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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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

For the quarterly period ended December 31, 2006



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

For the transition period from  to

Commission file number 0-23031



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DYNAMIC HEALTH PRODUCTS, INC.

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 34-1711778                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                    |  |           
|--------------------------------------------------- |  | ----------
|12399 Belcher Road South, Suite 140, Largo, Florida |  | 33773     
|(Address of principal executive offices)            |  | (Zip Code)

Issuers telephone number (727) 683-0670



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

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

The number of shares outstanding of the Issuers common stock at $.01 par value as of February 13, 2007 was 15,055,035.



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PART I  FINANCIAL INFORMATION



|Item 1. | CONSOLIDATED FINANCIAL STATEMENTS
|------- | ---------------------------------

DYNAMIC
HEALTH PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                               |  |                  |            |   |               |   |            |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                                                               |  | December 31,2006 |            |   | March 31,2006 |  
|                                                                                                                               |  | (Unaudited)      |            |   | (Audited)     |  
|ASSETS                                                                                                                         |  |                  |            |   |               |   |            |  
|Current assets:                                                                                                                |  |                  |            |   |               |   |            |  
|Cash and cash equivalents                                                                                                      |  | $                | 605,906    |   |               | $ | 1,009,012  |  
|Certificates of deposit                                                                                                        |  |                  | 151,505    |   |               |   |           |  
|Marketable equity securities, net                                                                                              |  |                  | 862,351    |   |               |   | 1,637,763  |  
|Accounts receivable, net                                                                                                       |  |                  | 2,232,319  |   |               |   | 2,485,954  |  
|Inventories, net                                                                                                               |  |                  | 4,562,402  |   |               |   | 4,478,970  |  
|Prepaid expenses                                                                                                               |  |                  | 449,811    |   |               |   | 223,515    |  
|Deferred consulting fees                                                                                                       |  |                  | 124,691    |   |               |   | 215,004    |  
|Other current assets                                                                                                           |  |                  | 201,641    |   |               |   | 163,766    |  
|Due from affiliates                                                                                                            |  |                  | 1,160      |   |               |   | 2,500      |  
|Notes receivable, net                                                                                                          |  |                  | 246,165    |   |               |   | 165,708    |  
|Note receivable from affiliate                                                                                                 |  |                  | 46,189     |   |               |   | 44,082     |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total current assets                                                                                                           |  |                  | 9,484,140  |   |               |   | 10,426,274 |  
|                                                                                                                               |  |                 
|Property, plant and equipment, net                                                                                             |  |                  | 760,905    |   |               |   | 743,846    |  
|                                                                                                                               |  |                 
|Note receivable                                                                                                                |  |                  |           |   |               |   | 29,940     |  
|Goodwill                                                                                                                       |  |                  | 4,145,130  |   |               |   | 4,145,130  |  
|Intangible assets, net                                                                                                         |  |                  | 542,550    |   |               |   | 749,217    |  
|Deferred consulting fees                                                                                                       |  |                  |           |   |               |   | 83,127     |  
|Other assets                                                                                                                   |  |                  | 21,832     |   |               |   | 77,517     |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total assets                                                                                                                   |  | $                | 14,954,557 |   |               | $ | 16,255,051 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                           |  |                  |            |   |               |   |            |  
|                                                                                                                               |  |                 
|Current liabilities:                                                                                                           |  |                  |            |   |               |   |            |  
|Revolving note payable, net                                                                                                    |  | $                | 1,678,059  |   |               | $ | 1,609,240  |  
|Current portion of long-term obligations                                                                                       |  |                  | 3,283,977  |   |               |   | 2,093,540  |  
|Accounts payable                                                                                                               |  |                  | 5,427,738  |   |               |   | 5,090,685  |  
|Other payables                                                                                                                 |  |                  | 645,164    |   |               |   | 411,530    |  
|Accrued expenses                                                                                                               |  |                  | 238,840    |   |               |   | 343,744    |  
|Accrued income taxes                                                                                                           |  |                  |           |   |               |   | 5,819      |  
|Obligations to affiliates                                                                                                      |  |                  | 26,688     |   |               |   | 26,551     |  
|Note payable                                                                                                                   |  |                  | 121,054    |   |               |   | 10,296     |  
|Derivative financial instruments                                                                                               |  |                  | 230,688    |   |               |   | 1,523,376  |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total current liabilities                                                                                                      |  |                  | 11,652,208 |   |               |   | 11,114,781 |  
|                                                                                                                               |  |                 
|Long-term obligations, less current portion                                                                                    |  |                  | 29,881     |   |               |   | 61,899     |  
|Deferred income taxes                                                                                                          |  |                  | 39,554     |   |               |   | 186,300    |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total liabilities                                                                                                              |  |                  | 11,721,643 |   |               |   | 11,362,980 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Commitments and contingencies                                                                                                  |  |                  |            |   |               |   |            |  
|                                                                                                                               |  |                 
|Shareholders' equity:                                                                                                          |  |                  |            |   |               |   |            |  
|Preferred stock, undesignated; 800,000 shares authorized; no shares issued or outstanding                                      |  |                  |           |   |               |   |           |  
|Series A Convertible Preferred stock, $.01 par value; 400,000 shares authorized; no shares issued or outstanding               |  |                  |           |   |               |   |           |  
|Series B 6% Cumulative Convertible Preferred stock, $.01 par value; 800,000 shares authorized; no shares issued or outstanding |  |                  |           |   |               |   |           |  
|Common stock, $.01 par value; 45,000,000 shares authorized; 15,055,035 and 14,463,630 shares issued and outstanding            |  |                  | 150,550    |   |               |   | 144,636    |  
|Additional paid-in capital                                                                                                     |  |                  | 4,467,866  |   |               |   | 4,004,048  |  
|Retained earnings (deficit)                                                                                                    |  |                  | (1,904,980 | ) |               |   | (272,354   | )
|Accumulated other comprehensive income:                                                                                        |  |                  |            |   |               |   |            |  
|Unrealized gains (losses) on marketable equity securities, net of tax                                                          |  |                  | 519,478    |   |               |   | 1,015,741  |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total shareholders' equity                                                                                                     |  |                  | 3,232,914  |   |               |   | 4,892,071  |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total liabilities and shareholders' equity                                                                                     |  | $                | 14,954,557 |   |               | $ | 16,255,051 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  

See accompanying notes to condensed consolidated financial statements.



2



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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------ |  | ------------------------------ | ---------- | - | ----------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                             |  | Three Months EndedDecember 31, |            |   | Nine Months EndedDecember 31, |  
|                                                             |  | 2006                           |            |   | 2005                          |   |            | 2006 |  |   | 2005       |  
|                                                             |  |                                |            |   | (Restated)                    |   |            |      |  |   | (Restated) |  
|Revenues                                                     |  | $                              | 13,400,640 |   |                               | $ | 11,367,033 |      |  | $ | 40,120,308 |   |  | $ | 35,861,533 |  
|                                                             |  |                                |            |  
|Cost of goods sold                                           |  |                                | 10,989,379 |   |                               |   | 9,212,712  |      |  |   | 32,535,023 |   |  |   | 29,158,972 |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                                 |  |                                | 2,411,261  |   |                               |   | 2,154,321  |      |  |   | 7,585,285  |   |  |   | 6,702,561  |  
|                                                             |  |                                |            |  
|Operating expenses:                                          |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Selling, general and administrative expenses                 |  |                                | 2,583,527  |   |                               |   | 2,256,282  |      |  |   | 7,593,010  |   |  |   | 6,770,278  |  
|Amortization expense                                         |  |                                | 77,222     |   |                               |   | 75,140     |      |  |   | 231,667    |   |  |   | 225,382    |  
|Depreciation expense                                         |  |                                | 49,319     |   |                               |   | 39,572     |      |  |   | 140,817    |   |  |   | 115,173    |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                     |  |                                | 2,710,068  |   |                               |   | 2,370,994  |      |  |   | 7,965,494  |   |  |   | 7,110,833  |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Operating income (loss) before other income and expense      |  |                                | (298,807   | ) |                               |   | (216,673   | )    |  |   | (380,209   | ) |  |   | (408,272   | )
|                                                             |  |                                |            |  
|Other income (expense):                                      |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Interest income                                              |  |                                | 5,473      |   |                               |   | 6,204      |      |  |   | 18,275     |   |  |   | 18,534     |  
|Other income and expenses, net                               |  |                                | (1,479     | ) |                               |   | (212,174   | )    |  |   | 93,740     |   |  |   | (144,036   | )
|Gain (loss) on sale of property                              |  |                                | (371       | ) |                               |   | (2,333     | )    |  |   | 404        |   |  |   | (4,828     | )
|Gain on sale of marketable equity securities                 |  |                                |           |   |                               |   |           |      |  |   | 572,096    |   |  |   |           |  
|Gain from debt extinguishment                                |  |                                |           |   |                               |   |           |      |  |   | 153,750    |   |  |   |           |  
|Derivative instrument income (expense), net                  |  |                                | 360,905    |   |                               |   | 518,106    |      |  |   | 1,093,938  |   |  |   | 9,611,164  |  
|Derivative instrument interest expense                       |  |                                | (827,938   | ) |                               |   | (827,938   | )    |  |   | (2,401,681 | ) |  |   | (2,483,814 | )
|Interest expense                                             |  |                                | (207,647   | ) |                               |   | (237,618   | )    |  |   | (628,046   | ) |  |   | (549,556   | )
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total other income (expense)                                 |  |                                | (671,057   | ) |                               |   | (755,753   | )    |  |   | (1,097,524 | ) |  |   | 6,447,464  |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                            |  |                                | (969,864   | ) |                               |   | (972,426   | )    |  |   | (1,477,733 | ) |  |   | 6,039,192  |  
|                                                             |  |                                |            |  
|Income tax expense (benefit)                                 |  |                                | (30,983    | ) |                               |   | (53,453    | )    |  |   | 154,893    |   |  |   | (220,991   | )
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                            |  |                                | (938,881   | ) |                               |   | (918,973   | )    |  |   | (1,632,626 | ) |  |   | 6,260,183  |  
|                                                             |  |                                |            |  
|Preferred stock dividends                                    |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) available to common shareholders           |  | $                              | (938,881   | ) |                               | $ | (918,973   | )    |  | $ | (1,632,626 | ) |  | $ | 6,260,183  |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic income (loss) per share                                |  | $                              | (0.06      | ) |                               | $ | (0.06      | )    |  | $ | (0.11      | ) |  | $ | 0.44       |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic weighted average number of common shares outstanding   |  |                                | 15,055,035 |   |                               |   | 14,463,630 |      |  |   | 14,972,765 |   |  |   | 14,257,416 |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Diluted income (loss) per share                              |  | $                              | (0.06      | ) |                               | $ | (0.06      | )    |  | $ | (0.11      | ) |  | $ | 0.07       |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Diluted weighted average number of common shares outstanding |  |                                | 15,055,035 |   |                               |   | 14,463,630 |      |  |   | 14,972,765 |   |  |   | 21,727,328 |  
|                                                             |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  

See accompanying notes to condensed consolidated financial statements.



3



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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY



|                                                                                                 |  |                         |                                       |                         |   |              |   |                           |   |                            |  |            |                                        |   |         |                           |   |           |  |   |            |   |  |   |           |   |  |   |            |  
|------------------------------------------------------------------------------------------------ |  | ----------------------- | ------------------------------------- | ----------------------- | - | ------------ | - | ------------------------- | - | -------------------------- |  | ---------- | -------------------------------------- | - | ------- | ------------------------- | - | --------- |  | - | ---------- | - |  | - | --------- | - |  | - | ---------- | -
|                                                                                                 |  |                         | Accumulated OtherComprehensive Income |                         |   |              |  
|                                                                                                 |  | Series APreferred Stock |                                       | Series BPreferred Stock |   | Common Stock |   | AdditionalPaid-in Capital |   | RetainedEarnings (Deficit) |  |            | Unrealized Gains(Losses) on Securities |   |         | TotalShareholders' Equity |  
|                                                                                                 |  | Shares                  |                                       | Dollars                 |   | Shares       |   | Dollars                   |   | Shares                     |  | Dollars    |                                        |   |         |                          
|Balances at March 31, 2006 (Audited)                                                             |  |                        |                                       | $                       |  |              |  |                           | $ |                           |  | 14,463,630 |                                        | $ | 144,636 |                           | $ | 4,004,048 |  | $ | (272,354   | ) |  | $ | 1,015,741 |   |  | $ | 4,892,071  |  
|COMPREHENSIVE INCOME (LOSS)                                                                      |  |                         |                                       |                         |   |              |   |                           |   |                            |  |            |                                        |   |         |                           |   |           |  |   |            |   |  |   |           |   |  |   |            |  
|Net income (loss)                                                                                |  |                        |                                       |                         |  |              |  |                           |   |                           |  |           |                                        |   |        |                           |   |          |  |   | (1,632,626 | ) |  |   |           |   |  |   | (1,632,626 | )
|Unrealized gains (losses) on marketable equity securities (net of tax of $279,148)               |  |                        |                                       |                         |  |              |  |                           |   |                           |  |           |                                        |   |        |                           |   |          |  |   |           |   |  |   | (496,263  | ) |  |   | (496,263   | )
|                                                                                                 |  |                         |                                       |                         |   |              |   |                           |   |                            |  |            |                                        |   |         |                           |   |           |  |   |            |   |  |   |           |   |  |   |            |  
|Comprehensive income (loss)                                                                      |  |                         |                                       |                         |   |              |   |                           |   |                            |  |            |                                        |   |         |                           |   |           |  |   |            |   |  |   |           |   |  |   | (2,128,889 | )
|Share-based compensation                                                                         |  |                        |                                       |                         |  |              |  |                           |   |                           |  |           |                                        |   |        |                           |   | 297,303   |  |   |           |   |  |   |           |   |  |   | 297,303    |  
|Issuance of 150,000 shares of common stock in exchange for cancellation of common stock warrants |  |                        |                                       |                         |  |              |  |                           |   |                           |  | 150,000    |                                        |   | 1,500   |                           |   | 43,500    |  |   |           |   |  |   |           |   |  |   | 45,000     |  
|Issuance of 275,000 shares of common stock in connection with Postponement Agreement             |  |                        |                                       |                         |  |              |  |                           |   |                           |  | 275,000    |                                        |   | 2,750   |                           |   | 79,750    |  |   |           |   |  |   |           |   |  |   | 82,500     |  
|Issuance of 166,405 shares of common stock as employer contribution to profit sharing plan       |  |                        |                                       |                         |  |              |  |                           |   |                           |  | 166,405    |                                        |   | 1,664   |                           |   | 43,265    |  |   |           |   |  |   |           |   |  |   | 44,929     |  
|                                                                                                 |  |                         |                                       |                         |   |              |   |                           |   |                            |  |            |                                        |   |         |                           |   |           |  |   |            |   |  |   |           |   |  |   |            |  
|Balances at December 31, 2006 (Unaudited)                                                        |  |                        |                                       | $                       |  |              |  |                           | $ |                           |  | 15,055,035 |                                        | $ | 150,550 |                           | $ | 4,467,866 |  | $ | (1,904,980 | ) |  | $ | 519,478   |   |  | $ | 3,232,914  |  
|                                                                                                 |  |                         |                                       |                         |   |              |   |                           |   |                            |  |            |                                        |   |         |                           |   |           |  |   |            |   |  |   |           |   |  |   |            |  

See accompanying notes to condensed consolidated financial statements.



