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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, 2005



| ̈ | 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 10, 2006 was 14,463,630.



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PART I - FINANCIAL INFORMATION



Item 1. CONSOLIDATED FINANCIAL STATEMENTS.



DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                               |  |                  |            |   |               |   |            |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ---------- | - | ------------- | - | ---------- | -
|                                                                                                                               |  | December 31,2005 |            |   | March 31,2005 |  
|                                                                                                                               |  | (Unaudited)      |            |   | (Restated)    |  
|ASSETS                                                                                                                         |  |                  |            |   |               |   |            |  
|                                                                                                                               |  |                 
|Current assets:                                                                                                                |  |                  |            |   |               |   |            |  
|Cash and cash equivalents                                                                                                      |  | $                | 309,474    |   |               | $ | 1,870,561  |  
|Marketable equity securities, net                                                                                              |  |                  | 1,406,134  |   |               |   | 1,162,546  |  
|Accounts receivable, net                                                                                                       |  |                  | 2,018,415  |   |               |   | 2,720,424  |  
|Inventories, net                                                                                                               |  |                  | 4,607,227  |   |               |   | 4,901,437  |  
|Prepaid expenses                                                                                                               |  |                  | 287,398    |   |               |   | 389,978    |  
|Deferred consulting fees                                                                                                       |  |                  | 239,379    |   |               |   | 308,745    |  
|Other current assets                                                                                                           |  |                  | 122,500    |   |               |   | 218,465    |  
|Due from affiliates                                                                                                            |  |                  | 2,625      |   |               |   | 959        |  
|Note receivable                                                                                                                |  |                  | 164,784    |   |               |   |           |  
|Note receivable from affiliate                                                                                                 |  |                  | 45,823     |   |               |   | 43,528     |  
|Derivative financial instruments                                                                                               |  |                  |           |   |               |   | 245,584    |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total current assets                                                                                                           |  |                  | 9,203,759  |   |               |   | 11,862,227 |  
|                                                                                                                               |  |                 
|Property, plant and equipment, net                                                                                             |  |                  | 761,007    |   |               |   | 759,519    |  
|                                                                                                                               |  |                 
|Note receivable                                                                                                                |  |                  | 73,756     |   |               |   |           |  
|Goodwill                                                                                                                       |  |                  | 4,594,982  |   |               |   | 4,577,613  |  
|Intangible assets, net                                                                                                         |  |                  | 499,747    |   |               |   | 625,842    |  
|Deferred consulting fees                                                                                                       |  |                  | 124,691    |   |               |   | 298,141    |  
|Other assets                                                                                                                   |  |                  | 70,433     |   |               |   | 65,209     |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total assets                                                                                                                   |  | $                | 15,328,375 |   |               | $ | 18,188,551 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                           |  |                  |            |   |               |   |            |  
|                                                                                                                               |  |                 
|Current liabilities:                                                                                                           |  |                  |            |   |               |   |            |  
|Revolving note payable, net                                                                                                    |  | $                | 1,563,571  |   |               | $ | 1,000,000  |  
|Current portion of long-term obligations                                                                                       |  |                  | 1,458,137  |   |               |   | 326,056    |  
|Capital lease obligation                                                                                                       |  |                  |           |   |               |   | 546        |  
|Accounts payable                                                                                                               |  |                  | 3,947,556  |   |               |   | 5,160,608  |  
|Other payables                                                                                                                 |  |                  | 382,364    |   |               |   | 272,893    |  
|Accrued expenses                                                                                                               |  |                  | 172,340    |   |               |   | 384,982    |  
|Accrued income taxes                                                                                                           |  |                  | 5,009      |   |               |   | 5,009      |  
|Obligations to affiliates                                                                                                      |  |                  | 55,553     |   |               |   | 78,944     |  
|Note payable                                                                                                                   |  |                  | 20,380     |   |               |   | 18,851     |  
|Derivative financial instruments                                                                                               |  |                  | 3,190,483  |   |               |   | 13,113,650 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total current liabilities                                                                                                      |  |                  | 10,795,393 |   |               |   | 20,361,539 |  
|                                                                                                                               |  |                 
|Long-term obligations, less current portion                                                                                    |  |                  | 70,492     |   |               |   | 75,215     |  
|Deferred income taxes                                                                                                          |  |                  | 200,475    |   |               |   | 336,999    |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total liabilities                                                                                                              |  |                  | 11,066,360 |   |               |   | 20,773,753 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|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; 14,463,630 and 14,024,592 shares issued and outstanding            |  |                  | 144,636    |   |               |   | 140,246    |  
|Additional paid-in capital                                                                                                     |  |                  | 4,004,049  |   |               |   | 3,735,266  |  
|Retained earnings (deficit)                                                                                                    |  |                  | (754,169   | ) |               |   | (7,172,316 | )
|Accumulated other comprehensive income:                                                                                        |  |                  |            |   |               |   |            |  
|Unrealized gains (losses) on marketable equity securities, net of tax                                                          |  |                  | 867,499    |   |               |   | 711,602    |  
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total shareholders equity                                                                                                     |  |                  | 4,262,015  |   |               |   | (2,585,202 | )
|                                                                                                                               |  |                  |            |   |               |   |            |  
|Total liabilities and shareholders equity                                                                                     |  | $                | 15,328,375 |   |               | $ | 18,188,551 |  
|                                                                                                                               |  |                  |            |   |               |   |            |  



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, |  
|                                                                                           |  | 2005                           |            |   | 2004                          |   |            | 2005 |  |   | 2004       |  
|                                                                                           |  |                                |            |   | (Restated)                    |   |            |      |  |   | (Restated) |  
|Revenues:                                                                                  |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Distribution                                                                               |  | $                              | 11,367,033 |   |                               | $ | 6,868,190  |      |  | $ | 35,861,533 |   |  | $ | 7,506,490  |  
|Prescription services                                                                      |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   | 70,897     |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total revenues                                                                             |  |                                | 11,367,033 |   |                               |   | 6,868,190  |      |  |   | 35,861,533 |   |  |   | 7,577,387  |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Cost of goods sold:                                                                        |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Distribution                                                                               |  |                                | 10,082,046 |   |                               |   | 6,009,073  |      |  |   | 31,831,697 |   |  |   | 6,370,788  |  
|Prescription services                                                                      |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   | 62,815     |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total cost of goods sold                                                                   |  |                                | 10,082,046 |   |                               |   | 6,009,073  |      |  |   | 31,831,697 |   |  |   | 6,433,603  |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Gross profit:                                                                              |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Distribution                                                                               |  |                                | 1,284,987  |   |                               |   | 859,117    |      |  |   | 4,029,836  |   |  |   | 1,135,702  |  
|Prescription services                                                                      |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   | 8,082      |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total gross profit                                                                         |  |                                | 1,284,987  |   |                               |   | 859,117    |      |  |   | 4,029,836  |   |  |   | 1,143,784  |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses:                                                                        |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Selling, general and administrative expenses                                               |  |                                | 1,386,948  |   |                               |   | 1,106,704  |      |  |   | 4,097,554  |   |  |   | 1,868,531  |  
|Amortization expense                                                                       |  |                                | 44,625     |   |                               |   | 27,471     |      |  |   | 133,836    |   |  |   | 36,872     |  
|Depreciation expense                                                                       |  |                                | 39,572     |   |                               |   | 18,008     |      |  |   | 115,173    |   |  |   | 54,217     |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                                   |  |                                | 1,471,145  |   |                               |   | 1,152,183  |      |  |   | 4,346,563  |   |  |   | 1,959,620  |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Operating income (loss) before other income and expense                                    |  |                                | (186,158   | ) |                               |   | (293,066   | )    |  |   | (316,727   | ) |  |   | (815,836   | )
|                                                                                           |  |                                |            |  
|Other income (expense):                                                                    |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Interest income                                                                            |  |                                | 6,204      |   |                               |   | 2,137      |      |  |   | 18,534     |   |  |   | 3,793      |  
|Other income and expenses, net                                                             |  |                                | (212,174   | ) |                               |   | (8,099     | )    |  |   | (144,036   | ) |  |   | 83,101     |  
|Gain on distribution of investment                                                         |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   | 1,349,966  |  
|Gain (loss) on sale of property                                                            |  |                                | (2,333     | ) |                               |   | 654,241    |      |  |   | (4,828     | ) |  |   | 654,241    |  
|Derivative instrument income (expense), net                                                |  |                                | 535,813    |   |                               |   | (1,327,579 | )    |  |   | 9,677,583  |   |  |   | (5,122,812 | )
|Derivative instrument interest expense                                                     |  |                                | (827,938   | ) |                               |   | (613,519   | )    |  |   | (2,483,814 | ) |  |   | (613,519   | )
|Interest expense resulting from non-cash amortization of debt discount on convertible note |  |                                | (21,740    | ) |                               |   |           |      |  |   | (39,226    | ) |  |   |           |  
|Interest expense                                                                           |  |                                | (215,878   | ) |                               |   | (110,456   | )    |  |   | (510,330   | ) |  |   | (143,063   | )
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total other income (expense)                                                               |  |                                | (738,046   | ) |                               |   | (1,403,275 | )    |  |   | 6,513,883  |   |  |   | (3,788,293 | )
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                                                          |  |                                | (924,204   | ) |                               |   | (1,696,341 | )    |  |   | 6,197,156  |   |  |   | (4,604,129 | )
|                                                                                           |  |                                |            |  
|Income tax expense (benefit)                                                               |  |                                | (53,453    | ) |                               |   | (109,396   | )    |  |   | (220,991   | ) |  |   | 161,807    |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                                                          |  |                                | (870,751   | ) |                               |   | (1,586,945 | )    |  |   | 6,418,147  |   |  |   | (4,765,936 | )
|                                                                                           |  |                                |            |  
|Preferred stock dividends                                                                  |  |                                |           |   |                               |   |           |      |  |   |           |   |  |   |           |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) available to common shareholders                                         |  | $                              | (870,751   | ) |                               | $ | (1,586,945 | )    |  | $ | 6,418,147  |   |  | $ | (4,765,936 | )
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic income (loss) per share                                                              |  | $                              | (0.06      | ) |                               | $ | (0.12      | )    |  | $ | 0.45       |   |  | $ | (0.37      | )
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Basic weighted average number of common shares outstanding                                 |  |                                | 14,463,630 |   |                               |   | 12,899,294 |      |  |   | 14,257,416 |   |  |   | 12,816,472 |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Diluted income (loss) per share                                                            |  | $                              | (0.06      | ) |                               | $ | (0.12      | )    |  | $ | 0.24       |   |  | $ | (0.37      | )
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Diluted weighted average number of common shares outstanding                               |  |                                | 14,463,630 |   |                               |   | 12,899,294 |      |  |   | 26,524,277 |   |  |   | 12,816,472 |  
|                                                                                           |  |                                |            |   |                               |   |            |      |  |   |            |   |  |   |            |  



