total distribution revenues for the year ended March 31, 2006 were derived from 98% dietary supplement sales with only 2% of total distribution revenues being
derived from consumer foods as compared to the corresponding period in 2005 whereas 23% of distribution revenues were derived from dietary supplement case sales with 77% of distribution revenues being derived from our consumer food products.

Pharmacy benefit management revenues increased 45.0% or approximately $5.15 million to $16.59 million for the fiscal year ended
March 31, 2006, as compared to $11.4 million for the fiscal year ended March 31, 2005. The increase results from the increase in overall membership and prescriptions filled in the two health plans as compared to the fiscal year ended
March 31, 2005. Revenue per member remained constant for both of the fiscal years.

Pharmaceutical revenues decreased to approximately
$486,000 for the fiscal year ended March 31, 2006 as compared to $1.1 million in sales for this business segment for the fiscal year ended March 31, 2005. The pharmaceutical business segment generated its revenues based solely on
manufacturing sales of Belchers branded Levothyroxine as compared to the year ended March 31, 2005 where over-the-counter contract repackaging sales of ephedrine of $602,000 in addition to a $500,000 licensing fee received from a European
company for licensing our brand of Levothyroxine.

Gross Profit. Total gross profit increased approximately $6.7
million or 115.6%, to $12.5 million for the fiscal year ended March 31, 2006, as compared to $5.8 million for the fiscal year ended March 31, 2005. Total gross margins increased to 25.0% for the fiscal year ended March 31, 2006 from
20.5% for the fiscal year ended March 31, 2005.

Manufacturing gross profit increased approximately $3.3 million, or 94.7%, to
approximately $6.8 million for the fiscal year ended March 31, 2006, as compared to approximately $3.5 million in the corresponding period in 2005. For the fiscal year ended March 31, 2006 manufacturing gross margin increased to 38.2%,
from 30.1% in the corresponding period in 2005. Sales and gross profits have increased proportionately as partially offset by higher costs due to increases in freight charges due to increased fuel costs, increases in resin and plastic-based
packaging component costs as well as increased labor costs. Current increases in this type of labor-based direct overhead costs are in line with the Companys planned improvements surrounding enhanced standard operating and manufacturing
procedures in all its manufacturing plants. The Company expects that these improvements will continue to increase the Companys visibility in the marketplaces that the Company competes in for new and expanded business for the upcoming fiscal
year.

Distribution gross profits increased 360.8% or approximately $4.4 million to approximately $5.6 million for the fiscal year ended
March 31, 2006, as compared to approximately $1.2 million for the fiscal year ended March 31, 2005, with distribution gross margins increasing to 37.8% for the fiscal year ended March 31, 2006 as compared to 30.2% for the fiscal year
ended March 31, 2005. Gross profits and gross margins improved based on a change in the sales mix from food products to branded dietary supplements which have a higher per unit sales prices and higher gross margins.

Pharmacy Benefit Management gross profit decreased approximately $124,000 or 47.8% to approximately $136,000 for the fiscal year ended March 31,
2006, as compared to approximately $260,000 for the fiscal year ended March 31, 2005. Pharmacy benefit management gross margin was 0.8% for the fiscal year ended March 31, 2006 as compared to 2.3% for the fiscal year ended March 31,
2005. Gross profit and margin decreased based on continued industry pressure on controlling per member and per claim revenues as they continue to decline coupled with growing membership, rising number of claims in addition to the rising prescription
costs in addition to the fiscal year ended March 31, 2005 the Company received a non-recurring contract renewal fee of $225,000.



21



---

##### Table of Contents

Pharmaceutical gross profits decreased $894,000 to approximately a gross profit deficit of $(103,000) for
the fiscal year ended March 31, 2006 as compared to $791,000 in gross profits for this business segment for the fiscal year ended March 31, 2005. Pharmaceutical gross margins were at a deficit of (21.2)% for the fiscal year ended 2006 as
compared to 71.8% for the fiscal year ended March 31, 2005. This was based primarily on the Beta-Lactam facility located in Baltimore, Maryland that has no revenue stream but has costs associated with product development and production and
laboratory direct labor costs. The Baltimore facility incurred $314,000 of costs with no revenue offset. The facility expects the derive revenues from their Beta-Lactams during the third quarter ended December 31, 2006. The Belcher facility
gross profit, excluding the Baltimore facility, derived $212,000 in gross profits and gross margins of 56.4%.

Selling, General and
Administrative Expenses. Selling, general and administrative (SGA) expenses consist of advertising and promotional expenses; insurance costs, research and development costs associated with the generic drug segment, personnel
costs related to general management functions, finance, accounting and information systems, payroll expenses and sales commissions; professional fees related to legal, audit and tax matters; and depreciation and amortization expenses. Selling,
general and administrative expenses, inclusive of depreciation and amortization, increased approximately $3.7 million, or 56.0%, to approximately $10.4 million for the fiscal year ended March 31, 2006, as compared to approximately $6.7 million
in the corresponding 2005 period. The increase is primarily attributable to additional advertising and promotional expenses associated with promoting our distribution segment and related branded product lines, including Hoodia DexL-10, CarbSlim and
Lean Protein. Increased legal expenses associated with our class action and derivative lawsuits both of which were dismissed. All insurance costs have increased, including health, general and product liability insurances; health insurance increased
primarily due to an increase in the cost per employee and the number of employees; in addition to external insurance market influences surrounding higher premium costs for all of the Companys business segments based on our increasing sales
revenues. Officer and employee salaries have increased in total based on increases in the number of personnel in addition to merit increases. Rents increased based on additional facilities leased as located in Baltimore, Maryland and Largo, Florida
for manufacturing, warehousing and distribution as required with growing manufacturing and distribution segments. As a percentage of sales, selling, general and administrative expenses decreased to 21.0% for the fiscal year ended March 31, 2006
from 23.7% in the corresponding period in 2005.

Other Income (Expense), Net. For the fiscal year ended March 31, 2006,
the balance in other income/(expense), net, changed from a net other expense in 2005 to a net other income in 2006 fluctuating approximately $465,000 or 251.5%, to $280,000 as compared to $(185,000) for the corresponding 2005 period. For the fiscal
year ended 2006, the $280,000 was primarily comprised of $374,000 of interest expense in addition to non-cash interest expense consisting of the write-off of approximately $300,000 related to the pay off of the convertible debt and the debt discount
as offset by other income of $908,000. The other income was based on $1.3 million being received as final settlement of our fire insurance claim that was filed August 2002. Cash-related interest expense, net of interest income, decreased
approximately $117,000 to approximately $374,000 for the fiscal year ended March 31, 2006, from approximately $491,000 for the fiscal year ended March 31, 2005. The decrease in interest expense was due the the Company paying off the
remaining balance of the 6% interest convertible debt due to Laurus in the amount of $2.4 million during February 2006.

Income Tax
(Expense) Benefit. At March 31, 2006, the Company had recorded $(1,080,800) of income tax expense as compared to a deferred income tax benefit of $212,800 for the fiscal year ended March 31, 2005. The expense is based on effective
rate calculations as applied to our net income earned versus the prior period where the deferred tax benefit was calculated based on temporary and permanent differences using the effective tax rates applied to our net loss amounts this fiscal year,
changes in information gained related to underlying assumptions about the future operations of the Company as well as the utilization of available operating loss carryforwards.

Management believes that there was no material effect on operations or the financial condition of the Company as a result of inflation as of and for the
year ended March 31, 2006. Management also believes that its business is not seasonal, however significant promotional activities can have a direct impact on sales volume in any given quarter.

Financial Condition, Liquidity and Capital Resources

The Company has financed its operations through available borrowings under its credit line facilities, cash provided from operations and receipt of $15 million of gross private placement proceeds based on a $10 million 6% convertible
preferred stock private placement together with a total of 412,500 warrants at exercise prices ranging from $6.29 to $8.51 exercisable through February 2011 and a $5 million convertible 6%, three-year term debt together with a total of 150,000
warrants at exercise prices ranging from $7.34 to $8.62 exercisable through January 2011 closed during the months of January 2004 through March 2004. Approximately $4,800,000 of the proceeds from the sale of the 6% convertible preferred stock were
placed in a restricted account. During December 2004, the holders of the $5 million Series A convertible preferred stock converted all of their preferred shares outstanding in exchange for 800,000 of the Companys $.01 par value common stock
thus releasing the restrictions surrounding the $4.8 million cash received January 2004.



22



---

##### Table of Contents

As a direct result of issuing warrants with the $5 million 6% convertible debt in January 2004, the
Company recorded $932,365 discount on the three-year term note based on applying a Black-Scholes valuation which lowered the gross amount of the note payable with the $932,365 offset recorded within Additional Paid in Capital (APIC). The
$932,365 discount will be straight-line amortized to interest expense over the three-year life of the note. As a direct result of issuing warrants with the $10 million 6% convertible preferred stock in February and March, the Company recorded a
total of $3,580,963 discount on the $10 million 6% convertible preferred stock based on applying a Black-Scholes valuation which resulted in a net reclassification of $3,580,963 lowering retained earnings and increasing APIC. All Black-Scholes
valuations referenced and related entries are noncash transactions. During February 2006, the Company paid off the remaining $2.4 million 6% interest convertible debt balance along with all fees and penalties by issuing approximately 530,000 shares
and simultaneously wrote-off approximate $300,000 to interest expense representing the debt discount remaining balance.

The Company had
working capital of approximately $8.4 million at March 31, 2006, inclusive of current portion of long-term obligations, as compared to a working capital of approximately $10.6 at March 31, 2005. The decline in working capital in primarily
due to increases in accounts payable due to increases in manufacturing and distribution purchases along with long term asset increases that include leasehold improvements, production and laboratory cash equipment purchases.

During March 2005, the Company negotiated with an international media company to exchange excess CarbSlim inventory for future credit for use on custom
print, radio and television advertising. Based on the Companys expansion into its own branded consumer product lines coupled with the decline in customer demand for low-carb products, this excess inventory was able to be redeemed with the
media credits having a three-year life. The media credits were recorded based on the net cost of CarbSlim inventory that was exchanged.

Net cash provided by operating activities was $915,000 for the fiscal year ended March 31, 2006, as compared to net cash used by operating activities of $(2,300,000) for the fiscal year ended March 31, 2005. Cash provided was
primarily attributable to a net income before preferred dividends of approximately $1.8 million based on consolidated gross profits increases of approximately $6.7 million, increases in trade accounts payable and accrued expenses of $5.9 million,
depreciation of $749,000 and amortization of debt discount of $563,000 as partially offset by increases in SGA expenses of $3.6 million and increases in trade accounts receivable of $5.2 million, increases in inventory of $2 million as based on
increased credit sales and those purchases required to meet open manufacturing and distribution orders, cash payments for income taxes of $840,000 and changes in deferred taxes of $240,000, and $620,000 in prepaid expenses, primarily for insurance
premiums, and $1.0 million in other asset purchases related to the DEXL-10 brand transfer for $600,000 and approximately $400,000 as related to prepaid ANDA bioequivalency work.

Net cash used in investing activities was $(6.8) million for the fiscal year ended March 31, 2006 as compared to the net cash used of $(3.1) million
for the fiscal year ended March 31, 2005. Investing activities represented the R&D related purchases and upgrades of plant and laboratory equipment for generic drug manufacturing and distribution plants, Belcher Pharmaceuticals and American
Antibiotics, of $(7.2) million as partially offset by net proceeds received from the minority interest associated with American Antibiotics.

Net provided by financing activities was $681,000 for the fiscal year ended March 31, 2006 as compared to cash used by financing activities of $(1.3) million for the fiscal year ended March 31, 2005. The 2006 financing activity
cash provided was primarily attributable to $221,000 of proceeds received from vested stock option exercises, the $3 million note for the Companys 51% American Antibiotics investment as partially offset by payments of $2.5 million on long-term
obligations.

Management believes that cash expected to be generated from operations, current cash reserves, and existing financial
arrangements will be sufficient for the Company to meet its capital expenditures and working capital needs for its operations as presently conducted. The Companys future liquidity and cash requirements will depend on a wide range of factors,
including the level of business in existing operations, expansion of facilities, expected results from recent procedural changes surrounding the acceptance of manufacturing sales orders, and possible acquisitions. In particular, we have added
additional manufacturing lines and have purchased additional fully automated manufacturing equipment to meet our present and future growth. Our plans may require the leasing of additional facilities and/or the leasing or purchase of additional
equipment in the future to accommodate further expansion of our manufacturing, warehousing and related storage needs. If cash flows from operations, current cash reserves and available credit facilities are not sufficient, it will be necessary for
the Company to seek additional financing. There can be no assurance that such financing would be available in amounts and on terms acceptable to the Company.

ITEM 7. FINANCIAL STATEMENTS

All financial information required by this Item is attached hereto beginning on Page 37.



23



---

##### Table of Contents

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

None.

ITEM 8A. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation was performed under the supervision and with the participation of our
management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure procedures. Based on managements evaluation as of the end of the period covered by this
Annual Report, our principal executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) were effective to ensure that the information required to be disclosed by us in the reports that we file under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness.

Changes in internal controls. There have been no changes in our internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation referred to above, nor were there any significant deficiencies or material weaknesses in our internal controls. Accordingly, no corrective actions were required or undertaken.

ITEM 8B. OTHER INFORMATION

None.



24



---

##### Table of Contents

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers, directors and key employees and
their ages and their respective positions as of March 31, 2006 were as follows:



|                        |  |     |  |                                                
|----------------------- |  | --- |  | -----------------------------------------------
|Name                    |  | Age |  | Position                                       
|Jugal K. Taneja         |  | 62  |  | Chairman of the Board and Director             
|Mihir K. Taneja         |  | 31  |  | Chief Executive Officer, Secretary and Director
|Kotha S. Sekharam, Ph.D |  | 55  |  | President and Director                         
|Carol Dore-Falcone      |  | 41  |  | Vice President and Chief Financial Officer     
|Barry H. Dash, Ph.D     |  | 74  |  | Director                                       
|William L. LaGamba      |  | 47  |  | Director                                       
|Shan Shikarpuri         |  | 55  |  | Director                                       
|George L. Stuart, Jr.   |  | 60  |  | Director                                       

JUGAL K. TANEJA has served as our Chairman of the Board since June 1998. Until June 1998, he also
served as Chief Executive Officer for Dynamic. From November 1991 until December 1998, he also served as the Chairman of the Board and Chief Executive Officer of NuMed Home Health Care, Inc., a provider of home health care services and contract
staffing of health care employees. From June 1993 until March 1998, he was also the Chief Executive Officer of National Diagnostics, Inc., a provider of medical diagnostic services. NuMed Home Health Care, Inc and National Diagnostics, Inc., are
publicly traded companies. Since April 1996, Mr. Taneja is also a Director of DrugMax, Inc., a public company operating as an online business to business wholesaler and retailer of pharmaceuticals, over-the-counter drugs, health and beauty care
products and private label dietary supplements. Although he devotes substantial time to our operations and business, Mr. Taneja does not devote his full time to our business. Mr. Taneja is the father of Mihir K. Taneja, our chief executive
officer.

MIHIR K. TANEJA has served as our Chief Executive Officer, Secretary and a Director since November 1999. Prior to this he served
as our Vice President of Marketing since June 1998. He also served as Dynamics Vice President of Marketing from July 1996 to November 1999. Prior to joining Dynamic, Mr. Taneja served as a market and financial analyst for Bancapital
Corporation from 1994 to 1996. Mr. Taneja holds Bachelor of Arts degrees in finance and marketing from the University of Miami. Mr. Taneja is the son of Jugal K. Taneja, the Companys Chairman of the Board.

DR. KOTHA S. SEKHARAM currently serves as our President and a Director. Prior to this, Dr. Sekharam was a founder and director of Nu-Wave Health
Products, Inc., a developer and manufacturer of over-the-counter analgesic roll-ons and creams, dietary supplements and health and beauty care products. Dynamic acquired 80% of Nu-Wave in September 1995 and the additional 20% of Nu-Wave in July
1997. Dr. Sekharam served as President of Nu-Wave from June 1996 through March 1998 and Vice President of Nu-Wave from September 1995 until June 1996. From 1992 until September 1995, he served as Director of Research and Development of Energy
Factors, Inc., our predecessor. He has served as President of Dynamic since June 1996 and served as our President since June 1998. Presently, he continues to serve as our President and as President of Dynamic. Dr. Sekharam holds a Ph.D. in food
sciences from Central Food Technological Research Institute, Mysore, India, a United Nations university center and has been employed in the food and health industry since 1982.

CAROL DORE-FALCONE has served as our Vice President and Chief Financial Officer since August 1999. She has also served as Vice President and Chief
Financial Officer of Dynamic from August 1999 until November 7, 2000. Prior to joining us, Ms. Dore-Falcone was employed as an audit manager with Deloitte & Touche, Certified Public Accountants, where she had served in various capacities since
January 1990. Ms. Dore-Falcone is a certified public accountant and holds a B.S. degree in Accounting from Montclair State University and an M.B.A. from the University of Tampa.

DR. BARRY H. DASH has served as a Director since January 2004. In addition, Dr. Dash has been President of Dash Associates, LLC since 1995, where he
provides consulting to the pharmaceutical and health and beauty aid industries. Prior to this he served 31 years as Senior Vice President of American Home Products Corporation, Whitehall-Robins Healthcare, now Wyeth; and served as a professor at
Columbia University College of Pharmaceutical Sciences from 1956-1962. Dr. Dash holds a Ph.D. in Medicinal Chemistry and Pharmaceutics from the University of Florida, MS in Pharmacy and a BS in Pharmaceutical Sciences both from Columbia
University.

WILLIAM L. LaGAMBA has served as a Director since July 2005 and has served as President and Chief Operating Officer of
DrugMax, Inc. since October 2000 until August 2005. From March 2000 to March 2000, he served as the Companys Chief Executive Officer. From November 1999 to October 2000, he also served as the Companys Secretary and Treasurer. From June
1998 until joining the company in November 1999, Mr. LaGamba served as Chief Executive Officer of Dynamic. He was also a founder and the President of Becan Distributors, Inc. from its inception in January 1997 until it was acquired by the
Company in November 1999. For 14 years prior to January 1997, Mr. LaGamba served in various capacities for McKesson Drug Company, a large distributor of pharmaceuticals, health and beauty care products and services, and FoxMeyer Drug Company.