4



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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                                                                   |  |                               |            |   |            |   |            |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---------- | - | ---------- | - | ---------- | -
|                                                                                                   |  | Nine Months EndedDecember 31, |           
|                                                                                                   |  | 2006                          |            |   | 2005       |  
|                                                                                                   |  |                               |            |   | (Restated) |  
|Cash flows from operating activities:                                                              |  |                               |            |   |            |   |            |  
|Net income (loss)                                                                                  |  | $                             | (1,632,626 | ) |            | $ | 6,260,183  |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                               |            |   |            |   |            |  
|Depreciation and amortization                                                                      |  |                               | 372,484    |   |            |   | 340,555    |  
|Amortization of deferred consulting fees                                                           |  |                               | 173,440    |   |            |   | 242,816    |  
|Amortization of debt discount to interest expense                                                  |  |                               | 104,328    |   |            |   | 39,226     |  
|Share-based compensation expense                                                                   |  |                               | 297,303    |   |            |   |           |  
|Derivative instrument (income) expense, net                                                        |  |                               | (1,093,938 | ) |            |   | (9,611,164 | )
|Derivative instrument interest expense                                                             |  |                               | 2,401,681  |   |            |   | 2,483,814  |  
|(Gain) loss on sale property                                                                       |  |                               | (404       | ) |            |   | 4,828      |  
|Gain on sale of marketable equity securities                                                       |  |                               | (572,096   | ) |            |   |           |  
|Gain from debt extinguishment                                                                      |  |                               | (153,750   | ) |            |   |           |  
|Changes in operating assets and liabilities:                                                       |  |                               |            |   |            |   |            |  
|Accounts receivable                                                                                |  |                               | 83,232     |   |            |   | 371,016    |  
|Inventories                                                                                        |  |                               | (83,432    | ) |            |   | 294,210    |  
|Due to/from affiliates, net                                                                        |  |                               | (630       | ) |            |   | (27,352    | )
|Prepaid expenses                                                                                   |  |                               | 21,999     |   |            |   | 152,921    |  
|Other current assets                                                                               |  |                               | 21,205     |   |            |   | 95,965     |  
|Other assets                                                                                       |  |                               | 55,685     |   |            |   | (5,224     | )
|Accounts payable                                                                                   |  |                               | 337,053    |   |            |   | (1,213,052 | )
|Other payables                                                                                     |  |                               | 233,634    |   |            |   | 109,471    |  
|Accrued expenses                                                                                   |  |                               | (104,904   | ) |            |   | (212,643   | )
|Accrued income taxes                                                                               |  |                               | (5,819     | ) |            |   |           |  
|Deferred income taxes                                                                              |  |                               | 132,403    |   |            |   | (224,215   | )
|                                                                                                   |  |                               |            |   |            |   |            |  
|Net cash provided by (used in) operating activities                                                |  |                               | 586,848    |   |            |   | (898,645   | )
|                                                                                                   |  |                               |            |   |            |   |            |  
|Cash flows from investing activities:                                                              |  |                               |            |   |            |   |            |  
|Purchases of property and equipment                                                                |  |                               | (175,972   | ) |            |   | (100,510   | )
|Proceeds from sale of property                                                                     |  |                               | 18,500     |   |            |   | 2,000      |  
|Proceeds from sale of marketable equity securities                                                 |  |                               | 572,096    |   |            |   |           |  
|Repayments of note receivable                                                                      |  |                               | 60,806     |   |            |   | 92,453     |  
|Purchase of distributor agreement                                                                  |  |                               | (25,000    | ) |            |   |           |  
|Purchase of certificates of deposit                                                                |  |                               | (151,505   | ) |            |   |           |  
|Adjustment to purchase price of Dynamic Marketing, Inc.                                            |  |                               |           |   |            |   | (17,369    | )
|Adjustment to purchase price of customer list                                                      |  |                               |           |   |            |   | (7,306     | )
|Purchase of trademark                                                                              |  |                               |           |   |            |   | (435       | )
|                                                                                                   |  |                               |            |   |            |   |            |  
|Net cash provided by (used in) investing activities                                                |  |                               | 298,925    |   |            |   | (31,167    | )
|                                                                                                   |  |                               |            |   |            |   |            |  
|Cash flows from financing activities:                                                              |  |                               |            |   |            |   |            |  
|Payments of long-term obligations                                                                  |  |                               | (621,833   | ) |            |   | (585,655   | )
|Proceeds from issuance of short-term obligations                                                   |  |                               | 6,666,000  |   |            |   | 8,053,419  |  
|Payments of short-term obligations                                                                 |  |                               | (7,333,046 | ) |            |   | (8,174,039 | )
|Proceeds from issuance of common stock                                                             |  |                               |           |   |            |   | 75,000     |  
|                                                                                                   |  |                               |            |   |            |   |            |  
|Net cash used in financing activities                                                              |  |                               | (1,288,879 | ) |            |   | (631,275   | )
|                                                                                                   |  |                               |            |   |            |   |            |  
|Net increase (decrease) in cash                                                                    |  |                               | (403,106   | ) |            |   | (1,561,087 | )
|                                                                                                   |  |                              
|Cash at beginning of period                                                                        |  |                               | 1,009,012  |   |            |   | 1,870,561  |  
|                                                                                                   |  |                               |            |   |            |   |            |  
|Cash at end of period                                                                              |  | $                             | 605,906    |   |            | $ | 309,474    |  
|                                                                                                   |  |                               |            |   |            |   |            |  

See accompanying notes to condensed consolidated financial statements.



5



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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)Continued



|                                                                               |  |                               |         |            |   |        
|------------------------------------------------------------------------------ |  | ----------------------------- | ------- | ---------- | - | -------
|                                                                               |  | Nine Months EndedDecember 31,
|                                                                               |  | 2006                          |         | 2005      
|                                                                               |  |                               |         | (Restated)
|Supplemental disclosure of cash flow information:                              |  |                               |         |            |   |        
|Cash paid during the period for interest                                       |  | $                             | 528,797 |            | $ | 437,518
|                                                                               |  |                               |         |            |   |        
|Cash paid during the period for income taxes                                   |  | $                             | 75,115  |            | $ |       
|                                                                               |  |                               |         |            |   |        
|Supplemental schedule of non-cash investing activities:                        |  |                               |         |            |   |        
|Conversion of accounts receivable to note receivable                           |  | $                             | 170,403 |            | $ | 330,993
|                                                                               |  |                               |         |            |   |        
|Supplemental schedule of non-cash financing activities:                        |  |                               |         |            |   |        
|Issuance of common stock in exchange for cancellation of common stock warrants |  | $                             | 45,000  |            | $ |       
|                                                                               |  |                               |         |            |   |        
|Issuance of common stock for postponement agreement                            |  | $                             | 82,500  |            | $ | 189,750
|                                                                               |  |                               |         |            |   |        
|Issuance of common stock for employer contribution to profit sharing plan      |  | $                             | 44,929  |            | $ |       
|                                                                               |  |                               |         |            |   |        
|Issuance of long-term obligations for purchase of equipment                    |  | $                             |        |            | $ | 22,979 
|                                                                               |  |                               |         |            |   |        
|Issuance of short-term obligations for prepaid expenses                        |  | $                             | 203,366 |            | $ | 41,917 
|                                                                               |  |                               |         |            |   |        

See accompanying notes to condensed consolidated financial statements.



6



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DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED

DECEMBER 31, 2006 AND 2005 (UNAUDITED)

NOTE 1  BASIS OF PRESENTATION

The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles for interim financial information and with the instruction to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2006 and 2005 are not necessarily indicative of the results that may be expected for the
year ending March 31, 2007. For further information, refer to the consolidated financial statements and footnotes included in the Companys Form 10-KSB for the year ended March 31, 2006.

Reclassifications

Certain reclassifications
have been made to the financial statements as of and for the three and nine months ended December 31, 2005 to conform to the presentation as of and for the three and nine months ended December 31, 2006.

Restatements

Financial Derivatives

The Company corrected its accounting for derivative financial instruments to conform to the requirements of Statements of Financial Accounting Standards
No. 133, as amended, and Emerging Issues Task Force No. 00-19. The Company previously accounted for these instruments under EITF 00-27 and EITF 98-5. Embedded conversion features that meet the definition of derivative financial instruments
have, where applicable, been bifurcated from host instruments and, in all instances derivative financial instruments have been recorded as assets or liabilities and are carried at fair value. Net fair value adjustments included in earnings (loss)
related to these instruments amounted to $(467,033) and $(1,307,743), respectively, for the three and nine months ended December 31, 2006. The effect of the restatement on the earnings (loss) reported on the Companys comparative statement
of operations for the three and nine months ended December 31, 2005 was $17,707 and $66,419, respectively. Earnings (loss) per share was impacted by zero for the three and nine months ended December 31, 2005.

Derivative Financial Instruments

The Company
generally does not use derivative financial instruments to hedge exposures to cash-flow or market risks. However certain other financial instruments, such as warrants to acquire common stock and the embedded conversion features of debt instruments
that are indexed to the Companys common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net share settlement is not within the control of the Company. In such
instances, net-cash settlement is assumed for financial



7



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accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially
recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. Fair value for option based derivative financial instruments is determined using the Black-Scholes option pricing model. Fair value for cash flow
derivatives is determined using discounted future cash flows of the probable expected outcomes of the derivative contract.

Aggregate Purchase Price
Allocations

The Company corrected its accounting for the aggregate purchase price allocations, in connection with the October 1,
2004 acquisition of Bob OLeary Health Food Distributor Co., Inc. and the March 31, 2005 acquisition of Dynamic Marketing, Inc., whereby intangible assets, specifically customer lists amounting to $285,000 and $165,000, respectively, that
were not previously identified, were valued separately and apart from goodwill. The effect of the restatement on the comparative statement of operations for the three and nine months ended December 31, 2005 was $30,515 and $91,546,
respectively, and earnings per share was impacted by zero.

Diluted Earnings Per Share

The Company corrected its calculations of diluted earnings per share and the diluted weighted average number of common shares outstanding for the nine
months ended December 31, 2005, to take into effect the as if converted method and the treasury stock method. The effect of the restatement of diluted earnings per share on the Companys comparative statement of operations for the nine
months ended December 31, 2005 was $(0.17).

NOTE 2  PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements as of and for the three and nine months ended December 31, 2006 and 2005 include the accounts of
Dynamic Health Products, Inc. and its principally wholly-owned subsidiaries (collectively the Company), Pharma Labs Rx, Inc., Dynamic Life Products, Inc., Herbal Health Products, Inc., Online Meds Rx, Inc. and its subsidiary Dynamic
Financial Consultants, LLC, Bryan Capital Limited Partnership, Pharma Labs Rx, Inc., Bob OLeary Health Food Distributor Co., Inc. (BOSS), Dynamic Marketing I, Inc. (DMI) and DYHP Acquisitions, Inc. Significant
intercompany balances and transactions have been eliminated in consolidation.

NOTE 3  RELATED PARTY TRANSACTIONS

Amounts due from and to affiliates represent balances owed to or from the Company for sales or purchases occurring in the normal course of business.
Amounts due from and to these affiliates are in the nature of trade payables or receivables and fluctuate based on sales and purchasing volume and payments received. Any future transactions between the Company and its officers, directors or
affiliates will be subject to approval by a majority of disinterested directors or shareholders in accordance with Florida law.

As of
December 31, 2006 and 2005, the Companys investment in GeoPharma, Inc. (GeoPharma), consisting of 204,914 and 347,938 shares of its common stock, respectively, is included in marketable equity securities, net. Jugal K. Taneja,
a principal shareholder and Chairman of the Board of the Company is also a principal shareholder and Chairman of the Board of GeoPharma. For the three and nine months ended December 31, 2006, purchases of products from subsidiaries of GeoPharma
were $20,867 and $81,788, respectively, and sales to subsidiaries of GeoPharma were $5 and $65, respectively. For the three and nine months ended December 31, 2005, purchases of



8



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products from subsidiaries of GeoPharma were $50,170 and $158,436, respectively, and sales to subsidiaries of GeoPharma were $60 and $31,025, respectively.
As of December 31, 2006 and 2005, $26,688 and $52,311, respectively, was due to subsidiaries of GeoPharma and are included in obligations to affiliates. As of December 31, 2006 and 2005, $835 and $1,566, respectively, was due from
GeoPharma and are included in due from affiliates.

Research and development is primarily contracted through Innovative Health Products,
Inc. (Innovative), a wholly-owned subsidiary of GeoPharma, and product nutritional information, as well as product label requirements, are prepared by Innovatives regulatory staff personnel. Research and development costs have been
immaterial to the operations of the Company, and are charged to expense as incurred.

On March 29, 2005, the Company entered into a
lease with GAM Realty, LLC, an affiliate of Gregg Madsen, the Companys Vice President of Business Development, which was effective March 31, 2005, whereby the Company agreed to lease approximately 15,000 square feet of office and
warehouse space for its operations in Cranston, Rhode Island. This facility is used for a portion of the office, warehousing and shipping operations of DMI. The lease is for a term of five years ending on March 31, 2010. The initial rental
under the lease was $120,000 annually.

NOTE 4  COMPREHENSIVE INCOME

The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income, which became effective for the Company for the fiscal year ended March 31, 1999. SFAS 130 establishes standards for reporting and display of comprehensive income within the general purpose financial statements and requires
reclassification of applicable financial statement components for any prior period comparative financial statement components. The Company implemented SFAS 130 as of and for the three months ended June 30, 2000 based on comprehensive income
transactions being present.

The Company has elected to present the comprehensive income items within the shareholders equity section
of the balance sheet in addition to presenting a condensed consolidated statement of changes in shareholders equity statement.

At
December 31, 2006 and 2005, investments in marketable equity securities, net are summarized as follows:

Available for sale equity securities:



|                           |  |      |         |   |      |   |          
|-------------------------- |  | ---- | ------- | - | ---- | - | ---------
|                           |  | 2006 |         |   | 2005
|Cost of securities         |  | $    | 50,667  |   |      | $ | 50,667   
|Plus gross unrealized gain |  |      | 831,951 |   |      |   | 1,355,467
|Less gross unrealized loss |  |      | (20,267 | ) |      |   |         
|                           |  |      |         |   |      |   |          
|Fair value                 |  | $    | 862,351 |   |      | $ | 1,406,134
|                           |  |      |         |   |      |   |          



9



---

Realized gains and losses from available for sale equity securities are determined on the basis of the
specific cost of the security sold versus the sale price of the security. For the three and nine months ended December 31, 2006 and 2005, the Company had no realized losses. The change in marketable equity securities included in earnings for
the three and nine months ended December 31, 2006 was zero and $572,096, respectively, of which zero and $572,096, respectively, of unrealized holding gains were reclassified from accumulated other comprehensive income into earnings. For the
three and nine months ended December 31, 2005, the Company had no realized gains.

NOTE 5  INVESTMENTS IN UNCONSOLIDATED AFFILIATES

Investments in companies in which the Company has a 20% to 50% interest are accounted for using the equity method. Accordingly, the
investments are carried at cost, adjusted for the Companys proportionate share of their undistributed earnings and losses.

The
Company owns 30%, or 300,000 shares of common stock of Tribeca Beverage Company (Tribeca), an affiliate of Jugal K. Taneja, Chairman of the Board of the Company and Mandeep K. Taneja, Chief Executive Officer and President of the Company.
The investment was accounted for under the equity method until March 31, 2003, at which time, as a result of managements analysis, it was determined that the investment was worthless and the Company recognized an impairment loss on the
investment. Tribeca discontinued its operations as of December 31, 2006.

NOTE 6  REVOLVING NOTE PAYABLE

On March 29, 2005, the Company entered into agreements with Laurus Master Fund, Ltd. (Laurus), a Cayman Islands corporation, whereby the
Company completed the sale to Laurus of convertible debt and a warrant to purchase Company common stock in a private offering pursuant to exemption from registration under Section 4(2) of the Securities Act of 1933. The securities sold to
Laurus include the following:



| |  |  | A secured convertible minimum borrowing note with a principal amount of $2,000,000;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | A secured revolving note with a principal amount not to exceed $4,000,000; and
| | - |  | ------------------------------------------------------------------------------



| |  |  | A common stock purchase warrant to purchase 750,000 shares of common stock of the Company, at a purchase price of $1.37 per share, exercisable for a period of seven
years;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The combined principal amount that may be outstanding under the $2,000,000 minimum borrowing note and the
$4,000,000 revolving note at any point in time cannot exceed $4,000,000.

The proceeds of the funding were used for the March 31, 2005
acquisition of Dynamic Marketing, Inc., for costs associated with the acquisition and for working capital. The borrowing is in excess of the advance rates provided for in the note. The lender has issued a waiver to this covenant whereby the Company
was permitted to bring the ratios into compliance within one year from the date of the note.

As of December 31, 2006 and 2005, the
outstanding principal balance on the notes was $2,177,126 and $2,920,314, respectively.



10



---

Because the common stock underlying the conversion feature embedded in the $2,000,000 convertible minimum
borrowing note and the warrant are subject to our Registration Rights Agreement with Laurus, they have been accounted for as derivative instrument liabilities (see Note 8). The embedded derivative instruments (primarily the conversion feature)
related to the $2,000,000 convertible minimum borrowing note were bifurcated and recorded as a derivative instrument liability. The warrants were valued using the Black-Scholes option pricing model at $937,500. Because the fair value of the warrants
of $937,500 and the fair value of the bifurcated derivative instrument of $2,530,973 exceeded the proceeds received, the convertible minimum borrowing note was initially recorded at zero and an initial expense of $1,468,473 was recognized to record
the warrants and the bifurcated derivative instrument at their fair values (see Note 8).