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



|                                                                                          |  |                          |  |                          |   |              |   |         |   |                                         |  |            |  |                            |         |                             |   |           |                                       |   |                            |   |  |   |         |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ------------------------ |  | ------------------------ | - | ------------ | - | ------- | - | --------------------------------------- |  | ---------- |  | -------------------------- | ------- | --------------------------- | - | --------- | ------------------------------------- | - | -------------------------- | - |  | - | ------- |  | - | ---------- | -
|                                                                                          |  |                          |  |                          |   |              |   |         |   |                                         |  |            |  | Additional Paid-in Capital |         | Retained Earnings (Deficit) |   |           | Accumulated OtherComprehensive Income |   | Total Shareholders Equity |  
|                                                                                          |  | Series A Preferred Stock |  | Series B Preferred Stock |   | Common Stock |   |         |   | Unrealized Gains (Losses) on Securities | 
|                                                                                          |  | Shares                   |  | Dollars                  |   | Shares       |   | Dollars |   | Shares                                  |  | Dollars    |  |                            |         |                            
|Balances at March 31, 2005 (Restated)                                                     |  |                         |  | $                        |  |              |  |         | $ |                                        |  | 14,024,592 |  | $                          | 140,246 |                             | $ | 3,735,266 |                                       | $ | (7,172,316                 | ) |  | $ | 711,602 |  | $ | (2,585,202 | )
|COMPREHENSIVE INCOME (LOSS)                                                               |  |                          |  |                          |   |              |   |         |   |                                         |  |            |  |                            |         |                             |   |           |                                       |   |                            |   |  |   |         |  |   |            |  
|Net income (loss)                                                                         |  |                         |  |                          |  |              |  |         |   |                                        |  |           |  |                            |        |                             |   |          |                                       |   | 6,418,147                  |   |  |   |         |  |   | 6,418,147  |  
|Unrealized gains (losses) on marketable equity securities (net of tax of $87,692)         |  |                         |  |                          |  |              |  |         |   |                                        |  |           |  |                            |        |                             |   |          |                                       |   |                           |   |  |   | 155,897 |  |   | 155,897    |  
|                                                                                          |  |                          |  |                          |   |              |   |         |   |                                         |  |            |  |                            |         |                             |   |           |                                       |   |                            |   |  |   |         |  |   |            |  
|Comprehensive income (loss)                                                               |  |                          |  |                          |   |              |   |         |   |                                         |  |            |  |                            |         |                             |   |           |                                       |   |                            |   |  |   |         |  |   | 6,574,044  |  
|Issuance of 275,000 shares of common stock in connection with Postponement Agreement      |  |                         |  |                          |  |              |  |         |   |                                        |  | 275,000    |  |                            | 2,750   |                             |   | 187,000   |                                       |   |                            |   |  |   |         |  |   | 189,750    |  
|Issuance of 14,038 shares of common stock as employer contribution to profit sharing plan |  |                         |  |                          |  |              |  |         |   |                                        |  | 14,038     |  |                            | 140     |                             |   | 8,283     |                                       |   |                            |   |  |   |         |  |   | 8,423      |  
|Issuance of 150,000 shares of common stock at $.50 per share                              |  |                         |  |                          |  |              |  |         |   |                                        |  | 150,000    |  |                            | 1,500   |                             |   | 73,500    |                                       |   |                            |   |  |   |         |  |   | 75,000     |  
|                                                                                          |  |                          |  |                          |   |              |   |         |   |                                         |  |            |  |                            |         |                             |   |           |                                       |   |                            |   |  |   |         |  |   |            |  
|Balances at December 31, 2005 (Unaudited)                                                 |  |                         |  | $                        |  |              |  |         | $ |                                        |  | 14,463,630 |  | $                          | 144,636 |                             | $ | 4,004,049 |                                       | $ | (754,169                   | ) |  | $ | 867,499 |  | $ | 4,262,015  |  
|                                                                                          |  |                          |  |                          |   |              |   |         |   |                                         |  |            |  |                            |         |                             |   |           |                                       |   |                            |   |  |   |         |  |   |            |  



