**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-KSB**

**(MarkOne)**

**x**                                 ANNUALREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscalyear ended December 31, 2006**

**or**

**o**                                   TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Commission fileNo. 000-50875**

**XELR8HOLDINGS, INC.**

(Exact name of smallbusiness issuer as specified in its charter)

| **Nevada**                | ** ** | **84-1575085**                           |
|---------------------------|------------|------------------------------------------|
| (State of  incorporation) |       | (I.R.S. Employer  Identification Number) |

 

**480 SouthHolly Street**

**Denver,CO 80246**

(Address of principal executive offices)

**(303)-316-8577**

(Issuer’stelephone number)

Securities registeredunder Section 12(b) of the Exchange Act: **Common Stock, par value $.001 per share**

Securities registeredunder Section 12(g) of the Exchange Act: **None**

Check whether the issueris not required to file reports pursuant to Section 13 or 15(d) of the ExchangeAct.** ****o**

Check whether the issuer (1) filed all reports to befiled by Section 13 or 15(d) of the Exchange Act during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

YES x          NO o

Check if there is no disclosureof delinquent filers in response to Item 405 of Regulation S-B is not containedin this form and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

Indicate by check mark whether the registrant is ashell company (as defined by Rule 12b-2 of the Act),

YES o          NO x

Issuer’s revenues for theyear ended December 31, 2006 were $2,148,420.

Aggregate market value ofvoting stock held by non-affiliates: $10,560,511.

As of March 9, 2007, theCompany had 10,097,170 shares of its $.001 par value common stock issued andoutstanding.

 

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**Indexto XELR8 Holdings, Inc. 2006 Form 10-KSB**

 

Cautionary NoteRegarding Forward-Looking Statements

 
| PART I   |   |                                                                                             |   |   |
|----------|--------|--------------------------------------------------------------------------------------------------|--------|--------|
| Item  1. |   | Description  of Business                                                                         |   |   |
| Item 1A  |   | Risk Factors                                                                                     |   |   |
| Item  2. |   | Description  of Property                                                                         |   |   |
| Item 3.  |   | Legal Proceedings                                                                                |   |   |
| Item 4.  |   | Submission of Matters to a Vote of Security Holders                                              |   |   |
|     |   |                                                                                             |   |   |
| PART II  |   |                                                                                             |   |   |
| Item 5.  |   | Market for Common Equity and Related Stockholder  Matters                                        |   |   |
| Item 6.  |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations      |   |   |
| Item  7. |   | Financial  Statements                                                                            |   |   |
| Item 8.  |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure            |   |   |
| Item 8a. |   | Controls and Procedures                                                                          |   |   |
| Item  8b |   | Other  Information                                                                               |   |   |
|     |   |                                                                                             |   |   |
| PART III |   |                                                                                             |   |   |
| Item 9.  |   | Directors and Executive Officers                                                                 |   |   |
| Item 10. |   | Executive Compensation                                                                           |   |   |
| Item 11. |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholders Matters |   |   |
| Item 12. |   | Certain Relationships and Related Transactions                                                   |   |   |
| Item 13. |   | Exhibits and Reports on Form 8-K                                                                 |   |   |
| Item 14. |   | Principal Accountant Fees and Services                                                           |   |   |
|     |   |                                                                                             |   |   |
|     |   | Signatures                                                                                       |   |   |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

ThisForm 10-KSB for XELR8 Holdings, Inc. (“the Company”) contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act and Section21E of the Securities Exchange Act of 1934, as amended. All statements otherthan statements of historical fact are “forward-looking statements” forpurposes of federal and state securities laws, including any projections ofearnings, revenue or other financial items; any statements of the plans,strategies and objectives of management for future operations; any statementsconcerning proposed new products or developments; any statements regardingfuture economic conditions or performance; any statements of belief; and anystatements of assumptions underlying any of the foregoing. Forward-lookingstatements may include the words “may,” “will,” “estimate,” “intend,” “continue,”“believe,” “expect” or “anticipate” and other similar words.

Although we believe that the expectations reflected in any of ourforward-looking statements are reasonable, actual results could differmaterially from those projected or assumed in any of our forward-lookingstatements. Our future financial condition and results of operations, as wellas any forward-looking statements, are subject to change and to inherentrisks and uncertainties. Actual future results may differ significantlyfrom the results discussed in the forward-looking statements. Some of the risksthat may affect our performance are discussed below under “Risk FactorsAssociated with Our Business.”