The Company is permitted to borrow an amount
based upon its eligible accounts receivable and inventory, as defined in the agreements with Laurus. The Company must pay certain fees for any unused portion of the credit facility or in the event the facility is terminated prior to expiration. The
Companys obligations under the notes are secured by all of the assets of the Company, including but not limited to inventory and accounts receivable. The notes mature on March 29, 2008. Annual interest on the Notes is equal to the
prime rate published in The Wall Street Journal from time to time, plus 2.0%, provided, that, such annual rate of interest may not be less than 6%, subject to certain downward adjustments resulting from certain increases in the
market price of the Companys common stock. Interest on the notes is payable monthly in arrears on the first day of each month, commencing on April 1, 2005.

The principal amount of the secured convertible minimum borrowing note, together with accrued interest thereon is payable on March 29, 2008. The secured convertible minimum borrowing note may be redeemed by the
Company in cash by paying the holder 115% of the principal amount, plus accrued interest. The holder of the term note may require the Company to convert all or a portion of the term note, together with interest and fees thereon at any time. The
number of shares to be issued shall equal the total amount to be converted, divided by $1.13.

Upon an issuance of shares of common stock
below the fixed conversion price, the fixed conversion price of the notes will be reduced accordingly. In connection with the September 12, 2005 stock issuance, the lender waived this provision. The conversion price of the secured convertible
notes may be adjusted proportionately in certain circumstances such as if the Company pays a stock dividend, subdivides or combines outstanding shares of common stock into a greater or lesser number of shares, or takes such other actions as would
otherwise result in dilution.

115% of the full principal amount of the convertible notes is due upon default under the terms of the
convertible notes. Laurus has contractually agreed to restrict its ability to convert if the convertible notes would exceed the difference between the number of shares of common stock beneficially owned by the holder or issuable upon exercise of the
warrant and the option held by such holder and 4.99% of the outstanding shares of common stock of the Company. In connection with the April 2006 Postponement and Amendment Agreement with Laurus, this provision was modified from 4.99% to 9.99%. In
addition, this restriction would not apply in the event there was an event of default or we sought to redeem the outstanding balance of the convertible debentures.

The warrants were exercisable until seven years from the date of the notes at a purchase price equal to $1.37 per share. The warrants were exercisable on a cashless basis. In the event that the warrants were exercised
on a cashless basis, then the Company would not receive any



11



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proceeds. In addition, the exercise price of the warrants would be adjusted in the event the Company issues common stock at a price below market, with the
exception of any securities issued as of the date of this warrant or issued in connection with the convertible minimum borrowing note. In September 2005, we sold 150,000 restricted shares of our common stock at a price below market. In connection
therewith, Laurus waived their anti-dilution provisions related to all convertible notes and warrants issued to Laurus. In connection with the April 2006 Postponement and Amendment Agreement with Laurus, we issued 52,941 restricted shares of our
common stock to Laurus, in exchange for cancellation of the 750,000 warrants.

The Company was obligated to file a registration statement
registering the resale of shares of the Companys common stock issuable upon conversion of the convertible notes, exercise of the warrant and exercise of the conversion option. If the registration statement was not filed by April 28, 2005,
or declared effective within 75 days thereafter, or if the registration is suspended other than as permitted, in the registration rights agreement between the Company and Laurus, the Company was obligated to pay Laurus certain fees and the
obligations may be deemed to be in default. On April 22, 2005, the Company filed such Registration Statement on Form S-2, which was subsequently withdrawn by the Company.

On July 19, 2005, the Company entered into a Postponement Agreement with Laurus, whereby Laurus agreed to postpone the Companys obligation to
make certain amortization payments on its September 30, 2004 secured convertible note (see Note 7). In connection with the agreement, Laurus agreed to amend the Registration Rights Agreement with the Company, to extend the dates for the filing
requirements of the Registration Statement.

On August 19, 2005, the Company filed such Registration Statement on Form S-2 for the
registration of up to 3,219,690 shares of the Companys common stock, including up to 2,194,690 shares of common stock underlying the March 29, 2005 convertible minimum borrowing note issued to Laurus, in the principal amount of
$2,000,000, up to 750,000 shares issuable upon the exercise of common stock purchase warrants, and up to 275,000 shares issued in connection with the July 19, 2005 Postponement Agreement. Such Registration Statement was subsequently withdrawn
by the Company on May 11, 2006.

In November 2005, the Company reached an agreement with Laurus in principle pursuant to which we will
be obligated to pay Laurus $48,000 as payment in full for all late effectiveness fees. The agreement was subject to negotiation and execution of a definitive agreement.

On April 28, 2006, the Company entered into a Postponement and Amendment Agreement with Laurus, pursuant to which the Company modified the September 30, 2004 and the March 29, 2005 earlier agreements
among the parties. The Postponement and Amendment Agreement provides for the following:



| |  |  | Principal payments under the September 30, 2004 note are reduced by $137,500 per month for the eight months commencing May 2006, all of which shall be paid on
the maturity date of the convertible note;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys obligation to repay overadvances of up to $1,721,000 under the March 29, 2005 notes shall be suspended for a period of eight months;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All of the common stock purchase warrants issued to Laurus in connection with the September 30, 2004 and March 29, 2005 agreements are cancelled in their
entirety;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



---

| |  |  | In connection with the foregoing, the Company issued 150,000 restricted shares of our common stock to Laurus, for cancellation of the warrants issued to Laurus;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the foregoing, the Company issued 275,000 restricted share of our common stock to Laurus, for postponement of the portion of principal payments
in connection with the September 30, 2004 note.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The fair value of the 275,000 shares issued in connection with the
April 28, 2006 Postponement and Amendment Agreement was $45,000, based upon the closing price of our common stock on that date. This financing cost was recorded as a discount on the September 2004 note and the discount is being amortized to
interest expense over the life of the note, in accordance with EITF 96-19 Debtors Accounting for a Modification or Exchange of Debt Instruments.

In connection with the Postponement and Amendment Agreement, the Company also executed restated promissory notes in favor of Laurus and an amended and restated registration rights agreement (the Restated
Registration Rights Agreement). Pursuant to the Restated Registration Rights Agreement, we agreed to file a registration statement by June 30, 2006, covering the resale of the securities issued or issuable to Laurus. The Company was
obligated to have such registration statement declared effective by September 30, 2006, but there were no stated penalties for failure to meet such deadline.

On July 3, 2006, the Company filed a Registration Statement on Form SB-2 for the registration of up to 10,221,275 shares of the Companys common stock, including up to 2,194,690 shares of common stock
underlying the March 2005 secured convertible notes, up to 7,326,585 shares of common stock underlying the September 2004 secured convertible notes, 275,000 shares of common stock underlying the July 2005 postponement agreement, and 425,000 shares
of common stock underlying the April 2006 amendment and postponement agreement. Such Registration Statement was subsequently withdrawn by the Company on October 4, 2006.

On October 4, 2006, the Company entered into an agreement with Laurus pursuant to which the Company modified the earlier agreements among the
parties (the Amendment Agreement). The Amendment Agreement (i) eliminated the obligation of the Company to register for resale the shares of common stock underlying the securities sold in September 2004, and (ii) removed
Laurus right to waive 9.99% ownership limitations contained in their convertible debentures.

In connection with the Amendment
Agreement, the Company also executed second amended and restated promissory notes in favor of Laurus. Pursuant to the Amendment Agreement, the Company agreed to file a registration statement by October 20, 2006, covering the resale of certain
securities issued or issuable to Laurus. The Company was obligated to have such registration statement declared effective by November 30, 2006, but there were no stated penalties for failure to meet such deadline. Laurus could declare the
obligations in default and seek immediate repayment, but it has given no indication of doing so. If immediate repayment was required, we would not have sufficient funds and Laurus could take legal action to recover amounts due from our assets.

On October 20, 2006, the Company filed a Registration Statement on Form SB-2 for the registration of up to 2,761,335 shares of the
Companys common stock, including up to 2,061,335 shares of common stock underlying the March 2005 secured convertible notes,



13



---

275,000 shares of common stock underlying the July 2005 postponement agreement, and 425,000 shares of common stock underlying the April 2006 amendment and
postponement agreement. On December 14, 2006, the Company filed Amendment #1 to this Registration Statement on Form SB-2. Such Registration Statement is not effective.

On May 24, 2006, the Company entered into an Amendment Agreement with Laurus, pursuant to which the Company modified earlier agreements among the
parties. In connection with the March 29, 2005 financing, the Company received certain overadvances of funds in the aggregate amount of $572,094, as of May 24, 2006. In accordance with the Amendment Agreement, Laurus permitted the Company
to sell a sufficient number of shares of GeoPharma, pledged by the Company to Laurus, in connection with the September 30, 2004 financing, by June 5, 2006 in satisfaction of the overadvances, with the proceeds being paid to Laurus. Any
remaining unsold shares of GeoPharma were delivered to Laurus to be held pursuant to the original pledge agreement.

The revolving note
payable provides for borrowings utilizing an asset based formula, based on eligible accounts receivable and inventory, less certain allowances and reserves.

Revolving note payable consists of the following at December 31, 2006 and 2005:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 2006 |            |   | 2005 |  
|Principal balance of revolving note payable collateralized by all assets, interest payable at prime (8.25% at December 31, 2006 and 7.25%
at December 31, 2005) plus 2% through March 29, 2008.                                                                                                                                                                                                                                                                                                  |  | $    | 2,177,126  |   |      | $ | 2,920,314  |  
|Less face value of convertible portion of revolving note payable, accounted for as a derivative financial instrument liability, convertible
into shares of the Companys common stock at a conversion price of $1.13 per share. Proceeds from the convertible debenture were allocated first to the embedded conversion feature and the residual to the debenture. The resulting discount is
being amortized through period charges to interest expense using the effective interest method. (a) |  |      | (2,000,000 | ) |      |   | (2,000,000 | )
|Plus amortization of discount recorded as derivative instrument interest expense using an effective interest rate of 300%. (a)                                                                                                                                                                                                                                                                                                                                                                   |  |      | 1,500,933  |   |      |   | 643,257    |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |  
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | $    | 1,678,059  |   |      | $ | 1,563,571  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |      |            |   |      |   |            |  

---

|(a) | See Note 8 for information on the derivative instrument liabilities related to the warrants issued to Laurus and the bifurcated embedded derivative instruments related to the
convertible minimum borrowing note.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 7  LONG-TERM OBLIGATIONS

On September 30, 2004, the Company entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd., whereby the Company completed the sale
to Laurus of a secured



14



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convertible note in the principal amount of $6,000,000 and warrants to purchase 1,375,000 shares of Company common stock. Net proceeds from the offering were
used to pay the purchase price for the acquisition of Bob OLeary Health Food Distributor Co., Inc., effective on October 1, 2004.

The convertible note accrues interest at a rate per annum equal to the prime rate published in The Wall Street Journal plus 2%, subject to a floor of 6%. The interest rate on the convertible note is subject to possible downward
adjustment as follows:



| |  |  | the interest rate will be decreased by 1.0% (or 100 basis points) for every 25% increase of the Companys common stock price above the fixed conversion price
prior to an effective registration statement covering the shares of common stock underlying the convertible notes and warrants; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the interest rate will be decreased by 2.0% (or 200 basis points) for every 25% increase of the Companys common stock price above the fixed conversion price
after an effective registration statement covering the shares of common stock underlying the convertible notes and warrants, however, the interest rate cannot drop below 0%.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The convertible note has a term of three years. The fixed conversion rate is equal to $.90 (103% of the average closing price for the ten days prior to
the execution of the securities purchase agreement). Upon an issuance of shares of common stock below the fixed conversion price, the fixed conversion price of the note will be reduced accordingly. In connection with the September 12, 2005
stock issuance, the lender waived this provision. The conversion price of the note may be adjusted proportionately in certain circumstances such as if the Company pays a stock dividend, subdivides or combines outstanding shares of common stock into
a greater or lesser number of shares, or takes such other actions as would otherwise result in dilution.

Beginning on December 1,
2004, and each month thereafter, the Company shall pay $187,500 of the outstanding principal, together with accrued interest on the convertible note, in cash or registered stock. The monthly payments shall be payable in registered stock if:
(i) the Company has an effective registration statement under which the stock can be sold; (ii) the average closing price of the Companys common stock as reported by Bloomberg, L.P. on the Companys principal trading market for
the five trading days immediately preceding such repayment date shall be greater than or equal to 110% of the fixed conversion rate; and (iii) the amount of such conversion does not exceed 25% of the aggregate dollar trading volume of our
common stock for the twenty 22 day trading period immediately preceding the applicable repayment date. If the conversion criteria are not met, the investor shall convert only such part of the monthly payment that meets the conversion criteria. Any
part of the monthly payment due on a repayment date that the investor has not been able to convert into shares of common stock due to failure to meet the conversion criteria, shall be paid by the Company in cash at the rate of 102% of the principal
portion of the monthly payment otherwise due on such repayment date.

As of December 31, 2006 and 2005, the outstanding principal
balance on the convertible note was $3,912,500 and $4,500,000, respectively. As of December 31, 2006 and 2005, 989,758 shares of Company common stock have been issued to Laurus in payment of $750,000 of principal and $140,782 of interest on the
note.

Laurus will not be entitled to be issued shares of common stock in repayment of any portion of the convertible note or upon exercise
of the warrants if and to the extent such issuance would result in Laurus and its affiliates beneficially owning more than 4.99% of the Companys



15



---

issued and outstanding common stock upon such issuance, unless Laurus shall have provided at least 75 days prior written notice to the Company of its
revocation of such restriction. In connection with the April 2006 Postponement and Amendment Agreement with Laurus, this provision was modified from 4.99% to 9.99%. In addition, this restriction would not apply in the event there was an event of
default or we sought to redeem the outstanding balance of the convertible debentures.

The convertible note may be prepaid by the Company
in cash by paying to the holder 115% of the principal and related accrued and unpaid interest thereon being prepaid. 115% of the full principal amount of the convertible note is due upon default under the terms of convertible note. In addition, the
Company has granted the investor a security interest in substantially all of the Companys assets and intellectual property, as well as registration rights.

The warrants were exercisable until five years from the date of the Securities Purchase Agreement at a purchase price equal to $1.04 per share (115% of the average closing price of the Companys common stock for
the 10 trading days immediately prior to the execution date). The warrants were exercisable on a cashless basis. In the event that the warrants were exercised on a cashless basis, then the Company would not receive any proceeds. In addition, the
exercise price of the warrants was to be adjusted in the event the Company issues common stock at a price below market, with the exception of any securities issued as of the date of this warrant or issued in connection with the convertible notes
issued pursuant to the Securities Purchase Agreement. In connection therewith, Laurus waived their anti-dilution provisions related to all convertible notes and warrants issued to Laurus. In September 2005, we sold 150,000 restricted shares of our
common stock at a price below market. In connection therewith, Laurus waived their anti-dilution provisions related to all convertible notes and warrants issued to Laurus. In connection with the April 2006 Postponement and Amendment Agreement with
Laurus, we issued 97,059 restricted shares of our common stock to Laurus, in exchange for cancellation of the 1,375,000 warrants.

Because
the common stock underlying the conversion feature embedded in the $6,000,000 convertible note and the warrant are subject to our Registration Rights Agreement with Laurus, they have been accounted for as derivative instrument assets or liabilities
(see Note 8). The interest rate index derivative asset related to the interest rate index feature was recorded as a derivative instrument asset. The embedded derivative instruments (primarily the conversion feature) related to the $6,000,000
convertible note were bifurcated and recorded as a derivative instrument liability. The warrants were valued using the Black-Scholes option pricing model at $1,357,125. Because the fair value of the warrants of $1,357,125 and the fair value of the
bifurcated derivative instrument of $6,579,999 exceeded the proceeds received, the convertible minimum borrowing note was initially recorded at zero and a charge to income of $1,937,124 was recognized to record the warrants and the bifurcated
derivative instrument at their fair values (see Note 8).

The Companys obligations under the Security Agreement, Securities Purchase
Agreement and the Note are secured by a first priority lien on all of the Companys assets and all future assets acquired, including a pledge by the Company of shares representing 100% of the Companys share capital of GeoPharma, Inc.,
Inc. and a put option on the pledged shares of GeoPharma, Inc. at $6.00 per share. Additionally, the note is guaranteed by the Companys Chairman of the Board, Jugal K. Taneja.

On October 29, 2004, we filed a Registration Statement on Form S-2 for the registration of up to 8,701,585 shares of the our common stock, including
up to 7,326,585 shares of common



16



---

stock underlying the Secured Convertible Note issued to Laurus Master Fund, Ltd., in the principal amount of $6,000,000 and up to 1,375,000 shares issuable
upon the exercise of common stock purchase warrants. On November 15, 2004, the Securities and Exchange Commission declared the Registration Statement to be effective. Such Registration Statement is no longer current.