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 Ended December 31, |           
|                                                                                     |  | 2005                           |            |   | 2004       |  
|                                                                                     |  |                                |            |   | (Restated) |  
|Cash flows from operating activities:                                                |  |                                |            |   |            |   |            |  
|Net income (loss)                                                                    |  | $                              | 6,418,147  |   |            | $ | (4,765,936 | )
|                                                                                     |  |                               
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                                |            |   |            |   |            |  
|Depreciation and amortization                                                        |  |                                | 249,009    |   |            |   | 91,089     |  
|Common stock issued for consulting fees                                              |  |                                |           |   |            |   | 35,350     |  
|Amortization of deferred consulting fees                                             |  |                                | 242,816    |   |            |   | 223,439    |  
|Amortization of debt discount to interest expense                                    |  |                                | 39,226     |   |            |   |           |  
|Derivative instrument (income) expense, net                                          |  |                                | (9,677,583 | ) |            |   | 5,122,812  |  
|Derivative instrument interest expense                                               |  |                                | 2,483,814  |   |            |   | 613,519    |  
|Common stock issued in payment of interest expense                                   |  |                                |           |   |            |   | 34,452     |  
|(Gain) loss on sale property                                                         |  |                                | 4,828      |   |            |   | (654,241   | )
|Gain on distribution of marketable equity securities                                 |  |                                |           |   |            |   | (1,349,966 | )
|Changes in operating assets and liabilities:                                         |  |                                |            |   |            |   |            |  
|Accounts receivable                                                                  |  |                                | 371,016    |   |            |   | (6,673     | )
|Inventories                                                                          |  |                                | 294,210    |   |            |   | (132,810   | )
|Due to/from affiliates, net                                                          |  |                                | (27,352    | ) |            |   | (169,448   | )
|Prepaid expenses                                                                     |  |                                | 152,921    |   |            |   | (63,065    | )
|Other current assets                                                                 |  |                                | 95,965     |   |            |   | 30,988     |  
|Other assets                                                                         |  |                                | (5,224     | ) |            |   | 2,627      |  
|Accounts payable                                                                     |  |                                | (1,213,052 | ) |            |   | 440,992    |  
|Other payables                                                                       |  |                                | 109,471    |   |            |   | 79,079     |  
|Accrued expenses                                                                     |  |                                | (212,642   | ) |            |   | (292,083   | )
|Accrued income taxes                                                                 |  |                                |           |   |            |   |           |  
|Deferred income taxes                                                                |  |                                | (224,215   | ) |            |   | 125,151    |  
|                                                                                     |  |                                |            |   |            |   |            |  
|Net cash used in operating activities                                                |  |                                | (898,645   | ) |            |   | (634,724   | )
|                                                                                     |  |                                |            |   |            |   |            |  
|Cash flows from investing activities:                                                |  |                                |            |   |            |   |            |  
|Purchases of property and equipment                                                  |  |                                | (100,510   | ) |            |   | (6,151     | )
|Proceeds from sale of property                                                       |  |                                | 2,000      |   |            |   | 1,911,014  |  
|Purchase of Bob OLeary Health Food Distributor Co., Inc., net of cash acquired      |  |                                |           |   |            |   | (4,889,763 | )
|Repayments of note receivable                                                        |  |                                | 92,453     |   |            |   |           |  
|Payment of deposit into escrow                                                       |  |                                |           |   |            |   | (550,000   | )
|Adjustment to purchase price of Dynamic Marketing, Inc.                              |  |                                | (17,369    | ) |            |   |           |  
|Adjustment to purchase price of customer list                                        |  |                                | (7,306     | ) |            |   |           |  
|Purchase of trademark                                                                |  |                                | (435       | ) |            |   | (1,977     | )
|                                                                                     |  |                                |            |   |            |   |            |  
|Net cash used in investing activities                                                |  |                                | (31,167    | ) |            |   | (3,536,877 | )
|                                                                                     |  |                                |            |   |            |   |            |  
|Cash flows from financing activities:                                                |  |                                |            |   |            |   |            |  
|Proceeds from issuance of long-term obligations                                      |  |                                |           |   |            |   | 5,734,500  |  
|Payments of long-term obligations                                                    |  |                                | (585,655   | ) |            |   | (831,891   | )
|Proceeds from issuance of short-term obligations                                     |  |                                | 8,053,419  |   |            |   |           |  
|Payments of short-term obligations                                                   |  |                                | (8,174,039 | ) |            |   | (260,974   | )
|Payments of loan costs                                                               |  |                                |           |   |            |   | (53,123    | )
|Payments of common stock registration costs                                          |  |                                |           |   |            |   | (2,653     | )
|Proceeds from issuance of common stock                                               |  |                                | 75,000     |   |            |   |           |  
|Proceeds from issuance of related party obligations                                  |  |                                |           |   |            |   | 150,000    |  
|Payments of related party obligations                                                |  |                                |           |   |            |   | (150,000   | )
|                                                                                     |  |                                |            |   |            |   |            |  
|Net cash provided by (used in) financing activities                                  |  |                                | (631,275   | ) |            |   | 4,585,859  |  
|                                                                                     |  |                                |            |   |            |   |            |  
|Net increase (decrease) in cash                                                      |  |                                | (1,561,087 | ) |            |   | 414,258    |  
|                                                                                     |  |                               
|Cash at beginning of period                                                          |  |                                | 1,870,561  |   |            |   | 219,119    |  
|                                                                                     |  |                                |            |   |            |   |            |  
|Cash at end of period                                                                |  | $                              | 309,474    |   |            | $ | 633,377    |  
|                                                                                     |  |                                |            |   |            |   |            |  



See accompanying notes
to condensed consolidated financial statements.





5



---

DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - Continued



|                                                                             |  |                               |         |            |   |          
|---------------------------------------------------------------------------- |  | ----------------------------- | ------- | ---------- | - | ---------
|                                                                             |  | Nine Months EndedDecember 31,
|                                                                             |  | 2005                          |         | 2004      
|                                                                             |  |                               |         | (Restated)
|Supplemental disclosure of cash flow information:                            |  |                               |         |            |   |          
|Cash paid during the period for interest                                     |  | $                             | 437,518 |            | $ | 76,530   
|                                                                             |  |                               |         |            |   |          
|Cash paid during the period for income taxes                                 |  | $                             |        |            | $ |         
|                                                                             |  |                               |         |            |   |          
|Supplemental schedule of non-cash investing activities:                      |  |                               |         |            |   |          
|Conversion of accounts receivable to note receivable                         |  | $                             | 330,993 |            | $ |         
|                                                                             |  |                               |         |            |   |          
|Supplemental schedule of non-cash financing activities:                      |  |                               |         |            |   |          
|Dividend distribution of 1,277,483 shares of Vertical Health Solutions, Inc. |  | $                             |        |            | $ | 1,532,979
|                                                                             |  |                               |         |            |   |          
|Issuance of common stock warrants for funding                                |  | $                             |        |            | $ | 3,480,025
|                                                                             |  |                               |         |            |   |          
|Payment of loan costs for the issuance of long-term obligations              |  | $                             |        |            | $ | 265,500  
|                                                                             |  |                               |         |            |   |          
|Issuance of common stock options for guarantee of long-term obligation       |  | $                             |        |            | $ | 498,763  
|                                                                             |  |                               |         |            |   |          
|Issuance of common stock for payment of long-term obligation                 |  | $                             |        |            | $ | 326,250  
|                                                                             |  |                               |         |            |   |          
|Issuance of common stock warrants for consulting services                    |  | $                             |        |            | $ | 465,000  
|                                                                             |  |                               |         |            |   |          
|Issuance of common stock for consulting services                             |  | $                             |        |            | $ | 35,350   
|                                                                             |  |                               |         |            |   |          
|Issuance of common stock for postponement agreement                          |  | $                             | 189,750 |            | $ |         
|                                                                             |  |                               |         |            |   |          
|Issuance of long-term obligation for purchase of equipment                   |  | $                             | 22,979  |            | $ |         
|                                                                             |  |                               |         |            |   |          
|Issuance of short-term obligation for prepaid expenses                       |  | $                             | 41,917  |            | $ | 41,446   
|                                                                             |  |                               |         |            |   |          



See accompanying notes
to condensed consolidated financial statements.



6



---

DYNAMIC HEALTH PRODUCTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED

DECEMBER 31, 2005 AND 2004 (UNAUDITED)



NOTE A-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, 2005 and 2004 are not necessarily indicative of the results that may be expected for the year ending March 31, 2006. 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, 2005.



Reclassifications



Certain reclassifications have been made to the financial statements as of and for the three and nine months ended December 31, 2004 to conform to
the presentation as of and for the three and nine months ended December 31, 2005.



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. 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 liabilities and are carried at fair value. Net fair value adjustments included in earnings (loss) related to these instruments amounted to $292,125 and
$7,193,769, respectively, during the three and nine months ended December 31, 2005. The effect of the restatement on the comparative statement of operations for the three and nine months ended December 31, 2004 was $1,648,722 and
$5,440,777, respectively, and earnings (loss) per share was impacted for the same periods by ($0.12) and ($0.42) per share, respectively. The effect of the restatement on the comparative statement of operations for the year ended March 31, 2005
was $5,509,553 and earnings (loss) per share was impacted by ($0.42) per share.



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



---

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.



NOTE B-PRINCIPLES OF CONSOLIDATION



The condensed consolidated financial statements as of and for the three and nine months ended December 31, 2005 include the accounts of Dynamic
Health Products, Inc. and its principally wholly-owned subsidiaries (collectively the Company), Pharma Labs Rx, Inc. (Pharma FL), Dynamic Life Products, Inc., Herbal Health Products, Inc. (Herbal), Online Meds Rx,
Inc. and its subsidiary Dynamic Financial Consultants, LLC, Bryan Capital Limited Partnership, Pharma Labs Rx, Inc. (Pharma NV), 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.