**PART I**

**ITEM 1. DESCRIPTION OF BUSINESS**

### **Overview**

Wedevelop, sell, market and distribute nutritional supplement products primarilythrough a direct sales or network marketing system in which independentdistributors sell our products, as well as purchase them for their own personaluse. We also sell our products directly to professional and Olympic athletesand to professional sports teams.

We formulated ourproducts in 2000 and 2001 for sale to professional and Olympic athletes. Welaunched our sales and marketing programs to the general public in early 2002through our internal sales force targeting specialty retail stores, healthclubs and personal trainers. During 2003, we refocused our marketing and salesstrategy on direct selling through independent distributors. We believe, basedupon our sales experience in 2001 and 2002, our products can be moreeffectively sold through the face-to-face sales method afforded by directselling. During 2005, we formulated a new line of products that would have awider appeal to the general public, as they were more functional foods thannutritional supplements, and began marketing them through our existingindependent distributors in the latter part of 2005.  In conjunction with this, we rebranded thenetwork marketing company and all the products with the name of XELR8 — WHATMOVES YOU. In January 2007 we launched our latest product offering, BaziTM, adietary supplement drink.

A key part of ourmarketing strategy, in conjunction with our direct sales program, is theendorsement of our products by sports celebrities. Some of our celebrityendorsers include:

·                  MikeShanahan (football): Head Coach — three Super Bowl teams;

·                  CarnellWilliams (football): All Pro Running Back, 2005 Rookie of the Year

·                  RandyJohnson (baseball): Pitcher—five-time Cy Young Award Winner and 2001 WorldSeries Co-MVP;

·                  BrianGriese (football): All Pro Quarterback;

·                  CarolineLalive (skier) - 2-Time Olympian and World Cup Medalist;

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·                  BrianaScurry (soccer player): Two time Olympic gold medal winner and U.S. Woman’sWorld Cup Champion.

·                  BeckyQuinn (cycling) — 2-Time Silver medalist World Track Cycling Championship.

·                  GaryGait (lacrosse): Former forward, six-time National Lacrosse League MVP andmember of NLL Hall of Fame

We were formed in2001, under the name “Instanet, Inc.” to provide Internet fund transfers. Instanet,which had no operating revenues, was a development stage company. Instanet’sbusiness model was not successful and it was searching for an operatingbusiness. Vita Cube Systems, Inc. (“V3S”), a Colorado corporation formed inOctober 2000, contacted Instanet in May 2003. The parties completed astock-for-stock exchange on June 20, 2003, in which Instanet acquired V3S. Theacquisition was conducted on an “arms-length” basis. In the exchange, thethen existing stockholders of V3S exchanged their stock in V3S for 2,714,403shares of common stock of Instanet, then representing a 90% ownership interestin Instanet. V3S then became a wholly-owned subsidiary of Instanet andV3S’s management became management of Instanet. Instanet changed its name toVitaCube Systems Holdings, Inc. V3S at the time of the acquisition had $810,743of current and long-term assets and $3,000,080 of current and long-termliabilities. V3S’s assets included cash and cash equivalents, inventory,product formulations, an office information technology system and officeequipment and furniture. The acquisition of V3S by Instanet is considered areverse acquisition and accounted for under the purchase method of accounting.Under reverse acquisition accounting, V3S is considered the acquirer foraccounting and financial reporting purposes. In September 2005, we changed thename of the network marketing subsidiary from Vitacube Network, Inc. to XELR8,Inc. In March 2007, the shareholders approved the change of the name of theparent company from Vitacube Systems Holdings, Inc. to XELR8 Holdings, Inc.

The description ofour business describes the business being conducted by V3S and now XELR8, Inc.Instanet discontinued its business prior to the stock-for-stock exchange.