25



---

##### Table of Contents

SHAN SHIKARPURI has served as a Director since November 2003. In addition, he is the founding principal
of his Palm Harbor accounting firm, Shan Shikarpuri & Associates, P.A., which has been doing business in Florida for the past twenty years. Shan earned three degrees from Florida State University, has taught accounting and income tax law at
the University of South Florida and the University of Virginia, and had trained auditors at the Office of Inspectors General in Washington, D.C. He is a past president of the Palm Harbor Chamber of Commerce, is active in many civic organizations and
is a frequent speaker on tax and accounting issues. Shan is a member of the Tampa Bay Regional Planning Council representing Pinellas County. He has served on the board of directors of the Sun Coast Chapter of the Florida Institute of CPAs and is
currently on the board of numerous privately held corporations and not-for-profit organizations in the Tampa Bay area.

GEORGE L. STUART,
JR. has served as a Director since March 2000. Since 2005, Mr. Stuart has served a Senior Vice President of Mirabilis Ventures, Inc. a merger and acquisition company headquartered in Orlando, Florida. Mr. Stuart is the President of George
Stuart & Associates, a management consulting firm. In addition, Mr. Stuart was the Chief Executive Officer of DoctorSurf.com, Inc. from December 1, 1999 to July 2000. From July 1997 to December 1999, Mr. Stuart was Vice
President and a Director of Leapfrog Smart Products, Inc., a high-technology smart card development company in Orlando, Florida. From January 1995 to July 1997, Mr. Stuart was a partner in Stuart/Cloud Enterprises, Ltd. A government relations
business development and organizational consulting firm in Tallahassee, Florida. Mr. Stuart was a Florida State Senator from 1978 through 1990. From January 1991 to January 1995, Mr. Stuart served as the Secretary and Chief Executive
Officer of the State of Floridas Department of Business and Professional Regulation. Mr. Stuart holds a B.A. degree in Economics from the University of Florida and an M.B.A. from Harvard Universitys Graduate School of Business.

Compensation of Directors

We
reimburse each of our directors for reasonable expenses incurred in attending meetings of our Board of Directors. Each non-employee director receives compensation in the form of a fee of $2,500 per quarter. Additionally, all directors are eligible
to receive stock options under the Companys 1999 Stock Option Plan, and directors who are also employees of the Company, or a subsidiary of the Company, are eligible to receive Incentive Stock Options when and as approved by the Board of
Directors. Effective with the term beginning April 2005, the Company established a policy providing that all directors will receive 50,000 stock options and non officer directors are eligible to receive 5,000 shares of restricted stock per fiscal
year if they attend at least two meetings in such fiscal year. The options granted under this policy to directors are exercisable in accordance with a three-year vesting schedule from date of grant, provided that should any director resign prior to
the end of the relevant term of office, the options granted for during such fiscal term shall be immediately forfeited. During the fiscal year ended March 31, 2006 and 2005, 550,000 and 460,000 options, respectively, were granted to the
directors.

Committees of the Board of Directors

The Board of Directors have formed the following committees with each of its respective members listed: Audit Committee consists of Mssrs. LaGamba, Stuart, Jr., and Shikarpuri, with Mssr. Shikarpuri representing the
audit committee financial expert, Nominating Committee: Mssrs. Dash, Stuart and Shikarpuri, Executive Committee: Mssrs. Dash, Sekharam and M. Taneja with the compensation committee consisting of Mssrs. Dash, Stuart and Dore-Falcone.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3, 4 and 5, and amendments thereto, furnished to the Company during fiscal year 2006 and 2005, the Company is not aware of any director, officer or beneficial owner of more than ten percent of the
Companys Common Stock that failed to file reports required by Section 16(a) of the Securities Exchange Act of 1934 on a timely basis during fiscal year 2005.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth certain summary information with
respect to the compensation paid to the Companys Chief Executive Officer, President and Chief Financial Officer for services rendered in all capacities to the Company for the fiscal periods ended March 31, 2006, 2005 and 2004. Other than
as listed below, the Company had no executive officers whose total annual salary and bonus exceeded $100,000 for that fiscal year:



26



---

##### Table of Contents

SUMMARY COMPENSATION TABLE



|                                        |      |                     |   |            |         |           |   |                               |   |                                 |        |                                                    |         |                  |   |                            |   |  
|--------------------------------------- | ---- | ------------------- | - | ---------- | ------- | --------- | - | ----------------------------- | - | ------------------------------- | ------ | -------------------------------------------------- | ------- | ---------------- | - | -------------------------- | - | -
|                                        |      | Annual Compensation |   |            |         |           |   | Long-Term Compensation       
|                                        |      |                     |   |            |         |           |   |                               |   |                                 |        | Awards                                             |         |                  |   | Payouts                   
|Name and Principal Position             |      | Year                |   | Salary ($) |         | Bonus ($) |   | Other Annual Compensation ($) |   | Restricted Stock Award (shares) |        | Securities Underlying Options / SARs (#) (1)(2)(3) |         | LTIP Payouts ($) |   | All Other Compensation ($)
|Mihir K. Taneja Chief Executive Officer |      | 2006                |   | $          | 196,425 |           | $ | 70,000                        |   |                                |        | 30,000                                             |         | 250,000          |   |                           |   | 
|                                        | 2005 |                     | $ | 176,394    |         |           |  |                               |  |                                 | 40,000 |                                                    | 225,000 |                  |  |                            | 
|                                        | 2004 |                     | $ | 161,473    |         |           |  |                               |  |                                 | 40,000 |                                                    | 25,000  |                  |  |                            | 
|Kotha S. Sekharam                       |      | 2006                |   | $          | 159,076 |           | $ | 55,000                        |   |                                |        | 20,000                                             |         | 150,000          |   |                           |   | 
|Ph.D., President                        |      | 2005                |   | $          | 134,254 |           |   |                              |   |                                |        | 30,000                                             |         | 175,000          |   |                           |   | 
|                                        |      | 2004                |   | $          | 99,160  |           |   |                              |   |                                |        | 25,000                                             |         | 25,000           |   |                           |   | 
|Carol Dore-Falcone                      |      | 2006                |   | $          | 151,053 |           | $ | 50,000                        |   |                                |        | 10,000                                             |         | 125,000          |   |                           |   | 
|Vice President and                      |      | 2005                |   | $          | 134,369 |           |   |                              |   |                                |        | 20,000                                             |         | 100,000          |   |                           |   | 
|Chief Financial Officer                 |      | 2004                |   | $          | 120,560 |           |   |                              |   |                                |        | 20,000                                             |         |                 |   |                           |   | 

---

|(1) | On June 7, 2005, each of the officers were granted common stock options by action of the Board of Directors. The options vest prorata over a three year period. The exercise price of
the options for the June 7, 2005 grant was $1.95 as based on the closing price of the Companys stock on the NASDAQ Capital Market the business date of the grant.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On September 1, 2004, each of the officers were granted restricted common stock and common stock options by action of the Board of Directors. The stock options vest prorata
over a three year period. The exercise price of the options for the September 1, 2004 grant was $4.55 as based on the closing price of the Companys stock on the NASDAQ Capital Market the business date of the grant.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | For Mssrs. M. Taneja and Sekharam, amounts presented for stock option awards include officer and board member option grants. April 1, 2003, 2004 and 2005 as a part of a board
of directors compensation, Mssrs. M. Taneja and Sekharam received 25,000, 25,000 and 50,000 options respectively. The prices of the stock option grants at April 1, 2003 were equal to a price of $0.80 and at April 1, 2004, were equal
to $6.15 and April 1, 2005 were equal to $1.95 and vest over a three-year period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Arrangements

During February 2004, effective April 1, 2004, the Company renewed all officers three-year employment agreements with Mihir K. Taneja, Chief
Executive Officer, Kotha S. Sekharam, President, and Carol Dore-Falcone, Vice President and Chief Financial Officer, at annual salaries of $200,000, $160,000 and $150,000, plus benefits, respectively. In addition, the Company renewed the consulting
agreement with the Chairman of the Board, Jugal K. Taneja, pursuant to which he is paid an annual fee of $240,000.

Officers and employees
are permitted to participate in our benefits and employee benefit plans that may be in effect from time to time, to the extent eligible, and each employee is entitled to receive an annual bonus as determined in the sole discretion of our Board of
Directors based on the Boards evaluation of the officers or employees performance as well as the Companys financial performance.



27



---

##### Table of Contents

Employee and Non-Employee Stock Option Plans

1999 Employee Stock Option Plan

On September 30, 1999, our Board of Directors and our sole stockholder at that time adopted our 1999 Stock Option Plan. The 1999 plan will enable us to attract and retain top-quality employees, officers, directors and consultants and
to provide such employees, officers, directors and consultants with an incentive to enhance stockholder return. The 1999 plan will allow the grant of options to purchase a maximum aggregate of 1,000,000 shares of common stock to our officers,
directors, or other key employees and consultants. The plan was amended on May 18, 2004 based on shareholder approval, increasing the number of shares to a total of 1,500,000 shares of common stock.

The Board of Directors or a committee of the Board may administer the 1999 plan, and has complete discretion to select the optionees and terms and
conditions of each option, subject to the provisions of the 1999 plan. Options granted under the 1999 plan may be incentive stock options as defined in Section 411 of the Internal Revenue Code of 1986 or so-called nonqualified
options.

The exercise price of incentive stock options may not be less than 100% of the fair market value of the common stock as of the
date of grant (110% of the fair market value if the grant is to an employee who owns more than 10% of the total combined voting power of all classes of capital stock of the company). The Internal Revenue Code currently limits to $100,000 the
aggregate value of common stock that may be acquired in any one year pursuant to incentive stock options under the 1999 plan or any other option plan adopted by a company.

Nonqualified options may be granted under the 1999 plan at an exercise price of not less than 100% of the fair market value of the common stock on the
date of grant. Nonqualified options also may be granted without regard to any restriction on the amount of common stock that may be acquired pursuant to such options in any one year.

Subject to the limitations contained in the 1999 plan, options become exercisable at such times and in such installments (but not less than 20% per
year) as the Committee shall provide in the terms of each individual stock option agreement. The Committee must also provide in the terms of each stock option agreement when the option expires and becomes unexercisable, and may also provide the
option expires immediately upon termination of employment for any reason. No option held by directors, executive officers or other persons subject to Section 16 of the Securities Exchange Act of 1934 may be exercised during the first six months
after such option is granted.

Unless otherwise provided in the applicable stock option agreement, upon termination of employment of an
optionee, all options that were then exercisable would terminate three months (twelve months in the case of termination by reason of death or disability) following termination of employment. Any options which were not fully vested and exercisable on
the date of such termination would immediately be cancelled concurrently with the termination of employment.

Options granted under the
1999 plan may not be exercised more than ten years after the grant (five years after the grant if the grant is an incentive stock option to an employee who owns more than 10% of the total combined voting power of all classes of capital stock of the
company). Options granted under the 1999 plan are not transferable and may be exercised only by the respective grantees during their lifetime or by their heirs, executors or administrators in the event of death. Under the 1999 plan, shares subject
to cancelled or terminated options are reserved for subsequently granted options. The number of options outstanding and the exercise price thereof are subject to adjustment in the case of certain transactions such as mergers, recapitalizations,
stock splits or stock dividends. The 1999 plan is effective for ten years, unless sooner terminated or suspended.

Employees

The following represents the employees common stock options outstanding as of March 31, 2006:



|                                           |  |          |  
|------------------------------------------ |  | -------- | -
|Option balance outstanding, March 31, 2005 |  | 633,200  |  
|Granted                                    |  | 150,000  |  
|Exercised                                  |  | (101,783 | )
|Forfeited                                  |  | (33,000  | )
|                                           |  |          |  
|Option balance outstanding, March 31, 2006 |  | 648,417  |  
|                                           |  |          |  



28



---

##### Table of Contents

Effective January 1, 2006, the board approved the grant of 150,000 options to a Company employee hired as President
for Belcher. The exercise price of the granted options was $3.60 which was the closing price of the Companys stock on January 3, 2006. Forfeited options represent options granted to one or more employees of record whose employment is
terminated, voluntarily or involuntarily, and based on their termination date, such options were considered nonvested. As of March 31, 2006, of the 648,417 options outstanding, 371,417 options were vested with 277,000 options being nonvested.

The following represents the employees common stock options outstanding as of March 31, 2005:



|                                           |  |         |  
|------------------------------------------ |  | ------- | -
|Option balance outstanding, March 31, 2004 |  | 507,219 |  
|Granted                                    |  | 200,000 |  
|Exercised                                  |  | (39,300 | )
|Forfeited                                  |  | (34,719 | )
|                                           |  |         |  
|Option balance outstanding, March 31, 2005 |  | 633,200 |  
|                                           |  |         |  

On September 1, 2004, the board approved the grant of 200,000 options to Company employees. The exercise
price of the granted options was $4.55 which was the closing price of the Companys stock. Forfeited options represent options granted to one or more employees of record whose employment is terminated, voluntarily or involuntarily, and based on
their termination date, such options were considered nonvested. As of March 31, 2005, of the 633,200 options outstanding, 351,134 options were vested with 282,066 options being nonvested.

Officers

The following represents the officers
common stock options outstanding as of March 31,2006:



|                                           |  |          
|------------------------------------------ |  | ---------
|Option balance outstanding, March 31, 2005 |  | 769,933  
|Granted                                    |  | 375,000  
|Exercised                                  |  |         
|Forfeited                                  |  |         
|                                           |  |          
|Option balance outstanding, March 31, 2006 |  | 1,144,933
|                                           |  |          

On June 7, 2005, the board awarded the officers of the Company 375,000 options at an exercise
price of $1.95 which was the closing price of the Companys stock on the date of the grant. As of March 31, 2006, of the 1,144,933 options outstanding, 469,933 of those options were vested with 675,000 options being nonvested.

The following represents the officers common stock options outstanding as of March 31,2005:



|                                           |  |         |  
|------------------------------------------ |  | ------- | -
|Option balance outstanding, March 31, 2004 |  | 323,333 |  
|Granted                                    |  | 450,000 |  
|Exercised                                  |  | (3,400  | )
|Forfeited                                  |  |        |  
|                                           |  |         |  
|Option balance outstanding, March 31, 2005 |  | 769,933 |  
|                                           |  |         |  

On September 1, 2004, the board awarded the officers of the Company 450,000 options at an
exercise price of $4.55 which was the closing price of the Companys stock on the date of the grant. As of March 31, 2005, of the 769,933 options outstanding, 319,933 of those options were vested with 459,000 options being nonvested.

1999 Non-Employee Stock Option Plan

On September 30, 1999, our Board of Directors and sole stockholder adopted our 1999 non-employee stock option plan. The 1999 non-employee plan enables us to attract and retain top-quality directors and
consultants and to provide such directors and consultants with an incentive to enhance stockholder return. The 1999 non-employee plan allows the grant of options to purchase a maximum aggregate of 500,000 shares of common stock to non-employee
directors. The plan was amended on May 18, 2004 based on shareholder approval, increasing the number of shares to a total of 1,000,000 shares of common stock.



29



---

##### Table of Contents

The Board of Directors or a committee of the Board may administer the 1999 non-employee plan, and has
complete discretion to select the optionees and terms and conditions of each option, subject to the provisions of the 1999 non-employee plan. Options granted under the 1999 non-employee plan will not be incentive stock options as defined
in Section 411 of the Internal Revenue Code of 1986, they will be so-called nonqualified options.

Nonqualified options may be granted
under the 1999 non-employee plan at an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. Nonqualified options also may be granted without regard to any restriction on the amount of common stock
that may be acquired pursuant to such options in any one year.

Subject to the limitations contained in the 1999 non-employee plan, options
become exercisable at such times and in such installments as the Committee shall provide in the terms of each individual stock option agreement. The Committee must also provide in the terms of each stock option agreement when the option expires and
becomes unexercisable, and may also provide the option expires immediately upon termination of services for us or for any other reason. No option held by persons subject to Section 16 of the Securities Exchange Act of 1934 may be exercised
during the first six months after such option is granted.

Unless otherwise provided in the applicable stock option agreement, upon
termination of engagement of an optionee, all options that were then exercisable would terminate three months (twelve months in the case of termination by reason of death or disability) following termination of services. Any options which were not
fully vested and exercisable on the date of such termination would immediately be cancelled concurrently with the termination.

Options
granted under the 1999 non-employee plan may not be exercised more than ten years after the grant. Options granted under the 1999 non-employee plan are not transferable and may be exercised only by the respective grantees during their lifetime or by
their heirs, executors or administrators in the event of death. Under the 1999 non-employee plan, shares subject to cancelled or terminated options are reserved for subsequently granted options.

The number of options outstanding and the exercise price thereof are subject to adjustment in the case of certain transactions such as mergers, recapitalizations, stock
splits or stock dividends. The 1999 non-employee plan is effective for ten years, unless sooner terminated or suspended. We will not grant any options under the 1999 non-employee plan until the plan is appropriately registered pursuant to Florida
Statutes or an exemption therefrom is available.

The following represents the nonemployee common stock options outstanding as of
March 31, 2006:



|                                           |  |           |  
|------------------------------------------ |  | --------- | -
|Option balance outstanding, March 31, 2005 |  | 866,665   |  
|Granted                                    |  | 650,000   |  
|Exercised                                  |  | (98,168   | )
|Forfeited                                  |  |          |  
|                                           |  |           |  
|Option balance outstanding, March 31, 2006 |  | 1,418,497 |  
|                                           |  |           |  

On June 7, 2005 the board of directors were granted 650,000 options at an exercise price of
$1.95 based on the Companys stock closing price on the date of grant. As of March 31, 2006, of the 1,418,497 options outstanding, 338,499 of those options were vested with 1,069,998 options being nonvested.

The following represents the nonemployee common stock options outstanding as of March 31, 2005:



|                                           |  |          |  
|------------------------------------------ |  | -------- | -
|Option balance outstanding, March 31, 2004 |  | 729,531  |  
|Granted                                    |  | 460,000  |  
|Exercised                                  |  | (220,866 | )
|Forfeited                                  |  | (102,000 | )
|                                           |  |          |  
|Option balance outstanding, March 31, 2005 |  | 866,665  |  
|                                           |  |          |  

On April 1, 2004 the board of directors were granted 210,000 options at an exercise price of
$6.15 based on the Companys stock closing price on the date of grant. Forfeited options represent those options that were not vested upon resignation of one director and one consultant. As of March 31, 2005, of the 866,665 options
outstanding, 134,332 of those options were vested with 732,333 options being nonvested.