On July 19, 2005, we entered into a Postponement Agreement with Laurus, whereby Laurus agreed to postpone our obligation to make certain
amortization payments on its secured convertible note and, in consideration therefore, we issued to Laurus 275,000 shares of our restricted common stock. Pursuant to the agreement, the principal portion of the monthly amount that is due in
connection with the September 30, 2004 note, on the first business day of each of the months from August 2005 through March 2006 in the amount of $187,500 per month, shall not be required to be paid until the first business day of each of the
months from February 2007 through September 2007, respectively, in each case, in addition to the regular monthly principal payments due in each of the months. In connection with the agreement, Laurus agreed to amend the Registration Rights Agreement
with us, to extend the dates for the filing requirements of our Registration Statement in connection with the March 29, 2005 financing and in connection with the shares issued under the Postponement Agreement.

The fair value of the 275,000 shares issued in connection with the July 19, 2005 Postponement Agreement was $189,750, based upon the closing price
of our common stock on that date. This financing cost was recorded as a discount on the September 2004 note and the discount is being amortized to interest expense over the life of the note, in accordance with EITF 96-19 Debtors
Accounting for a Modification or Exchange of Debt Instruments.

On August 19, 2005, the Company filed a Registration Statement
on Form S-2 for the registration of up to 3,219,690 shares of the Companys common stock, including up to 2,194,690 shares of common stock underlying the March 29, 2005 Secured Convertible Notes issued to Laurus, in the principal amount of
$4,000,000, up to 750,000 shares issuable upon the exercise of common stock purchase warrants, and up to 275,000 shares issued in connection with the July 19, 2005 Postponement Agreement. Such Registration Statement was subsequently withdrawn
by the Company on May 11, 2006.

On April 28, 2006, the Company entered into a Postponement and Amendment Agreement with Laurus,
pursuant to which the Company modified the September 30, 2004 and the March 29, 2005 earlier agreements among the parties. The Postponement and Amendment Agreement provides for the following:



| |  |  | Principal payments under the September 30, 2004 note are reduced by $137,500 per month for the eight months commencing May 2006, all of which shall be paid on
the maturity date of the convertible note;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys obligation to repay overadvances of up to $1,721,000 under the March 29, 2005 notes shall be suspended for a period of eight months;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All of the common stock purchase warrants issued to Laurus in connection with the September 30, 2004 and March 29, 2005 agreements are cancelled in their
entirety;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the foregoing, the Company issued 150,000 restricted shares of our common stock to Laurus, for cancellation of the warrants issued to Laurus;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the foregoing, the Company issued 275,000 restricted share of our common stock to Laurus, for postponement of the portion of principal payments
in connection with the September 30, 2004 note.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



17



---

The fair value of the 275,000 shares issued in connection with the April 28, 2006 Postponement and
Amendment Agreement was $45,000, based upon the closing price of our common stock on that date. This financing cost was recorded as a discount on the September 2004 note and the discount is being amortized to interest expense over the life of the
note, in accordance with EITF 96-19 Debtors Accounting for a Modification or Exchange of Debt Instruments.

In connection
with the Postponement and Amendment Agreement, the Company also executed restated promissory notes in favor of Laurus and an amended and restated registration rights agreement (the Restated Registration Rights Agreement). Pursuant to the
Restated Registration Rights Agreement, we agreed to file a registration statement by June 30, 2006, covering the resale of the securities issued or issuable to Laurus. The Company was obligated to have such registration statement declared
effective by September 30, 2006, but there were no stated penalties for failure to meet such deadline.

On July 3, 2006, the
Company filed a Registration Statement on Form SB-2 for the registration of up to 10,221,275 shares of the Companys common stock, including up to 2,194,690 shares of common stock underlying the March 2005 secured convertible notes, up to
7,326,585 shares of common stock underlying the September 2004 secured convertible notes, 275,000 shares of common stock underlying the July 2005 postponement agreement, and 425,000 shares of common stock underlying the April 2006 amendment and
postponement agreement. Such Registration Statement was subsequently withdrawn by the Company on October 4, 2006.

On October 4,
2006, the Company entered into an agreement with Laurus pursuant to which the Company modified the earlier agreements among the parties (the Amendment Agreement). The Amendment Agreement (i) eliminated the obligation of the Company
to register for resale the shares of common stock underlying the securities sold in September 2004, and (ii) removed Laurus right to waive 9.99% ownership limitations contained in their convertible debentures.

In connection with the Amendment Agreement, the Company also executed second amended and restated promissory notes in favor of Laurus. Pursuant to the
Amendment Agreement, the Company agreed to file a registration statement by October 20, 2006, covering the resale of certain securities issued or issuable to Laurus. The Company was obligated to have such registration statement declared
effective by November 30, 2006, but there were no stated penalties for failure to meet such deadline. Laurus could declare the obligations in default and seek immediate repayment, but it has given no indication of doing so. If immediate
repayment was required, we would not have sufficient funds and Laurus could take legal action to recover amounts due from our assets.

On
October 20, 2006, the Company filed a Registration Statement on Form SB-2 for the registration of up to 2,761,335 shares of the Companys common stock, including up to 2,061,335 shares of common stock underlying the March 2005 secured
convertible notes, 275,000 shares of common stock underlying the July 2005 postponement agreement, and 425,000 shares of common stock underlying the April 2006 amendment and postponement agreement. On December 14, 2006, the Company filed
Amendment #1 to this Registration Statement on Form SB-2. Such Registration Statement is not effective.



18



---

Long-term obligations consist of the following at December 31, 2006 and 2005:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      |            |   |      |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | 2006 |            |   | 2005 |  
|Convertible note payable collateralized by all assets, due in monthly principal payments (see above), plus interest at prime (8.25% at
December 31, 2006 and 7.25% at December 31, 2005) plus 2%, through September 2007.                                                                                                                                                                                                                                                                       |  | $    | 3,912,500  |   |      | $ | 4,500,000  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Less face value of convertible note payable, accounted for as a derivative financial instrument liability, convertible into shares of the
Companys common stock at a conversion price of $0.90 per share. Proceeds from the convertible debenture were allocated first to the warrants and to the embedded conversion feature and the residual to the debenture. The resulting discount is
being amortized through period charges to interest expense using the effective interest method. (a) |  |      | (6,000,000 | ) |      |   | (6,000,000 | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Plus amortization of discount recorded as derivative instrument interest expense using an effective interest rate of 300%. (a)                                                                                                                                                                                                                                                                                                                                                                  |  |      | 5,439,538  |   |      |   | 3,067,595  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Less discount recorded for July 19, 2005 postponement agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      | (189,750   | ) |      |   | (189,750   | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Less discount recorded for April 28, 2006 postponement agreement.                                                                                                                                                                                                                                                                                                                                                                                                                               |  |      | (82,500    | ) |      |   |           |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Plus amortization of discount as interest expense, related to postponement agreements.                                                                                                                                                                                                                                                                                                                                                                                                          |  |      | 164,821    |   |      |   | 39,226     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Note payable collateralized by certain equipment, due in monthly payments of approximately $1,662, including interest at 10%, through December
2007.                                                                                                                                                                                                                                                                                                                                            |  |      | 18,908     |   |      |   | 36,022     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Note payable collateralized by a vehicle, due in monthly payments of $412, including interest at 4.02%, through January 2009.                                                                                                                                                                                                                                                                                                                                                                   |  |      |           |   |      |   | 13,954     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Note payable collateralized by a vehicle, due in monthly payments of $666, including interest at 1.9%, through February 2010.                                                                                                                                                                                                                                                                                                                                                                   |  |      | 24,493     |   |      |   | 31,939     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |     
|Capitalized lease obligation for certain equipment, due in monthly payments of $499, including interest at 11.33%, through July
2010.                                                                                                                                                                                                                                                                                                                                                           |  |      | 17,225     |   |      |   | 21,020     |  
|Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |      | 8,623      |   |      |   | 8,623      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      |            |   |      |   |            |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      | 3,313,858  |   |      |   | 1,528,629  |  
|Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |      | 3,283,977  |   |      |   | 1,458,137  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      |            |   |      |   |            |  
|Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | $    | 29,881     |   |      | $ | 70,492     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |      |            |   |      |   |            |  

---

|(a) | See Note 8 for information on the derivative instrument assets or liabilities related to the warrants issued to Laurus and the bifurcated embedded derivative instruments related to
the convertible note.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

NOTE 8  DERIVATIVE FINANCIAL INSTRUMENTS

The captions derivative financial instruments consist of (a) the embedded conversion feature bifurcated from the September 2004 and the March 2005
convertible debentures, (b) the Warrants issued in connection with the September 2004 and March 2005 convertible debts and (c) interest rate index. These derivative financial instruments are indexed to an aggregate of 6,455,928 and
7,219,422 shares, respectively, at December 31, 2006 and 2005, and are carried at fair value.

We use the Black-Scholes option price
model to value embedded conversion feature components of any bifurcated embedded derivative instruments that are recorded as derivative assets or derivative liabilities. See Note 6 and Note 7 related to embedded derivative instruments that have been
bifurcated from our notes payable to Laurus. We use the discounted present value of future cash flows to value derivative financial assets.

In valuing the embedded conversion feature components of the bifurcated embedded derivative instruments and the detachable warrants, at the time they were issued and at December 31, 2006 and 2005, we used the market price of our common
stock on the date of valuation, an expected dividend yield of zero and the remaining period or maturity date of the convertible debt instruments. Even though the warrants issued in September 2004 expire in five years and the warrants issued March
2005 expire in seven years, we assumed they would be exercised in three years, the life of the convertible debt instruments, based on normal practices by the lender. All convertible instruments and warrants can be exercised by the holder at any
time.

Because of the limited trading history of our common stock prior to the acquisition of BOSS on October 1, 2004, the expected
volatility of our common stock over the remaining life of the warrants has been estimated at 126% based on not only the history of our stock price but also a review of the volatility of entities considered by management as comparable.

The embedded conversion features in the convertible notes issued to Laurus are subject to the requirements of EITF 00-19 and SFAS 133. The Company is
required by EITF 00-19 and SFAS 133 to bifurcate the embedded conversion features and warrants, and account for them as derivative instrument liabilities. These derivative instrument liabilities were initially recorded at their fair values and are
then adjusted to fair value at the end of each subsequent reporting period, with any changes in the fair value recognized as income or expense in the period of change. The most significant component of this compound derivative instrument is the
embedded conversion feature, which is revalued using the Black-Scholes option pricing model. The interest rate index derivative has been accounted for as a standalone financial derivative asset.

The proceeds received from Laurus were first allocated to the fair value of the freestanding warrants and then to the fair value of the bifurcated
embedded derivative instruments included in the convertible notes. The remaining proceeds were then allocated to the convertible notes, resulting in those notes being recorded at a significant discount from their face amounts. For the $6,000,000
term note, that discount, is being accreted into its face amount using the effective interest method over the term of the note. For the $2,000,000 minimum borrowing note, that discount, is also being accreted to its face amount using the effective
interest method over the term of the note.

The effective interest rate used to amortize the debt discount on the September 2004 6.75%
convertible debenture and the March 2005 7.75% convertible debenture, amounted to



20



---

300% and 300%, respectively. Amortization of the discounts, which are included in derivative interest expense, amounted to $613,519 and $214,419,
respectively, for the three months ended December 31, 2006 and $1,758,424 and $643,257, respectively, for the nine months ended December 31, 2006. Amortization of the discounts amounted to $613,519 and $214,419, respectively, for the three
months ended December 31, 2005 and $1,840,557 and $643,257, respectively, for the nine months ended December 31, 2005.

The
initial fair value for derivative financial instrument liabilities was determined using the Black-Scholes option pricing model. Significant assumptions used in the determination of fair value of the September 2004 and March 2005 embedded conversion
features and detachable warrants were: volatility of 126%, a dividend rate of zero and a risk free interest rated of 4.20%. At each reporting period, the remaining term and risk free rate used varies depending on the factors existing at those dates.

Interest Rate Index Derivative

The
September 2004 and March 2005 convertible debt financings included provisions to potentially lower the stated interest rates on the instruments in the event the price of the Companys common stock was to increase by over 25% of the stated
conversion price relating to the financing. For the September 2004 financing, the stated interest rate of 6.75% could be reduced by 200 basis points for every 25% increase in the Companys common stock price above the conversion price. This
provision could potentially reduce the interest rate, but not below zero, and would not result in an increase in the interest rate. The provision only took effect upon the effectiveness of a registration statement. The registration statement became
effective on November 15, 2004 for the September 2004 financing and thus triggered the interest rate index (IRI) provision. Since the registration statements filed for the March 2005 financing did not become effective, this
provision did not take effect.

Since the IRI is directly affected by the price of the Companys common stock and has a value
dependent on the price of the stock, it was determined to be a derivative asset. The fair value of the asset was determined using the present value of the projected cash flow benefit of the potential reduction in the interest rate over the term of
the loan. The initial fair value of the present value of discounted future cash flows from the projected reduction in the interest on the September 2004 convertible debt was $335,126. Since the price of the Companys stock has decreased, the
fair value of the IRI decreased to zero, as of December 31, 2006 and 2005. Upon the future filing of a registration statement for both financings and when such registration statement is declared effective, the IRI for each instrument will be
calculated based upon the discounted present value of the projected reduction in stated interest on the convertible debts.

The initial
fair value for derivative financial assets was determined using a discounted present value of projected future cash flows. The significant assumptions in the determination of fair value of the September 2004 interest rate index (IRI) were: normal
borrowing rate of 6.75% and a projected price of the Companys common stock using a historical weighted average price of the common stock over a period equivalent to the projected life of the instrument. At each reporting period, the remaining
term and a newly computed weighted average price of the Companys common stock is determined based upon updated historical activity.

At December 31, 2006 and 2005, the following derivative asset and liabilities related to common stock warrants and embedded derivative instruments were outstanding:

Derivative Financial Asset



|                                                                           |  |                |   |            |                     |                        |   |                    |  |                           |         |                           |   |   |  |   |  
|-------------------------------------------------------------------------- |  | -------------- | - | ---------- | ------------------- | ---------------------- | - | ------------------ |  | ------------------------- | ------- | ------------------------- | - | - |  | - | -
|Issue Date                                                                 |  | ExpirationDate |   | Instrument |                     | ExercisePrice PerShare |   | Value At IssueDate |  | Value AtDecember 31, 2006 |         | Value AtDecember 31, 2005
|9/30/2004                                                                  |  | 9/30/2007      |   | Laurus $   | 6,000,000 term note |                        | $ | 0.90               |  | $                         | 335,126 |                           | $ |  |  | $ | 
|                                                                           |  |                |   |            |                     |                        |   |                    |  |                           |         |                           |   |   |  |   |  
|Fair value of freestanding interest rate index derivative instrument asset |  | $              |  |            | $                   |                      
|                                                                           |  |                |   |            |                     |                        |   |                    |  |                           |         |                           |   |   |  |   |  