### **IndustryOverview**

### ***TheNutrition Industry***

According to thelatest industry overview, *Nutrition BusinessJournal* (NBJ) (June/July 2006), the year 2005 was a study ofcontrast and contradiction in the nutrition industry. While supplementsdeclined in the mass market, many large direct sellers of nutritional productsreported double-digit growth. Overall growth was 9.3% to a total of $75.4billion in U.S. sales, up from 7.8% the year before. The Nutrition industry issubdivided into four common categories: Dietary Supplements; Natural andOrganic Foods; Functional Foods; and Natural and Organic Personal Care &Household Products. U.S. consumer sales of all Dietary Supplements totaled$21.3 billion in 2005 on 4.5% growth, according to NBJ.  This growth was mixed across the multiple channels,with the mass market again faring the worst with an overall 1.5% decline, whileall other channels saw increases: with a 6.2% gain in natural and specialtyretail channels; 25% in internet sales; 6.7% for practitioner sales  and direct sales saw an increase of8.6%.  Dietary supplement sales in 2005were led by specialty supplements, with growth of 13.3%, then sports nutritionat 5.7%, minerals at 4.3%, vitamins at 3.9% and finally herbs and botanicals at2.1%.

We believe thatthe size of the supplement market is due to public awareness of the positiveeffects of nutritional dietary supplements. The 2004 Consumer Confidence Surveyby the Council for Responsible Nutrition found high consumer confidence insupplements — as well as a significant increase in supplement usage.  Fully 78% of U.S. adults surveyed repliedthat they are very or somewhat confident in supplements, while the overwhelmingmajority (85%) believes vitamin and mineral supplements are safe.  Over two-thirds (66%) have confidence in thesafety of herbal supplements. Regular supplement use rose from 27% to 33%,while 62% of consumers reported using supplements at least occasionally.

While organicfoods growth continues to be an important story, 2005 will likely most beremembered as the year that liquid botanical supplements exploded into acategory that is approaching half a billion dollars in U.S. consumer

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sales.  2005 will also be remembered for thecontinued slide of the liquid meal supplements, which continued to decline for itsthird consecutive year

### ***TheDirect Selling Industry***

Firms that use directsales as their distribution method have grown in numbers, sales and profits,both domestically and abroad. Stated in a press release issued on February 15,2006, by the Direct Selling Association, the direct selling industrycontributed $72 billion to the U.S. economy in 2004, according to an economicimpact study conducted by Ernst & Young.

The $72 billion includesdirect, indirect, and induced impacts from $27.8 billion in wages, commissions,bonuses, and other compensation earned by the more than 13.6 million Americanswho work in the direct selling industry, as well as impact from sales tocustomers, production activities, capital investments and tax revenue.  The study also found significant socialbenefits that flow to those who work as independent sellers. These include theflexibility that allows them to own and operate a business while caring fortheir families, higher self-esteem and confidence as a result of their directselling experiences, and high levels of satisfaction (more than 89 percentdescribed satisfaction with their direct selling experience.).

Results of the2004 Direct Selling Association’s Annual Growth and Outlook Survey indicate a10.7% increase in direct sales over the previous two years to a record high of$29.55 billion. This represents the 19th consecutive year of growth for the industry.The survey, which measures the size and activity of the U.S. direct sellingindustry, is conducted annually and includes responses from a cross-sectionof direct selling companies. Other major results of the survey indicatewellness products, such as weight loss products and nutritional supplements,account for approximately 15.3% of direct sales. The Direct Selling Association’spublished figures for 1999-2003 indicate that annual U.S. retail sales for thefive years ended December 31, 2003, have grown from $24.5 billion to nearly $30billion along with the independent distributor base growing from 10.3 millionto nearly 13.3 million individuals during the same time period.

We believe theprospects for continued growth in direct sales are good and should benefit us,and we perceive several reasons why such growth has occurred:

·                  Thegrowth of direct sales has given it public visibility. We believe thatgovernmental regulation of the direct selling industry has facilitated thepublic’s market acceptance of legitimate direct selling companies.

·                  Thecurrent economic climate of business closures, lay-offs, downsizing,outsourcing, and merging has resulted in motivated, educated workers seekingdirect sales. These workers generally have professional and social networks,which offer personalized credibility to the direct selling industry.

·                  Withimproved technology and the expanding use of the Internet, direct selling firmscan become more efficient. For example, none of our independent distributorsare required to carry inventory or personally conduct public presentations, andour computer systems keep track of and communicate with independentdistributors and their organizations. We believe these efficiencies make directselling easier to administer than in the past.

### **OurProducts**

Currently we offer13 different nutritional products. None of our products contain substances thathave been the subject of publicized health concerns by the medical communitysuch as ephedra, creatine, androstene, androstenedione, aspartame, steroids orhuman growth hormones. During 2006 the Company developed a new product offeringthat was launched on January 12, 2007 called Bazi. Our products include:

***XELR8 EDS System***

The EDS System isthe packaged concept for three of our products, EAT, DRINK and SNACK whichallows the distributor or customer to purchase the complete system of productsbundled together. The products can also be purchased individually.