30



---

##### Table of Contents

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

The following table sets forth, as of March 31, 2006, certain information concerning beneficial ownership of shares of Common
Stock with respect to (i) each person known to the Company to own 5% or more of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) the executive officers of the Company, and (iv) all directors and
officers of the Company as a group:



|               |  |                                          |  |                                               |  |                                  |  
|-------------- |  | ---------------------------------------- |  | --------------------------------------------- |  | -------------------------------- | -
|Title Of Class |  | Name And Address Of Beneficial Owner (1) |  | Amount And Nature Of Beneficial
Ownership (2) |  | Approximate Percent of Class (%) |  
|Common         |  | Jugal K. Taneja                          |  | 1,954,034                                     |  | 19.6                             | %
|Common         |  | Mihir K. Taneja                          |  | 736,329                                       |  | 7.3                              | %
|Common         |  | Kotha S. Sekharam, PhD                   |  | 443,196                                       |  | 4.4                              | %
|Common         |  | Carol Dore-Falcone                       |  | 169,766                                       |  | 1.7                              | %
|Common         |  | Joseph Zappala                           |  | 770,550                                       |  | 7.8                              | %
|Common         |  | William L. LaGamba                       |  | 74,660                                        |  | 0.8                              | %
|Common         |  | Shan Shikarpuri, CPA                     |  | 35,000                                        |  | 0.4                              | %
|Common         |  | Barry H. Dash, PhD                       |  | 37,000                                        |  | 0.4                              | %
|Common         |  | George Stuart, Jr.                       |  | 41,531                                        |  | 0.4                              | %
|Common         |  | Carnegie Capital                         |  | 582,537                                       |  | 5.9                              | %
|Common         |  | Barclays Global Investors                |  | 504,431                                       |  | 5.1                              | %
|Common         |  | All officers and directors as a group    |  | 4,074,053                                     |  | 38.2                             | %

---

|(1) | Except as noted above, the address for the above identified officers and directors of the Company is c/o GeoPharma, Inc., 6950 Bryan Dairy Road, Largo, Florida 33777.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to the shares shown. Except where
indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of voting securities shown as beneficially owned by them. Percentages are
based upon the assumption that each shareholder has exercised all of the currently exercisable options he or she owns which are currently exercisable or exercisable within 60 days and that no other shareholder has exercised any options he or she
owns.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The following factors have been taken into consideration in calculating the amount and nature of beneficial ownership in GeoPharma:
|--- | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dr. Kotha Sekharams beneficially owned shares include approximately 44,862 shares beneficially owned by Madhavi Sekharam, Dr. Sekharams wife, as to which
Dr. Sekharam exercises no investment or voting power and disclaims beneficial ownership.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Jugal K. Tanejas beneficially owned shares include approximately 359,206 shares beneficially owned by his wife Manju Taneja. Mr. Taneja exercises no investment or voting
power over any of the shares owned by his wife, and disclaims beneficial ownership of those shares.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Jugal K. Tanejas beneficially owned shares also include 582,537 shares beneficially owned by Carnegie Capital, Ltd, 347,938 shares beneficially owned by Bryan Capital Limited
Partnership and approximately 60,855 shares beneficially owned by First Delhi Trust. Mr. Taneja is the general partner of both Carnegie Capital, Ltd. and First Delhi Trust, and holds sole voting and investment power over these shares. Bryan
Capital Limited Partnership is indirectly owned by Dynamic Health Products, Inc., an affiliate, and who Jugal K. Taneja is the Chairman and CEO.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has entered into transactions and business
relationships with certain of our officers, directors and principal stockholders or their affiliates.



31



---

##### Table of Contents

Revenues: For the fiscal years ended March 31, 2006 and 2005, manufacturing revenues of
approximately $172,901 and $414,073 respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products, an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the
Company, is a principal shareholder. For the fiscal years ended March 31, 2006 and 2005, revenues of $673,544 and $348,156 respectively, were recorded from sales by the Company to Vertical Health Inc., an affiliate of the Company, and of which
Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder.

For the fiscal years ended March 31, 2006 and
2005, distribution revenues of approximately $0 and 22,176, respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products.

For the fiscal years ended March 31, 2006 and 2005, pharmacy benefit management revenues of approximately $16,587,701 and $11,437,659, respectively,
were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the Companys former board member Mssr. Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract.

Trade Accounts Receivable/ Trade Accounts PayableAmounts due to affiliates and amounts due from affiliates represent balances owed by or amounts
owed to the Company for sales occurring in the normal course of business. Amounts due to and amounts due from these affiliates are in the nature of trade payables or receivables and fluctuate based on sales volume and payments received.

As of March 31, 2006 and 2005, for the manufacturing segment, $25,888 and $51,460 was due from subsidiaries of Dynamic Health Products and
$140,038 and $57,363 was due from Vertical Health, Inc.

As of March 31, 2006 and 2005, for the pharmacy benefit management segment,
$995,452 and $743,801 was due from CarePlus Health.

Lease / Debt ObligationsFor each of the years ended March 31, 2006 and
2005, rent expense of $0 and $128,529 was paid to Dynamic Health Products, Inc. Monthly rents were approximately $18,333 per month. The Company and Dynamic were parties to a ten-year, triple net operating lease that would have expired in the year
2009; however, on October 28, 2004 the Company purchased this leased facility for the independent appraised value of $1,925,000.

ITEM 13.
EXHIBITS, LIST AND REPORTS ON FORM 8-K

The Company filed Form-8K with the Securities and Exchange Commission during the fiscal year
ended March 31, 2006 through the date of this filing are as follows:



|                        |  |                                                                       
|----------------------- |  | ----------------------------------------------------------------------
|Date of Form-8K filing: |  | Filing Topic:                                                         
|                        | 
|April 19, 2004          |  | Nasdaq staff determination letter                                     
|                        | 
|April 26, 2004          |  | Lawsuit settlement                                                    
|                        | 
|June 14, 2004           |  | Nasdaq listing qualification panel letter                             
|                        | 
|October 28, 2004        |  | Acquisition of property                                               
|                        | 
|December 3, 2004        |  | Director resignation                                                  
|                        | 
|March 28, 2005          |  | Director appointment                                                  
|                        | 
|July 1, 2005            |  | Fiscal year ended 3/31/05 financial statement disclosure              
|                        | 
|July 29, 2005           |  | Director appointment                                                  
|                        | 
|August 3, 2005          |  | First quarter ended June 30, 2005 financial statement disclosure      
|                        | 
|August 22, 2005         |  | Entry into material agreement                                         
|                        | 
|September 16, 2005      |  | Entry into material agreement                                         
|                        | 
|October 26, 2005        |  | Second quarter ended September 30, 2005 financial statement disclosure
|                        | 
|February 6, 2006        |  | Entry into material agreement                                         



32



---

##### Table of Contents

Exhibits

The following Exhibits are filed as part of this Report:



|               |  |                                                                                                                                                                                                                                                                            
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                
|               | 
|2.1            |  | Agreement and Plan of Reorganization dated June 12, 1998, effective June 15, 1998, by and among Nu-Wave Health Products, Inc., Nu-Wave Acquisition, Inc., Energy Factors, Inc., U.S. Diversified
Technologies, Inc., Paul Santostasi, Chris Starkey, and Marvin Deutsch. **
|               | 
|3.1            |  | Articles of Incorporation of Energy Factors, Inc., filed September 3, 1985.**                                                                                                                                                                                              
|               | 
|3.2            |  | By-Laws of Energy Factors, Inc.**                                                                                                                                                                                                                                          
|               | 
|3.3            |  | Articles of Incorporation of Nu-Wave Acquisition, Inc., dated June 11, 1998 and filed June 12, 1998. **                                                                                                                                                                    
|               | 
|3.4            |  | Articles of Amendment to Articles Innovative changing name.**                                                                                                                                                                                                              
|               | 
|3.5            |  | Agreement with holder of Series A preferred stock dated as of March 25, 2002.**                                                                                                                                                                                            
|               | 
|3.6            |  | Certificate of Designation of Series B preferred stock (2)**                                                                                                                                                                                                               
|               | 
|4.1            |  | Specimen Stock Certificate of the Company **                                                                                                                                                                                                                               
|               | 
|4.2            |  | Form of Underwriters Warrant **                                                                                                                                                                                                                                           
|               | 
|10.1           |  | Promissory note in favor of Nu-Wave Health Products, Inc. from Energy Factors, Inc., dated May 13, 1998.**                                                                                                                                                                 
|               | 
|10.2           |  | Form of 1999 Stock Option Plan **                                                                                                                                                                                                                                          
|               | 
|10.3           |  | Innovative Health Products, Inc. 1999 Stock Option Plan.**                                                                                                                                                                                                                 
|               | 
|10.4           |  | Form of Employment Agreement with Kotha S. Sekharam, Ph.D. **                                                                                                                                                                                                              
|               | 
|10.5           |  | Form of Employment Agreement with Mihir K. Taneja **                                                                                                                                                                                                                       
|               | 
|10.6           |  | Form of Employment Agreement with Carol Dore-Falcone **                                                                                                                                                                                                                    
|               | 
|10.7           |  | Lease of Companys facility at 6950 Bryan Dairy Road, Largo, Florida 33777 **                                                                                                                                                                                              
|               | 
|10.8           |  | Acquisition Agreement between Go2Pharmacy.com, Inc. (Florida) and Go2Pharmacy.com, Inc. (Delaware) **                                                                                                                                                                      
|               | 
|10.9           |  | Agreement between Go2Pharmacy.com, Inc. (Delaware) and CarePlus dated as of March 23, 2000.**                                                                                                                                                                              
|               | 
|10.10          |  | Agreement between Go2Pharmacy.com, Inc. (Delaware) and the Greater New York Health Care Association dated June 27, 2000. **                                                                                                                                                
|               | 
|10.11          |  | Consulting Agreement between Go2Pharmacy.com, Inc. and Joseph Zappala**                                                                                                                                                                                                    
|               | 
|10.12          |  | Promissory Note between Go2Pharmacy, Inc. and First Community Bank of America dated March 8, 2001 in the amount of $551,512 **                                                                                                                                             
|               | 
|10.13          |  | Revolving Line of Credit Promissory Note between Go2Pharmacy, Inc. and First Community Bank of America dated March 8, 2001 in the amount of $650,000**                                                                                                                     
|               | 
|10.14          |  | Consulting Agreement with Jugal K. Taneja dated February 2001.**                                                                                                                                                                                                           
|               | 
|10.15          |  | Sublease and Consent**                                                                                                                                                                                                                                                     
|               | 
|10.16          |  | Revolving line of Credit Promissory Note between Breakthrough Engineered Nutrition, Inc. and First Community Bank of America dated March 29, 2002 in the amount of $100,000**                                                                                              



33



---

##### Table of Contents

|               |  |                                                                                                                                                               
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                   
|               | 
|10.17          |  | Revolving line of Credit Promissory Note between Innovative and First Community Bank of America dated March 2003 in the amount of $900,000.**                 
|               | 
|10.18          |  | Securities Purchase Agreement between the Company and Laurus Master Fund, Ltd. dated as of January 30, 2004 (1)**                                             
|               | 
|10.19          |  | Registration Rights Agreement between the Company and Laurus Master Fund, Ltd. dated as of January 30, 2004.(1)**                                             
|               | 
|10.20          |  | Form of 6% Secured Convertible Term Notes between the Company and Laurus Mater Fund, Ltd. dated as of January 30, 2004.(1)**                                  
|               | 
|10.21          |  | Form of Common Stock Purchase Warrant between the Company and Laurus Master Fund, Ltd. dated as of January 30, 2004(1)**                                      
|               | 
|10.22          |  | Stock Pledge Agreement between the Company and Laurus Master Fund, Ltd. dated January 30, 2004(1)**                                                           
|               | 
|10.23          |  | Subsidiary Guarantee between the Company and Laurus Master Fund, Ltd. dated January 30, 2004(1)**                                                             
|               | 
|10.24          |  | Series A Bank Escrow Agreement between the Company and Laurus Master Fund, Ltd.(1)**                                                                          
|               | 
|10.25          |  | Security Agreement between the Company and Laurus Master Fund, Ltd.(1)**                                                                                      
|               | 
|10.26          |  | Series A Securities Purchase Agreement between the Company and Laurus Master Fund, Ltd. dated as of February 10, 2004(1)**                                    
|               | 
|10.27          |  | Series A Registration Rights Agreement between the Company and Laurus Master Fund, Ltd. dated as of February 10, 2004(1)**                                    
|               | 
|10.28          |  | Form of Common Stock Purchase Warrant between the Company and Laurus Master Fund, Ltd. dated as of February 10, 2004(1)**                                     
|               | 
|10.29          |  | Securities Purchase Agreement between the Company, Midsummer Capital Ltd. and Omicron Master Trust dated as of March 5, 2004(2)**                             
|               | 
|10.30          |  | Registration Rights Agreement between the Company, Midsummer Capital Ltd. and Omicron Master Trust dated as of March 5, 2004(2)**                             
|               | 
|10.31          |  | Form of Common Stock Purchase Warrant between the Company, Midsummer Capital Ltd. and Omicron Master Trust dated as March 5, 2004(2)**                        
|               | 
|10.32          |  | Media Credit Agreement between the Company and Icon International, Inc.**                                                                                     
|               | 
|21.1           |  | GeoPharma, Inc.List of Subsidiaries.                                                                                                                         
|               | 
|31.1           |  | Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
|               | 
|31.2           |  | Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
|               | 
|32.1           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)              
|               | 
|32.2           |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)              

---

|** | Previously filed
|-- | ----------------

|1. | Filed as an Exhibit to the Companys Form 8-K dated as of January 30, 2004.
|-- | ---------------------------------------------------------------------------

|2. | Filed as an exhibit to the Companys Form 8-K dated as of March 5, 2004.
|-- | ------------------------------------------------------------------------



34



---

##### Table of Contents

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees. The aggregate fees billed by BBK, for professional services rendered for the audit of the Companys annual financial statements included
in the Companys Annual Report on Form 10-KSB for the years ended March 31, 2006 and 2005 and for the reviews of the financial statements included in the Companys Quarterly Reports on Form 10-QSB during such fiscal years were
approximately $58,000 and $49,000 respectively.

Audit Related Fees. The Company did not engage BBK to provide professional services to the
Company regarding audit related matters during the fiscal years ended March 31, 2006 and 2005.

Tax Fees. The aggregate fees billed by
BBK, for professional services rendered for tax advice and related return preparation to the Company for both the years ended March 31, 2006 and 2005 were approximately $12,900 and $12,000, respectively.

All Other Fees. The aggregate fees billed by BBK for services rendered to the Company, other than the services covered above for both fiscal years ended
March 31, 2006 and 2005 were $0.



35



---

##### Table of Contents

SIGNATURES

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

Dated: June 29, 2006

GEOPHARMA, INC.  /s/ Mihir K. Taneja,Mihir K. Taneja,Chief Executive Officer, Secretary and Director/s/ Kotha S. Sekharam, Ph.DKotha S. Sekharam, Ph.DPresident and Director/s/ Carol Dore-FalconeCarol Dore-FalconeVice President, Chief Financial Officer (Chief Accounting Officer)


In accordance with Exchange Act this report has been signed below by the following persons
on behalf of the registrant in the capacities as on June 29, 2006.



/s/ Jugal K. TanejaJugal K. TanejaChairman of the Board of Directors/s/ Barry H. Dash, PhDBarry H. Dash, PhDDirector/s/ William L. LaGambaWilliam L. LaGambaDirector/s/ George L. Stuart, Jr.George L. Stuart, Jr./s/ Shan ShikarpuriShan Shikarpuri, CPADirector




36



---

##### Table of Contents

GEOPHARMA, INC.

AND SUBSIDIARIES

FINANCIAL STATEMENTS

MARCH 31, 2006 AND 2005

CONTENTS



|                                                |  |   
|----------------------------------------------- |  | --
|INDEPENDENT AUDITORS REPORT                    |  | 38
|                                                | 
|FINANCIAL STATEMENTS                            |  |   
|CONSOLIDATED BALANCE SHEETS                     |  | 39
|CONSOLIDATED STATEMENTS OF OPERATIONS           |  | 41
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY |  | 42
|CONSOLIDATED STATEMENTS OF CASH FLOWS           |  | 43
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      |  | 44



37



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

GeoPharma, Inc. and Subsidiaries

We have audited the
accompanying consolidated balance sheets of GeoPharma, Inc, and subsidiaries as of March 31, 2006 and 2005 and the related consolidated statements of operations, stockholders equity, and cash flows for the years then ended. 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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal-control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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
GeoPharma, Inc. and subsidiaries as of March 31, 2006 and 2005 and the consolidated results of operations and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.