21



---

Derivative Financial Liabilities



|                                                                                                                                        |  |                 |         |                                     |   |                          |      |                     |         |                            |  |                            |         |  |   |          
|--------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | ----------------------------------- | - | ------------------------ | ---- | ------------------- | ------- | -------------------------- |  | -------------------------- | ------- |  | - | ---------
|Issue Date                                                                                                                              |  | Expiration Date |         | Instrument                          |   | Exercise Price Per Share |      | Value At Issue Date |         | Value At December 31, 2006 |  | Value At December 31, 2005
|9/30/2004                                                                                                                               |  | 9/30/2007       |         | 1,375,000 warrantsissued to Laurus  |   | $                        | 1.04 |                     | $       | 1,357,125                  |  | $                          |        |  | $ | 302,500  
|3/29/2005                                                                                                                               |  | 3/29/2008       |         | 750,000 warrantsissued to Laurus    |   | $                        | 1.37 |                     | $       | 937,500                    |  | $                          |        |  | $ | 180,000  
|                                                                                                                                        |  |                 |         |                                     |   |                          |      |                     |         |                            |  |                            |         |  |   |          
|Fair value of freestanding derivative instrument liabilities for warrants                                                               |  |                 |         |                                     | $ |                         |      | $                   | 482,500
|                                                                                                                                        |  |                 |         |                                     |   |                          |      |                     |         |                            |  |                            |         |  |   |          
|                                                                                                                                        |  |                 |         |                                     |   |                         
|Issue Date                                                                                                                              |  | Expiration Date |         | Instrument                          |   | Exercise Price Per Share |      | Value At Issue Date |         | Value At December 31, 2006 |  | Value At December 31, 2005
|9/30/2004                                                                                                                               |  | 9/30/2007       |         | Laurus $6,000,000term note          |   | $                        | 0.90 |                     | $       | 6,579,999                  |  | $                          | 130,418 |  | $ | 1,200,001
|3/29/2005                                                                                                                               |  | 3/29/2008       |         | Laurus $2,000,000revolving termnote |   | $                        | 1.13 |                     | $       | 2,530,973                  |  | $                          | 88,497  |  | $ | 442,479  
|                                                                                                                                        |  |                 |         |                                     |   |                          |      |                     |         |                            |  |                            |         |  |   |          
|Fair value of bifurcated embedded derivative instrument liabilities associated with the above mentioned
instruments                     |  | $               | 218,915 |                                     | $ | 1,642,480               
|                                                                                                                                        |  |                 |         |                                     |   |                          |      |                     |         |                            |  |                            |         |  |   |          
|                                                                                                                                        |  |                 |         |                                     |   |                         
|Issue Date                                                                                                                              |  | Expiration Date |         | Instrument                          |   | Exercise Price Per Share |      | Value At Issue Date |         | Value At December 31,
2006 |  | Value At December 31,
2005
|9/30/2004                                                                                                                               |  | 9/30/2007       |         | Laurus $6,000,000term note          |   | $                        | 0.90 |                     | $       | 748,187                    |  | $                          | 6,067   |  | $ | 65,766   
|3/29/2005                                                                                                                               |  | 3/29/2008       |         | Laurus $2,000,000revolving termnote |   | $                        | 1.13 |                     | $       | 273,968                    |  | $                          | 5,706   |  | $ | 36,260   
|                                                                                                                                        |  |                 |         |                                     |   |                          |      |                     |         |                            |  |                            |         |  |   |          
|Fair value of interest portion of bifurcated embedded derivative instrument liabilities associated with the above mentioned
instruments |  | $               | 11,773  |                                     | $ | 102,026                 
|                                                                                                                                        |  |                 |         |                                     |   |                          |      |                     |         |                            |  |                            |         |  |   |          
|Total derivative financial instrument liabilities                                                                                       |  | $               | 230,688 |                                     | $ | 2,227,006               
|                                                                                                                                        |  |                 |         |                                     |   |                          |      |                     |         |                            |  |                            |         |  |   |          

On April 28, 2006, in connection with the Amendment and Postponement Agreement entered into
with Laurus, the 2,125,000 common stock warrants issued to Laurus were cancelled (see Notes 6 and 7). On the date of cancellation, April 28, 2006, the fair value of freestanding derivative instrument liabilities for the warrants was as follows:



|                                                                          |  |                 |         |                                     |  |                          |      |                     |   |                         |  |   |        
|------------------------------------------------------------------------- |  | --------------- | ------- | ----------------------------------- |  | ------------------------ | ---- | ------------------- | - | ----------------------- |  | - | -------
|Issue Date                                                                |  | Expiration Date |         | Instrument                          |  | Exercise Price Per Share |      | Value At Issue Date |   | Value At April 28, 2006
|9/30/2004                                                                 |  | 9/30/2007       |         | 1,375,000 warrants issued to Laurus |  | $                        | 1.04 |                     | $ | 1,357,125               |  | $ | 123,750
|3/29/2005                                                                 |  | 3/29/2008       |         | 750,000 warrants issued to Laurus   |  | $                        | 1.37 |                     | $ | 937,500                 |  | $ | 75,000 
|                                                                          |  |                 |         |                                     |  |                          |      |                     |   |                         |  |   |        
|Fair value of freestanding derivative instrument liabilities for warrants |  | $               | 198,750
|                                                                          |  |                 |         |                                     |  |                          |      |                     |   |                         |  |   |        



22



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NOTE 9  LETTER OF CREDIT

On June 9, 2006, the Company issued a Standby Letter Of Credit and Security Agreement to First Community Bank Of America, in the amount of $500,000 in favor of Iovate Health Sciences USA, Inc. The letter of
credit is personally guaranteed by Mandeep K. Taneja, the Companys Chief Executive Officer. In addition, Jugal K. Taneja, Chairman of the Board of the Company, pledged additional collateral in the form of a $300,000 certificate of deposit.

NOTE 10  STOCK WARRANTS

At
December 31, 2006 and 2005, the Company had outstanding warrants to purchase 500,000 and 2,625,000 shares of the Companys common stock, respectively.

In June 2004, pursuant to a Financial Consulting Agreement, the Company issued 300,000 3-year life warrants to purchase common stock, for consulting services. The exercise prices range from $1.50 to $2.50 per share on
the 300,000 warrants and they become exercisable in June 2005 and expire in June 2007.

On October 1, 2004, pursuant to a Financial
Consulting Agreement, the Company issued 200,000 4-year life warrants to purchase common stock, for consulting services. For the 200,000 warrants, the exercise prices range from $1.25 to $1.50 per share, with 25% vesting on October 1, 2004 and
then subsequent vesting is at 25% per quarter, expiring on October 1, 2008.

For the warrants issued in connection with the
financial consulting agreements, the balance of deferred consulting fees as of December 31, 2006 and 2005 was zero and $73,125, respectively. The initial valuation of these warrants was $465,000. For the three and nine months ended
December 31, 2006, the Company included consulting expense in the amount of zero and $48,750, respectively, in selling, general and administrative expenses in the statements of operations, for these warrants. For the three and nine months ended
December 31, 2005, the Company included consulting expense in the amount of $24,375 and $118,125, respectively, in selling, general and administrative expenses in the statements of operations, for these warrants.

In September 2004, pursuant to a Securities Purchase Agreement, the Company issued 1,375,000 warrants to purchase common stock, in connection with the
Companys sale of a secured convertible note. For the 1,375,000 warrants, the exercise price was $1.04 per share, subject to certain adjustments pursuant to the September 30, 2004 Securities Purchase Agreement with Laurus, and they were to
expire in September 2009. On March 29, 2005, pursuant to a Security Agreement, the Company issued 750,000 warrants to purchase common stock, in connection with the Companys sale of a secured convertible note. For the 750,000 warrants, the
exercise price was $1.37 per share, subject to certain adjustments pursuant to the March 29, 2005 Security Agreement with Laurus, and they were to expire in March 2012. On April 28, 2006, pursuant to an Amendment and Postponement Agreement
with Laurus, the 2,125,000 warrants to purchase common stock were cancelled in exchange for 150,000 restricted shares of the Companys common stock. For the three and nine months ended December 31, 2006, the Company included a gain from
debt extinguishment of zero and $153,750, respectively, for the cancellation of these warrants. The Company had been accounting for these warrants as derivative financial instruments from their dates of issuance until April 28, 2006, their date
of cancellation (See Note 8).



23



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NOTE 11  STOCK OPTIONS

On April 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (FAS 123(R)), that address the accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for either equity instruments of the enterprise or liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. The
statement eliminated the ability to account for share-based compensation transactions, as we formerly did, using the intrinsic value method as prescribed by APB Opinion No. 25, and generally requires that such transactions be accounted for
using a fair-value-based method and recognized as expenses in our consolidated statement of operations.

We adopted FAS 123(R) using the
modified prospective method which requires the application of the accounting standard as of April 1, 2006. Our unaudited condensed consolidated financial statements as of and for the three and nine months ended December 31, 2006 reflect
the impact of adopting FAS 123(R). In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of FAS 123(R).

Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately
expected to vest. Share-based compensation expense recognized in the unaudited condensed consolidated statement of operations during the three and nine months ended December 31, 2006 included compensation expense for the share-based payment
awards granted prior to March 31, 2006 and thereafter, based on the grant date fair value estimated in accordance with FAS 123(R). As share-based compensation expense recognized in the statement of operations is based on awards ultimately
expected to vest, it will be reduced for estimated forfeitures. FAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

As a result of adopting FAS 123(R), $106,471 and $297,303, respectively, of share-based compensation was charged against income for the three and nine
months ended December 31, 2006. For the three and nine months ended December 31, 2005, the following table illustrates the effect on net income and earnings per share had we applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Share-Based Compensation, to share-based employee compensation.



|                                                  |  |                                    |            |   |                                   |   |           |  
|------------------------------------------------- |  | ---------------------------------- | ---------- | - | --------------------------------- | - | --------- | -
|                                                  |  | Three MonthsEndedDecember 31, 2005 |            |   | Nine MonthsEndedDecember 31, 2005 |  
|Net income (loss):                                |  |                                    |            |   |                                   |   |           |  
|As reported                                       |  | $                                  | (918,973   | ) |                                   | $ | 6,260,183 |  
|Pro forma adjustment for compensation, net of tax |  |                                    | (121,798   | ) |                                   |   | (365,252  | )
|                                                  |  |                                    |            |   |                                   |   |           |  
|Pro forma                                         |  | $                                  | (1,040,771 | ) |                                   | $ | 5,894,931 |  
|                                                  |  |                                    |            |   |                                   |   |           |  
|Basic income (loss) per share:                    |  |                                    |            |   |                                   |   |           |  
|As reported                                       |  | $                                  | (0.06      | ) |                                   | $ | 0.44      |  
|                                                  |  |                                    |            |   |                                   |   |           |  
|Pro forma                                         |  | $                                  | (0.07      | ) |                                   | $ | 0.41      |  
|                                                  |  |                                    |            |   |                                   |   |           |  



24



---

|                                 |  |                                   |       |   |                                    |   |     
|-------------------------------- |  | --------------------------------- | ----- | - | ---------------------------------- | - | ----
|                                 |  | Nine MonthsEndedDecember 31, 2005 |       |   | Three MonthsEndedDecember 31, 2005
|Diluted income (loss) per share: |  |                                   |       |   |                                    |   |     
|As reported                      |  | $                                 | (0.06 | ) |                                    | $ | 0.07
|                                 |  |                                   |       |   |                                    |   |     
|Pro forma                        |  | $                                 | (0.07 | ) |                                    | $ | 0.06
|                                 |  |                                   |       |   |                                    |   |     

On July 17, 2006, the Company granted options to purchase 650,000 shares of the
Companys common stock to employees, in accordance with the Companys 1999 Stock Option Plan. The exercise price of the options is $0.37 (100% of the fair value of the Companys common stock on July 16, 2006). The options vest
approximately equally over a three year period, commencing July 17, 2007. The fair value of the options granted was estimated on the grant date using the Black-Scholes option pricing model with a volatility factor of 114.74% and a risk free
interest rate of 5.07%.

On July 17, 2006, the Company granted options to purchase 250,000 shares of the Companys common stock
to Jugal Taneja, the Companys Chairman and a principal shareholder of the Company, and options to purchase 250,000 shares of the Companys common stock to Mandeep Taneja, the Companys Chief Executive Officer and a principal
shareholder of the Company, in accordance with the Companys 1999 Stock Option Plan. The exercise price of the options is $0.407 (110% of the fair value of the Companys common stock on July 16, 2006). The options vest approximately
equally over a three year period, commencing July 17, 2007. The fair value of the options granted was estimated on the grant date using the Black-Scholes option pricing model with a volatility factor of 114.74% and a risk free interest rate of
3.56%.

On July 24, 2006, the Compensation Committee of the Companys Board of Directors granted options to purchase 500,000
shares of the Companys common stock to Mandeep Taneja, as compensation for Mr. Tanejas personal guarantee to First Community Bank, on July 24, 2006, of the Standby Letter Of Credit and Security Agreement issued by the Company
to First Community Bank. The exercise price of the options is $0.44 (110% of the fair value of the Companys common stock on July 23, 2006). The options vest approximately equally over a three year period, commencing July 24, 2007.
The fair value of the options granted was estimated on the grant date using the Black-Scholes option pricing model with a volatility factor of 114.74% and a risk free interest rate of 3.69%.

The fair value of each option granted during the nine months ended December 31, 2006 was estimated on the grant date using the Black-Scholes option
pricing model, as indicated above, with the following weighted average assumptions:



|                        |  |              |  
|----------------------- |  | ------------ | -
|Risk-free interest rate |  | 3.56% - 5.07 | %
|Dividend yield          |  |             |  
|Volatility              |  | 114.74       | %
|Average expected term   |  | 7 years      |  



25



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The following summarizes information about the aggregate stock option activity for the nine months ended
December 31, 2006:



|                                                                                              |  |                                |   |  |               |    
|--------------------------------------------------------------------------------------------- |  | ------------------------------ | - |  | ------------- | ---
|                                                                                              |  | WeightedAverageNumberof Shares |   |  | ExercisePrice
|Outstanding, April 1, 2006                                                                    |  | 1,960,000                      |   |  | $             | .82
|Granted                                                                                       |  | 1,650,000                      |   |  |               | .40
|Exercised                                                                                     |  |                               |   |  |               |   
|Expired and forfeited                                                                         |  | (105,000                       | ) |  |               |   
|                                                                                              |  |                                |   |  |               |    
|Outstanding, December 31, 2006                                                                |  | 3,505,000                      |   |  | $             | .64
|                                                                                              |  |                                |   |  |               |    
|Options vested, December 31, 2006                                                             |  | 1,353,330                      |   |  | $             | .65
|                                                                                              |  |                                |   |  |               |    
|Weighted average fair value of options granted during the nine months ended December 31, 2006 |  |                                |   |  | $             | .33
|                                                                                              |  |                                |   |  |               |    

As of December 31, 2006, there were 3,505,000 options outstanding. Options outstanding and
exercisable under the plan as of December 31, 2006 were:



|                         |  |                 |  |                              |       |                                              |      |                 |         |                              |   |      
|------------------------ |  | --------------- |  | ---------------------------- | ----- | -------------------------------------------- | ---- | --------------- | ------- | ---------------------------- | - | -----
|                         |  | Outstanding     |  | Exercisable                 
|Range of Exercise Prices |  | NumberofOptions |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractedLife (yrs) |      | NumberofOptions |         | WeightedAverageExercisePrice
|$ 0.16250 - $0.17875     |  | 700,000         |  | $                            | 0.169 |                                              | 3.83 |                 | 700,000 |                              | $ | 0.169
|$ 1.00000 - $1.55000     |  | 1,255,000       |  | $                            | 1.19  |                                              | 5.63 |                 | 653,330 |                              | $ | 1.16 
|$ 0.37 - $0.44           |  | 1,550,000       |  | $                            | 0.40  |                                              | 6.60 |                 |        |                              | $ | 0.00 

On December 1, 2005 the Company granted options to purchase 2,500 shares of the
Companys common stock to an employee, in accordance with the Companys 1999 Stock Option Plan. The exercise price of the options is $0.39 (100% of the fair value of the Companys common stock on November 30, 2005). The options
vest on December 1, 2006. The fair value of the options granted was estimated on the grant date using the Black-Scholes option pricing model with a volatility factor of 110.35% and a risk free interest rate of 4.47%.

The weighted average fair value of the 2,500 options granted during the nine months ended December 31, 2005 was $0.40. The fair value of the options
granted during the nine months ended December 31, 2005 was estimated on the grant date using the Black-Scholes option pricing model, as indicated above, with the following weighted average assumptions:



|                        |  |         |  
|----------------------- |  | ------- | -
|Risk-free interest rate |  | 4.47    | %
|Dividend yield          |  |        |  
|Volatility              |  | 110.35  | %
|Average expected term   |  | 7 years |  



26



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NOTE 12  SHAREHOLDERS EQUITY

On April 22, 2005, the Company filed a Registration Statement on Form S-2 for the registration of up to 2,944,690 shares of the Companys common
stock, including up to 2,194,690 shares of common stock underlying the March 2005 secured convertible notes in the principal amount of $4,000,000 and up to 750,000 shares issuable upon the exercise of common stock purchase warrants. The Company
subsequently withdrew such Registration Statement on August 19, 2005.

On August 19, 2005, the Company filed a Registration
Statement on Form S-2 for the registration of up to 3,219,690 shares of the Companys common stock, including up to 2,194,690 shares of common stock underlying the March 2005 secured convertible notes in the principal amount of $4,000,000, up
to 750,000 shares issuable upon the exercise of common stock purchase warrants and 275,000 shares of common stock underlying the July 2005 postponement agreement. The Company subsequently withdrew such Registration Statement on May 11, 2006.

On July 19, 2005, the Company entered into a Postponement Agreement with Laurus Master Fund, Ltd., whereby Laurus agreed to postpone
the Companys obligation to make certain amortization payments on its secured convertible note and, in consideration therefore, the Company issued to Laurus 275,000 shares of restricted common stock of the Company. Pursuant to the agreement,
the principal portion of the monthly amount that is due on the first business day of each of the months from August 2005 through March 2006, in the amount of $187,500 per month, shall not be required to be paid until the first business day of each
of the months from February 2007 through September 2007, respectively, in each case, in addition to the regular monthly principal payments due in each of the months. In connection with the agreement, Laurus agreed to amend the Registration Rights
Agreement with the Company to extend the dates for the filing requirements of the Companys Registration Statement.