***XELR8 EAT***

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The EAT product is a functional food drinkthat was formulated as a meal replacement. It combines all the healthbenefits of a protein-based meal replacement drink with the high-impactnutrition value of pure whole food supplements. The foods and nutrients in theEAT product are based on the Harvard Healthy Food Pyramid developed at theHarvard Medical School, and includes ingredients from the eight essential foodgroups that their studies have shown people should eat from everyday: WholeGrains; Vegetables; Fruits; Poultry, Eggs and Fish; Plant Oils; Nuts; Legumes;and Multi-Vitamin and Calcium Supplements. Added to the product are essentialenzymes, pro-biotics and SerotainTM.

***XELR8 DRINK***

The DRINK product is an energy drink that hasbeen formulated with the health benefits of antioxidants. The DRINK is sugarfree, low in carbohydrates, high in flavonoid antioxidants (vitamins A, C andD) and has an ORAC value (measurement of antioxidant strength) of 6,000, whichis equilivant to three servings of blueberries.

***XELR8 SNACK***

The SNACK is araspberry-chocolate chew that contains SeroTONETM, a proprietary complex thatworks with your body’s natural levels of serotonin helping to satisfy cravingsbetween meals. SNACK is also formulated to be low in fat and calories atapproximately 60 calories and 2.5g of fat per serving.

***XELR8 HYDRATE(formerly eForce® Sports Drink)***

XELR8 HYDRATE is asports drink that has been formulated to support sustained energy without thelevels of sugar and caffeine of most colas, and with one-tenth the amount ofcarbohydrates and two additional hydrating electrolytes not found in Gatorade®,a competing sports drink. XELR8 HYDRATE has been formulated to provide supportfor sustained energy before activity by incorporating the ingredients D-Ribose,5 ginsengs and a complete B-Vitamin Complex (B1, B2, B6 and B12). XELR8 HYDRATEalso contains antioxidants such as Vitamins A, C and E and pomegranateextract in its formulation designed to benefit the body after activity.

***XELR8 BUILD(formerly VitaPro® Nutrition Shake)***

XELR8 BUILD is abalanced shake that has a blend of proteins, carbohydrates and sugars and isavailable in chocolate or vanilla flavors. Its blend of proteins is designed tosupport metabolism and provide energy.

XELR8 BUILD isformulated with 27 vitamins, minerals and antioxidants to help providenourishment. XELR8 BUILD combines various protein sources, vitamins, andminerals with ingredients such as Aminogen®—an ingredient that contributesamino acids to the body and Fibersol-2®, a fiber that aids in digestion.

***Vitamins andMinerals, including XELR8 SUPPORT***

Our vitamins,minerals, and specialty formulations are sold in various VitaCubes® and in theXELR8 SUPPORT PACK, and consist of tablets, capsules and soft gel formulations.The VitaCube® is a compartmentalized container in which each supplement isseparated into its own compartment, with a label above to designate thelocation of supplement. The XELR8 SUPPORT PACK is a flip top box of vitaminsthat are pillow packed into individual servings, with four tablets in eachserving. The XELR8 SUPPORT PACK replaced the Basic VitaCube®, and is designedfor individuals who are new to nutritional supplement programs or who arerecreational athletes. This label also provides the supplement name, aphotograph, its benefits, the main ingredients and dosages, and the time totake it. VitaCubes® are divided into two primary and gender-specificpackages:

·                  VitaCube®Essential, designed for the individuals who have taken supplements previouslyand who seek a continued, serious exercise routine; and

·                  VitaCube®Elite, designed for the individual who wants to maximize his or her exerciseregimen and sports performance.