BRIMMER, BUREK & KEELAN LLPCertified Public Accountants


Tampa, Florida

June 09, 2006



38



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS



|                                               |  |                |            |                |   |           
|---------------------------------------------- |  | -------------- | ---------- | -------------- | - | ----------
|                                               |  | March 31, 2006 |            | March 31, 2005
|Current assets:                                |  |                |            |                |   |           
|Cash and cash equivalents                      |  | $              | 1,206,017  |                | $ | 6,433,011 
|Certificate of deposit                         |  |                | 433,273    |                |   | 425,927   
|Accounts receivable, net                       |  |                | 7,465,025  |                |   | 2,256,189 
|Accounts receivable, other                     |  |                | 634,684    |                |   | 586,164   
|Inventories, net                               |  |                | 5,767,056  |                |   | 3,743,063 
|Prepaid expenses and other current assets      |  |                | 1,324,339  |                |   | 693,786   
|Due from affiliates                            |  |                | 1,162,416  |                |   | 867,007   
|                                               |  |                |            |                |   |           
|Total current assets                           |  | $              | 17,992,810 |                | $ | 15,005,147
|                                               |  |               
|Property, plant, leaseholds and equipment, net |  |                | 8,024,651  |                |   | 4,485,767 
|                                               |  |               
|Goodwill, net                                  |  |                | 728,896    |                |   | 728,896   
|Intangible assets, net                         |  |                | 4,384,842  |                |   | 521,499   
|Media Credits, net                             |  |                | 799,748    |                |   | 799,748   
|Other assets, net                              |  |                | 166,194    |                |   | 130,886   
|                                               |  |                |            |                |   |           
|Total assets                                   |  | $              | 32,097,141 |                | $ | 21,671,943
|                                               |  |                |            |                |   |           

See accompanying notes to consolidated financial statements



39



---

##### Table of Contents

LIABILITIES AND SHAREHOLDERS EQUITY



|                                                                                                                                                           |  |                |             |   |                |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | -------------- | - | ----------- | -
|                                                                                                                                                           |  | March 31, 2006 |             |   | March 31, 2005 |  
|Current liabilities:                                                                                                                                       |  |                |             |   |                |   |             |  
|Accounts payable                                                                                                                                           |  | $              | 4,882,107   |   |                | $ | 1,759,512   |  
|Current portion of long-term obligations                                                                                                                   |  |                | 1,016,789   |   |                |   | 1,818,812   |  
|Accrued expenses, other liabilities and related party obligations                                                                                          |  |                | 3,711,153   |   |                |   | 855,364     |  
|                                                                                                                                                           |  |                |             |   |                |   |             |  
|Total current liabilities                                                                                                                                  |  | $              | 9,610,049   |   |                | $ | 4,433,688   |  
|Long-term obligations, less current portion                                                                                                                |  |                | 1,666,667   |   |                |   | 1,562,569   |  
|                                                                                                                                                           |  |                |             |   |                |   |             |  
|Total liabilities                                                                                                                                          |  | $              | 11,276,716  |   |                | $ | 5,996,257   |  
|                                                                                                                                                           |  |               
|Commitments and contingencies                                                                                                                              |  |                |             |   |                |   |             |  
|                                                                                                                                                           |  |               
|Minority interest                                                                                                                                          |  |                | (582,610    | ) |                |   |            |  
|                                                                                                                                                           |  |               
|Shareholders equity:                                                                                                                                      |  |                |             |   |                |   |             |  
|6% convertible preferred stock, Series B, $.01 par value (5,000 shares authorized, 5,000 shares issued and outstanding (liquidation preference
$5,000,000) |  |                | 50          |   |                |   | 50          |  
|Common stock, $.01 par value; 24,000,000 shares authorized; 10,051,775 and 9,181,481 shares issued and outstanding                                         |  |                | 100,518     |   |                |   | 91,815      |  
|Treasury stock (189,617 and 483,020 common shares, $.01 par value)                                                                                         |  |                | (1,896      | ) |                |   | (4,830      | )
|Additional paid-in capital                                                                                                                                 |  |                | 46,593,630  |   |                |   | 42,367,115  |  
|Retained earnings (deficit)                                                                                                                                |  |                | (25,289,267 | ) |                |   | (26,778,464 | )
|                                                                                                                                                           |  |                |             |   |                |   |             |  
|Total shareholders equity                                                                                                                                 |  | $              | 21,403,035  |   |                | $ | 15,675,686  |  
|                                                                                                                                                           |  |                |             |   |                |   |             |  
|Total liabilities and shareholders equity                                                                                                                 |  | $              | 32,097,141  |   |                | $ | 21,671,943  |  
|                                                                                                                                                           |  |                |             |   |                |   |             |  

See accompanying notes to consolidated financial statements.



40



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                             |  |                      |            |   |      |   |            |  
|---------------------------------------------------------------------------- |  | -------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                             |  | Year Ended March 31, |           
|                                                                             |  | 2006                 |            |   | 2005 |  
|Revenue                                                                      |  |                      |            |   |      |   |            |  
|PBM (a related party activity)                                               |  | $                    | 16,587,701 |   |      | $ | 11,437,659 |  
|Distribution                                                                 |  |                      | 14,754,861 |   |      |   | 4,004,560  |  
|Manufacturing                                                                |  |                      | 17,915,170 |   |      |   | 11,685,484 |  
|Pharmaceutical                                                               |  |                      | 485,813    |   |      |   | 1,102,537  |  
|                                                                             |  |                      |            |   |      |   |            |  
|Total revenue                                                                |  | $                    | 49,743,545 |   |      | $ | 28,230,240 |  
|Cost of goods sold                                                           |  |                      |            |   |      |   |            |  
|PBM                                                                          |  |                      | 16,452,039 |   |      |   | 11,177,585 |  
|Distribution                                                                 |  |                      | 9,179,513  |   |      |   | 2,794,712  |  
|Manufacturing (exclusive of depreciation and amortization shown below)       |  |                      | 11,066,402 |   |      |   | 8,168,262  |  
|Pharmaceutical                                                               |  |                      | 588,627    |   |      |   | 311,188    |  
|                                                                             |  |                      |            |   |      |   |            |  
|Total cost of goods sold                                                     |  | $                    | 37,286,581 |   |      | $ | 22,451,747 |  
|Gross profit                                                                 |  |                      |            |   |      |   |            |  
|PBM                                                                          |  |                      | 135,662    |   |      |   | 260,074    |  
|Distribution                                                                 |  |                      | 5,575,348  |   |      |   | 1,209,848  |  
|Manufacturing                                                                |  |                      | 6,848,768  |   |      |   | 3,517,222  |  
|Pharmaceutical                                                               |  |                      | (102,814   | ) |      |   | 791,349    |  
|                                                                             |  |                      |            |   |      |   |            |  
|Total gross profit                                                           |  | $                    | 12,456,964 |   |      | $ | 5,778,493  |  
|Selling, general and administrative expenses:                                |  |                      |            |   |      |   |            |  
|Selling, general and administrative expenses                                 |  |                      | 9,701,193  |   |      |   | 6,071,411  |  
|Depreciation and amortization                                                |  |                      | 748,532    |   |      |   | 605,697    |  
|                                                                             |  |                      |            |   |      |   |            |  
|Operating income (loss) before other income (expense)                        |  | $                    | 2,007,239  |   |      | $ | (898,615   | )
|Other income (expense):                                                      |  |                      |            |   |      |   |            |  
|Interest income (expense), net                                               |  |                      | (628,109   | ) |      |   | (490,859   | )
|Other income (expense), net                                                  |  |                      | 908,257    |   |      |   | 305,884    |  
|                                                                             |  |                      |            |   |      |   |            |  
|Total other income (expense)                                                 |  | $                    | 280,148    |   |      | $ | (184,975   | )
|                                                                             |  |                      |            |   |      |   |            |  
|Income (loss) before income taxes, minority interest and preferred dividends |  | $                    | 2,287,387  |   |      | $ | (1,083,590 | )
|Minority interest benefit (expense)                                          |  |                      | 582,610    |   |      |   |           |  
|Income tax benefit (expense)                                                 |  |                      | (1,080,800 | ) |      |   | 201,898    |  
|                                                                             |  |                      |            |   |      |   |            |  
|Net income (loss)                                                            |  | $                    | 1,789,197  |   |      | $ | (881,692   | )
|Preferred stock dividends                                                    |  |                      | 300,000    |   |      |   | 521,762    |  
|                                                                             |  |                      |            |   |      |   |            |  
|Net income (loss) available to common shareholders                           |  | $                    | 1,489,197  |   |      | $ | (1,403,454 | )
|                                                                             |  |                      |            |   |      |   |            |  
|Basic income (loss) per share                                                |  | $                    | 0.17       |   |      | $ | (0.17      | )
|                                                                             |  |                      |            |   |      |   |            |  
|Basic weighted average number of common shares outstanding                   |  |                      | 9,041,106  |   |      |   | 8,111,851  |  
|                                                                             |  |                      |            |   |      |   |            |  
|Diluted income (loss) per share                                              |  | $                    | 0.14       |   |      | $ | (0.17      | )
|                                                                             |  |                      |            |   |      |   |            |  
|Diluted weighted average number of common shares outstanding                 |  |                      | 12,478,786 |   |      |   | 8,111,851  |  
|                                                                             |  |                      |            |   |      |   |            |  

See accompanying notes to consolidated financial statements.



41



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)

MARCH 31, 2006



|                                                        |  |                 |   |              |          |                |          |         |   |          |   |        |  |            |  |        |         |  |          |   |  |                            |        |   |                             |   |            |                                      |  |   |             |   |  |   |            |  
|------------------------------------------------------- |  | --------------- | - | ------------ | -------- | -------------- | -------- | ------- | - | -------- | - | ------ |  | ---------- |  | ------ | ------- |  | -------- | - |  | -------------------------- | ------ | - | --------------------------- | - | ---------- | ------------------------------------ |  | - | ----------- | - |  | - | ---------- | -
|                                                        |  | Preferred Stock |   | Common Stock |          | Treasury Stock |          |         |   |          |   |        |  |            |  |       
|                                                        |  | Shares          |   | Dollars      |          |                |          |         |   |          |   |        |  |            |  |        |         |  |          |   |  |                            |       
|                                                        |  | Series A        |   |              | Series B |                | Series A |         |   | Series B |   | Shares |  | Dollars    |  | Shares |         |  | Dollars  |   |  | Additional paid in capital |        |   | Retained earnings (deficit) |   |            | Total Shareholders equity (deficit) | 
|Balances at March 31, 2003                              |  |                |   |              |         |                | $        |        |   |          | $ |       |  | 7,727,634  |  | $      | 77,276  |  | (143,600 | ) |  | $                          | (1,436 | ) |                             | $ | 29,840,208 |                                      |  | $ | (25,321,979 | ) |  | $ | 4,594,066  |  
|Purchase of treasury shares                             |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  | (14,360  | ) |  |                            | (144   | ) |                             |   | (4,856     | )                                    |  |   |            |   |  |   | (5,000     | )
|Issuance of Series A Preferred Stock                    |  | 5,000,000       |   |              |         |                |          | 50,000  |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   | 4,950,000  |                                      |  |   |            |   |  |   | 5,000,000  |  
|Issuance of Series B Preferred Stock                    |  |                |   |              | 5,000    |                |          |        |   |          |   | 50     |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   | 4,999,950  |                                      |  |   |            |   |  |   | 5,000,000  |  
|Payment of preferred stock private placement expenses   |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   | (381,594   | )                                    |  |   |            |   |  |   | (381,594   | )
|Grant of nonemployee stock options                      |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   | 155,149    |                                      |  |   |            |   |  |   | 155,149    |  
|Amortization of debt and preferred stock warrants       |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   | 4,506,325  |                                      |  |   | (3,580,960  | ) |  |   | 925,365    |  
|Issuance of stock awards                                |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  | 157,000  |   |  |                            | 1,570  |   |                             |   | 110,436    |                                      |  |   |            |   |  |   | 112,006    |  
|Exercise of stock options                               |  |                |   |              |         |                |          |        |   |          |   |       |  | 261,917    |  |        | 2,620   |  |         |   |  |                            |       |   |                             |   | 281,675    |                                      |  |   |            |   |  |   | 284,295    |  
|Preferred stock dividend                                |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   |           |                                      |  |   | (111,890    | ) |  |   | (111,890   | )
|Net income                                              |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   |           |                                      |  |   | 1,119,009   |   |  |   | 1,119,009  |  
|                                                        |  |                 |   |              |          |                |          |         |   |          |   |        |  |            |  |        |         |  |          |   |  |                            |        |   |                             |   |            |                                      |  |   |             |   |  |   |            |  
|Balances at March 31, 2004                              |  | 5,000,000       |   |              | 5,000    |                | $        | 50,000  |   |          | $ | 50     |  | 7,989,551  |  | $      | 79,896  |  | (960     | ) |  | $                          | (10    | ) |                             | $ | 44,457,293 |                                      |  | $ | (27,895,823 | ) |  | $ | 16,691,406 |  
|                                                        |  |                 |   |              |          |                |          |         |   |          |   |        |  |            |  |        |         |  |          |   |  |                            |        |   |                             |   |            |                                      |  |   |             |   |  |   |            |  
|Purchase of treasury shares                             |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  | (152,900 | ) |  |                            | (1,529 | ) |                             |   | (694,288   | )                                    |  |   |            |   |  |   | (695,817   | )
|Payment of preferred stock private placement expenses   |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   | (6,000     | )                                    |  |   |            |   |  |   | (6,000     | )
|Exercise of stock options                               |  |                |   |              |         |                |          |        |   |          |   |       |  | 264,566    |  |        | 2,646   |  |         |   |  |                            |       |   |                             |   | 275,077    |                                      |  |   |            |   |  |   | 277,723    |  
|Amortization of debt and preferred stock warrants       |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   | 684,187    |                                      |  |   | (684,187    | ) |  |   |           |  
|Issuance of stock awards                                |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  | 160,000  |   |  |                            | 1,600  |   |                             |   | 112,686    |                                      |  |   |            |   |  |   | 114,286    |  
|Receipt of shares in a legal settlement                 |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  | (500,000 | ) |  |                            | (5,000 | ) |                             |   | (3,200,000 | )                                    |  |   | 3,205,000   |   |  |   |            |  
|401(k) employee match                                   |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  | 10,840   |   |  |                            | 109    |   |                             |   | 41,204     |                                      |  |   |            |   |  |   | 41,313     |  
|Preferred stock dividends (in cash and common stock)    |  |                |   |              |         |                |          |        |   |          |   |       |  | 73,339     |  |        | 733     |  |         |   |  |                            |       |   |                             |   | 343,439    |                                      |  |   | (521,762    | ) |  |   | (177,590   | )
|Payment of convertible debt and interest                |  |                |   |              |         |                |          |        |   |          |   |       |  | 54,025     |  |        | 540     |  |         |   |  |                            |       |   |                             |   | 311,517    |                                      |  |   |            |   |  |   | 312,057    |  
|Conversion of Series A Preferred Stock                  |  | (5,000,000      | ) |              |         |                | $        | (50,000 | ) |          |   |       |  | 800,000    |  |        | 8,000   |  |          |   |  |                            |        |   |                             |   | 42,000     |                                      |  |   |             |   |  |   |           |  
|Net loss                                                |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   |           |                                      |  |   | (881,692    | ) |  |   | (881,692   | )
|                                                        |  |                 |   |              |          |                |          |         |   |          |   |        |  |            |  |        |         |  |          |   |  |                            |        |   |                             |   |            |                                      |  |   |             |   |  |   |            |  
|Balances at March 31, 2005                              |  |                |   |              | 5,000    |                | $        |        |   |          | $ | 50     |  | 9,181,481  |  | $      | 91,815  |  | (483,020 | ) |  | $                          | (4,830 | ) |                             | $ | 42,367,115 |                                      |  | $ | (26,778,464 | ) |  | $ | 15,675,686 |  
|Exercise of stock options                               |  |                |   |              |         |                |          |        |   |          |   |       |  | 184,949    |  |        | 1,849   |  |         |   |  |                            |       |   |                             |   | 220,063    |                                      |  |   |            |   |  |   | 221,912    |  
|Issuance of stock awards                                |  |                |   |              |         |                |          |        |   |          |   |       |  | 50,000     |  |        | 500     |  | 280,000  |   |  |                            | 2,800  |   |                             |   | 266,200    |                                      |  |   |            |   |  |   | 269,500    |  
|401(k) employee match                                   |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  | 13,403   |   |  |                            | 134    |   |                             |   | 48,767     |                                      |  |   |            |   |  |   | 48,901     |  
|Preferred stock dividends                               |  |                |   |              |         |                |          |        |   |          |   |       |  | 104,876    |  |        | 1,049   |  |         |   |  |                            |       |   |                             |   | 298,951    |                                      |  |   | (300,000    | ) |  |   |           |  
|Payment of convertible debt of series A Preferred Stock |  |                |   |              |         |                |          |        |   |          |   |       |  | 530,469    |  |        | 5,305   |  |         |   |  |                            |       |   |                             |   | 2,418,940  |                                      |  |   |            |   |  |   | 2,424,245  |  
|Minority interests                                      |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   | 973,594    |                                      |  |   |            |   |  |   | 973,594    |  
|Net Income                                              |  |                |   |              |         |                |          |        |   |          |   |       |  |           |  |        |        |  |         |   |  |                            |       |   |                             |   |           |                                      |  |   | 1,789,197   |   |  |   | 1,789,197  |  
|                                                        |  |                 |   |              |          |                |          |         |   |          |   |        |  |            |  |        |         |  |          |   |  |                            |        |   |                             |   |            |                                      |  |   |             |   |  |   |            |  
|Balances at March 31, 2006                              |  |                 |   |              | 5,000    |                | $        |         |   |          | $ | 50     |  | 10,051,775 |  | $      | 100,518 |  | (189,617 | ) |  | $                          | (1,896 | ) |                             | $ | 46,593,630 |                                      |  | $ | (25,289,267 | ) |  | $ | 21,403,035 |  

See accompanying notes to consolidated financial statements.