On
August 31, 2005, the Company issued 14,038 restricted shares of its common stock to Dynamic Health Products, Inc. 401(k) Plan for the Companys contribution to the employees 401(k) benefit plan.

On September 12, 2005, 150,000 shares of restricted common stock of the Company were sold to a non-affiliated third party investor at $.50 per new
share, for gross proceeds of $75,000. Proceeds were used to provide additional working capital for the Company.

On April 28, 2006,
the Company entered into a Postponement and Amendment Agreement with Laurus Master Fund, Ltd., pursuant to which the Company modified the September 30, 2004 and the March 29, 2005 earlier agreements among the parties. Pursuant to the
agreement, the principal portion of the monthly amount that is due under the September 30, 2004 convertible note on the first business day of each of the months from May 2006 through December 2006, in the amount of $187,500 per month, shall be
reduced by $137,500 per month. and, in consideration therefore, the Company issued to Laurus 275,000 shares of restricted common stock of the Company. In addition, Laurus agreed to the cancellation of all of the common stock purchase warrants issued
to Laurus in connection with the September 30, 2004 and March 29, 2005 agreements and, in consideration therefore, the Company issued to Laurus 150,000 shares of restricted common stock of the Company. In connection with the agreement,
Laurus agreed to amend the Registration Rights Agreement with the Company to extend the dates for the filing requirements of the Companys Registration Statement.



27



---

On June 7, 2006, the Company issued 166,405 restricted shares of its common stock to Dynamic Health
Products, Inc. 401(k) Plan for the Companys contribution to the employees 401(k) benefit plan.

In connection with the Postponement
and Amendment Agreement, the Company also executed restated promissory notes in favor of Laurus and an amended and restated registration rights agreement (the Restated Registration Rights Agreement). Pursuant to the Restated Registration
Rights Agreement, we agreed to file a registration statement by June 30, 2006, covering the resale of the securities issued or issuable to Laurus. The Company was obligated to have such registration statement declared effective by
September 30, 2006, but there were no stated penalties for failure to meet such deadline.

On July 3, 2006, the Company filed a
Registration Statement on Form SB-2 for the registration of up to 10,221,275 shares of the Companys common stock, including up to 2,194,690 shares of common stock underlying the March 2005 secured convertible notes, up to 7,326,585 shares of
common stock underlying the September 2004 secured convertible notes, 275,000 shares of common stock underlying the July 2005 postponement agreement, and 425,000 shares of common stock underlying the April 2006 amendment and postponement agreement.
Such Registration Statement was subsequently withdrawn by the Company on October 4, 2006.

On October 4, 2006, the Company
entered into an agreement with Laurus pursuant to which the Company modified the earlier agreements among the parties (the Amendment Agreement). The Amendment Agreement (i) eliminated the obligation of the Company to register for
resale the shares of common stock underlying the securities sold in September 2004, and (ii) removed Laurus right to waive 9.99% ownership limitations contained in their convertible debentures.

In connection with the Amendment Agreement, the Company also executed second amended and restated promissory notes in favor of Laurus. Pursuant to the
Amendment Agreement, the Company agreed to file a registration statement by October 20, 2006, covering the resale of certain securities issued or issuable to Laurus. The Company was obligated to have such registration statement declared
effective by November 30, 2006, but there were no stated penalties for failure to meet such deadline. Laurus could declare the obligations in default and seek immediate repayment, but it has given no indication of doing so. If immediate
repayment was required, we would not have sufficient funds and Laurus could take legal action to recover amounts due from our assets.

On
October 20, 2006, the Company filed a Registration Statement on Form SB-2 for the registration of up to 2,761,335 shares of the Companys common stock, including up to 2,061,335 shares of common stock underlying the March 2005 secured
convertible notes, 275,000 shares of common stock underlying the July 2005 postponement agreement, and 425,000 shares of common stock underlying the April 2006 amendment and postponement agreement. On December 14, 2006, the Company filed
Amendment #1 to this Registration Statement on Form SB-2. Such Registration Statement is not effective.

NOTE 13  INCOME TAXES

The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income
Taxes. Under SFAS 109, the Company uses the asset and liability method which recognizes the amount of current and



28



---

deferred taxes payable or refundable based on transactions recorded as of and for the periods presented in the consolidated financial statements as
determined by the enacted tax laws and tax rates.

As of December 31, 2006 and 2005, the Company had a current income tax liability of
zero, an accrued income tax liability of zero and $5,009, respectively, and a net deferred income tax liability $39,554 and $200,475, respectively, which primarily represents the potential future tax expense associated with the unrealized gains on
marketable equity securities, and is partially offset due to potential utilization of net operating losses not previously recognized. The Company has net operating losses that expire through March 31, 2026.

NOTE 14  EARNINGS PER SHARE

The following sets
forth the unaudited computation of basic and diluted net earnings (loss) per common share:



|                                                                                                   |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|-------------------------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | - | --------------------------------- | - | ---------- | -------------------------------- |  | - | ------------------------------- | - |  | - | ----------
|                                                                                                   |  | Three MonthsEndedDecember 31,2006 |            |   | Three MonthsEndedDecember 31,2005 |   |            | Nine MonthsEndedDecember 31,2006 |  |   | NineMonthsEndedDecember 31,2005
|                                                                                                   |  | (Unaudited)                       |            |   | (Unaudited)                       |   |            | (Unaudited)                      |  |   | (Unaudited)                    
|Numerator:                                                                                         |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Net income (loss)                                                                                  |  | $                                 | (938,881   | ) |                                   | $ | (918,973   | )                                |  | $ | (1,632,626                      | ) |  | $ | 6,260,183 
|Less preferred stock Dividends                                                                     |  |                                   |           |   |                                   |   |           |                                  |  |   |                                |   |  |   |          
|                                                                                                   |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Net income (loss) available to common shareholders                                                 |  |                                   | (938,881   | ) |                                   |   | (918,973   | )                                |  |   | (1,632,626                      | ) |  |   | 6,260,183 
|                                                                                                   |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Less derivative instrument income and interest expense, net, from convertible notes                |  |                                   |           |   |                                   |   |           |                                  |  |   |                                |   |  |   | 4,694,415 
|                                                                                                   |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Net income (loss) available to common shareholders after assumed conversion of dilutive securities |  | $                                 | (938,881   | ) |                                   | $ | (918,973   | )                                |  | $ | (1,632,626                      | ) |  | $ | 1,565,768 
|                                                                                                   |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Denominator:                                                                                       |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Weighted average basic shares outstanding                                                          |  |                                   | 15,055,035 |   |                                   |   | 14,463,630 |                                  |  |   | 14,972,765                      |   |  |   | 14,257,416
|Stock options                                                                                      |  |                                   |           |   |                                   |   |           |                                  |  |   |                                |   |  |   | 700,000   
|Warrants                                                                                           |  |                                   |           |   |                                   |   |           |                                  |  |   |                                |   |  |   |          
|Convertible note                                                                                   |  |                                   |           |   |                                   |   |           |                                  |  |   |                                |   |  |   | 6,769,912 
|                                                                                                   |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Weighted average fully diluted shares outstanding                                                  |  |                                   | 15,055,035 |   |                                   |   | 14,463,630 |                                  |  |   | 14,972,765                      |   |  |   | 21,727,328
|                                                                                                   |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Net earnings (loss) per common share                                                              |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Basic                                                                                              |  | $                                 | (0.06      | ) |                                   | $ | (0.06      | )                                |  | $ | (0.11                           | ) |  | $ | 0.44      
|                                                                                                   |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           
|Diluted                                                                                            |  | $                                 | (0.06      | ) |                                   | $ | (0.06      | )                                |  | $ | (0.11                           | ) |  | $ | 0.07      
|                                                                                                   |  |                                   |            |   |                                   |   |            |                                  |  |   |                                 |   |  |   |           



29



---

For the three months ended December 31, 2006, options on 3,505,000 shares of common stock, warrants
on 500,000 shares of common stock and 6,117,135 shares issuable upon conversion of convertible notes were not included in the computation of diluted earnings (loss) per share because their effects were anti-dilutive. For the nine months ended
December 31, 2006, options on 2,889,182 shares of common stock, warrants on 500,000 shares of common stock and 6,117,135 shares issuable upon conversion of convertible notes were not included in the computation of diluted earnings (loss) per
share because their effects were anti-dilutive. For the three months ended December 31, 2005, options on 1,955,842 shares of common stock, warrants on 2,625,000 shares of common stock and 6,769,912 shares issuable upon conversion of convertible
notes were not included in the computation of diluted earnings (loss) per share because their effects were anti-dilutive. For the nine months ended December 31, 2005, options on 1,255,282 shares of common stock and warrants on 2,625,000 shares
of common stock were not included in the computation of diluted earnings per share because their effects were anti-dilutive.

NOTE 15 
CONCENTRATION OF CREDIT RISK

Concentrations of credit risk with respect to trade receivables are limited due to the distribution of
sales over a large customer base. For the three and nine months ended December 31, 2006, DPS Nutrition Inc. accounted for 9.9% and 10.0%, respectively, in relation to total consolidated revenues. For the three and nine months ended
December 31, 2005 DPS Nutrition Inc. accounted for 12.2% and 11.0%, respectively, in relation to total consolidated revenues. The Company has no concentration of customers within specific geographic areas outside of the United States that would
give rise to significant geographic credit risk.

Financial instruments that potentially subject the Company to concentrations of credit
risk include cash deposits with commercial banks and brokerage firms. At December 31, 2006 and 2005, the Company maintained cash balances in excess of the Federal Deposit Insurance Companys $100,000 insurance limit.



30



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|Item 2. | 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 statements. 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 Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Report. The discussion is based upon such consolidated
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).

Overview

The Company derives its revenues from
developing, marketing and distributing a wide variety of sports nutrition products, performance drinks, non-prescription dietary supplements, over-the-counter drugs, health and beauty care products, health food and nutritional products, soft goods
and other related products.

Revenues are recognized by the Company upon passage of title and risk of loss to customers when product is
delivered to common carrier for shipment to customers. Provisions for discounts and sales incentives to customers, and returns and other adjustments are provided for in the period the related sales are recorded. Sales incentives to customers and
returns have thus far been immaterial to the Company. All shipping and handling costs invoiced to customers are included in revenues.

Cost
of goods sold is comprised of direct product costs, plus the cost of transportation necessary to bring the products to our distribution facilities, net of consideration received from suppliers in connection with the purchase or promotion of the
suppliers products. Research and development expenses are charged against cost of goods sold as incurred and are not material to the Companys operations.

Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, depreciation and amortization expense. We include outbound transportation
expenses within our operating expenses rather than in our cost of goods sold.

Other expenses (income) includes interest earned on notes
receivable and on cash balances maintained in interest bearing accounts with banks, interest on our outstanding indebtedness, the change in fair value of derivative financial instruments and miscellaneous income and expenses.



31



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Results of Operations

Three And Nine Months Ended December 31, 2006 Compared To Three And Nine Months Ended December 31, 2005

Revenues

We generated revenues of $13,400,640 and $40,120,308, respectively, for the three and nine months ended
December 31, 2006, an increase of $2,033,607 or 17.9% and $4,258,775 or 11.9%, respectively, compared to $11,367,033 and $35,861,533, respectively, for the three and nine months ended December 31, 2005. The increase was primarily
attributable to organic growth resulting from expansion of our distribution channels with the opening of distribution centers in Henderson, Nevada and Largo, Florida in May 2005 and the expansion of our in-house sales force. We expect organic growth
of up to 15% in the future, based on expansion of marketing efforts through our in-house sales force.

Gross Profit

We achieved a gross profit of $2,411,261 and $7,585,285, respectively, for the three and nine months ended December 31, 2006, an increase of $256,940
or 11.9% and $882,724 or 13.2%, respectively, compared to $2,154,321 and $6,702,561, respectively, for the three and nine months ended December 31, 2005. Gross margin, as a percentage of revenues, was 18.0% and 18.9%, respectively, for the
three and nine months ended December 31, 2006 and 19.0% and 18.7%, respectively, for the three and nine months ended December 31, 2005. We expect gross margins of 18% to 20% in the future.

Operating Expenses

We incurred
operating expenses of $2,710,068 and $7,965,494, respectively, for the three and nine months ended December 31, 2006, compared to $2,370,994 and $7,110,833, respectively, for the three and nine months ended December 31, 2005.

For the three months ended December 31, 2006, these expenses include various selling, general and administrative expenses of $2,583,527, and
amortization and depreciation expenses of $126,541, compared to $2,256,282 in various selling, general and administrative expenses, and amortization and depreciation expenses of $114,712 for the three months ended December 31, 2005. For the
nine months ended December 31, 2006, these expenses include various selling, general and administrative expenses of $7,593,010, and amortization and depreciation expenses of $372,484, compared to $6,770,278 in various selling, general and
administrative expenses, and amortization and depreciation expenses of $340,555 for the nine months ended December 31, 2005.

For the
three months ended December 31, 2006 and 2005, selling, general and administrative expenses included non-cash amortization of deferred consulting fees of $41,564 and $65,939, respectively. For the nine months ended December 31, 2006 and
2005, selling, general and administrative expenses included non-cash amortization of deferred consulting fees of $173,441 and $242,816, respectively.

Outbound transportation expenses, which are included in selling, general and administrative expenses, were $512,853 and $444,640, respectively, for the three months ended December 31, 2006 and 2005, and were
$1,508,264 and $1,379,475, respectively, for the nine months ended December 31, 2006 and 2005.



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Operating expenses, excluding amortization and depreciation expenses decreased from 19.8% of revenues for
the three months ended December 31, 2005, to 19.3% of revenues for the three months ended December 31, 2006. The decrease in operating expenses as a percentage of revenues was attributable to tradeshow expenses incurred in the first and
second quarters this year versus the first through third quarters in the prior year, a decrease in contract labor, a decrease in equipment maintenance costs, a decrease in legal fees, a decrease in office expenses, a decrease in public relations
fees, a decrease in rent expense, a decrease in telephone expense and a decrease in travel expenses, and was partially offset by an increase in our allowance for bad debts related to accounts and notes receivable, an increase in credit card fees,
the amortization of stock-based compensation costs, an increase in outbound transportation costs, an increase in profit sharing plan expenses, an increase in compensation related expenses and an increase in insurance expenses.

Operating expenses, excluding amortization and depreciation expenses were 18.9% of revenues for the nine months ended December 31, 2006 and 2005.
The dollar increase in operating expenses was attributable to an increase in our allowance for bad debts related to accounts and notes receivable, an increase in commissions paid to brokers and outside sales representatives, the amortization of
stock-based compensation costs, an increase in compensation related expenses, an increase in credit card fees, an increase in outbound transportation costs, an increase in insurance expenses, an increase in profit sharing plan expenses and an
increase in tradeshow expenses, and was partially offset by a decrease in advertising expenses, a decrease in audit related accounting fees, a decrease in amortization of deferred consulting fees, a decrease in rent expense, a decrease in telephone
expense and a decrease in travel expenses.

Operating Income (Loss)

Operating loss increased by 37.9% or $82,134, to $298,807 for the three months ended December 31, 2006 from $216,673 for the three months ended
December 31, 2005. As a percentage of revenues, operating loss was 2.2% and 1.9%, respectively, for the three months ended December 31, 2006 and 2005. For the nine months ended December 31, 2006, operating loss decreased by 6.9% or
$28,063, to $380,209, from $408,272 for the nine months ended December 31, 2005. As a percentage of revenues, operating loss was 0.9% and 1.1%, respectively, for the nine months ended December 31, 2006 and 2005.

Other Income (Expense)

Other income
(expense) was $(671,057) and $(1,097,524), respectively, for the three and nine months ended December 31, 2006, compared to $(755,753) and $6,447,464, respectively, for the three and nine months ended December 31, 2005. Below is a
discussion of each of the various line items of other income (expense).

Derivative instrument income (expense), net, was $360,905 and
$1,093,938, respectively, for the three and nine months ended December 31, 2006, compared to $518,106 and $9,611,164, respectively, for the three and nine months ended December 31, 2005. Derivative instrument interest expense was $827,938
and $2,401,681, respectively, for the three and nine months ended December 31, 2006, compared to $827,938 and $2,483,814, respectively, for the three and nine months ended December 31, 2005. The accounting for derivative financial



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instruments is very complex and has had a material non-cash effect on our net income (loss) for the three and nine months ended December 31, 2006 and
2005. We expect the accounting for these derivative financial instruments to have a material non-cash effect on our net income (loss) in any given reporting period during the life of the derivative financial instruments. The effect on our future
earnings (losses) cannot be predicted since various factors effect both the valuation and corresponding charges or credits to income at each reporting period, as further discussed below under Derivative Instruments.