The condensed consolidated financial statements as of and for the three and nine months ended December 31, 2004 include the accounts of Dynamic
Health Products, Inc. and its principally wholly-owned subsidiaries, 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. and Bob OLeary Health Food Distributor Co., Inc., acquired October 1, 2004. Significant intercompany balances and transactions have been eliminated in consolidation.



NOTE C-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. As of December 31, 2005 and 2004, $401 and zero, respectively, were due from Tribeca and are
included in due from to affiliates.





8



---

NOTE D-FINANCIAL INSTRUMENTS



Fair Value of Financial Instruments (other than Derivative Financial Instruments)



The carrying amount of cash, accounts receivable, accounts payable and
accrued expenses approximates fair value because of their short maturity. The carrying amounts of loans and notes payable approximates fair value based on interest rates that approximate market interest rates for these instruments. The fair value of
the 6.75% and 7.75% Convertible Debentures amounted to approximately $3,710,852 as of December 31, 2005. Fair values for the convertible debentures were calculated at net present value using the effective interest rate method and a rate of
approximately 300%.



Derivative Financial Instruments



The captions derivative financial instruments consist of (a) the
embedded conversion feature bifurcated from the 6.75% and 7.75% Convertible Debentures, (b) the Warrants issued in connection with the 6.75% and 7.75% Convertible Debts, (c) interest rate index, and (d) put options. These derivative
financial instruments are indexed to an aggregate of 9,344,422 shares at December 31, 2005 and are carried at fair value.



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



|                                                                                                                    |  |                |           |                                     |  |                        |      |                    |   |                           |  |   |          
|------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | ----------------------------------- |  | ---------------------- | ---- | ------------------ | - | ------------------------- |  | - | ---------
|Issue Date                                                                                                          |  | ExpirationDate |           | Instrument                          |  | ExercisePrice PerShare |      | Value At IssueDate |   | Value AtDecember 31, 2005
|9/30/2004                                                                                                           |  | 9/30/2007      |           | 1,375,000 warrants issued to Laurus |  | $                      | 1.04 |                    | $ | 1,357,125                 |  | $ | 302,500  
|3/29/2005                                                                                                           |  | 3/29/2008      |           | 750,000 warrants issued to Laurus   |  | $                      | 1.37 |                    | $ | 937,500                   |  | $ | 127,500  
|                                                                                                                    |  |                |           |                                     |  |                        |      |                    |   |                           |  |   |          
|Fair value of freestanding derivative instrument liabilities for options and warrants                               |  | $              | 430,000  
|                                                                                                                    |  |                |           |                                     |  |                        |      |                    |   |                           |  |   |          
|                                                                                                                    |  |                |           |                                     | 
|Issue Date                                                                                                          |  | ExpirationDate |           | Instrument                          |  | ExercisePrice PerShare |      | Value At IssueDate |   | Value At December 31,2005
|9/30/2004                                                                                                           |  | 9/30/2007      |           | Laurus $6,000,000 term note         |  | $                      | 0.90 |                    | $ | 6,579,999                 |  | $ | 1,265,765
|3/29/2005                                                                                                           |  | 3/29/2008      |           | Laurus $2,000,000 term note         |  | $                      | 1.13 |                    | $ | 2,530,973                 |  | $ | 478,738  
|9/30/2004                                                                                                           |  | 9/30/2007      |           | Laurus put option                   |  | $                      | 6.00 |                    | $ | 1,109,922                 |  | $ | 1,015,978
|                                                                                                                    |  |                |           |                                     |  |                        |      |                    |   |                           |  |   |          
|Fair value of bifurcated embedded derivative instrument liabilities associated with the above mentioned
instruments |  | $              | 2,760,481
|                                                                                                                    |  |                |           |                                     |  |                        |      |                    |   |                           |  |   |          
|Total derivative financial instruments liability at December 31, 2005                                               |  | $              | 3,190,481
|                                                                                                                    |  |                |           |                                     |  |                        |      |                    |   |                           |  |   |          



Convertible debentures
consist of the following as of December 31, 2005:



|                                                                           |  |   |          
|-------------------------------------------------------------------------- |  | - | ---------
|Face value of $6,000,000 convertible debentures, due September 30, 2007(a) |  | $ | 3,067,595
|                                                                           |  |   |          
|Face value of $2,000,000 convertible debentures, due March 29, 2008(b)     |  | $ | 643,257  
|                                                                           |  |   |          



9



---

|(a) | Face value $6,000,000 6.75% convertible debentures: On September 30, 2004, the Company entered into a debt agreement to issue a $6,000,000 convertible debenture. The debenture
is immediately convertible into common stock of the Company at a price of $1.13 per share, together with 6.75% interest per annum, which is payable in either cash or common stock. Proceeds from the 6.75% convertible debenture were allocated first to
the embedded conversion features and the residual to the debenture. The resulting discount amounted to $6,000,000, which is being amortized through periodic charges to interest expense using the effective interest rate method.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Face value $2,000,000 7.75% convertible debenture: On March 29, 2005, the Company received an investment of $2,000,000 from Laurus Master Fund, Ltd. in exchange for a
convertible debenture. The debenture is convertible into shares of the Companys common stock at a conversion price of $1.37 per share. Proceeds from the 7.75% convertible debenture were allocated first to the embedded conversion feature and
the residual to the debenture. The resulting discount amounted to $2,000,000, which is being amortized through periodic charges to interest expense using the effective interest rate method.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The effective interest rate used to amortize the debt discount on the 6.75%
convertible debenture and the March 29, 2005 7.75% convertible debenture, amounted to 300% and 300%, respectively. Amortization of the discounts, which are included in derivative interest expense, amounted to $827,938 and $2,483,814,
respectively, for the three and nine months ended December 31, 2005.



Fair value for option-based financial instruments is determined using the Black-Scholes Option Pricing Model. Significant assumptions as of December 31, 2005 for the embedded conversion feature on the 6.75% and
7.75% convertible debentures, the embedded conversion features and the warrants included a strike price of $.90, $1.37 and $1.04, respectively, volatility of 122% for all instruments, remaining term of conversion feature for all instruments, and a
risk free interest rate of 4.20% for all instruments.



The fair
value of the put option was determined using the Black-Scholes Option Pricing Model using a volatility of 80%, a strike price of $6.00 and a risk free interest rate of 4.18%.



10



---

NOTE E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. Such Registration Statement is not effective.



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 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.



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.





11



---

At December 31, 2005 and 2004, investments in marketable equity securities, net are summarized as
follows:



Available for sale equity
securities:



|                           |  |      |           |      |   |          
|-------------------------- |  | ---- | --------- | ---- | - | ---------
|                           |  | 2005 |           | 2004
|Cost of securities         |  | $    | 50,667    |      | $ | 50,667   
|Plus gross unrealized gain |  |      | 1,355,467 |      |   | 1,698,338
|                           |  |      |           |      |   |          
|Fair value                 |  | $    | 1,406,134 |      | $ | 1,749,005
|                           |  |      |           |      |   |          
|Gross unrealized loss      |  | $    |          |      | $ |         
|                           |  |      |           |      |   |          



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, 2005, the Company had no sales of
available for sale equity securities. For the three and nine months ended December 31, 2004, gross gains included in results of operations resulting from transfers of securities from the available-for-sale category into the trading category
were $1,349,966 and there were no gross losses. No such transfers occurred in the three and nine months ended December 31, 2005.



Stock Warrants



In June 2004, pursuant to a Financial Consulting Agreement, the Company issued 300,000 warrants to purchase common stock, for consulting services. 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. 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. 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.



At December 31, 2005 and 2004, the Company had outstanding warrants to purchase 2,625,000 and 300,000 shares of the Companys common stock, respectively. 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 at various dates through June 2008. For the 1,375,000 warrants, the exercise price is $1.04 per share, subject to certain adjustments pursuant to the September 30, 2004 Securities
Purchase Agreement with Laurus Master Fund, Ltd. (Laurus), and they expire in September 2009. 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 750,000 warrants, the exercise price is $1.37 per share, subject to certain adjustments pursuant to the March 29, 2005 Security Agreement with Laurus, and they expire
in March 2012.