42



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                |  |                |            |   |                |   |            |  
|----------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | -------------- | - | ---------- | -
|                                                                                                |  | March 31, 2006 |            |   | March 31, 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                           |  |                |            |   |                |   |            |  
|Net income (loss)                                                                               |  | $              | 1,789,197  |   |                | $ | (881,692   | )
|Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: |  |                |            |   |                |   |            |  
|Depreciation, leasehold and intangible amortization                                             |  |                | 748,530    |   |                |   | 605,697    |  
|Income tax expense                                                                              |  |                | 1,080,800  |   |                |   | (216,342   | )
|Amortization of stock option deferred compensation                                              |  |                | 50,707     |   |                |   | 37,865     |  
|Amortization of debt discount to interest expense                                               |  |                | 563,014    |   |                |   | 308,455    |  
|Accrued interest income                                                                         |  |                | (7,346     | ) |                |   | (6,936     | )
|                                                                                                |  |               
|Changes in operating assets and liabilities:                                                    |  |                |            |   |                |   |            |  
|Accounts receivable                                                                             |  |                | (5,208,835 | ) |                |   | (631,878   | )
|Accounts receivable, other                                                                      |  |                | (48,520    | ) |                |   | (210,164   | )
|Inventory                                                                                       |  |                | (2,023,993 | ) |                |   | (517,380   | )
|Prepaid expenses and other current assets                                                       |  |                | (620,188   | ) |                |   | (181,271   | )
|Other assets                                                                                    |  |                | (965,698   | ) |                |   | (45,718    | )
|Media credits, net                                                                              |  |                |           |   |                |   | (799,748   | )
|Accounts payable                                                                                |  |                | 3,122,593  |   |                |   | (303,741   | )
|Accrued expenses                                                                                |  |                | 2,730,398  |   |                |   | 278,010    |  
|Due from affiliates, net                                                                        |  |                | (295,743   | ) |                |   | 264,525    |  
|                                                                                                |  |                |            |   |                |   |            |  
|Net cash provided (used) by operating activities                                                |  | $              | 914,916    |   |                | $ | (2,300,318 | )
|                                                                                                |  |               
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                           |  |                |            |   |                |   |            |  
|Purchases of property, leaseholds and equipment                                                 |  | $              | (7,220,366 | ) |                | $ | (1,195,038 | )
|Purchase of land and building                                                                   |  |                |           |   |                |   | (1,925,000 | )
|Proceeds from minority interest, net                                                            |  |                | 397,390    |   |                |   |           |  
|                                                                                                |  |                |            |   |                |   |            |  
|Net cash used by investing activities                                                           |  | $              | (6,822,976 | ) |                | $ | (3,120,038 | )
|                                                                                                |  |               
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                           |  |                |            |   |                |   |            |  
|Purchase of treasury stock                                                                      |  | $              |           |   |                | $ | (695,817   | )
|Proceeds from stock option exercise                                                             |  |                | 221,909    |   |                |   | 277,723    |  
|Proceeds from issuance of long-term obligations                                                 |  |                | 3,000,000  |   |                |   | 60,301     |  
|Payments for private placement fees                                                             |  |                |           |   |                |   | (6,000     | )
|Payments of long-term obligations                                                               |  |                | (2,540,843 | ) |                |   | (798,105   | )
|Payment of preferred stock dividends                                                            |  |                |           |   |                |   | (152,500   | )
|                                                                                                |  |                |            |   |                |   |            |  
|Net cash provided (used) by financing activities                                                |  | $              | 681,066    |   |                | $ | (1,314,398 | )
|                                                                                                |  |                |            |   |                |   |            |  
|Net increase (decrease) in cash                                                                 |  | $              | (5,226,994 | ) |                | $ | (6,734,754 | )
|Cash at beginning of period                                                                     |  |                | 6,433,011  |   |                |   | 13,167,765 |  
|                                                                                                |  |                |            |   |                |   |            |  
|Cash at end of period                                                                           |  | $              | 1,206,017  |   |                | $ | 6,433,011  |  
|                                                                                                |  |                |            |   |                |   |            |  
|SUPPLEMENTAL INFORMATION:                                                                       |  |                |            |   |                |   |            |  
|Cash paid for interest                                                                          |  | $              | 188,570    |   |                | $ | 87,899     |  
|                                                                                                |  |                |            |   |                |   |            |  
|Cash paid for taxes                                                                             |  | $              | 840,000    |   |                | $ |           |  
|                                                                                                |  |                |            |   |                |   |            |  
|NON-CASH INVESTING AND FINANCING ACTIVITIES:                                                    |  |                |            |   |                |   |            |  
|Conversion value of preferred stock to common stock                                             |  | $              |           |   |                | $ | 5,000,000  |  
|                                                                                                |  |                |            |   |                |   |            |  
|Payment of preferred stock dividends with common stock                                          |  | $              | 300,000    |   |                | $ | 344,172    |  
|                                                                                                |  |                |            |   |                |   |            |  
|Payment of debt principal and interest with common stock                                        |  | $              | 2,424,424  |   |                | $ | 312,057    |  
|                                                                                                |  |                |            |   |                |   |            |  
|Equity reclassification related to warrants issued with the $10 million preferred stock         |  | $              |           |   |                | $ | 684,187    |  
|                                                                                                |  |                |            |   |                |   |            |  
|Debt discount amortization related to warrants issued with the $5 million convertible debt      |  | $              | 563,014    |   |                | $ | 308,455    |  
|                                                                                                |  |                |            |   |                |   |            |  

See accompanying notes to consolidated financial statements.



43



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2006 and 2005

NOTE 1BACKGROUND
INFORMATION

We were incorporated in 1985 as Energy Factors, Inc., a Florida corporation. In August 1998 we changed our name to
Innovative Health Products, Inc., and in February 2000 we changed our name to Go2Pharmacy, Inc., in anticipation of our merger with the Delaware corporation Go2Pharmacy.com, Inc. September 2002, we changed our name to Innovative Companies, Inc.
(Innovative). On May 18, 2004, based on majority shareholder vote, the Company changed its name to GeoPharma, Inc. Currently, GeoPharma continues to do manufacturing business under the name Innovative Health Products, Inc. as it
represents our manufacturing arm of the Company. Prior to November 7, 2000 Go2Pharmacy, Inc., the Florida corporation was a wholly-owned subsidiary of Dynamic Health Products, Inc. (Dynamic).

On November 7, 2000, the Securities and Exchange Commission declared the Companys registration of 1,000,000 shares of the common stock to be
effective. The registration was affected through the filing of Registration Statement No. 333-92849 on Form SB-2 with the Securities and Exchange Commission. The Companys initial public offering, pursuant to this registration, was
successfully completed on November 14, 2000. In conjunction with this offering, 1,000,000 shares of common stock, $.01 par value, were sold to the public for net proceeds of $6,655,705. Simultaneously with and conditioned upon the offering, Go2
merged with Go2Pharmacy.com, Inc., a Delaware corporation, in exchange for 3,000,000 shares of its common stock. Other than the $250,000 gross cash capital contribution, Go2Delaware had no assets with any assignable value thus creating no goodwill.

In April 2000, Breakthrough Engineered Nutrition, Inc. (Breakthrough), a Florida corporation, which also conducts distribution
business as Delmar Labs, was formed as a wholly-owned subsidiary to market and distribute its own functional foods and dietary supplement product lines to national and mass retailers, wholesalers and other retail outlets stores using a network of
brokers and distributors throughout the United States and Canada.

In September 2000, we formed a wholly-owned subsidiary, Belcher
Pharmaceuticals, Inc. (Belcher), a Florida corporation, in order to manufacture and distribute private label over the counter products.

In March 2001, we formed a wholly-owned subsidiary, Go2PBM Services, Inc., (PBM), a Florida corporation, for the purpose of providing pharmacy benefit management services. PBM administers drug benefits for health maintenance
organizations, insurance company plans, preferred provider organizations, self-insured corporate health plans and self-insured labor unions. As a pharmacy benefit manager, we manage all member benefits in low risk plans, while taking an exclusively
administrative role in higher risk plans. Our administrative services include claim processing, network management and customer service. We have entered into an agreement to provide our pharmacy benefit management services to a New York State Health
Maintenance Organization. Through the development of our manufacturing and pharmacy benefit management efforts, we intend to provide health plans and institutional customers with an efficient source for their pharmacy product needs.

In September 2002, we Florida-incorporated two wholly-owned distribution companies, IHP Marketing, Inc., which also does business as Archer Stevens
Pharmaceuticals, and Breakthrough Marketing, Inc., which also does business as Bentley Labs, for the purpose of marketing and distributing additional proprietary brands to the public.

In February 2004, we incorporated a wholly-owned company, Belcher Capital Corporation (Belcher Capital), a Delaware corporation, as a result
of a $10 million preferred stock and $5 million convertible debt private placement.

In August 2005, we formed American Antibiotics LLC, a
Florida limited liability corporation that will manufacture and distribute Beta-Lactam antibiotic pharmaceutical products.

In June 2006,
we formed a wholly-owned manufacturing subsidiary named Libi Labs, Inc., a Florida corporation, for the purpose of conducting nutraceutical and cosmeceutical liquid, gel and cream manufacturing for ourselves and others.

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.
Principles of Consolidation

The consolidated financial statements as of and for the year ended March 31, 2006 and 2005 include the
corporate and manufacturing accounts of GeoPharma, Inc. (the Company), (GeoPharma), which is continuing to



44



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



do manufacturing business as Innovative Health Products, Inc. (Innovative), and its wholly-owned subsidiaries IHP Marketing, Breakthrough,
Breakthrough Marketing, Belcher, Belcher Capital, and PBM and its 51% owned LLC, American Antibiotics. Significant intercompany balances and transactions have been eliminated in consolidation.

b. Industry Segment

In accordance with the
provisions of Statement of Financial Accounting Standards No. 131, (SFAS 131), Disclosures about Segments of an Enterprise and Related Information, a company is required to disclose selected financial and other related information about its
operating segments. Operating segments are components of an enterprise about which separate financial information is available and is utilized by the chief operating decision maker (CODM) related to the allocation of resources and in the
resulting assessment of the segments overall performance. The measure used by the Companys CODM is a business segments gross profit. As of and for the year ended March 31, 2006 and 2005, the Company had four industry segments
that accompany corporate: manufacturing, distribution, pharmacy benefit management and pharmaceutical. Each of the business segments total revenues for the fiscal years ended March 31, 2006 and 2005 are presented on the face of the statements
of operations. The $32,097,141 of total assets as of March 31, 2006 were comprised of $1,367,236 attributable to corporate, $10,735,828 attributable to manufacturing, $6,540,047 attributable to distribution, $1,496,380 attributable to pharmacy
benefit management and $11,957,650 attributable to pharmaceutical. The $21,671,943 of total assets as of March 31, 2005 were comprised of $6,352,631 attributable to corporate, $11,853,060 attributable to manufacturing, $2,573,787 attributable
to distribution, $817,099 attributable to pharmacy benefit management and $75,366 attributable to pharmaceutical.

c. Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.

e. Inventories

Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

f. Property, Plant, Leasehold Improvements and Equipment

Depreciation is provided for using the straight-line method, in
amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (asset categories range from three to thirty-nine years). Leasehold improvements are amortized using the straight-line method over the lives
of the respective leases or the service lives of the improvements, whichever is shorter. Leased equipment under capital leases is amortized using the straight-line method over the lives of the respective leases or over the service lives of the
assets, whichever is shorter, for those leases that substantially transfer ownership. Accelerated depreciation methods are used for tax purposes.

g.
Intangible Assets

Intangible assets consist primarily of goodwill and intellectual property. Effective April 1, 2002 with the
adoption of SFAS 142, Goodwill and Other Intangibles, intangible assets with an indefinite life, namely goodwill and the intellectual property, are not amortized. Intangible assets with a definite life are amortized on a straight-line
basis with estimate useful lives ranging from 1 to 3 years. Indefinite lived intangible assets will be tested for impairment yearly and will be tested for impairment between the annual tests should an event occur or should circumstances change that
would indicate that the carrying amount may be impaired. The Company has selected January 1, as the annual date to test these assets for impairment. The unamortized balance of goodwill as of the date of the initial test and still as of
March 31, 2006 was $728,896 with the unamortized balance of the intellectual property for the same periods was $228,305. Based on the required analyses performed as of that annual test date, no impairment loss was required to be recorded for
the fiscal year ended March 31, 2006 or 2005.



45



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



h. Impairment of Assets

In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Companys policy is to evaluate whether there has
been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain events have taken place that indicate the remaining unamortized balance may not be recoverable. When factors indicate that the
intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted cash flows. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash
flows. There have been no impairment losses recorded as of and for the fiscal years 2006 and 2005.

i. Income Taxes

The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. Under the
liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.

j. Earning (Loss) Per Common
Share

Earnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic
earnings (loss) per share are calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing
net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. The effect of the preferred stock conversion, the
convertible debt warrants and stock options are antidilutive at March 31, 2005 and are therefore excluded from the fully diluted calculation. Convertible debt and preferred stock warrants, officer, employee and nonemployee stock options and
warrants are considered potentially dilutive and are included in the fully diluted share calculation at March 31, 2006. The reconciliation between basic and fully diluted shares are as follows:



|                                                                            |  |      |            |      |   |            |  
|--------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|                                                                            |  | 2006 |            | 2005 |  
|Net income (loss) per share  basic                                         |  |      |            |      |   |            |  
|Net income (loss)                                                           |  | $    | 1,489,197  |      | $ | (1,403,454 | )
|                                                                            |  |      |            |      |   |            |  
|Weighted average shares  basic                                             |  |      | 9,041,106  |      |   | 8,111,851  |  
|                                                                            |  |      |            |      |   |            |  
|Net income (loss) per share  basic                                         |  | $    | 0.17       |      | $ | (.17       | )
|                                                                            |  |      |            |      |   |            |  
|Net income (loss) per share  diluted:                                      |  |      |            |      |   |            |  
|Net income (loss)                                                           |  | $    | 1,489,197  |      | $ | (1,403,454 | )
|                                                                            |  |      |            |      |   |            |  
|Preferred dividends                                                         |  |      | 300,000    |      |   |           |  
|                                                                            |  |      |            |      |   |            |  
|                                                                            |  | $    | 1,789,197  |      | $ | (1,403,454 | )
|                                                                            |  |      |            |      |   |            |  
|Weighted average shares outstanding  basic                                 |  |      | 9,041,106  |      |   | 8,111,851  |  
|Effect of preferred stock prior to conversion                               |  |      | 833,333    |      |   |           |  
|Effect of preferred stock and convertible debt warrants prior to conversion |  |      | 562,500    |      |   |           |  
|Dilutive effect of stock options                                            |  |      | 2,041,847  |      |   |           |  
|Effect of convertible term note                                             |  |      |           |      |   |           |  
|                                                                            |  |      |            |      |   |            |  
|Weighted average shares  diluted                                           |  |      | 12,478,786 |      |   | 8,111,851  |  
|                                                                            |  |      |            |      |   |            |  
|Net income (loss) per share  diluted                                       |  | $    | 0.14       |      | $ | (.17       | )
|                                                                            |  |      |            |      |   |            |  

k. Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles, requires management to make estimates, assumptions and apply certain critical accounting policies that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at March 31, 2006 and 2005, as well as the reported amounts of revenues and expenses for the fiscal years ended March 31, 2006 and 2005.
Estimates and assumptions used in our financial statements are based on historical experience and on various other factors that we believe are 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. These estimates and assumptions also require the application of certain accounting policies, many of which require estimates and assumptions about future
events and their effect on amounts reported in the financial statements and related notes. We periodically review our accounting policies and estimates and makes adjustments when facts and circumstances dictate. Actual results may differ from these
estimates under different assumptions or conditions. Any differences may have a material impact on our financial condition, results of operations and cash flows.



46



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



l. Concentration of Credit Risk

Concentrations of credit risk with respect to trade accounts receivable are customers with balances that exceed 5% of total consolidated trade accounts receivable, net at March 31, 2006. Four customers, General
Nutrition Distribution with 31.4%, Spectrum Group with 21.4%, NutraCea with 10% and Rite Aid Corporation with 7.9% of the total of trade accounts receivable. Concentrations of credit risk with respect to trade accounts receivable are limited due to
the distribution of sales over a large customer base as of March 31, 2005.

For the year ended March 31, 2006, four customers
individually exceeded 5% of our total consolidated revenues which included General Nutrition Distribution for 15.3%, 12.2% for Spectrum Group, 5% for Direct Marketing, Inc. and 33.3% for CarePlus Health in relation to total consolidated revenues and
for the year ended March 31, 2005, two customers, Spectrum Group and CarePlus Health accounted for 11.2% and 40.5% in relation to total consolidated revenues.

The Company has no concentration of customers within specific geographic areas outside the United States that would give rise to significant geographic credit risk.

As of March 31, 2006 and 2005 the Company maintained cash balances in excess of federally insured limits of approximately $1,000,000 and $6,500,000
, respectively.

m. Revenue and Cost of Sales Recognition

In accordance with SAB 101, Revenue Recognition, revenues are recognized by the Company when the merchandise is shipped which is when title and risk of loss has passed to the external customer. The Company analyzes
the status of the allowance for uncollectible accounts based on historical experience, customer history and overall credit outstanding. For our distribution segment, any charge backs or other sales allowances immediately reduce the gross receivable
with the corresponding reduction effected through increases in sales allowances which directly reduce sales revenue. For our PBM segment, service revenues are recognized once the member service of completing and fulfilling delivery of the
members prescription.

Cost of Sales is recognized for the manufacturing and distribution business segments simultaneously with the
recognition of revenues with a direct charge to cost of goods sold and with an equal reduction to inventory at FIFO cost. For the PBM segment, cost of sales is recognized based on actual costs incurred and are recognized as the related revenue is
recognized.

n. Advertising Costs

The
Company charges advertising costs to expense as incurred. Advertising expense was $1,611,617 and $391,141 for the years ended March 31, 2006 and 2005, respectively.

o. Research and Development Costs

Costs incurred to develop our generic pharmaceutical products for
the Company are expensed as incurred and charged to research and development (R&D). R&D expenses for the years ended March 31, 2006 and 2005 were approximately $500,000 and $263,000, respectively. R&D-related production
and laboratory equipment purchased and capitalized was approximately $1.2 million and $719,000 at March 31, 2006 and 2005, respectively.

p. Fair
Value of Financial Instruments

The Company, in estimating its fair value disclosures for financial instruments, uses the following
methods and assumptions:

Cash, Accounts Receivable, Accounts Payable and Accrued Expenses: The carrying amounts reported in the balance
sheet for cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their relatively short maturity.

Long-term Obligations: The fair value of the Companys fixed-rate long-term obligations is estimated using discounted cash flow analyses, based on the Companys current incremental borrowing rates for similar types of borrowing
arrangements. At March 31, 2006 and 2005, the fair value of the Companys long-term obligations approximated its carrying value.

Credit Lines Payable: The carrying amount of the Companys credit lines payable approximates fair market value since the interest rate on these instruments corresponds to market interest rates.



47



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



q. Reclassifications

Certain reclassifications have been made to the financial statements as of and for the fiscal year ended March 31, 2005 to conform to the presentation as of and for the year ended March 31, 2006.

r. Stock-Based Compensation

The Company has
adopted Statement of Financial Accounting Standards (SFAS) No. 123 Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 allows companies which have stock-based compensation arrangements with employees
to adopt a new fair-value basis of accounting for stock options and other equity instruments, or to continue to apply the existing accounting required by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. The Company intends to continue to account for stock-based compensation arrangements under APB Opinion No. 25. The Company has also adopted the disclosure provisions of SFAS No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure. This pronouncement requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the
method used on reporting results. The additional required disclosure is found in Note 15. Effective April 1, 2006, the Company is required to adopt Statement of Financial Accounting Standards (SFAS) No. 123R Accounting
for Stock-Based Compensation - Revised (SFAS 123R). The Company has not yet finalized the financial impact of implementing SFAS 123R.

s. Accounting for Financial Instruments

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. (SFAS 150), SFAS 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments effected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that
can be settled with shares of stock. SFAS 150 is effective for all 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 adopted SFAS 150 and its related adoption provisions as reflected and as applicable to the January 29, 2004, $5,000,000 6% convertible debt, the February 10, 2004 $5,000,000 convertible preferred stock Series A and the
March 5, 2004 $5,000,000 convertible preferred stock Series B.