Interest income was $5,473 and $18,275, respectively, for the three and nine months ended December 31, 2006, compared to $6,204 and $18,534,
respectively, for the three and nine months ended December 31, 2005. The decrease in interest income was a result of the reduction in interest received on notes receivable due to smaller principal balances and was partially offset by higher
cash amounts held in interest bearing accounts in banks.

For the three months ended December 31, 2006, other income and expenses,
net, of $(1,479), consisted primarily of insurance audit premiums assessed on prior years. For the three months ended December 31, 2005, other income and expenses, net, of $(212,174) consisted primarily of expenses incurred in pursuing a
potential acquisition that was not consummated. For the nine months ended December 31, 2006, other income and expenses, net, of $93,740, consisted primarily of proceeds from an insurance claim, proceeds from a disputed escrow balance, and
income from negotiated allowances on prior years. For the nine months ended December 31, 2005, other income and expenses, net, of $(144,036) consisted primarily of expenses incurred in pursuing a potential acquisition that was not consummated
and was partially offset by income from negotiated allowances on prior years.

For the three and nine months ended December 31, 2006,
we realized a gain from the sale of marketable equity securities of zero and $572,096, respectively. Proceeds were used for payment of a portion of the principal balance on our revolving note payable.

For the three and nine months ended December 31, 2006, we realized a gain from debt extinguishment of zero and $153,750, respectively, resulting
from the cancellation of all common stock warrants issued to Laurus, associated with our September 2004 and March 2005 financings, in exchange for 150,000 shares of our common stock.

Interest expense was $207,647 and $628,046, respectively, for the three and nine months ended December 31, 2006, compared to $237,618 and $549,556,
respectively, for the three and nine months ended December 31, 2005. Interest expense increased for the three and nine months ended December 31, 2006, primarily as a result of interest rate increases and an increase in short-term
obligations issued for insurance policy premiums. In addition, $36,335 and $104,328, respectively, of the interest expense for the three and nine months ended December 31, 2006, and $21,740 and $39,226, respectively, of the interest expense for
the three and nine months ended December 31, 2005, relates to the non-cash amortization of debt discounts based on the Black-Scholes option pricing model, applied to the Postponement Agreement entered into in July 2005 and the Postponement and
Amendment Agreement entered into in April 2006, in connection with the September 30, 2004 convertible term note.

Income Taxes

As of December 31, 2006 and 2005, we had an accrued income tax liability of zero and $5,009, respectively, income taxes payable of
zero, and an estimated deferred income tax liability of $39,554 and $200,475, respectively, which primarily represents the potential future tax



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expense associated with unrealized gains on marketable equity securities, and is partially offset due to potential utilization of net operating losses not
previously recognized. The net operating losses may be carried forward for up to up to 20 years.

Net Income Per Share

We had a net loss of $938,881 or $0.06 per basic share and $0.06 per diluted share for the three months ended December 31, 2006, compared to a net
loss of $918,973 or $0.06 per basic share and $0.06 per diluted share for the three months ended December 31, 2005. For the nine months ended December 31, 2006, our net loss was $1,632,626 or $0.11 per basic share and $0.11 per diluted
share, compared to net income of $6,260,183 or $0.44 per basic share and $0.07 per diluted share for the nine months ended December 31, 2005.

Derivative Instruments

Derivative instrument income (expense), net, represents the net unrealized (non-cash) change, during
the three and nine months ended December 31, 2006 and 2005, in the fair value of our derivative financial instrument assets or liabilities related to certain warrants and embedded derivatives in our debt instruments that have been bifurcated
and accounted for separately.

Derivative instrument interest expense, with a corresponding increase in the face amount of the debts, for
the three and nine months ended December 31, 2006 and 2005, represents the (non-cash) accretion of debt discount as a result of the bifurcation of the embedded conversion features and related warrants. We calculated the accretion using the
effective interest rate method over the term of the debts. Due to the effect of the payment streams associated with the debts, the straight-line amount of the accretion is substantially equivalent to the effective interest rate method and therefore
is the resulting method we used for our calculations.

We sold debt convertible into shares of our common stock. The debt had detachable
warrants to purchase shares of our common stock. These warrants have been classified as derivative liabilities, rather than as equity. Additionally, the debt instruments contain embedded derivative features, such as conversion rights, which are
required to be bifurcated from the associated host instrument and are accounted for separately as derivative instrument liabilities.

The
identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liabilities recorded as charges or
credits to income, in the period in which the changes occur. For warrants and bifurcated conversion features that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using the Black-Scholes option
pricing model. That model requires us to make assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price, expected dividend yield, and the expected volatility of our common stock price
over the life of the instruments. Because of the limited trading history of our common stock prior to the acquisition of Bob OLeary Health Food Distributor Co., Inc. on October 1, 2004, we have estimated the future volatility of our
common stock price based on not only the history of our stock price but also the experience of other entities considered comparable to us.

The accounting for derivative instruments and the assumptions used to value them have materially affected our financial statements and are expected to do so in the future. Factors that would have an affect on the fair value of derivative
instruments and related derivative expense or income include, but are not limited to, the price of our common stock and risk free interest rates.



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For example, if the price of our common stock increases, generally the fair value of the derivative instrument
liabilities will increase and this will result in a corresponding increase in the derivative instrument expense recorded in our statement of operations. Alternatively, if the price of our common stock decreases, it generally will cause the fair
value of the derivative instrument liabilities to decrease and this will result in a corresponding increase in derivative instrument income to be recorded in our statement of operations. The above changes could be mitigated by the change in the
remaining term of the instruments over time and possible principal payments made during the life of the instruments. We currently do not pay dividends and as such, the payment of dividends would not have an impact on the fair value of the derivative
instrument liabilities.

In connection with the September 30, 2004 convertible debt, we executed an interest rate index
(IRI) whereby if the price of our common stock had increased by a specified amount, there would have been a reduction in the stated interest rate payable on that instrument. This initially created a derivative instrument asset. The IRI
agreement provided for a potential reduction but not an increase in the stated interest rate. The fair value of the derivative instrument asset so created would increase if we projected a potential increase in the price of our common stock. This
resulted in derivative instrument income for the year ended March 31, 2005. Since the price of our common stock decreased during the year ended March 31, 2006, the resulting fair value of the IRI was zero at March 31,
2006, December 31, 2006 and December 31, 2005, and this resulted in derivative instrument expense of zero and $245,584, respectively, being recorded during the three and nine months ended December 31, 2005. For a full discussion
on Derivative Instruments, see Note 8 to our unaudited condensed consolidated financial statements for the three and nine months ended December 31, 2006 and 2005.

Inflation And Seasonality

We believe that there was no material effect on our operations or our
financial condition as a result of inflation for the three and nine months ended December 31, 2006 and 2005. We also believe that our business is not seasonal; however, significant promotional activities can have a direct impact on our sales
volume in any given quarter.

Economic And Industry Conditions

We believe that there was no material effect on our operations or our financial condition a result of general economic and industry conditions for the
three and nine months ended December 31, 2006 and 2005. However, should there be a material deterioration of general economic or industry conditions, our results of operations could be impacted in any given quarter.

Financial Condition, Liquidity and Capital Resources

We finance our operations and growth primarily through cash flows from operations, borrowing under our revolving credit facility, operating leases, trade payables, and the sale of equity and debt securities. We had a working capital deficit
of $2,168,068 at December 31, 2006, compared to a working capital deficit of $688,507 at March 31, 2006.

Net cash provided by
operating activities was $586,848 for the nine months ended December 31, 2006, as compared to net cash used in operating activities of $898,645 for the nine months ended December 31, 2005. The cash provided was primarily attributable to a
decrease in accounts receivable of $83,232 based on decreases in credit sales, a decrease in prepaid expenses



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of $21,999 primarily due to the timing of insurance policy renewals, a decrease in other current assets of $21,205 primarily based on a decrease in refunds
due from vendors, a decrease in other assets of $55,685, an increase in accounts payable of $337,053 based on increased purchases made on accounts, an increase in other payables of $233,634 primarily based on an increase in prepayments received from
customers, an increase in deferred income taxes of $132,403 as a result of the sale of marketable equity securities and a decrease in available net operating loss carry forwards, partially offset by an increase in inventories of $83,432 due to
increased restocking levels, a decrease in amounts due to/from affiliates, net, of $630, a decrease in accrued expenses of $104,904 and a decrease in accrued income taxes of $5,819 based on payments made.

Net cash provided by investing activities was $298,925, representing proceeds from the sale of property of $18,500, proceeds from the sale of marketable
equity securities of $572,096 and proceeds from repayments on notes receivable of $60,806, partially offset by purchases of property and equipment of $175,972, the purchase of a distributor agreement of $25,000 and the purchase of certificates of
deposit of $151,505.

Net cash used in financing activities was $1,288,879, representing payments of long-term obligations of $621,833, the
excess of payments versus advances received of $574,439 on our short-term revolving note and payments of short-term obligations of $92,607.

At December 31, 2006, we had $605,906 in cash and cash equivalents, as compared to $309,474 at December 31, 2005.

We
believe that cash expected to be generated from operations and current cash reserves will be sufficient for us to meet our capital expenditures and working capital needs, for our operations as presently conducted. Our future liquidity and cash
requirements will depend on a wide range of factors, including the level of business in existing operations, expansion of facilities and possible acquisitions. In particular, if cash flows from operations are not sufficient, it will be necessary for
us to seek additional financing. While there can be no assurance that such financing would be available in amounts and on terms acceptable to us, we believe that such financing would likely be available on acceptable terms.

On September 30, 2004, we entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd., whereby we completed the sale to Laurus of a
secured convertible note in the principal amount of $6,000,000 and warrants to purchase 1,375,000 shares of our common stock. Net proceeds from the offering were used to pay the purchase price for the acquisition of Bob OLeary Health Food
Distributor Co., Inc., effective on October 1, 2004 (see Note 7 to our unaudited condensed consolidated financial statements).

The
convertible note has a three year term and accrues interest at a rate per annum equal to the prime rate published in The Wall Street Journal plus 2%, subject to a floor of 6%. The interest rate is subject to possible downward adjustments. The
fixed conversion rate is equal to $.90 (103% of the average closing price for the ten days prior to the execution of the securities purchase agreement).

Upon an issuance of shares of common stock below the fixed conversion price, the fixed conversion price of the note will be reduced accordingly. In connection with the September 12, 2005 stock issuance, the
lender waived this provision. The conversion price of the note may be adjusted proportionately in certain circumstances such as if the Company pays a stock dividend, subdivides or combines outstanding shares of common stock into a greater or lesser
number of shares, or takes such other actions as would otherwise result in dilution.



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In accordance with the convertible note, commencing December 1, 2004, and each month thereafter, we
were to pay $187,500 of the outstanding principal, together with accrued interest on the convertible note, in cash or registered stock. In July 2005, we entered into a Postponement Agreement with Laurus, whereby the required principal payments under
the convertible note were modified. In April 2006, we entered into a Postponement and Amendment Agreement with Laurus, whereby the required principal payments under the convertible note were again modified and the note was amended and restated.

The monthly payments shall be payable in registered stock if: (i) we have an effective registration statement under which the stock
can be sold; (ii) the average closing price of our common stock as reported by Bloomberg, L.P. on our principal trading market for the five trading days immediately preceding such repayment date shall be greater than or equal to 110% of the
fixed conversion rate; and (iii) the amount of such conversion does not exceed 25% of the aggregate dollar trading volume of our common stock for the twenty 22 day trading period immediately preceding the applicable repayment date. If the
conversion criteria are not met, the investor shall convert only such part of the monthly payment that meets the conversion criteria. Any part of the monthly payment due on a repayment date that the investor has not been able to convert into shares
of common stock due to failure to meet the conversion criteria, shall be paid by us in cash at the rate of 102% of the principal portion of the monthly payment otherwise due on such repayment date.

The convertible note may be prepaid by us in cash by paying to the holder 115% of the principal and related accrued and unpaid interest thereon being
prepaid. 115% of the full principal amount of the convertible note is due upon default under the terms of convertible note. In addition, we have granted the investor a security interest in substantially all of our assets and intellectual property,
as well as registration rights.

As of December 31, 2006 and 2005, the outstanding principal balance on the convertible note was
$3,912,500 and $4,500,000, respectively. As of December 31, 2006 and 2005, 989,758 shares of our common stock have been issued to Laurus in payment of $750,000 of principal and $140,782 of interest on the note.

Initially, Laurus was not entitled to be issued shares of common stock in repayment of any portion of the convertible note if and to the extent such
issuance would result in Laurus and its affiliates beneficially owning more than 4.99% of our issued and outstanding common stock upon such issuance, unless Laurus shall have provided at least 75 days prior written notice to us of its revocation of
such restriction. In connection with the April 2006 Postponement and Amendment Agreement with Laurus, this provision was modified from 4.99% to 9.99%. In addition, this restriction would not apply in the event of default or we sought to redeem the
outstanding balance of the convertible debentures.

The warrants were exercisable until five years from the date of the Securities Purchase
Agreement at a purchase price equal to $1.04 per share (115% of the average closing price of our common stock for the 10 trading days immediately prior to the execution date). The warrants were exercisable on a cashless basis. In the event that the
warrants were exercised on a cashless basis, then we would not receive any proceeds. In addition, the exercise price of the warrants would have been adjusted in the event we issued common stock at a price below market, with the exception of any
securities issued as of the date of this warrant or issued in connection with the convertible notes issued pursuant to the Securities Purchase Agreement. In September 2005, we sold 150,000 restricted shares of our common stock at a price below
market. In connection therewith, Laurus waived their anti-dilution provisions related to all convertible notes and



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warrants issued to Laurus. In connection with the April 2006 Postponement and Amendment Agreement with Laurus, we issued 97,059 restricted shares of our
common stock to Laurus, in exchange for cancellation of the 1,375,000 warrants.

Our obligations under the Security Agreement, Securities
Purchase Agreement and the Note are secured by a first priority lien on all of our assets and all future assets acquired, including a pledge by us of shares representing 100% of our share capital of GeoPharma, Inc. and DrugMax, Inc., and a put
option on the pledged shares of GeoPharma, Inc. and DrugMax, Inc. at $6.00 and $4.00 per share, respectively.

On March 29, 2005, we
entered into agreements with Laurus Master Fund, Ltd., whereby we completed the sale to Laurus of convertible debt and a warrant to purchase our common stock in a private offering pursuant to exemption from registration under Section 4(2) of
the Securities Act of 1933. The $3,000,000 proceeds of the funding were used for the acquisition of Dynamic Marketing, Inc. on March 31, 2006, costs associated with the acquisition and for working capital (see Note 6 to our unaudited condensed
consolidated financial statements).

The securities sold to Laurus included a secured convertible minimum borrowing note with a principal
amount of $2,000,000, a secured revolving note with a principal amount note to exceed $4,000,000, and a common stock purchase warrant to purchase 750,000 shares of our common stock, at a purchase price of $1.37 per shares, exercisable for a period
of seven years. In connection with the April 2006 Postponement and Amendment Agreement with Laurus, we issued 52,941 restricted shares of our common stock to Laurus, in exchange for cancellation of the 750,000 warrants.

The combined principal amount that may be outstanding under the $2,000,000 minimum borrowing note and the $4,000,000 revolving note at any point in time
cannot exceed $4,000,000.

We are permitted to borrow an amount based upon its eligible accounts receivable and inventory, as defined in
the agreements with Laurus. We must pay certain fees for any unused portion of the credit facility or in the event the facility is terminated prior to expiration. Our obligations under the notes are secured by all of our assets, including but not
limited to inventory and accounts receivable. The notes mature on March 29, 2008. Annual interest on the Notes is equal to the prime rate published in The Wall Street Journal from time to time, plus 2.0%, provided, that, such
annual rate of interest may not be less than 6%, subject to certain downward adjustments resulting from certain increases in the market price of our common stock. Interest on the notes is payable monthly in arrears on the first day of each month,
commencing on April 1, 2005.

The principal amount of the secured convertible minimum borrowing note, together with accrued interest
thereon is payable on March 29, 2008. The secured convertible minimum borrowing note may be redeemed by us in cash by paying the holder 115% of the principal amount, plus accrued interest. The holder of the term note may require us to convert
all or a portion of the term note, together with interest and fees thereon at any time. The number of shares to be issued shall equal the total amount to be converted, divided by $1.13.