For the warrants issued in connection with the
financial consulting agreements, the balance of deferred consulting fees as of December 31, 2005 and 2004 was $73,125 and $283,125, respectively. The initial valuation of these warrants was $465,000. 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. For the three and nine months
ended December 31, 2004, the Company included consulting expense in the amount of $91,875 and $181,875, respectively, in selling, general and administrative expenses in the statements of operations, for these warrants.



12



---

Stock Options



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, 2005 was $290,945, of which the current portion was $166,254 and the long-term portion was $124,691. 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, 2005 and $41,564 being expensed during the three and nine months ended
December 31, 2004. 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 December 1, 2005, the Company granted options to purchase 2,500 share
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 Company has adopted only the disclosure provision of SFAS No. 123,
Accounting for Stock Based Compensation, as it relates to employee awards. Accounting Principles Board Opinion No. 25 is applied in accounting for the plan. Accordingly, no compensation expense is recognized related to the stock
based compensation plans. The unaudited pro forma net earnings (loss) per common share, if the Company had elected to account for its plan consistent with the methodology prescribed by SFAS No. 123, are shown in the following:



|                                    |  |                                   |           |                                   |   |            |  
|----------------------------------- |  | --------------------------------- | --------- | --------------------------------- | - | ---------- | -
|                                    |  | Nine MonthsEndedDecember 31, 2005 |           | Nine MonthsEndedDecember 31, 2004 |  
|                                    |  | (Unaudited)                       |           | (Unaudited)                       |  
|Net income (loss):                  |  |                                   |           |                                   |   |            |  
|As reported                         |  | $                                 | 6,418,147 |                                   | $ | (4,765,936 | )
|                                    |  |                                   |           |                                   |   |            |  
|Pro forma                           |  | $                                 | 6,052,823 |                                   | $ | (4,906,432 | )
|                                    |  |                                   |           |                                   |   |            |  
|Net income (loss) per common share: |  |                                   |           |                                   |   |            |  
|Basic income (loss) per share:      |  |                                   |           |                                   |   |            |  
|As reported                         |  | $                                 | 0.45      |                                   | $ | (0.37      | )
|                                    |  |                                   |           |                                   |   |            |  
|Pro forma                           |  | $                                 | 0.42      |                                   | $ | (0.38      | )
|                                    |  |                                   |           |                                   |   |            |  
|Diluted income (loss) per share:    |  |                                   |           |                                   |   |            |  
|As reported                         |  | $                                 | 0.24      |                                   | $ | (0.37      | )
|                                    |  |                                   |           |                                   |   |            |  
|Pro forma                           |  | $                                 | 0.23      |                                   | $ | (0.38      | )
|                                    |  |                                   |           |                                   |   |            |  





13



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NOTE F-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 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.



The Company has a current and deferred tax liability recorded as of December 31, 2005 of $5,009 and $200,475, respectively. As of December 31, 2004, the Company had a current and deferred tax liability recorded of $5,009 and
$639,700, respectively. The deferred tax liability is primarily a result of the differences arising between book and tax basis of unrealized gains and losses, net, on marketable equity securities.



NOTE G-EARNINGS (LOSS) PER SHARE



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



|                                                   |  |                                   |            |   |                                   |   |            |                                  |  |                                  |            |  |   |            |  
|-------------------------------------------------- |  | --------------------------------- | ---------- | - | --------------------------------- | - | ---------- | -------------------------------- |  | -------------------------------- | ---------- |  | - | ---------- | -
|                                                   |  | Three MonthsEndedDecember 31,2005 |            |   | Three MonthsEndedDecember 31,2004 |   |            | Nine MonthsEndedDecember 31,2005 |  | Nine MonthsEndedDecember 31,2004 |           
|                                                   |  | (Unaudited)                       |            |   | (Unaudited)                       |   |            | (Unaudited)                      |  | (Unaudited)                      |           
|Numerator:                                         |  |                                   |            |   |                                   |   |            |                                  |  |                                  |            |  |   |            |  
|Net income (loss)                                  |  | $                                 | (870,751   | ) |                                   | $ | (1,586,945 | )                                |  | $                                | 6,418,147  |  | $ | (4,765,936 | )
|Less preferred stock dividends                     |  |                                   |           |   |                                   |   |           |                                  |  |                                  |           |  |   |           |  
|                                                   |  |                                   |            |   |                                   |   |            |                                  |  |                                  |            |  |   |            |  
|Net income (loss) available to common shareholders |  | $                                 | (870,751   | ) |                                   | $ | (1,586,945 | )                                |  | $                                | 6,418,147  |  | $ | (4,765,936 | )
|                                                   |  |                                   |            |   |                                   |   |            |                                  |  |                                  |            |  |   |            |  
|Denominator:                                       |  |                                   |            |   |                                   |   |            |                                  |  |                                  |            |  |   |            |  
|Weighted average basic shares outstanding          |  |                                   | 14,463,630 |   |                                   |   | 12,899,294 |                                  |  |                                  | 14,257,416 |  |   | 12,816,472 |  
|Stock options                                      |  |                                   | 1,955,842  |   |                                   |   | 1,405,000  |                                  |  |                                  | 1,955,282  |  |   | 1,072,273  |  
|Warrants                                           |  |                                   | 2,625,000  |   |                                   |   | 514,946    |                                  |  |                                  | 2,625,000  |  |   | 763,182    |  
|Convertible note                                   |  |                                   | 7,686,579  |   |                                   |   | 72,464     |                                  |  |                                  | 7,686,579  |  |   | 2,254,546  |  
|                                                   |  |                                   |            |   |                                   |   |            |                                  |  |                                  |            |  |   |            |  
|Weighted average fully diluted shares outstanding  |  |                                   | 26,731,051 |   |                                   |   | 14,891,704 |                                  |  |                                  | 26,524,277 |  |   | 16,906,473 |  
|                                                   |  |                                   |            |   |                                   |   |            |                                  |  |                                  |            |  |   |            |  



For the three months
ended December 31, 2005 there were 12,267,421 shares and for the three and nine months ended December 31, 2004 there were 1,992,410 and 4,090,001 shares, respectively, that could potentially dilute basic earnings (loss) per share in the
future that were not included in the computation of diluted earnings (loss) per share, because to do so would have been anti-dilutive.



14



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NOTE H-FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS



In accordance with the provisions of Statement of Financial Accounting
Standards No. 131 (SFAS 131), Disclosures About Segments of an Enterprise and Related Information, a company is required to disclose selected financial and other related information about its operating segments. Operating segments
are components of an enterprise about which separate financial information is available and is utilized by the chief operating decision maker related to the allocation of resources and in the resulting assessment of the segments overall
performance. As of and for the three and nine months ended December 31, 2005, the Company had one industry segment, Distribution. As of and for the three and nine months ended December 31, 2004, the Company had two industry segments:
Distribution and Prescription Services.



In addition to being
presented separately, intersegment financial data is included in the gross segment amounts disclosed below in order to present accurate segment information, whereas on the condensed consolidated balance sheets and statements of operations, all
intercompany transactions have been eliminated in consolidation.