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* *

*Supplements found in our**XELR8 SUPPORT PACK  and VitaCube® and their product description:*
| Name of Supplement                                                                   | ** ** | **Product Description/Intended Benefits**                                                                                                  |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
| XELR8  Multi-Vitamin and Mineral / VitaCube ® M32+® (Multi System Formula) |       | 32 vitamins and minerals—multivitamins                                                                                                |
|                                                                                 |       |                                                                                                                                       |
| XELR8 Bone  Support / VitaCube® Cal/Mag+                                        |       | Calcium and Magnesium—support bones and muscles                                                                                       |
|                                                                                 |       |                                                                                                                                       |
| Absorbit                                                                             |       | Digestive Enzymes and Aminogen®—aid digestion of  nutrients                                                                      |
|                                                                                 |       |                                                                                                                                       |
| CP Complex®                                                                     |       | Vitamin C and Potassium—aid metabolic function                                                                                        |
|                                                                                 |       |                                                                                                                                       |
| AO Elite®                                                                       |       | L-Arginine and L-Ornithine—aid  circulation and muscle repair                                                                         |
|                                                                                 |       |                                                                                                                                       |
| ZMA Pro                                                                              |       | Zinc and Magnesium Aspartate—support muscle function  and muscle recovery from exercise                                               |
|                                                                                 |       |                                                                                                                                       |
| WNB                                                                                  |       | Women’s Natural Balance—support for women’s health                                                                          |
|                                                                                 |       |                                                                                                                                       |
| GC Elite®                                                                       |       | L-Glutamine and L-Carnitine amino  acids—facilitate muscle recovery and fat metabolism                                                |
|                                                                                 |       |                                                                                                                                       |
| Ultra EFA                                                                            |       | Essential Fatty Acids with Vitamin E—support  cardiovascular health (essential fatty acids) and cellular functions (Vitamin  E)       |
|                                                                                 |       |                                                                                                                                       |
| XELR8 Essential  Oils                                                                |       | Essential Oils—support cardiovascular health and  supports muscle recovery, including Omega 3, 6 & 9; Vitamin E and  CoEmzyme Q10 |
|                                                                                 |       |                                                                                                                                       |
| AlphaNac®                                                                       |       | Alpha Lipoic Acid and N-Acetyl-L-Cysteine  antioxidants—help neutralize effects of muscle stress associated with  exercise            |
|                                                                                 |       |                                                                                                                                       |
| JSH® (Joint  Support Health)                                                    |       | Glucosamine and Chondroitin—support joint  flexibility and mobility                                                                   |
|                                                                                 |       |                                                                                                                                       |
| XELR8 Joint  Support                                                                 |       | Glucosamine and Chondroitin—support joint  flexibility and mobility including MSM, Boswellia, Tumeric and Cayenne                     |
|                                                                                 |       |                                                                                                                                       |
| Q-Zyme®                                                                         |       | CoEnzyme Q10—support energy metabolism in the heart                                                                                   |

 

***BaziTM***

Our latest product offering, Bazi, is a liquidnutritional drink packed with eight different fruits and berries, including theChinese jujube, plus 12 vitamins and 68 minerals. The proprietary XELR8 Phyto8Blend contains the following fruits and berries: Jujube Fruit, Blueberry,Pomegranate, Goji Berry, Mangosteen, Raspberry, Acai and Seabuckthorn.Additionally, the product contains 12 vitamins including A, C, E and B-complexand the XELR8 Mineral Blend.

***Quality in OurProducts***

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In seeking quality in our products, we require that before a product isbrought to market, all:

·                  supplementsare supported with publicly available scientific research and references;

·                  ourmanufacturers carry applicable manufacturing licenses;

·                  ingredientsare combined so that their effectiveness is not impaired;

·                  ingredientsare in dosage levels that fall within tolerable upper intake levels establishedfor healthy people by the Institute of Medicine of the National Academies;

·                  productsare free of adulterated ingredients such as ephedra, creatine, androstenedione,aspartame, steroids or human growth hormones;

·                  formulationshave a minimum one year shelf life;

·                  productsare 100% free of lead and the typical allergens of wheat, corn and yeast; and

·                  tablets,capsules and soft gels are designed to readily dissolve in the body tofacilitate absorption.

### **ProductDevelopment**

In May of 2005, weentered into a twelve month contract for the services of UTEK, Inc., aknowledge transfer enterprise, under a strategic alliance services contract.UTEK is the primary organization responsible for the acquisition of newtechnologies, primarily from universities, medical centers and federal researchlaboratories for the formulation of all of our new products. During 2006 and2005 our expenses related to the UTEK contracts were $40,005 and $55,995respectively. In October 2006, we terminated our relationship with UTEK.

***New Product Identification.***  From time to time we expand our product linethrough the development of new products. New product ideas are derived from anumber of sources, including trade publications, scientific and healthjournals, consultants, distributors, and other third parties. Prior tointroducing new products, we investigate product formulations as they relate toregulatory compliance and other issues. We expect to formulate approximatelytwo new products within the next 12 to 24 months.