In June 2005, the Financial Accounting Standards Board Emerging Issues
Task Force issued EITF 05-04, The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock. Under EITF 05-04, liquidated damages clauses may qualify as freestanding financial instruments for treatment as a derivative liability. Furthermore, EITF 05-04 addresses the question of whether a registration rights
agreement should be combined as a unit with the underlying financial instruments and be evaluated as a single instrument. EITF 05-04 does not reach a consensus on this question and allows for treatment as a combined unit (Views A and B) as well as
separate freestanding financial instruments (View C). On September 15, 2005, the FASB staff postponed further discussion of EITF 05-04. As of March 31, 2006, the FASB has still not rescheduled EITF 05-04 for discussion. In conjunction with
our issuance of convertible debentures, preferred stock Series A and B, and the related warrants and registration rights, we adopted View C of EITF 05-04. Accordingly, the registration rights agreements, preferred stock Series A and B, the warrants
associated with the convertible debentures, convertible preferred stock the debentures themselves, as well as certain features of the debentures convertible preferred stock were evaluated as stand alone financial instruments. This treatment resulted
in classification of the warrants and certain features of the debentures and preferred stock as equity while the registration rights agreements were treated as derivative liabilities. Derivative liability treatment requires adjusting the carrying
value of the instrument to its fair value at each balance sheet date and recognizes any change since the prior balance sheet date as a component of other income/(expense). The recorded value of such derivative liabilities can fluctuate significantly
based on fluctuations of the market value of the underlying securities of the Company, as well as on the volatility of the Companys stock price during the term used for observation and the term remaining for the underlying financial
instruments. We believe that should the FASB staff reach a consensus on EITF 05-04 and select combined unit treatment (View A or B), the debt features of the debentures convertible and associated warrants previously classified as equity will have



48



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



to be evaluated as a combined unit with the registration rights agreements. This combination will result in these instruments being treated as derivative
liabilities requiring periodic reevaluation of fair value with potentially significant fluctuation in fair value from period to period. Accordingly, this consensus could have a significant effect on our financial statements. The Company entered into
registration rights agreements with regard to the January 29, 2004 convertible debt financing on January 29, 2004, and with regard to the February 10, 2004 convertible preferred stock Series A financing on February 10, 2004 and
with regard to the March 5, 2004 convertible stock Series B on March 5, 2004.Pursuant to all of the registration rights agreements, we agreed to file a resale registration statement covering the resale of the shares issuable to the
investors upon the exercise of their warrants and conversion of their debentures and preferred stock by February 29, 2004, March 10, 2004 and April 5, 2004 respectively. At inception, the registration rights agreements required
us to pay monthly liquidated damages if a registration statement was not declared effective on or prior to April 29, 2004, May 10, 2004 and September 5, 2004 respectively or after declared effective if the registration statements
cease for any reason to remain continuously effective as to all registrable securities for which it is required to be effective or the investors are not permitted to utilize the prospectus therein to resell such registrable securities for 20
consecutive calendar days but no more than an aggregate of 30 calendar days during any 12 month period. The amount of monthly liquidating damages equals 1%, 1% and 2% respectively of the aggregate purchase price paid by the investors for any
registrable securities held by the investors. Any late payment beyond seven days is subject to interest at an annual rate of 18%. We evaluated the liquidated damages feature of the registration rights agreements in accordance with Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133). The liquidated damages qualify as embedded derivative instruments at issuance and, because they
do not qualify for any scope exception within SFAS 133, they were required by SFAS 133 to be recorded as derivative financial instruments. Further, in accordance with EITF 05-04, The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, we also evaluated whether the registration rights agreements, the senior
and convertible debentures, and convertible preferred stock Series A and B and associated warrants should be combined into and accounted for as a single unit or accounted for as separate financial agreements. In considering the appropriate treatment
of these instruments, we observed that although entered into contemporaneously, the agreements are nevertheless separate legal agreements. Payment of the liquidated damages penalty under the registration rights agreements does not alter the
investors rights under either the warrant or debenture agreements. The debentures, preferred stock and warrants have values which are based on their interest rate and the relation between their conversion price or exercise price and the value
of our common stock. This value is independent of any payment for liquidated damages under the registration rights agreements, which is based on how long the shares are unregistered. The various agreements do not relate to the same risk. The risk
inherent in the debentures relates to our ability to repay these instruments as and when they come due or to the extent converted into common stock, to the price of our common stock. The warrants similarly bear risk related to the value of our
common stock. The liquidated damages penalty under the registration rights agreements relates to the risk of the Company filing a registration statement and whether it will be declared effective. In light of the above facts and circumstances and
accordance with guidance in EITF 05-4, View C, we evaluated and treated the registration rights agreements, convertible debentures, preferred stock and associated warrants as separate free standing agreements. Upon execution, the registration rights
agreements had no initial fair value. In subsequent periods, the carrying value of the derivative financial instrument related to the registration rights agreements will be adjusted to its fair value at each balance sheet date and any change since
the prior balance sheet date will be recognized as a component of other income/(expense). The estimated fair value of the registration rights agreements was determined using the discounted value of the expected future cash flows. The Company filed
its registration statement with regard to the Series A and B preferred stock, the convertible debt and debentures on April 2, 2004 and it was declared effective on April 23, 2004. Therefore, the Company has met the registration
requirements and will continue to do so in the future. Should an event occur to cause the registration to not be effective, we believe the holders of the debentures and preferred stock (Series A and B) will waive the liquidated damages required
under the registration rights agreements. As a result, at March 31, 2004 and at all subsequent periods we assigned no value to the potential liquidating damages. EITF 05-04 offers multiple views on the question of whether a registration rights
agreements should be combined as a unit with the underlying financial instruments and be evaluated as a single instrument. EITF 05-04 does not reach a consensus on this question and allows for treatment as a combined unit (Views A and B) as well as
separate freestanding financial instruments (View C). On September 15, 2005, the FASB staff postponed further discussion of EITF 05-04. As of March 31, 2006, the FASB has still not rescheduled EITF 05-04 for discussion. In conjunction with
our issuance of convertible debentures, preferred stock Series A and B, and the related warrants and registration rights, we adopted View C of EITF 05-04. Accordingly, the registration rights agreements, the warrants associated with the convertible
debentures, preferred stock Series A and B, the debentures themselves, as well as certain features of the debentures and preferred stock were evaluated as stand alone financial instruments. This treatment resulted in classification of the warrants
and certain features of the debentures and preferred stock as equity while the registration rights agreements and other features of the debentures were treated as derivative liabilities. Derivative liability treatment requires adjusting the carrying
value of the instrument to its fair value at each balance sheet date and recognizes any change since the prior balance sheet date as a component of other income/(expense). The recorded value of such derivative liabilities can fluctuate significantly
based on fluctuations of the market value of our underlying securities, as well as on the volatility of our stock



49



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



price during the term used for observation and the term remaining for the underlying financial instruments. We believe that should the FASB staff reach a
consensus on EITF 05-04 and select combined unit treatment (View A or B), the debt features of the debentures and associated warrants previously classified as equity will have to be evaluated as a combined unit with the registration rights
agreements. This combination will result in these instruments being treated as derivative liabilities requiring periodic reevaluation of fair value with potentially significant fluctuation in fair value from period to period. Accordingly, this
consensus could have a significant effect on our financial statements.

The instruments each have detachable warrants that
have a cashless exercise feature. The feature permits the warrant holders to net settle the warrant in the event the price of the stock exceeds the strike price of the warrant which meets the criteria of paragraph 6 of FAS 133. DIG A 17
states that the right to net settle an obligation is equivalent to a cashless exercise feature. However, paragraph 11a of FAS 133 states that not withstanding paragraphs 6-10 of FAS 133 an item will not be considered a derivative if it is a contract
issued by that entity that is both (1) indexed to its own stock and (2) classified in stockholders equity.

The warrants meet test 1
since they are settleable in stock of the Company. They also meet test 2 under EITF 00-19 since they are not combined with the registration rights agreements as the Company has elected to treat the registration rights agreement as a standalone
derivative under EITF 05-04 View C. Therefore, the warrants are classified as equity and are scoped out uder paragraph 11a of FAS 133.

On
December 1, 2004, the Company entered into an agreement and converted 800,000 common shares in full satisfaction of the $5,000,000 Series A 6%, convertible preferred stock outstanding.

On February 1, 2006, the entered into an agreement and converted 530,469 common shares in full satisfaction of the principle and interest outstanding as
related to the $2,424,000 6% convertible debt.

NOTE 3ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, consist of the following:



|                                          |  |           |           |   |      |   |           |  
|----------------------------------------- |  | --------- | --------- | - | ---- | - | --------- | -
|                                          |  | March 31, |          
|                                          |  | 2006      |           |   | 2005 |  
|Trade accounts receivable                 |  | $         | 7,557,309 |   |      | $ | 2,364,117 |  
|Less allowance for uncollectible accounts |  |           | (92,284   | ) |      |   | (107,928  | )
|                                          |  |           |           |   |      |   |           |  
|                                          |  | $         | 7,465,025 |   |      | $ | 2,256,189 |  
|                                          |  |           |           |   |      |   |           |  

As of March 31, 2006, the total accounts receivable balance of $7,557,309 includes $3,545,079
related to the Companys manufacturing segment and $4,012,230 related to the Companys distribution segment. As of March 31, 2005, the total accounts receivable balance of $2,364,117 includes $1,892,666 related to the Companys
manufacturing segment and $471,451 related to the Companys distribution segment.

The Company recognizes revenues for product sales
when title and risk of loss pass to its external customers and analyzes the status of the allowance for uncollectible accounts based on historical experience, customer history and overall credit outstanding. For our distribution segment, any charge
backs or other sales allowances immediately reduce the gross receivable with the corresponding reduction effected through increases in sales allowances which directly reduce sales revenue.



50



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 4ACCOUNTS RECEIVABLE, OTHER

Accounts receivable, other, consist of the following:



|                           |  |           |         |      |   |        
|-------------------------- |  | --------- | ------- | ---- | - | -------
|                           |  | March 31,
|                           |  | 2006      |         | 2005
|Due from insurance company |  | $         |        |      | $ | 500,000
|Accounts receivable, other |  |           | 537,686 |      |   | 86,164 
|Income tax receivable      |  |           | 96,998  |      |   |       
|                           |  |           |         |      |   |        
|                           |  | $         | 634,684 |      | $ | 586,164
|                           |  |           |         |      |   |        

As of March 31, 2006, accounts receivable, other primarily represented contract reimbursable
amounts due from unrelated third party based on expenses incurred by the Company for certain pharmaceutical research and development projects in process.

On August 27, 2002, a commercial building where one of our manufacturing facilities was located was involved in a fire. Although this fire was not in our leased space, nor was the fire caused by the Company or
any of its related parties, our facility was exposed to and incurred smoke and water damage. The company that had the fire is not a related party. The Company has adequate insurance coverage that covers replacement cost of the facilities
contents which includes inventory and leasehold improvements, in addition to business interruption insurance which covers lost profits based on certain coverage formulas and policy limits. During the fiscal year ended March 31, 2006, the final
financial assessment was made by our insurance company and the balance was paid in full.

As of March 31, 2005, included within
accounts receivable-other, the Company has recorded the minimum net amounts due from the party who has caused the fire that are quantifiable, measurable and deemed collectible, in the amount of $500,000 that are comprised of additional amounts due
and approved for losses already incurred as caused by our business interruption. For the fiscal year ended March 31, 2005 and 2004, amounts recorded in other income/(expense), net, were approximately $175,000 and $325,000.

NOTE 5INVENTORIES, NET

Inventories, net,
consist of the following:



|                                      |  |           |           |   |      |   |           |  
|------------------------------------- |  | --------- | --------- | - | ---- | - | --------- | -
|                                      |  | March 31, |          
|                                      |  | 2006      |           |   | 2005 |  
|Processed raw materials and packaging |  | $         | 4,517,472 |   |      | $ | 3,050,858 |  
|Work in process                       |  |           | 318,462   |   |      |   | 225,086   |  
|Finished goods                        |  |           | 1,094,862 |   |      |   | 502,067   |  
|                                      |  |           |           |   |      |   |           |  
|                                      |  | $         | 5,930,796 |   |      | $ | 3,778,011 |  
|Less reserve for obsolescence         |  |           | (163,740  | ) |      |   | (34,948   | )
|                                      |  |           |           |   |      |   |           |  
|                                      |  | $         | 5,767,056 |   |      | $ | 3,743,063 |  
|                                      |  |           |           |   |      |   |           |  

As of March 31, 2006, the total inventory balance of $5,930,796 includes $4,840,536 related
to the Companys manufacturing segment, $697,073 related to the Companys distribution segment and $393,187 as related to the pharmaceutical segment. As of March 31, 2005, the total inventory balance of $3,778,011 includes $2,939,459
related to the Companys manufacturing segment, $763,186 related to the Companys distribution segment and $75,366 as related to the pharmaceutical segment. In addition, for the manufacturing segment, approximately $316,696 and $446,583 of
factory overhead has been capitalized in inventory as of March 31, 2006 and 2005, respectively.



51



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 6PROPERTY, PLANT, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET

Property, plant, leasehold improvements and equipment, net, consists of the following:



|                                               |  |           |            |   |      |   |            |  
|---------------------------------------------- |  | --------- | ---------- | - | ---- | - | ---------- | -
|                                               |  | March 31, |           
|                                               |  | 2006      |            |   | 2005 |  
|Land                                           |  | $         | 579,767    |   |      | $ | 579,767    |  
|Building and building improvements             |  |           | 1,439,714  |   |      |   | 1,387,974  |  
|Machinery and equipment                        |  |           | 5,009,298  |   |      |   | 3,222,845  |  
|Furniture, fixtures and equipment              |  |           | 586,432    |   |      |   | 488,536    |  
|Leasehold improvements                         |  |           | 3,123,260  |   |      |   | 838,983    |  
|                                               |  |           |            |   |      |   |            |  
|                                               |  | $         | 10,738,471 |   |      | $ | 6,518,105  |  
|Less accumulated depreciation and amortization |  |           | (2,713,820 | ) |      |   | (2,032,338 | )
|                                               |  |           |            |   |      |   |            |  
|                                               |  | $         | 8,024,651  |   |      | $ | 4,485,767  |  
|                                               |  |           |            |   |      |   |            |  

Depreciation and leasehold amortization expense totaled $681,482 and $538,755 for the years ended
March 31, 2006 and 2005, respectively primarily attributable to manufacturing and corporate depreciable assets.

Of the $10,738,471 as
of March 31, 2006, $4,983,608 was attributable to manufacturing segment, $5,739,581 was attributable to pharmaceutical segment with $15,282 was attributable to distribution segment. Of the $6,518,105 as of March 31,2005, $5,302,321 was
attributable to manufacturing segment, $1,200,502 was attributable to pharmaceutical segment with $15,282 was attributable to distribution segment.

The Company purchased one of our manufacturing facilities from Dynamic, a related party, (See note 13), for $1.925 million on October 28, 2004. For each of the years ended March 31, 2006 and 2005, total rent expense was $734,094
and $457,782; included in the $734,094 and $457,782 of rent expense, amounts paid to Dynamic were approximately $117,831 and $128,529, respectively.

NOTE 7GOODWILL, NET

Goodwill, net, consists of the following:



|                              |  |           |          |   |      |   |          |  
|----------------------------- |  | --------- | -------- | - | ---- | - | -------- | -
|                              |  | March 31, |         
|                              |  | 2006      |          |   | 2005 |  
|Goodwill                      |  | $         | 901,727  |   |      | $ | 901,727  |  
|Less accumulated amortization |  |           | (172,831 | ) |      |   | (172,831 | )
|                              |  |           |          |   |      |   |          |  
|                              |  | $         | 728,896  |   |      | $ | 728,896  |  
|                              |  |           |          |   |      |   |          |  

As of March 31, 2006 and 2005, goodwill represented an intangible asset attributable to the
manufacturing segment. Goodwill is analyzed each January 1 for impairment as it has an indeterminant life. Based on the Companys analyses performed, no impairment losses were required to have been recorded during the fiscal years ended
March 31, 2006 and 2005.

NOTE 8INTANGIBLE ASSETS, NET

Intangible assets, net, consist of the following:



|                              |  |           |           |   |      |   |          |  
|----------------------------- |  | --------- | --------- | - | ---- | - | -------- | -
|                              |  | March 31, |          
|                              |  | 2006      |           |   | 2005 |  
|Loan and lease costs          |  | $         | 200,525   |   |      | $ | 200,525  |  
|Intellectual property         |  |           | 895,696   |   |      |   | 295,696  |  
|Generic drug ANDAs            |  |           | 3,387,403 |   |      |   | 115,500  |  
|Deferred compensation expense |  |           | 100,583   |   |      |   | 155,150  |  
|Patents                       |  |           | 9,454     |   |      |   | 9,129    |  
|                              |  |           |           |   |      |   |          |  
|                              |  | $         | 4,593,661 |   |      | $ | 776,000  |  
|Less accumulated amortization |  |           | (208,819  | ) |      |   | (254,501 | )
|                              |  |           |           |   |      |   |          |  
|                              |  | $         | 4,384,842 |   |      | $ | 521,499  |  
|                              |  |           |           |   |      |   |          |  



52



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of March 31, 2006 and 2005, loan and lease costs, and patents represented identifiable
intangible assets attributable to the manufacturing segment with the intellectual property balance, not identifiable related to service life, is an intangible attributable to the distribution segment. The generic drug ANDAs are attributable to the
pharmaceutical segment and also do not have an identifiable life (See note 12). The deferred compensation expense, and the lease and loan costs, and the patents are amortized based on their useful life as determined by the life of the option for
deferred compensation expense; over the life of the directly-related loan or lease and over the lives of the patents.

As there is an
indeterminant life as related to the intellectual property and the generic drug ANDAs, this asset is analyzed each January 1 for impairment. Based on that analysis, no impairment loss was required to be recorded as of or for the fiscal year
ended March 31, 2006 or 2005.

NOTE 9  MEDIA CREDITS, NET

Media credits, net, consist of the following:



|                 |  |           |           |   |      |   |           |  
|---------------- |  | --------- | --------- | - | ---- | - | --------- | -
|                 |  | March 31, |          
|                 |  | 2006      |           |   | 2005 |  
|Media credits    |  | $         | 1,269,350 |   |      | $ | 1,269,350 |  
|Deferred revenue |  |           | (469,602  | ) |      |   | (469,602  | )
|                 |  |           |           |   |      |   |           |  
|                 |  | $         | 799,748   |   |      | $ | 799,748   |  
|                 |  |           |           |   |      |   |           |  

During March 2005, the Company negotiated with an international media company to exchange excess
CarbSlim inventory for future credit for use on custom print, radio and television advertising. Based on the Companys distribution segment expansion into its own branded consumer product lines coupled with the decline in customer demand for
low-carb products, this excess inventory was able to be redeemed with the media credits having a three-year life. The media credits were recorded based on the net cost of CarbSlim inventory that was exchanged. As of March 31, 2006, the media
credits had yet to be utilized but a structured useage plan has been instituted for their use throughout fiscal years ending March 31, 2007 and 2008.