Presented below is unaudited condensed segment information as of and for the nine months ended December 31, 2004



|                         |  |                                    |           |   |                                   |   |           |  
|------------------------ |  | ---------------------------------- | --------- | - | --------------------------------- | - | --------- | -
|                         |  | Three MonthsEndedDecember 31, 2004 |           |   | Nine MonthsEndedDecember 31, 2004 |  
|Revenues:                |  |                                    |           |   |                                   |   |           |  
|Distribution             |  | $                                  | 6,868,190 |   |                                   | $ | 7,506,490 |  
|Prescription services    |  |                                    |          |   |                                   |   | 70,897    |  
|                         |  |                                    |           |   |                                   |   |           |  
|                         |  | $                                  | 6,868,190 |   |                                   | $ | 7,577,387 |  
|                         |  |                                    |           |   |                                   |   |           |  
|Intersegment sales       |  | $                                  |          |   |                                   | $ |          |  
|                         |  |                                    |           |   |                                   |   |           |  
|Gross profit:            |  |                                    |           |   |                                   |   |           |  
|Distribution             |  | $                                  | 859,117   |   |                                   | $ | 1,135,702 |  
|Prescription services    |  |                                    |          |   |                                   |   | 8,082     |  
|                         |  |                                    |           |   |                                   |   |           |  
|                         |  | $                                  | 859,117   |   |                                   | $ | 1,143,784 |  
|                         |  |                                    |           |   |                                   |   |           |  
|Operating income (loss): |  |                                    |           |   |                                   |   |           |  
|Distribution             |  | $                                  | 155,687   |   |                                   | $ | 25,665    |  
|Prescription services    |  |                                    | (23,884   | ) |                                   |   | (47,636   | )
|Corporate                |  |                                    | (424,868  | ) |                                   |   | (793,865  | )
|                         |  |                                    |           |   |                                   |   |           |  
|                         |  | $                                  | (293,065  | ) |                                   | $ | (815,836  | )
|                         |  |                                    |           |   |                                   |   |           |  



|                      |  |                  |           
|--------------------- |  | ---------------- | ----------
|                      | 
|                      |  | December 31,2004
|Assets:               |  |                  |           
|Distribution          |  | $                | 4,645,904 
|Prescription services |  |                  | 1,672     
|Corporate             |  |                  | 6,997,302 
|                      |  |                  |           
|                      |  | $                | 11,644,878
|                      |  |                  |           



15



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NOTE I-RELATED PARTY TRANSACTIONS



On October 1, 1999, the Company entered into a triple-net lease agreement with GeoPharma, Inc. (GeoPharma),
a publicly traded company and an affiliate of the Company, whereby GeoPharma agreed to lease the Companys land and 33,222 square foot building situated in Largo, Florida for a term of ten years. The initial rental under the lease was
approximately $192,000 annually. The lease provided for an annual cost-of-living increase. This facility serves as GeoPharmas corporate headquarters and also serves as part of GeoPharmas offices, manufacturing, warehousing and shipping
operations. On October 25, 2004, the Company sold the building to GeoPharma for $1,925,000 in cash. This resulted in a gain of $654,241 to the Company for the year ended March 31, 2005. The sale price was determined by an independent
third-party appraisal. 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. As of December 31, 2005 and 2004, the Companys investment in
GeoPharma, consisting of 347,938 shares of its common stock, is included in marketable equity securities, net.



On June 14, 2004, the Board of Directors of the Company, approved the declaration of a pro rata dividend distribution to holders of record of its
issued and outstanding common shares as of July 1, 2004, in the form of approximately 1.3 million shares of Vertical Health Solutions, Inc. (Vertical), which the Company owned. On July 7, 2004, the Board of Directors of
the Company amended the record date to July 16, 2004 and the distribution date to July 26, 2004. The payment rate was one share of Vertical common stock for each ten shares of the Companys common stock held on July 16, 2004. The
Company only distributed whole shares and any fractional shares to which shareholders would otherwise be entitled were rounded down to the nearest whole share. Jugal K. Taneja, a principal shareholder and Chairman of the Board of the Company is also
a principal shareholder and a Director of Vertical. On July 26, 2004, the Company distributed approximately 1.3 million shares of Vertical common stock to its shareholders. This resulted in a gain of $1,349,966 to the Company for the year
ended March 31, 2005.



For the three and nine months ended
December 31, 2004, the Company charged Vertical consulting fees totaling zero and $5,213, respectively, for accounting and administrative services. The charge was on an hourly basis for services rendered. The Company did not provide consulting
services to Vertical during the three and nine months ended December 31, 2005. As of December 31, 2005 and 2004, $325 was due from Vertical and is included in amounts due from affiliates. As of December 31, 2005 and 2004, the
Companys investment in Vertical is included in marketable equity securities, net.



The Company owns 30%, or 300,000 shares of common stock of Tribeca Beverage Company (Tribeca), an affiliate of Jugal K. Taneja, a principal shareholder and Chairman of the Board of the Company, and Mandeep
K. Taneja, a Director, 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 of $166,939 in the investment. As of December 31, 2005 and 2004, $401 and zero, respectively, were due from Tribeca and are included in amounts due from affiliates.



On January 1, 2004, the Company entered into a verbal
agreement with Innovative Health Products, Inc. (Innovative), a wholly-owned subsidiary of GeoPharma, whereby the



16



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Company agreed to sublease approximately 5,131 square feet of office and warehouse space for its executive offices and
its operations in Largo, Florida. This facility served as the Companys corporate headquarters and was also used for its offices, warehousing and shipping operations. The facility was sublet until May 1, 2005, at which time the sublease
was terminated. The initial rental under the sublease was $41,066 annually.



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.



For
the three and nine months ended December 31, 2005, purchases of products from subsidiaries of GeoPharma were $50,170 and $158,436, respectively, and sales to subsidiaries of GeoPharma were $60 and $31,025, respectively. For the three and nine
months ended December 31, 2004, purchases of products from subsidiaries of GeoPharma were $81,744 and $352,502, respectively. Sales to subsidiaries of GeoPharma were zero and $5,213, respectively, during the three and nine months ended
December 31, 2004. As of December 31, 2005 and 2004, $52,311 and $66,474, respectively, were due to subsidiaries of GeoPharma and are included in obligations to affiliates. As of December 31, 2005 and 2004, $1,566 and $753,
respectively, were due from GeoPharma and are included in due from affiliates.



Research and development is primarily contracted through Innovative, 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.



As of December 31, 2005 and 2004, amounts due to T & L, Inc. (T&L), an affiliate of Mandeep K. Taneja, a Director, Chief
Executive Officer and President of the Company, were $2,471, for product purchases and services provided to the Company during the year ended March 31, 2005. For the three and nine months ended December 31, 2005 and 2004, there were no
purchases of products or services provided to the Company by T&L.



On July 28, 2004, the Company issued a promissory note payable to an affiliate of the Chairman of the Company, in the principal amount of $50,000. The principal together with interest at the rate of 7% per annum is payable on
demand. Proceeds were used for placement of funds in escrow in connection with the acquisition of Bob OLeary Health Food Distributor Co., Inc., effective October 1, 2004. The note was subsequently repaid on October 5, 2004.



On September 7, 2004, the Company issued a promissory
note payable to the Companys Chairman, in the principal amount of $100,000. The principal together with interest at the rate of 7% per annum is payable on demand. Proceeds were used for placement of funds in escrow in connection with the
acquisition of Bob OLeary Health Food Distributor Co., Inc., effective October 1, 2004. The note was subsequently repaid on October 5, 2004.



On October 17, 2004, a meeting of the Compensation Committee of the Board of Directors of the Company was held. At the meeting, the Compensation
Committee 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





17



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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. The value of the options, as determined by reference to the Black-Scholes option pricing model, has been recorded as a prepaid expense and is being amortized over the life of the loan (see Note E).



On March 29, 2005, the Company entered into a lease with GAM Realty,
LLC, an affiliate of Gregg Madsen, the Chief Operating Officer of DMI, 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. As of
December 31, 2005, approximately $578 was due to GAM Realty, LLC.



NOTE
J- 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, 2005, DPS Nutrition Inc. accounted for 12.2% and 11.0%, respectively, in relation
to total consolidated revenues. For the three and nine months ended December 31, 2004, DPS Nutrition Inc. accounted for 16.4% and 14.9%, 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, 2005 and 2004, the Company maintained cash balances in excess of the Federal Deposit Insurance Companys $100,000 insurance limit.



18



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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. We also derived revenues from services provided in connection with prescription services, until September 30, 2004.



Revenues for the distribution segment result from product sales and 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. Revenues for the prescription services segment resulted from
non-product related administrative fees earned principally for pharmacy network management and are recorded when performance occurs and collectibility is assured.



Cost of goods sold is comprised of direct product costs, contracted service fees, direct personnel compensation and other
statutory benefits and indirect costs relating to labor to support the warehousing of product and other warehousing overhead. Costs incurred by the Company for shipping and handling are included in cost of goods sold. Research and development
expenses are charged against cost of goods sold as incurred and are not material to the Companys operations.



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



Interest income is comprised of interest earned on notes receivable and interest earned on cash balances maintained in interest bearing accounts with banks.



Interest expense is primarily associated with borrowings for the funding of acquisitions and other working capital needs.



19



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Other income (expense) consists primarily of expenses incurred in pursuing a potential acquisition that
was not consummated.