### **CelebrityEndorsements**

As part of ourmarketing efforts, we compensate several sports celebrities for endorsing our products.We believe these endorsements lead health and fitness conscious consumers touse our products.

Our endorsers haveagreed to provide written testimonials to advertise our products including theuse of their name, likeness, and pictures for print, radio, electronic media,and video announcements. Additionally some endorsers have agreed to makepersonal appearances, participate in website chats, and wear apparel containingour logo.

The terms of ourendorsement contracts vary. These contracts are generally for a period of oneto three years and the endorsers are provided with our products for personaluse on a reduced or no cost basis. In addition to receiving our products, theseendorsers may receive cash compensation, stock options, stock grants, a percentageof net revenues, or other consideration. Some of our endorsement contracts alsoprovide that the endorser will not endorse any competing products.

### **OurIndependent Distributors and Customers**

***Overview.***  We distribute products through a direct sellingprogram with independent distributors. Our distributors purchase products fortheir own consumption and to sell to their customers. Generally distributors donot maintain an inventory of products, but rather introduce new customers whopurchase directly from us.

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Independentdistributors are encouraged to recruit and sign up new independent distributorsand customers, the result of which is the creation of new “levels” within theirsales organizations. These new enrollees are referred to as the “downline” oftheir enrolling distributor. Downline independent distributors are alsoencouraged to recruit new independent distributors, thereby creating additionallevels in their organizations, but still connected to the original enrollingdistributor. Enrollments occur based on personal introduction regardless ofgeographic location. We have no sales territories. Our independent distributorsare compensated with commissions and bonuses on the sale of product generatedthrough their downline.

We believe direct selling is an effective way to distribute ourproducts because:

·                  distributorscan educate consumers about our products in person;

·                  directsales allows for actual product sampling by potential consumers;

·                  comparedto other distribution methods our distributors can provide customers highlevels of service and attention;

·                  directselling has benefited from advancements in technology, including low-costtelephone services and the Internet; and

·                  productscan be introduced to the market through person-to-person selling, resulting inlower up front capital outlays for us than conventional methods.

Our marketing teamutilizes multimedia website, CDs and e-mail to enhance the selling andrecruiting capabilities of our independent distributors. These materials aresold to the independent distributors so that the ongoing advertising costsborne by us are not substantial. In addition, we utilize print,telecommunications and the Internet to recruit and train independentdistributors. We have created a compensation plan that we believe motivatesindependent distributors to sell our products, build their sales organizations,and participate in Company-sponsored contests.

***Structure of Our Direct Selling Program.***  To become one of our independentdistributors, a person must be enrolled through an existing independentdistributor and must purchase a starter kit or business builder pack, except instates where a purchase of a starter kit is optional due to state regulations,in which case the distributor is given a starter kit at no charge. The starterkit consists of forms, policy and procedures and selling aids, their personalwebsite and costs $30. The business builder packs contain the starter kit, aselection of our products, and other materials, and range in price from $99 to$499.

***Compensation Plan.***  Independent distributors can earncompensation in three different ways:

·                  sellingproducts directly to customers (earning a “retail rebate” for the spreadbetween their price and their customer’s price as established by us);

·                  generatingcommissions based on their personal sales volume and the sales volume of theirdownline organization. We do not pay compensation for an existing distributorenrolling a new distributor; and

·                  qualifyingfor bonuses based on sales performance by distributors and their downlineorganization.

***Independent Distributor Training, Support and Motivation.***  We believe that training, support andmotivation are key elements in our independent distributors achieving success.Training from our corporate management includes live training events,conference calls and e-mail. We have conference call capabilities which areavailable any time and can be accessed from any U.S. location for use by ourindependent distributors. In addition, every independent distributor isprovided with an online “back office” or website. This provides thedistributors the ability to send e-mails directly to their downline databasealong with tools for placing and reviewing orders and managing his or herdownline.

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For motivation, werecognize our independent distributors with recognition and awards based uponsales achievements. In addition, from time to time, we use memorabilia signedby our celebrity endorsers as a further incentive. We plan on utilizing tripsand vacations as a primary component of our motivation strategy. During March2006, we held a distributor recognition and training conference in Las Vegas,Nevada and in July 2006, we held a “Diamond” recognition weekend in Aspen,Colorado for our best performing independent distributors. In September 2006,we held a “Director Training” weekend in Denver, Colorado.