NOTE 10OTHER ASSETS, NET

Other assets, net, consist of the following:



|                                          |  |           |         |   |      |   |         |  
|----------------------------------------- |  | --------- | ------- | - | ---- | - | ------- | -
|                                          |  | March 31, |        
|                                          |  | 2006      |         |   | 2005 |  
|Deposits                                  |  | $         | 129,550 |   |      | $ | 74,233  |  
|Other assets                              |  |           | 67,644  |   |      |   | 85,282  |  
|                                          |  |           |         |   |      |   |         |  
|                                          |  |           | 197,194 |   |      |   | 159,515 |  
|Less allowance for uncollectible accounts |  |           | (31,000 | ) |      |   | (28,629 | )
|                                          |  |           |         |   |      |   |         |  
|                                          |  | $         | 166,194 |   |      | $ | 130,886 |  
|                                          |  |           |         |   |      |   |         |  

As March 31, 2006 and 2005, other assets, net are attributable to the manufacturing segment.
As of March 31, 2006, other assets consisted of approximately $67,644 of one customers returned checks. Although the Company has begun legal action against the customers, an allowance of $31,000 has been established. The Company intends
to continue to pursue collection efforts until such time that management has deemed collection efforts as futile based on ongoing cost versus benefit analyses. As of March 31, 2005, other assets consisted of approximately $70,000 of two
customers returned checks. Although the Company has begun legal action against the two customers, an allowance of $28,629 has been established. The Company intends to continue to pursue collection efforts until such time that management has
deemed collection efforts as futile based on ongoing cost versus benefit. The note, the interest and the related allowance was written off during the fiscal year ended March 31, 2005.



53



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 11LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:



|                                                                                                                                                                                                                                         |  |           |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                                                         |  | March 31, |           
|                                                                                                                                                                                                                                         |  | 2006      |            |   | 2005 |  
|6% Convertible Term Note, due in monthly principal payments of $151,515.15 July 1, 2004, interest due monthly beginning on March 1,
2004, net of the debt discount for warrants issued of $0 and $563,014 as of March 31, 2006 and 2005. |  | $         |           |   |      | $ | 3,376,381  |  
|5% Three year note, due in annual principle and interest payments; principle payments of $833,333 are due each August
2006-2008                                                                                                          |  |           | 2,500,000  |   |      |   |           |  
|Other                                                                                                                                                                                                                                    |  |           | 183,456    |   |      |   |           |  
|                                                                                                                                                                                                                                         |  |           |            |   |      |   |            |  
|                                                                                                                                                                                                                                         |  | $         | 2,683,456  |   |      | $ | 3,376,381  |  
|Less current maturities                                                                                                                                                                                                                  |  |           | (1,016,789 | ) |      |   | (1,818,812 | )
|                                                                                                                                                                                                                                         |  |           |            |   |      |   |            |  
|                                                                                                                                                                                                                                         |  | $         | 1,666,667  |   |      | $ | 1,557,569  |  
|                                                                                                                                                                                                                                         |  |           |            |   |      |   |            |  

The $2,683,456 of total debt outstanding as of March 31, 2006, $183,456 related to corporate
and $2,500,000 relates to pharmaceutical. During August 2005, the Company finalized its agreement with an unrelated third party to purchase 51% of American Antibiotics LLC (See note 12) and entered into a three-year 6% note payable in $833,333
annual installments after the initial $500,000 down payment. The $3,376,381 of total debt outstanding as of March 31, 2005 relates to corporate. On January 30, 2004, the Company entered into a Securities Purchase Agreement with a Master
Fund under which we borrowed $5,000,000 principal in accordance with a 6% Secured Convertible Term Note due January 29, 2007 together with warrants issued to purchase a total of 150,000 shares of common stock; 75,000 warrants are at a price
equal to $7.34, 50,000 warrants are at a price equal to $7.98 and 25,000 warrants at a price equal to $8.62. In accordance with the provisions of EITF 00-27, Black-Scholes valuations were performed on the 150,000 warrants resulting in a gross debt
discount of $932,365 which will be amortized over the term of the debt, or 36 months, to interest expense. All warrants are exercisable until January 29, 2011. $1,206,756 of the proceeds were used to immediately payoff the Companys
outstanding credit lines and a term note payable with another bank. The conversion price of the 6% Secured Convertible Term Note is $6.25 per share. The principal and the interest can be paid in cash or in common stock at the Companys option.
A 1% surcharge will be assessed to the Company if the principal is paid in cash. If the interest of the principal is paid with the Companys common stock, the value of the common stock will be determined based on the volume weighted average
price (VWAP) of the common stock for the ten trading days immediately preceeding the due date. On February 1, 2006, the Company satisfied the $2,424,424 balance together with any and all additional fees outstanding by issuing 530,469 shares of
the Companys $.01 par value stock.

At March 31, 2006, aggregate maturities of long-term obligations are as follows:



|                      |  |   |          
|--------------------- |  | - | ---------
|Year ending March 31, |  |  
|2007                  |  | $ | 1,016,789
|2008                  |  |   | 833,333  
|2009                  |  |   | 833,334  
|2010                  |  |   |         
|2011                  |  |   |         
|Thereafter            |  |   |         
|                      |  |   |          
|                      |  | $ | 2,683,456
|                      |  |   |          

NOTE 12-AMERICAN ANTIBIOTICS LLC

On August 12, 2005, the Company, through American Antibiotics LLC, a newly-formed subsidiary which is 51% owned by the Company, acquired substantially all of the assets of Consolidated Pharmaceutical Group, Inc.,
an antibiotic manufacturer located in Baltimore, Maryland. The acquisition was made through American Antibiotics LLC, a newly formed Florida limited liability company. GeoPharma has a 51% controlling interest in American Antibiotics LLC in exchange
for $3,000,000. In accordance with the Purchase Agreement, the $3,000,000 note was immediately reduced based on a $500,000



54



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



cash down payment with the balance due of $2,500,000 note amortized over three years at 5% interest with principal and interest serviced annually. In
addition, the manufacturing facility located Baltimore, Maryland remains rent free for the longer of twelve months or until the Sellers have brought the Facility to current FDA and cGMP standards.

American Antibiotics began with five ANDAs in 10 dosage forms; Amoxicillin 250mg and 500mg oral capsule, Amoxicillin 125mg / 5ml and 250mg / 5ml suspensions, Ampicillin
250mg and 500mg oral capsule, Ampicillin 125mg / 5ml and 250mg / 5ml suspensions, and Penicillin V. Potassium 125mg / 5ml and 250mg / 5ml suspension.

NOTE 13RELATED PARTY TRANSACTIONS

The Company has entered into transactions and business relationships with certain
of our officers, directors and principal stockholders or their affiliates.

Revenues: For the fiscal years ended March 31, 2006 and
2005, manufacturing revenues of approximately $172,901 and $414,073 respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products, an affiliate of the Company, and of which Jugal K. Taneja, the
Chairman of the Board of the Company, is a principal shareholder. For the fiscal years ended March 31, 2006 and 2005, revenues of $673,544 and $348,156 respectively, were recorded from sales by the Company to Vertical Health Inc., an affiliate
of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder.

For the fiscal years
ended March 31, 2006 and 2005, distribution revenues of approximately $0 and 22,176, respectively, were recorded from sales by the Company to subsidiaries or joint ventures of Dynamic Health Products.

For the fiscal years ended March 31, 2006 and 2005, pharmacy benefit management revenues of approximately $16,587,701 and $11,437,659, respectively,
were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the Companys former board member Mssr. Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract.

Trade Accounts Receivable/ Trade Accounts PayableAmounts due to affiliates and amounts due from affiliates represent balances owed by or amounts
owed to the Company for sales occurring in the normal course of business. Amounts due to and amounts due from these affiliates are in the nature of trade payables or receivables and fluctuate based on sales volume and payments received.

As of March 31, 2006 and 2005, for the manufacturing segment, $25,888 and $51,460 was due from subsidiaries of Dynamic Health Products and
$140,038 and $57,363 was due from Vertical Health, Inc.

As of March 31, 2006 and 2005, for the pharmacy benefit management segment,
$995,452 and $743,801 was due from CarePlus Health.

Lease / Debt ObligationsFor each of the years ended March 31, 2006 and
2005, rent expense of $0 and $128,529 was paid to Dynamic Health Products, Inc. Monthly rents were approximately $18,333 per month. The Company and Dynamic were parties to a ten-year, triple net operating lease that would have expired in the year
2009; however, on October 28, 2004 the Company purchased this leased facility for the independent appraised value of $1,925,000.

NOTE
14INCOME TAXES

Income taxes for the years ended March 31, 2006 and 2005 differ from the amounts computed by applying the
effective income tax rates to income before income taxes as a result of the following:



|                                                    |  |           |           |   |           |   |          |  
|--------------------------------------------------- |  | --------- | --------- | - | --------- | - | -------- | -
|                                                    |  | March 31, |           |   | March 31, |  
|                                                    |  | 2006      |           |   | 2005      |  
|Computed tax expense at the statutory rate (37.63%) |  | $         | 860,700   |   |           | $ | (407,800 | )
|Increase (decrease) in taxes resulting from:        |  |           |           |   |           |   |          |  
|Effect of permanent differences:                    |  |           |           |   |           |   |          |  
|Permanent differences                               |  | $         | 388,000   |   |           |   | 111,000  |  
|Other adjustments for permanent differences         |  |           | 82,100    |   |           |   | (155,098 | )
|Valuation allowance                                 |  |           | (250,000  | ) |           |   | 250,000  |  
|                                                    |  |           |           |   |           |   |          |  
|Income tax (benefit) expense                        |  | $         | 1,080,800 |   |           | $ | (201,898 | )
|                                                    |  |           |           |   |           |   |          |  



55



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Temporary differences that give rise to deferred tax assets and liabilities are as follows:



|                                            |  |           |          |   |           |   |          |  
|------------------------------------------- |  | --------- | -------- | - | --------- | - | -------- | -
|                                            |  | March 31, |          |   | March 31, |  
|                                            |  | 2006      |          |   | 2005      |  
|Deferred tax assets:                        |  |           |          |   |           |   |          |  
|Bad debts                                   |  | $         | 4,600    |   |           | $ | 52,300   |  
|Inventories                                 |  |           | 61,600   |   |           |   | 13,200   |  
|Accrued vacation                            |  |           | 23,000   |   |           |   | 23,100   |  
|Deposits                                    |  |           | 69,900   |   |           |   | 42,000   |  
|Research credit carryforward                |  |           |         |   |           |   | 85,000   |  
|Net operating loss carryforwards            |  |           |         |   |           |   | 518,500  |  
|                                            |  |           |          |   |           |   |          |  
|                                            |  | $         | 159,100  |   |           | $ | 734,100  |  
|Valuation Allowance                         |  |           |         |   |           |   | (250,000 | )
|                                            |  |           |          |   |           |   |          |  
|Deferred tax asset                          |  |           | 159,100  |   |           | $ | 484,100  |  
|                                            |  |           |          |   |           |   |          |  
|Deferred tax liabilities:                   |  |           |          |   |           |   |          |  
|Fixed asset basis differences               |  |           | (348,800 | ) |           | $ | (403,200 | )
|Amortization                                |  |           | (55,100  | ) |           |   | (42,900  | )
|                                            |  |           |          |   |           |   |          |  
|                                            |  |           | (403,900 | ) |           | $ | (446,100 | )
|                                            |  |           |          |   |           |   |          |  
|Net deferred tax asset (liability) recorded |  | $         | (244,800 |   |           | $ | 38,000   |  
|                                            |  |           |          |   |           |   |          |  

At March 31, 2006 and 2005, the Company has a tax net operating loss carryforward of
approximately $-0- and $1,200,000 to offset future taxable income. In addition, the Company has research and development credit carryforwards of approximately $0 and $85,000 to offset future tax liability. The tax net operating loss and research and
development credit carryforwards begin to expire in 2021.

NOTE 15SHAREHOLDERS EQUITY

Common Stock

As of March 31, 2006 and 2005, the
number of shares of $.01 par value Common Stock outstanding was 10,051,775 and 9,181,481 before treasury shares of 189,617 and 483,020 for the same periods. The increase in common shares outstanding is a direct result of stock option exercises,
payment of preferred stock dividends, payment of convertible debt principle and interest, and employee stock awards. During June 2005, the Companys management was awarded a total of 130,000 restricted, three-year vesting shares from the
treasury shares held by the Company and as a direct result of such grant, recorded a non-cash deferred compensation expense of approximately $92,820 included within other assets and has amortized $23,000 to selling, general and administrative
expenses.

During the fiscal year ended March 31, 2006, 1,161,000 employee, officer and nonemployee stock options were granted with
332,286 employee, officer and nonemployee stock options exercised. During the fiscal year ended March 31, 2005, 1,110,000 employee, officer and nonemployee stock options were granted with 264,566 employee, officer and nonemployee stock options
exercised.



56



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Subject to preferences that might be applicable to any Preferred Stock, the holders of the Common
Stock are entitled to receive dividends when, as, and if declared from time to time by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution, or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining after payment of liabilities subject to prior distribution rights of any Preferred Stock then outstanding. The Common Stock has no preemptive or conversion rights and is not subject to call
or assessment by the Company. There are no redemption or sinking fund provisions applicable to the Common Stock.

Preferred Stock

On February 10, 2004, we entered into a Securities Purchase Agreement with a Master Fund under which we issued 5,000,000 shares of, 6% Series A
Convertible Preferred Stock of one of our wholly owned subsidiaries, Belcher Capital Corporation together with warrants to purchase 150,000 shares of the companys common stock for $5,000,000; 75,000 warrants are at a price equal to $7.25,
50,000 warrants are at a price equal to $7.88 and 25,000 warrants at a price of $8.51. All of the warrants are exercisable until February 10, 2011. The 6% Series A Convertible Preferred Stock is convertible into the Companys common stock.
The conversion price of the preferred stock is $6.25 per share. The series A convertible preferred stock has a liquidation value of $1 per share. During December 2004, the holders of the series A convertible preferred stock converted all preferred
shares outstanding in exchange for 800,000 shares of the Companys common stock. No warrants were exercised during the fiscal year ended March 31, 2006 or 2005.

On March 5, 2004, we entered into a Securities Purchase Agreement with two Funds under which we issued a total of 5000 shares, 6% Series B Convertible Preferred Stock together with warrants to purchase 262,500
shares of the companys common stock for $5,000,000; 131,250 warrants are at a price equal to $6.29, 131,250 warrants are at a price equal to $6.57. All of the warrants are exercisable until March 5, 2011. The 6% Series B Convertible
Preferred Stock is convertible into the Companys common stock. The conversion price of the preferred stock is $6.00 per share. The series B convertible preferred stock has a liquidation value of $1,000 per share.

As a direct result of issuing warrants with the $5 million 6% convertible debt in January, the Company recorded $932,365 discount on the three-year term
note based on applying a Black-Scholes valuation which lowered the gross amount of the note payable with the $932,365 offset recorded within Additional Paid in Capital (APIC). The $932,365 discount will be straight-line amortized to
interest expense over the three-year life of the note. As a direct result of issuing warrants with the $10 million 6% convertible preferred stock in February and March, the Company recorded a total of $3,580,960 discount on the $10 million 6%
convertible preferred stock based on applying a Black-Scholes valuation which resulted in a net reclassification of $684,187 and $3,580,960 as of March 31 2005 and 2004 which reduced retained earnings and increased APIC. All Black-Scholes
valuations referenced and related entries are noncash transactions.

During February 2006, the Company fully satisfied its approximate
$2.424 million debt outstanding by issuing 530,469 common shares and simultaneously wrote off to interest expense the $300,000 unamortized debt discount.



57



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                         |  |                             |  |                                                     |  |                                 |      |                                       |         |                                  |   |     
|------------------------ |  | --------------------------- |  | --------------------------------------------------- |  | ------------------------------- | ---- | ------------------------------------- | ------- | -------------------------------- | - | ----
|                         |  | Warrants                    |  | Outstanding                                         |  |                                 |      | Warrants                              |         | Exercisable                     
|Range of Exercise Prices |  | Number Outstanding 03/31/06 |  | Weighted Average Remaining Contractual Life (years) |  | Weighted Average Price 03/31/06 |      | Options exercisable at March 31, 2005 |         | Weighted Average Exercise Prices
|$6.29-$8.62              |  | 562,500                     |  | 7                                                   |  | $                               | 7.19 |                                       | 562,500 |                                  | $ | 7.19

Stock Option Plan

On September 30, 1999, the Company adopted a Stock Option Plan, which provides for the grant to employees of incentive or non-qualified options to purchase up to 1,000,000 shares of Common Stock; on May 18,
2004, based on a majority shareholder vote, the plan was increased by 500,000, for a total of 1,500,000. The exercise price represents the closing price of the Companys Common Stock at the time of the grant. All outstanding options vest
equally over three years or sooner upon the change in control of the Company. Options granted under the Plan expire not later than ten years after the date granted or sooner in the event of death, disability, retirement, or termination of
employment.