Effective October 1, 2004, the
Company acquired Bob OLeary Health Food Distributor Co., Inc. The results of operations of BOSS commencing October 1, 2004 are included in the results of operations of the Company.



Effective March 31, 2005, the Company, through its wholly-owned
subsidiary, Dynamic Marketing I, Inc., acquired Dynamic Marketing, Inc. On March 30, 2005, through the filing by Dynamic Marketing I, Inc. of Articles of Merger, effective March 31, 2005, Dynamic Marketing, Inc. merged into Dynamic
Marketing I, Inc. with Dynamic Marketing I, Inc. being the surviving entity. The results of operations of DMI for April 1, 2005 through December 31, 2005 are included in the results of operations of the Company.



Results of Operations



Three And Nine Months Ended December 31, 2005 Compared To Three And Nine Months Ended December 31, 2004



Revenues. The Company generated total revenues of $11,367,033 and
$35,861,533, respectively, for the three and nine months ended December 31, 2005, an increase of $4,498,843 or 65.5% and $28,284,146 or 373.3%, compared to $6,868,190 and $7,577,387 for the three and nine months ended December 31, 2004.
Distribution revenues increased $4,498,843 or 65.5% and $28,355,043 or 377.7%, to $11,367,033 and $35,861,533, respectively, for the three and nine months ended December 31, 2005, compared to $6,868,190 and $7,506,490, respectively, for the
three and nine months ended December 31, 2004. For the three months ended December 31, 2005, the increase was primarily attributable to an increase in revenues associated with BOSS of approximately $2.5 million, primarily due to BOSS
expanding its distribution channels with the opening of distribution centers in Henderson, Nevada and Largo, Florida in May 2005, revenues associated with DMI of approximately $2.1 million, partially offset by a decrease in revenues associated with
Herbal of approximately $41,100. For the nine months ended December 31, 2005, the increase was primarily attributable to revenues associated with BOSS of approximately $28.3 million and revenues associated with DMI of approximately $7.1
million, partially offset by a decrease in revenues associated with Herbal of approximately $376,100. Prescription services revenues were zero and $70,897, respectively, for the three and nine months ended December 31, 2004. The Company
discontinued its prescription services operations in September 2004.



Gross profit. The Company achieved total gross profit of $1,284,987 and $4,029,836, respectively, for the three and nine months ended December 31, 2005, an increase of $425,870 or 49.6% and $2,886,052 or 252.3%, compared to $859,117
and $1,143,784, respectively, for the three and nine months ended December 31, 2004. Total gross margins, as a percentage of revenues, decreased to 11.3% and 11.2%, respectively, for the three and nine months ended December 31, 2005 from
12.5% and 15.1%, respectively, for the three and nine months ended December 31, 2004. Distribution gross profit increased $425,870 or 49.6% and $2,894,134 or 254.8%, to $1,284,987 and $4,029,836, respectively, for the three and nine months
ended December 31, 2005, as compared to $859,117 and $1,135,702, respectively, for the three and nine months ended December 31, 2004. For the three and nine months ended December 31, 2005, BOSSs gross profit was approximately
$927,400 and $2.9 million, respectively, DMIs gross profit was approximately $317,500 and $985,500, respectively, and Herbals gross profit



20



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was approximately $40,100 and $175,200, respectively. For the three and nine months ended December 31, 2005,
distribution gross margin decreased to 11.3% and 11.2%, respectively, from 12.5% and 15.1%, respectively, for the three and nine months ended December 31, 2004. The decrease was primarily attributable to lower gross margins associated with BOSS
of 10.1% and 10.2%, respectively, lower gross margins associated with DMI of 15.3% and 13.8%, respectively, and lower gross margins associated with Herbal of 27.9% and 39.2%, respectively, for the three and nine months ended December 31, 2005.
Prescription services gross profit was zero and $8,082, respectively, for the three and nine months ended December 31, 2004.



Operating expenses. The Company incurred operating expenses of $1,471,145 and $4,346,563, respectively, for the three and nine months ended
December 31, 2005, compared to $1,152,183 and $1,959,620, respectively, for the three and nine months ended December 31, 2004. For the three months ended December 31, 2005, these expenses include various administrative, sales,
marketing and other direct operating expenses of $1,386,948, and amortization and depreciation expenses of $84,197, compared to $1,106,704 in various administrative, sales, marketing and other direct operating expenses, and amortization and
depreciation expenses of $45,479 for the three months ended December 31, 2004. Operating expenses, excluding amortization and depreciation expenses decreased to 12.2% of revenues for the three months ended December 31, 2005, from 16.1% of
revenues for the three months ended December 31, 2004. The decrease in operating expenses as a percentage of revenues was primarily attributable to the increase in revenues associated with BOSS and DMI, as well as a decrease in legal fees, and
was partially offset by expenses associated with DMI, as well as an increase in accounting and public relations fees. For the nine months ended December 31, 2005, these expenses include various administrative, sales, marketing and other direct
operating expenses of $4,097,554, and amortization and depreciation expenses of $249,009, compared to $1,868,531 in various administrative, sales, marketing and other direct operating expenses, and amortization and depreciation expenses of $91,089
for the nine months ended December 31, 2004. Operating expenses, excluding amortization and depreciation expenses decreased to 11.4% of revenues for the nine months ended December 31, 2005, from 24.7% of revenues for the nine months ended
December 31, 2004. The decrease in operating expenses as a percentage of revenues was primarily attributable to the increase in revenues associated with BOSS and DMI, as well as a decrease in legal fees, and was partially offset by expenses
associated with BOSS and DMI, as well as an increase in accounting fees, an increase in amortization of deferred consulting fees, an increase in the write off of bad debts and an increase in tradeshow expenses.



Interest income. Interest income was $6,204 and $18,534, respectively, for
the three and nine months ended December 31, 2005, compared to $2,137 and $3,793, respectively, for the three and nine months ended December 31, 2004. The increase in interest income was due to interest received on the note receivable and
higher cash amounts held in interest bearing accounts in banks.



Interest expense. Interest expense was $237,618 and $549,556, respectively, for the three and nine months ended December 31, 2005, compared to $110,456 and $143,063, respectively, for the three and nine months ended December 31,
2004. Interest expense increased for the three and nine months ended December 31, 2005, primarily due to the $6 million convertible term note that funded on September 30, 2004, in connection with the acquisition of BOSS and the $4 million
convertible minimum borrowing note and revolving note in connection with the acquisition of DMI. Approximately $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 the debt discount based on the Black-Scholes pricing model, applied to the Postponement Agreement entered into in July 2005, in connection with the September 30, 2004 convertible term note.



21



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Income taxes. As of December 31, 2005, the Company had an accrued income tax liability of $5,009 and
an estimated deferred income tax liability of $200,475, which primarily represented the potential future tax expense associated with the unrealized gains on marketable equity securities. As of December 31, 2004, the Company had an accrued
income tax liability of $5,009 and an estimated deferred income tax liability of $639,700.



Net income (loss) per share. Net income (loss) per share for the three and nine months ended December 31, 2005 was $(0.06) and $0.45, respectively. Net loss per share for the three and nine months ended
December 31, 2004 was $0.12 and $0.37, respectively. The reduction in the net loss per share for the three months ended December 31, 2005 as compared to the net loss per share for the three months ended December 31, 2004 was primarily
a result of the net change from derivative instrument income (expense), net, of $1,863,392, and a decrease in the Companys operating loss of $106,908, partially offset by an increase in other income and expenses, net, of $204,075, which
resulted from expenses incurred in pursuing a potential acquisition that was not consummated, an increase in derivative instrument interest expense of $214,419 and the decrease of the gain (loss) on sale of property of $656,584. The net income per
share for the nine months ended December 31, 2005 as compared to the net loss per share for the nine months ended December 31, 2004 was primarily a result of the net change from derivative instrument income (expense), net, of $14,800,395,
and a decrease in the Companys operating loss before other income and expense of $499,109, partially offset by an increase in derivative instrument interest expense of $1,870,295, an increase in other income and expenses, net, of $227,137,
which resulted from expenses incurred in pursuing a potential acquisition that was not consummated, the decrease of the gain (loss) on sale of property of $659,069 and the absence of the gain on distribution of investment of $1,349,966.