Upon an issuance of shares of common stock below the fixed conversion price, the fixed conversion price of the notes will be reduced accordingly. The
conversion price of the secured convertible notes may be adjusted proportionately in certain circumstances such as if we pay a stock dividend, subdivide or combine outstanding shares of our common stock into a greater or lesser number of shares, or
we take such other actions as would otherwise result in dilution. In



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September 2005, we sold 150,000 restricted shares of our common stock at a price below market. In connection therewith, Laurus waived their anti-dilution
provisions related to all convertible notes and warrants issued to Laurus.

115% of the full principal amount of the convertible notes is
due upon default under the terms of convertible notes. Laurus had contractually agreed to restrict its ability to convert if the convertible notes would exceed the difference between the number of shares of common stock beneficially owned by the
holder or issuable upon exercise of the warrant and the option held by such holder and 4.99% of the outstanding shares of our common stock. In connection with the April 2006 Postponement and Amendment Agreement with Laurus, this provision was
modified from 4.99% to 9.99%.

In addition, this restriction would not apply in the event there was an event of default or we sought to
redeem the outstanding balance of the convertible deventures.

On August 19, 2005, we filed a Registration Statement on Form S-2 for
the registration of up to 3,219,690 shares of our common stock, including up to 2,194,690 shares of common stock underlying the March 29, 2005 Secured Convertible Notes issued to Laurus, in the principal amount of $4,000,000, up to 750,000
shares issuable upon the exercise of common stock purchase warrants, and up to 275,000 shares issued in connection with the July 19, 2005 Postponement Agreement. Such Registration Statement was subsequently withdrawn by us on May 11, 2006.

In November 2005, we reached an agreement with Laurus in principle pursuant to which we will be obligated to pay Laurus $48,000 as payment
in full for all late effectiveness fees. The agreement was subject to negotiation and execution of a definitive agreement.

On
April 28, 2006, we entered into a Postponement and Amendment Agreement with Laurus, pursuant to which we modified the September 30, 2004 and the March 29, 2005 earlier agreements among the parties. The Postponement and Amendment
Agreement provides for the following:



| |  |  | Principal payments under the September 30, 2004 note are reduced by $137,500 per month for the eight months commencing May 2006, all of which shall be paid on
the maturity date of the convertible note;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys obligation to repay overadvances of up to $1,721,000 under the March 29, 2005 notes shall be suspended for a period of eight months;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All of the common stock purchase warrants issued to Laurus in connection with the September 30, 2004 and March 29, 2005 agreements are cancelled in their
entirety;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the foregoing, the Company issued 150,000 restricted shares of our common stock to Laurus, for cancellation of the warrants issued to Laurus;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the foregoing, the Company issued 275,000 restricted share of our common stock to Laurus, for postponement of the portion of principal payments
in connection with the September 30, 2004 note.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The fair value of the 275,000 shares issued in connection with the
April 28, 2006 Postponement and Amendment Agreement was $45,000, based upon the closing price of our common stock on that date. This financing cost was recorded as a discount on the September 2004 note and the discount is being amortized to
interest expense over the life of the note, in accordance with EITF 96-19 Debtors Accounting for a Modification or Exchange of Debt Instruments.



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In connection with the Postponement and Amendment Agreement, we also executed restated promissory notes
in favor of Laurus and an amended and restated registration rights agreement (the Restated Registration Rights Agreement). Pursuant to the Restated Registration Rights Agreement, we agreed to file a registration statement by
June 30, 2006, covering the resale of the securities issued or issuable to Laurus. We were obligated to have such registration statement declared effective by September 30, 2006, but there were no stated penalties for failure to meet such
deadline.

On July 3, 2006, the Company filed a Registration Statement on Form SB-2 for the registration of up to 10,221,275 shares of
the Companys common stock, including up to 2,194,690 shares of common stock underlying the March 2005 secured convertible notes, up to 7,326,585 shares of common stock underlying the September 2004 secured convertible notes, 275,000 shares of
common stock underlying the July 2005 postponement agreement, and 425,000 shares of common stock underlying the April 2006 amendment and postponement agreement. Such Registration Statement was subsequently withdrawn by the Company on October 4,
2006.

On October 4, 2006, the Company entered into an agreement with Laurus pursuant to which the Company modified the earlier
agreements among the parties (the Amendment Agreement). The Amendment Agreement (i) eliminated the obligation of the Company to register for resale the shares of common stock underlying the securities sold in September 2004, and
(ii) removed Laurus right to waive 9.99% ownership limitations contained in their convertible debentures.

In connection with
the Amendment Agreement, the Company also executed second amended and restated promissory notes in favor of Laurus. Pursuant to the Amendment Agreement, the Company agreed to file a registration statement by October 20, 2006, covering the
resale of certain securities issued or issuable to Laurus. The Company is obligated to have such registration statement declared effective by November 30, 2006, but there are no stated penalties for failure to meet such deadline. Laurus could
declare the obligations in default and seek immediate repayment, but it has given no indication of doing so. If immediate repayment was required, we would not have sufficient funds and Laurus could take legal action to recover amounts due from our
assets.

On October 20, 2006, the Company filed a Registration Statement on Form SB-2 for the registration of up to 2,761,335 shares
of the Companys common stock, including up to 2,061,335 shares of common stock underlying the March 2005 secured convertible notes, 275,000 shares of common stock underlying the July 2005 postponement agreement, and 425,000 shares of common
stock underlying the April 2006 amendment and postponement agreement. On December 14, 2006, the Company filed Amendment #1 to this Registration Statement on Form SB-2. Such Registration Statement is not effective.

On May 24, 2006, we entered into an Amendment Agreement with Laurus, pursuant to which we modified earlier agreements among the parties. In
connection with the March 29, 2005 financing, we received certain overadvances of funds in the aggregate amount of $572,094, as of May 24, 2006. In accordance with the Amendment Agreement, Laurus permitted us to sell a sufficient number of
shares of GeoPharma, pledged by us to Laurus, in connection with the September 30, 2004 financing, by June 5, 2006 in satisfaction of the overadvances, with the proceeds being paid to Laurus. Any remaining unsold shares of GeoPharma were
delivered to



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Laurus to be held pursuant to the original pledge agreement. In June 2006, we sold 143,024 shares of GeoPharma at $4.00 per share. Proceeds from the sale
were paid to Laurus in satisfaction of the overadvances. This resulted in our recognizing a gain on the sale of marketable equity securities of zero and $572,096, respectively, for the three and nine months ended December 31, 2006.

On October 17, 2004 the Compensation Committee of the Companys Board of Directors granted options to purchase 500,000 shares of the
Companys common stock, effective October 1, 2004, to Jugal Taneja, the Companys Chairman and a principal shareholder of the Company, as compensation for Mr. Tanejas personal guarantee to Laurus Master Fund, Ltd. of
financing in the amount of $6 million, to fund the BOSS acquisition. The exercise price of the options is $1.14 (110% of the fair value of the Companys common stock on September 30, 2004). The options vest approximately equally over a
three year period, commencing October 1, 2005. For the options granted, the balance of deferred consulting fees as of December 31, 2006 was $124,691, of which the current portion was $124,691 and the long-term portion was zero. The initial
valuation of these options was $498,763, with $41,564 and $124,691, respectively, being expensed during the three and nine months ended December 31, 2006 and 2005. The fair value of the options granted was estimated on the grant date using the
Black-Scholes option pricing model with a volatility factor of 223% and a risk free interest rate of 3.44%.

On April 12, 2005, we
issued a note payable to Royal Premium Budget, Inc., for insurance expenses associated with a new policy, in the principal amount of $11,622. The principal together with interest at the rate of 13.5% per annum was payable in nine monthly
installments commencing April 12, 2005 in the amount of $1,365. Upon cancellation of the policy on June 1, 2005, the insurance company repaid the balance on the note.

On May 3, 2005, we received a promissory note in conversion of accounts receivable from Health Express Food, Inc. in the principal amount of
$330,993. The note shall be paid to us in twenty-three (23) monthly installments of $15,000, including principal and interest at 8% per annum, commencing June 15, 2005. As of December 31, 2006, the remaining principal balance on
the note was $155,935.

On July 21, 2005, we entered into a capital lease with NEC Financial Services, Inc. for the purchase of
equipment, in the principal amount of $22,979. The principal together with interest at the rate of 11.326% per annum is payable in 60 monthly installments commencing July 21, 2005 in the amount of $499. As of December 31, 2006, the
principal balance on the lease was $17,225.

On August 31, 2005, we issued 14,038 restricted shares of our common stock to Dynamic
Health Products, Inc. 401(k) Plan for our contribution to the employees 401(k) benefit plan.

On September 12, 2005, 150,000
restricted shares of our common stock were sold to a non-affiliated third party investor at $.50 per new share, for gross proceeds of $75,000. Proceeds were used to provide additional for working capital for us.

On September 21, 2005, we issued a note payable to AFCO Credit Corporation, for insurance expenses associated with a new policy, in the principal
amount of $30,296. The principal together with interest at the rate of 8.25% per annum is payable in one monthly installment commencing October 21, 2005 in the amount of $3,483 and eight remaining monthly installments commencing
November 21, 2005 in the amount of $3,478. In June 2006, the note was subsequently paid in full.



42



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On May 15, 2006, we received a promissory note in conversion of accounts receivable from Better
Nutrition, LLC in the principal amount of $170,403. The note shall be paid to us in twenty-four (24) semi-monthly installments of $7,366, including principal and interest at 7.75% per annum, commencing May 15, 2006. As of
December 31, 2006, the remaining principal balance on the note was $149,311.

On June 7, 2006, we issued 166,405 restricted
shares of our common stock to Dynamic Health Products, Inc. 401(k) Plan for our contribution to the employees 401(k) benefit plan.

On
September 1, 2006, we issued a note payable to AFCO Credit Corporation, for insurance expenses associated with a new policy, in the principal amount of $132,052. The principal together with interest at the rate of 7.732% per annum is
payable in nine monthly installments commencing October 1, 2006 in the amount of $15,149. As of December 31, 2006, the principal balance on the note was $74,304.

On September 1, 2006, we issued a note payable to AFCO Credit Corporation, for insurance expenses associated with a new policy, in the principal
amount of $25,347. The principal together with interest at the rate of 9.861% per annum is payable in nine monthly installments commencing October 1, 2006 in the amount of $2,933. As of December 31, 2006, the principal balance on the
note was $14,313.

On September 21, 2006, we issued a note payable to AFCO Credit Corporation, for insurance expenses associated with
a new policy, in the principal amount of $13,831. The principal together with interest at the rate of 10% per annum is payable in nine monthly installments commencing October 21, 2006 in the amount of $1,601. As of December 31, 2006,
the principal balance on the note was $9,336.

On November 1, 2006, we issued a note payable to AFCO Credit Corporation, for insurance
expenses associated with a new policy, in the principal amount of $32,136. The principal together with interest at the rate of 7.73% per annum is payable in seven monthly installments commencing December 1, 2006 in the amount of $4,710. As
of December 31, 2006, the principal balance on the note was $23,101.



|Item 3. | 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 Companys chief executive officer and its chief financial officer, of the effectiveness of the design and
operation of the Companys disclosure procedures. Based on managements evaluation as of the end of the period covered by this Quarterly Report, our chief executive officer and chief financial officer have concluded that the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) 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 filed under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness and to ensure that such information is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding required disclosure.



43



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Changes in internal controls. There have been no changes in the Companys internal controls or in
other factors that materially affected or were reasonably likely to materially affect these controls during the period covered by this report, nor were there any material weaknesses in our internal controls. Accordingly, no corrective actions were
required or undertaken.



44



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PART II - OTHER INFORMATION



|Item 1. | LEGAL PROCEEDINGS.
|------- | ------------------

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. We are not currently a party to any legal proceedings which we believe will have a
material adverse affect on our results of operations.



|Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

None.



|Item 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

Not applicable.



|Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- | ----------------------------------------------------

None.



|Item 5. | OTHER INFORMATION.
|------- | ------------------

None.



|Item 6. | EXHIBITS AND REPORTS ON FORM 8-K.
|------- | ---------------------------------

(a)Exhibits.

The following exhibits are filed with this report:



|     |  |                                                                                                                            
|---- |  | ---------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Articles of Incorporation of Direct Rx Healthcare, Inc., filed January 27, 1998. (1)                                       
|     | 
|3.2  |  | Articles of Amendment to Articles of Incorporation of Nu-Wave Health Products, Inc., dated August 11, 1998. (2)            
|     | 
|3.3  |  | Articles of Amendment to Articles of Incorporation of Dynamic Health Products, Inc., filed September 1, 1998. (3)          
|     | 
|3.4  |  | Articles of Restatement of the Articles of Incorporation of Dynamic Health Products, Inc., filed April 16, 1999. (3)       
|     | 
|3.5  |  | Certificate of Amendment to Restated Articles of Incorporation of Dynamic Health Products, Inc., filed October 25, 2004.(4)
|     | 
|3.5  |  | Certificate of Amendment to Restated Articles of Incorporation of Dynamic Health Products, Inc., filed October 25, 2004.(4)
|     | 
|10.2 |  | Amended and Restated Secured Convertible Term Note issued to Laurus Master Fund, Ltd., effective September 30, 2004.(5)    



45



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|
|

|      |  |                                                                                                                                                                
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3  |  | Amended and Restated Secured Revolving Note issued to Laurus Master Fund, Ltd., effective March 29, 2005.(5)                                                   
|      | 
|10.4  |  | Amended and Restated Secured Convertible Minimum Borrowing Note issued to Laurus Master Fund, Ltd., effective March 29, 2005.(5)                               
|      | 
|10.5  |  | Amended and Restated Registration Rights Agreement, restated as of April 28, 2006, by and between Laurus Master Fund, Ltd. and Dynamic Health Products, Inc.(5)
|      | 
|10.6  |  | Amendment Agreement, dated as of May 24, 2006, by and among Laurus Master Fund, Ltd., Dynamic Health Products, Inc. and Subsidiary.(6)                         
|      | 
|10.7  |  | Amendment Agreement, dated as of October 4, 2006, by and among Laurus Master Fund, Ltd., Dynamic Health Products, Inc. and Dynamic Marketing I, Inc.(7)        
|      | 
|10.8  |  | Second Amended and Restated Secured Convertible Minimum Borrowing Note issued to Laurus Master Fund, Ltd., effective as of October 4, 2006.(7)                 
|      | 
|10.9  |  | Second Amended and Restated Secured Revolving Note issued to Laurus Master Fund, Ltd., effective as of October 4, 2006.(7)                                     
|      | 
|10.10 |  | Second Amended and Restated Convertible Term Note issued to Laurus Master Fund, Ltd., effective as of October 4, 2006.(7)                                      
|      | 
|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).              

---

| | (1) | Incorporated by reference to the Companys Annual Report on Form 10-KSB for the fiscal year ended March 31, 1998, file number 0-23031, filed in Washington, D.C. on
June 16, 1998.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Incorporated by reference to the Companys Quarterly Report on Form 10-QSB for the quarter ended June 30, 1998, file number 0-23031, filed in Washington, D.C. on
August 14, 1998.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Incorporated by reference to the Companys Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999, file number 0-23031, filed in Washington, D.C. on
July 9, 1999.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Incorporated by reference to the Companys Current Report on Form 8-K, dated October 25, 2004, file number 0-23031, filed in Washington, D.C. on October 26, 2004.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Incorporated by reference to the Companys Current Report on Form 8-K, dated April 28, 2006, file number 0-23031, filed in Washington, D.C. on May 3, 2006.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



46



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| | (6) | Incorporated by reference to the Companys Current Report on Form 8-K, dated May 24, 2006, file number 0-23031, filed in Washington, D.C. on May 31, 2006.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (7) | Incorporated by reference to the Companys Current Report on Form 8-K, dated October 4, 2006, file number 0-23031, filed in Washington, D.C. on October 5, 2006.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)Reports on Form 8-K.

During the three month period ending December 31, 2006, the Company filed two reports on Form 8-K.

Form 8-K dated
October 4, 2006, with respect to the resignation of one of the Companys Directors.

Form 8-K dated October 23, 2006, with
respect to the Company entering into an Amendment Agreement with Laurus Master Funds, Ltd.



47



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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        |  |                               |  |                                                         
|----------------------- |  | ----------------------------- |  | --------------------------------------------------------
|                        |  | Dynamic Health Products, Inc.
|                        |  |                              
|Date: February 13, 2007 |  | By:                           |  | /s/ Mandeep K. Taneja                                   
|                        |  |                               |  | Mandeep K. Taneja, Chief Executive Officer and President
|                        |  |                              
|Date: February 13, 2007 |  | By:                           |  | /s/ Cani I. Shuman                                      
|                        |  |                               |  | Cani I. Shuman, Chief Financial Officer                 



48