The Non-Employee Plan

The
Non-Employee Plan originally provided for the grant of nonqualified stock options to purchase up to 500,000 shares of Common Stock to members of the Board of Directors who are not employees of the Company. On May 18, 2004, the shareholders
approved the amendment to the Plan increasing the total shares to 1,000,000. On the date on which a new non-employee director is first elected or appointed, he will automatically be granted options to purchase 25,000 shares of Common Stock for each
year of his initial term. All options have an exercise price equal to the fair market value of the Common Stock on the date of grant. The options vest over a three-year vesting schedule with the first years vesting period ending one year from
date of grant. 300,000 of the 530,000 non employee options granted during the fiscal year ended March 31, 2004 qualified for valuation using Black-Scholes and the Company recorded a gross deferred asset of $155,000 to which approximately
$40,000 and $66,000 was amortized to compensation expense for the years ended March 31, 2006 and 2005. This valuation and related expense was required under SFAS 123 treatment for nonemployee consultants. The following summarizes the
non-employee common stock options outstanding as of March 31, 2006 and 2005:



|                               |  |                  |   |  |                                 |       |   |                  |          |   |                                 |   |       |  
|------------------------------ |  | ---------------- | - |  | ------------------------------- | ----- | - | ---------------- | -------- | - | ------------------------------- | - | ----- | -
|                               |  | 2006             |   |  | 2005                            |      
|Non-Employee Stock Options     |  | Number of Shares |   |  | Weighted Average Exercise Price |       |   | Number of Shares |          |   | Weighted Average Exercise Price |  
|Outstanding, beginning of year |  | 866,665          |   |  | $                               | 4.31  |   |                  | 729,531  |   |                                 | $ | 3.06  |  
|Granted                        |  | 650,000          |   |  | $                               | 5.28  |   |                  | 460,000  |   |                                 | $ | 5.28  |  
|Exercised                      |  | (98,168          | ) |  | $                               | (2.97 | ) |                  | (220,866 | ) |                                 | $ | (2.97 | )
|Forfeited                      |  |                 |   |  | $                               | (2.64 | ) |                  | (102,000 | ) |                                 | $ | (2.64 | )
|                               |  |                  |   |  |                                 |       |   |                  |          |   |                                 |   |       |  
|Outstanding, end of year       |  | 1,418,497        |   |  | $                               | 4.31  |   |                  | 866,665  |   |                                 | $ | 4.31  |  
|                               |  |                  |   |  |                                 |       |   |                  |          |   |                                 |   |       |  
|Options vested, end of year    |  | 338,499          |   |  | $                               | 1.52  |   |                  | 134,332  |   |                                 | $ | 1.52  |  
|                               |  |                  |   |  |                                 |       |   |                  |          |   |                                 |   |       |  



58



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Employee Plan

The following table summarizes information about the employee stock option activity for the years ended March 31, 2006 and 2005:



|                               |  |                  |   |  |                                 |       |   |                  |         |   |                                 |   |       |  
|------------------------------ |  | ---------------- | - |  | ------------------------------- | ----- | - | ---------------- | ------- | - | ------------------------------- | - | ----- | -
|                               |  | 2006             |   |  | 2005                            |      
|Employee Stock Options         |  | Number of Shares |   |  | Weighted Average Exercise Price |       |   | Number of Shares |         |   | Weighted Average Exercise Price |  
|Outstanding, beginning of year |  | 633,200          |   |  | $                               | 1.71  |   |                  | 507,219 |   |                                 | $ | 1.71  |  
|Granted                        |  | 150,000          |   |  | $                               | 4.55  |   |                  | 200,000 |   |                                 | $ | 4.55  |  
|Exercised                      |  | (101,783         | ) |  | $                               | (0.85 | ) |                  | (39,300 | ) |                                 | $ | (0.85 | )
|(Forfeited)/ transferred in    |  | (33,000          | ) |  | $                               | (1.59 | ) |                  | (34,719 | ) |                                 | $ | (1.59 | )
|                               |  |                  |   |  |                                 |       |   |                  |         |   |                                 |   |       |  
|Outstanding, end of year       |  | 648,417          |   |  | $                               | 2.46  |   |                  | 633,200 |   |                                 | $ | 2.46  |  
|                               |  |                  |   |  |                                 |       |   |                  |         |   |                                 |   |       |  
|Options vested, end of year    |  | 371,417          |   |  | $                               | 1.57  |   |                  | 351,134 |   |                                 | $ | 1.57  |  
|                               |  |                  |   |  |                                 |       |   |                  |         |   |                                 |   |       |  

During the year March 31, 2006, the Company granted 150,000 shares as a hiring incentive based on
the January 3, 2006 closing price the date the employee accepted.

During the fiscal year ended March 31, 2005, September 1,
2004, the board of directors approved the granting of 200,000 options to be allocated amongst the Companys employees of record as of that date. The exercise price of the options is $4.55 based on the closing price, the day of the grant. Grants
were allocated based on years if service and salary.



|                               |  |                  |  |                                 |       |   |                  |         |   |                                 |   |       |  
|------------------------------ |  | ---------------- |  | ------------------------------- | ----- | - | ---------------- | ------- | - | ------------------------------- | - | ----- | -
|                               |  | 2006             |  |                                 | 2005  |  
|Officer Stock Options          |  | Number of Shares |  | Weighted Average Exercise Price |       |   | Number of Shares |         |   | Weighted Average Exercise Price |  
|Outstanding, beginning of year |  | 769,933          |  | $                               | 1.71  |   |                  | 323,333 |   |                                 | $ | 1.62  |  
|Granted                        |  | 375,000          |  | $                               | 4.55  |   |                  | 450,000 |   |                                 | $ | 4.55  |  
|Exercised                      |  |                 |  | $                               | (0.85 | ) |                  | (3,400  | ) |                                 | $ | (0.85 | )
|Forfeited or transferred       |  |                 |  |                                 |      |   |                  |        |   |                                 |   |      |  
|                               |  |                  |  |                                 |       |   |                  |         |   |                                 |   |       |  
|Outstanding, end of year       |  | 1,144,933        |  | $                               | 1.71  |   |                  | 769,933 |   |                                 | $ | 1.71  |  
|                               |  |                  |  |                                 |       |   |                  |         |   |                                 |   |       |  
|Options vested, end of year    |  | 469,933          |  | $                               | 1.41  |   |                  | 319,933 |   |                                 | $ | 1.41  |  
|                               |  |                  |  |                                 |       |   |                  |         |   |                                 |   |       |  

On June 7, 2005, the board approved the grant of 375,000 to the officers of the Company. The
exercise price was $1.95 which was the closing price on the date of the grant.

On September 1, 2004, the board of directors approved
the granting a total of 450,000 to be allocated to each of the Companys officers of record as of that date. The exercise price was $4.55 per share based on the closing price on the date of grant.

Employee Stock Options

The weighted-average fair
value of options granted for the years ending March 31, 2006 and 2005 was $3.35 and $4.36. The estimated fair value for the above options was determined using the Black-Scholes method with the following weighted-average assumptions used for
grants in 2006 and 2005 were as follows:



|                        |  |          |   |  |          |  
|----------------------- |  | -------- | - |  | -------- | -
|                        |  | 2006     |   |  | 2005     |  
|Dividend Yield          |  | 0.00     | % |  | 0.00     | %
|Option Term             |  | 10 years |   |  | 10 years |  
|Expected volatility     |  | 122.39   | % |  | 122.39   | %
|Risk-free interest rate |  | 4.13     | % |  | 4.13     | %



59



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Officers Stock Options

The weighted-average fair value of options granted for the years ending March 31, 2006 and 2005 was $4.68. The estimated fair value for the above options was determined using the Black-Scholes method with the
following weighted-average assumptions used for grants in 2006 and 2005:



|                        |  |          |   |  |          |  
|----------------------- |  | -------- | - |  | -------- | -
|                        |  | 2006     |   |  | 2005     |  
|Dividend Yield          |  | 0.00     | % |  | 0.00     | %
|Option Term             |  | 10 years |   |  | 10 years |  
|Expected volatility     |  | 120.92   | % |  | 120.92   | %
|Risk-free interest rate |  | 4.62     | % |  | 4.62     | %

The Company has adopted only the disclosure provision of SFAS No. 123, as it related to
employee awards. APB No. 25 is applied in accounting for the plan. Accordingly, no compensation expense is recognized related to the employee and nonemployee director stock based compensation plans although, $66,000 and $51,000 compensation
expense has been included in the results from operations for the fiscal year ended March 31, 2006 and 2005 for nonemployee consultants granted stock options under the Companys nonemployee stock option plan. The pro forma net earnings
(loss) per common share, if the Company had elected to account for its employee and nonemployee director plan consistent with the methodology prescribed by SFAS No. 123, are shown in the following:



|                                 |  |      |           |   |      |   |            |  
|-------------------------------- |  | ---- | --------- | - | ---- | - | ---------- | -
|                                 |  | 2006 |           |   | 2005 |  
|Net income (loss):               |  |      |           |   |      |   |            |  
|As reported                      |  | $    | 1,489,197 |   |      | $ | (1,403,454 | )
|                                 |  |      |           |   |      |   |            |  
|Pro forma                        |  | $    | 439,480   |   |      | $ | (2,721,616 | )
|                                 |  |      |           |   |      |   |            |  
|Net income per common share:     |  |      |           |   |      |   |            |  
|Basic income (loss) per share:   |  |      |           |   |      |   |            |  
|As reported                      |  | $    | 0.17      |   |      | $ | (0.17      | )
|                                 |  |      |           |   |      |   |            |  
|Pro forma                        |  | $    | 0.00      |   |      | $ | (0.34      | )
|                                 |  |      |           |   |      |   |            |  
|Diluted income (loss) per share: |  |      |           |   |      |   |            |  
|As reported                      |  | $    | 0.14      |   |      | $ | (0.17      | )
|                                 |  |      |           |   |      |   |            |  
|Pro forma                        |  | $    | (0.03     | ) |      | $ | (0.34      | )
|                                 |  |      |           |   |      |   |            |  



|                         |  |                             |  |                                                     |  |                                 |      |                                       |         |                                  |   |     
|------------------------ |  | --------------------------- |  | --------------------------------------------------- |  | ------------------------------- | ---- | ------------------------------------- | ------- | -------------------------------- | - | ----
|                         |  | Options                     |  | Outstanding                                         |  |                                 |      | Options                               |         | Exercisable                     
|Range of Exercise Prices |  | Number Outstanding 03/31/06 |  | Weighted Average Remaining Contractual Life (years) |  | Weighted Average Price 03/31/06 |      | Options exercisable at March 31, 2006 |         | Weighted Average Exercise Prices
|$0.80 - $2.00            |  | 1,884,814                   |  | 5                                                   |  | $                               | 1.36 |                                       | 859,814 |                                  | $ | 1.38
|$2.99 - $4.55            |  | 1,067,000                   |  | 8                                                   |  | $                               | 4.54 |                                       | 203,519 |                                  |   |     
|$5.00 - $6.44            |  | 260,000                     |  | 8                                                   |  | $                               | 6.19 |                                       |         |                                  |   |     
|                         |  |                             |  |                                                     |  |                                 |      |                                       |         |                                  |   |     
|$0.80 - $6.44            |  | 3,211,814                   |  | 8                                                   |  | $                               | 3.17 |                                       |         |                                  |   |     
|                         |  |                             |  |                                                     | 
|                         |  | Options                     |  | Outstanding                                         |  |                                 |      | Options                               |         | Exercisable                     
|Range of Exercise Prices |  | Number Outstanding 03/31/05 |  | Weighted Average Remaining Contractual Life (years) |  | Weighted Average Price 03/31/05 |      | Options exercisable at March 31, 2005 |         | Weighted Average Exercise Prices
|$0.80 - $2.00            |  | 1,099,798                   |  | 6.28                                                |  | $                               | 1.36 |                                       | 805,399 |                                  | $ | 1.38
|$2.99 - $4.55            |  | 930,000                     |  | 9.00                                                |  | $                               | 4.54 |                                       |         |                                  |   |     
|$5.00 - $6.44            |  | 240,000                     |  | 9.00                                                |  | $                               | 6.19 |                                       |         |                                  |   |     
|                         |  |                             |  |                                                     |  |                                 |      |                                       |         |                                  |   |     
|$0.80 - $6.44            |  | 2,269,798                   |  | 9.09                                                |  | $                               | 3.17 |                                       | 805,399 |                                  | $ | 1.38



60



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



NOTE 16COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has operating leases for facilities and certain machinery and equipment
that expire at various dates through 2009. Certain leases provide an option to extend the lease term. Certain leases provide for payment by the Company of any increases in property taxes, insurance, and common area maintenance over a base amount and
others provide for payment of all property taxes and insurance by the Company. Future minimum lease payments, by year and in aggregate under non-cancelable operating leases, consist of the following at March 31, 2006:



|                      |  |   |          
|--------------------- |  | - | ---------
|Year ending March 31, |  |  
|2007                  |  | $ | 386,481  
|2008                  |  |   | 386,481  
|2009                  |  |   | 386,481  
|2010                  |  |   | 386,481  
|2011                  |  |   | 386,481  
|Thereafter            |  |   | 772,962  
|                      |  |   |          
|                      |  | $ | 2,705,367
|                      |  |   |          



61



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Litigation

In December 2004 and January 2005 five securities class action lawsuits were filed in the Federal District Court, Southern District of New York against GeoPharma and certain of its officers, alleging violations of
federal securities laws in connection with certain press releases issued by the Company relating to Belcher Pharmaceuticals planned introduction of Mucotrol: Mat eVentures v. Kotha Sekharam and GeoPharma, Inc. (SDNY 04 Civ. 9463); Moshayedi v.
GeoPharma, Inc., Jugal Taneja, Mihir Taneja, and Kotha Sekharam (SDNY 04 Civ. 9736); Sarno v. Mihir Taneja, Kotha Sekharam, and GeoPharma, Inc. (SDNY 04 Civ. 9975); Farwell v. Kotha Sekharam and GeoPharma, Inc. (SDNY 05 Civ. 188); and Taylor v.
Kotha Sekharam and GeoPharma, Inc. (SDNY 05 Civ. 258). Plaintiffs, on behalf of themselves and all others similarly situated, seek unspecified damages allegedly suffered in connection with their respective purchases and sales of the Companys
securities during the Class period. On March 9, 2005 the Court consolidated the actions and appointed lead plaintiff and lead counsel. On April 18, 2005 plaintiffs filed a Consolidated Amended Class Action Complaint. On June 6, 2005
defendants filed a Motion to Dismiss the action. By Opinion and Order dated September 30, 2005 the Court granted defendents motion and dismissed the action without prejudice, with leave to replead. On October 24, 2005 plaintiffs
filed a Consolidated Second Amended Class Action Complaint in the action. The Company again moved to dismiss the Second Amended Consolidated Complaint, and after the issues were fully briefed by the parties, by Opinion and Order dated
January 27, 2006 the Court again dismissed Plaintiffs action, this time with prejudice.

The company received a letter dated
April 11, 2005 addressed to its Board of Directors, constituting a shareholder demand pursuant to Florida Statute Sec. 607.07401 from a San Diego law firm representing an alleged shareholder of GeoPharma, Inc. Such letter demanded that the
company commence legal proceedings against each Board member and each officer of the company for alleged breaches of fiduciary duty arising out of and/or evidenced by the same actions and circumstances involved in the class action referred to above.
At its Board meeting of June 7, 2005, the Board of Directors appointed a committee of independent directors to investigate the allegations outlined in such letter and as such, the investigation is currently underway. On December 29, 2005,
Imelda Hoeft, derivatively on behalf of the Company, instituted an action in the Circuit Court of the 6th Judicial Circuit in and for Pinellas County, Florida against the Company and all the Companys officers and directors asserting
claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The action sought unspecified damages and other relief. On April 21, 2006, plaintiff agreed to dismiss the action,
and filed with the Court a Notice of Voluntary Dismissal without Prejudice.

On April 11, 2003 the company filed a lawsuit against
Joseph Zappala, a member of the companys Board of Directors in the Sixth Judicial Circuit in and for Pinellas County, Florida. The lawsuit sought to rescind a purported agreement between the company and Mr. Zappala, breach of a consulting
agreement between the company and Mr. Zappala and related claims involving those agreements. Mr. Zappala denied the material allegations against him and has filed a counterclaim against the Company for breach of the consulting agreement.

On April 20, 2004, the Company and Mr. Zappala entered into an agreement (Settlement Agreement) pursuant to which
each party expressly disclaimed any liability and each party released the other (and all related parties) from all claims, and liabilities arising from the Merger Agreement, the Consulting Agreement and/or the subject matter of the Companys
lawsuit against Mr. Zappala and Go2 (Lawsuit), and the parties agreed to dismiss the Lawsuit with prejudice. As provided by the Settlement Agreement: (i) Mr. Zappala transferred ownership of 500,000 shares of the
Companys common stock to the Company; (ii) the Consulting Agreement was terminated without further liability to either party; and (iii) Mr. Zappala agreed, that during his tenure as a Director of the Company, he would not sell
his remaining shares of Company common stock, unless another Director of the Company sells shares of Company common stock. The Company filed Form 8-K on April 26, 2004. On December 3, 2004, Mr. Zappala resigned from the Companys
board of directors.

From time to time we are subject to litigation incidental to our business including possible product liability claims.
Such claims, if successful, could exceed applicable insurance coverage.

The Company is, from time to time, involved in litigation relating
to claims arising out of its operations in the ordinary course of business. The Company believes that none of the claims that were outstanding as of March 31, 2005 should have a material adverse impact on its financial condition or results of
operations.

Employment Agreements

Effective April 1, 2004, the Company renegotiated and renewed executive managements three year employment agreements with the Chief Executive Officer, the President and the Vice President/Chief Financial Officer at annual
salaries of $200,000, $160,000 and $150,000 plus benefits respectively.



62



---

##### Table of Contents

GEOPHARMA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Directors Compensation

The Company pays directors fees of $2,500 each per quarter. In addition, each non-employee director receives options to purchase shares of common stock for each year completed of the directors term and is
eligible for a restricted stock award. See further consideration within Note 14 above.

Common Stock

On April 11, 2003 the Company filed a lawsuit against Joseph Zappala, a member of the Companys Board of Directors in the Sixth Judicial Circuit
in and for Pinellas County, Florida. The lawsuit seeks to rescind a purported agreement between the Company and Mr. Zappala, breach of a consulting agreement between the Company and Mr. Zappala and related claims involving those
agreements. Mr. Zappala has denied the material allegations against him and has filed a counterclaim against the Company for breach of the consulting agreement.

On April 20, 2004, the Company and Mr. Zappala entered into an agreement (Settlement Agreement) pursuant to which each party expressly disclaimed any liability and each party released the other
(and all related parties) from all claims, and liabilities arising from the Merger Agreement, the Consulting Agreement and/or the subject matter of the Companys lawsuit against Mr. Zappala and Go2 (Lawsuit), and the parties
agreed to dismiss the Lawsuit with prejudice. As provided by the Settlement Agreement: (i) Mr. Zappala transferred ownership of 500,000 shares of the Companys common stock to the Company; (ii) the Consulting Agreement was
terminated without further liability to either party; and (iii) Mr. Zappala agreed, that during his tenure as a Director of the Company, he would not sell his remaining shares of Company common stock, unless another Director of the Company
sells shares of Company common stock. The Company filed Form 8-K with the Securities and Exchange Commission on April 26, 2004. On December 3, 2004, Mr. Zappala resigned from the Companys board of directors.



63