***Additional Methods of Distribution.*** We also sell directly to professional andOlympic athletes using our in-house staff. Many of these athletes purchase ourproducts at a discounted price, although some endorse our products in returnfor receiving them at no charge. We believe the endorsements of thesehigh-profile athletes provides credibility to our products.

We are not dependent on one customer or a group of customers.

### **ManagementInformation, Internet and Telecommunication Systems**

The ability toefficiently manage distribution, compensation, inventory control, andcommunication functions through the use of sophisticated and dependableinformation processing systems is critical to our success.

We continue toupgrade systems and introduce new technologies to facilitate our continuedgrowth and support of independent distributor activities. These systemsinclude: (1) an internal network server that manages user accounts, print andfile sharing, firewall management, and wide area network connectivity; (2) aMicrosoft SQL database server to manage sensitive transactional data, andcorporate accounting and sales information; (3) a centralized host computerlocated in Texas supporting our customized order processing, fulfillment andindependent distributor management software; (4) a standardized Nortel Meridiantelecommunication switch and system; (5) a hosted independent distributorwebsite system designed specifically for network marketing and direct salescompanies; and (6) procedures to perform daily and weekly backups with bothonsite and offsite storage of backups.

Importantly, ourtechnology systems provide key financial and operating data for management,timely and accurate product ordering, commission payment processing, inventorymanagement and detailed independent distributor records. Additionally, thesesystems deliver real-time business management, reporting and communicationstools to assist in retaining and developing our sales leaders and independentdistributors. We intend to continue to invest in our technology systems inorder to strengthen our operating platform.

### **ProductReturns**

We revised ourreturn policy in 2004 to provide an initial purchase guarantee to all first-timecustomers and first-time independent distributors who are not satisfiedwith our products for any reason. These customers and distributors may returnto us any products purchased within 60 days of their initial order for a fullrefund. After 60 days and on all subsequent orders, customers and independentdistributors may return unused, unopened and undamaged product that iscurrently being sold by us for a refund of 100% of the sales price less a 10%restocking fee, provided it is returned to us within 12 months of the purchasedate. Product damaged during shipment is replaced. Historically, productreturns as a percentage of our net sales have ranged from 0.7% to 7.7% of ourmonthly net sales.

### **OurCompetition**

We compete withmany companies engaged in selling nutritional supplements. We also compete withdirect selling companies who sell products similar to ours. Most of ourcompetitors have significantly greater financial and human resources than wedo, and have operating histories longer than ours. We seek to differentiate ourproducts and marketing from our competitors based on our product quality, theuse of sports celebrity endorsers, our attractive compensation plan for ourindependent distributors and through our simple selling program.

The retail marketfor nutritional supplements is characterized by a few dominant nationalcompanies, including General Nutrition Centers, Vitamin World, Vitamin Shoppe,and Great Earth Vitamin Stores. Others have a presence within local markets,such as Vitamin Cottage in Denver, Colorado. Three companies dominate theInternet— Puritan.com, GNC.com and VitaminShoppe.com, the latter two havingretail sales locations as well.

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Major competitorsin the sports nutrition and weight-loss markets consist of companies such asEAS, Inc., Weider Nutrition International, Inc. and Twinlab Corporation, whichdominate the market with such products as Myoplex (EAS), Body Shaper (Weider)and Ripped Fuel (Twinlab).

Competitors forour sports and energy drinks include Gatorade®, Red Bull®, Powerade®,Accelerade® and All Sport®. Indirect competition includes soft drinks andorange juice and related products such as Sunny Delight®, CapriSun® and otherfruit drinks. Our protein drink and meal replacement compete with Myoplex®,Atkins Advantage®, Ensure® and Prolab®. The SNACK product competes in themarket with low carbohydrate bars like Atkins Advantage®, Balance® and EASAdvantageEdge®.

We compete with anumber of large direct selling firms selling nutritional, diet, health, personalcare and environmental products, and numerous small competitors. The principaldirect selling competitors are Amway Corporation, Nature’s Bounty, Inc.,Sunrider Corporation, New Vision USA, Inc., Herbalife International of America,Inc., USANA, Inc., and Melalecua, Inc.

### **OurManufacturers**

We use sixprincipal manufacturers for the components of our products, and multiplevendors for packaging and labeling. Our relationship with any of ourmanufacturers may be terminated at will or upon short notice. We haveestablished relationships with other manufacturers that we believe can satisfyour needs if our relationship with any principal manufacturer terminates.