Inflation; Seasonality. Management believes that there was no material
effect on operations or the financial condition of the Company as a result of inflation for the three and nine months ended December 31, 2005 and 2004. Management also believes that its business is not seasonal; however, significant promotional
activities can have a direct impact on sales volume in any given quarter.



Economic And Industry Conditions. Management believes that there was no material effect on operations or the financial condition of the Company as a result of general economic and industry conditions for the three and
nine months ended December 31, 2005 and 2004. However, should there be a material deterioration of general economic or industry conditions, the Companys results of operations could be impacted in any given quarter.



Financial Condition, Liquidity and Capital Resources



The Company has financed its operations through the usage of available cash
reserves and through its revolving note payable. The Company had a working capital deficit of $1,591,634 at December 31, 2005, compared to a working capital deficit of $8,499,312 at March 31, 2005.



Net cash used in operating activities was $898,645 for the nine months ended
December 31, 2005, as compared to net cash used in operating activities of $634,724 for the nine months ended December 31, 2004. The usage of cash was primarily attributable to an increase in other



22



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assets of $5,224, a decrease in accounts payable of $1,213,052 based on substantial repayments made on accounts, a
decrease in accrued expenses of $212,642, a decrease in deferred income taxes of $224,215, and a decrease in amounts due to/from affiliates, net, of $27,352, partially offset by a decrease in accounts receivable of $371,016 as a result of increased
collection efforts, a decrease in inventories of $294,210 partially due to a reduction in restocking levels and to the sales of products from the Companys new distribution facilities, a decrease in prepaid expenses of $152,921, a decrease in
other current assets of $95,965 and an increase in other payables of $109,471.



Net cash used in investing activities was $31,167, representing purchases of property and equipment of $100,510, an adjustment to the purchase price of Dynamic Marketing, Inc. (DM) of $17,369 based upon
net adjustments to goodwill upon finalization of DMs books and records, an adjustment to the purchase price of a customer list of $7,306 due to an increase from estimated expenses to actual expenses, and the purchase of a trademark of $435,
partially offset by repayments of a note receivable of $92,453 and proceeds from the sale of property of $2,000.



Net cash used in financing activities was $631,275, representing payments of long-term obligations of $585,655, the excess of payments versus advances
received of $79,686 on the Companys short-term revolving note and payments on other short-term obligations of $40,934, partially offset by proceeds from the issuance of common stock of $75,000.



At December 31, 2005, the Company had $309,474 in cash and cash
equivalents, as compared to $633,377 at December 31, 2004.



Management believes that cash expected to be generated from operations and current cash reserves will be sufficient for the Company to meet its capital expenditures and working capital needs, for its operations as presently conducted, with
the Companys increased revenues associated with acquisitions made during the year ended March 31, 2005. The Companys future liquidity and cash requirements will depend on a wide range of factors, including the level of business in
existing operations, expansion of facilities and possible acquisitions. In particular, if cash flows from operations are not sufficient, it will be necessary for the Company to seek additional financing. While there can be no assurance that such
financing would be available in amounts and on terms acceptable to the Company, management believes that such financing would likely be available on acceptable terms.



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 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.



23



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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).



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 two (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, 2005, the outstanding principal balance on the convertible note was $4,500,000. As
of March 31, 2005 and December 31, 2005, 989,758 shares of Company common stock had 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 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.



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 are 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 are exercisable on a cashless basis. In the event that the warrants are exercised on a cashless basis, then the Company will not receive any proceeds. In addition, the exercise price of the warrants will 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.



24



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



On October 17, 2004, the Compensation Committee of the Board of Directors of the Company 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. The value of the options, $498,763, as determined by reference to the Black-Scholes option pricing model, has been recorded as deferred consulting fees and is being amortized over the three year
life of the loan. For the three and nine months ended December 31, 2005, the amount amortized as consulting fees was $41,564 and $124,691, respectively. As of December 31, 2005, the balance of deferred consulting fees for these options was
$290,945, of which the current portion was $166,254 and the long-term portion was $124,691.



On March 29, 2005, the Company entered into agreements with Laurus Master Fund, Ltd., 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 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





25



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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. The conversion price of the secured convertible notes may be adjusted 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 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.



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 option. If the registration statement was not filed by April 28, 2005, or declared effective within 75 days thereafter, or if the registration was suspended other than as
permitted, in the registration rights agreement between the Company and Laurus, the Company would have been obligated to pay Laurus certain fees and the obligations may have been deemed to be in default. On April 22, 2005, the Company filed
such registration statement on Form S-2 and on August 19, 2005, the Company withdrew such registration statement and filed a new registration statement on Form S-2, which is not effective.



The proceeds of the funding were used for the acquisition of Dynamic
Marketing, Inc., costs associated with the acquisition and for working capital. As of December 31, 2005, the principal balance due on this revolving note was $2,920,314, of which $2,000,000 was attributable to the secured convertible minimum
borrowing note. 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 is permitted to bring the ratios into compliance within one year from the date of the note.



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.



26



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



On April 12, 2005, the Company 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, the Company 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 the Company 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, 2005, the remaining principal balance on the note was $238,540.



On July 21, 2005, the Company 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, 2005, the principal balance on the lease was $21,020.



On August 31, 2005, the Company issued 14,038 restricted shares of 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 for working capital for the Company.



On September 21, 2005, the Company 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. As of December 31, 2005, the principal balance on the note was $20,380.



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



27



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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.



Changes in internal controls. There have been no material changes in the Companys internal controls or in other factors that materially affected or were reasonably likely to materially affect these controls
subsequent to the date of the evaluation referred to above, nor were there any material weaknesses in our internal controls. Accordingly, no corrective actions were required or undertaken.





28



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PART II - OTHER INFORMATION



Item 1. LEGAL PROCEEDINGS.



The Company is involved in litigation with Hi-Tech Pharmaceuticals, Inc. (Hi-Tech), whereby Hi-Tech filed a lawsuit against the Company on
August 25, 2003 with the United States District Court for the Northern District of Georgia over claims regarding intellectual property matters, in connection with the use of the Companys product named StaminaPro. Hi-Tech seeks unspecified
monetary damages as well as non-monetary relief. Management of the Company does not believe that it has any material exposure with regard to the allegations of the claims. The Company is vigorously defending this action. In addition, the Company has
instituted counterclaims against Hi-Tech and Jared Wheat, the President of Hi-Tech. We are seeking relief for libel, slander and tortious interference in amounts in excess of $75,000, exclusive of interest and costs. Furthermore, the
plaintiffs initial action seeking injunction against the Company was denied by the court. The parties participated in a mediation of the matter on November 10, 2005. The action has not been set for trial. As of the current date the
Company continues mediation with Hi-Tech.



From time to time
the Company is subject to litigation incidental to its business including possible product liability claims. Such claims, if successful, could exceed applicable insurance coverage. The Company is not currently a party to any legal proceedings which
it believes will have a material adverse affect on its 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)
|--- | ---------------------------------------------------------------------------------------------------------------





29



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|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)
|--- | ---------------------------------------------------------------------------------------------------------------------------



|10.1 | Promissory Note and Security Agreement by and between Health Express Food, Inc. and Dynamic Marketing I, Inc.(5)
|---- | ----------------------------------------------------------------------------------------------------------------



|10.2 | Postponement Agreement by and between Laurus Master Fund, Ltd. and Dynamic Health Products, Inc.(6)
|---- | ---------------------------------------------------------------------------------------------------



|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 Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005, file number 0-23031, filed in Washington, D.C. on
August 15, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Companys Registration Statement on Form S-2, dated August 19, 2005, file number 333-127692, filed in Washington, D.C. on August 19,
2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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(b)Reports on Form 8-K.



During the three month period ending December 31, 2005, the Company filed one report on Form 8-K.



Form 8-K dated November 10, 2005, with respect to the resignation of one
of the Companys Directors.



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 14, 2006 |  | By:                           |  | /s/ Mandeep K. Taneja                                   
|                        |  |                               |  | Mandeep K. Taneja, Chief Executive Officer and
President
|                        |  |                              
|Date: February 14, 2006 |  | By:                           |  | /s/ Cani I. Shuman                                      
|                        |  |                               |  | Cani I. Shuman, Chief Financial
Officer                 



31