**ProductDelivery**

All of ourproducts are shipped by our manufacturers directly to us for storage at ourfacilities in Denver, Colorado. The majority of the products sold to ourindependent distributors and their customers are shipped directly by a thirdparty warehouse and fulfillment contractor, HoldenMSS, to the distributors orcustomers. We collect sales tax on products based upon the address of theconsumer to whom products are sent regardless of how the order is placed. Salesto our professional and Olympic athletes, our sports teams and from ournon-distributor customers are shipped directly to them from our facilities.

**RegulatoryMatters**

***General.***  Our operations are affected by extensivelaws, governmental regulations, administrative determinations, court decisionsand enforcement policies. These requirements exist at the federal, state and locallevels in the United States, including laws and regulations pertaining to:

·                  theformulation, manufacturing, packaging, labeling, holding, storage,distribution, advertising, and sale of our products;

·                  productclaims and advertising, including direct claims and advertising by us, as wellas claims and advertising by independent distributors, for which we may be heldresponsible;

·                  ourdirect selling program; and

·                  taxationof independent distributors (which in some instances could impose an obligationon us to collect the taxes and maintain appropriate records).

The formulation,manufacturing, packaging, labeling, holding, storage, distribution,advertising, and sale of our products are subject to regulation by one or morefederal agencies, including the FDA, the FTC, the Consumer Product SafetyCommission (“CPSC”), the Occupational Safety and Health Administration (“OSHA”),the Department of Agriculture (“USDA”) and the Environmental Protection Agency(“EPA”). These activities are also regulated by various agencies of the statesand localities in which our products are sold. Pursuant to the Federal Food,Drug, and Cosmetic Act (“FDCA”), the FDA regulates the processing, formulation,safety, manufacture, packaging, labeling, holding, sale, and distribution offoods and nutritional supplements (including vitamins, minerals, amino acids,herbs, and botanicals). The FTC has jurisdiction to regulate the advertising ofthese products.

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The CPSC is charged withprotecting the public from risks of serious injury or death associated with theuse of consumer products. Nutritional supplements are among the over 15,000types of consumer products under CPSC’s jurisdiction. When consumers complainto the CPSC about alleged harm stemming from ingestion of a nutritional supplement,CPSC may contact the entity concerned, inform it of the nature of thecomplaint, and invite a response. CPSC has conducted several recalls ofiron-containing dietary supplements that do not comply with the child-resistantpackaging requirement. The OSHA is charged with protecting workplace safety.Nutritional supplement companies must maintain a safe workplace and may fromtime to time be subject to queries from OSHA if manufacturing methods orprocedures raise a question of worker safety. The USDA has jurisdiction overanimal food and animal feed, including regulatory control over the harvestingof animal-based source materials, including animal-derivedproteins, and animal-derived gelatin capsules, used in the making ofdietary supplements. The EPA regulates dietary supplement compliance withstandards established under the Clean Air Act, the Clean Water Act, theOccupational Safety and Health Act, and the Pollution Prevention Act as theyaffect the use, maintenance, and disposal of substances used in and facilitiesused for the manufacture of nutritional supplements.

The FDCA has beenamended several times with respect to nutritional supplements, in particular bythe Dietary Supplement Health and Education Act of 1994 (“DSHEA”), whichestablished a new framework governing the composition, safety, labeling andmarketing of nutritional supplements. Nutritional supplements are defined asvitamins, minerals, herbs, other botanicals, amino acids and other dietarysubstances for human use to supplement the diet, as well as concentrates,metabolites, constituents, extracts or combinations of such dietaryingredients. Generally, under DSHEA, dietary ingredients that were on themarket prior to October 15, 1994, may be used in nutritional supplements withoutnotifying the FDA. New dietary ingredients, consisting of dietary ingredientsthat were not marketed in the United States before October 15, 1994, aresubject to a FDA pre-market new dietary ingredient notification requirementunless the ingredient has been present in the food supply as an article usedfor food without being chemically altered. A new dietary ingredientnotification must provide the FDA with evidence of a history of use or otherevidence of safety establishing that use of the dietary ingredient willreasonably be expected to be safe. A new dietary ingredient notification mustbe submitted to the FDA at least 75 days before the initial marketing of thenew dietary ingredient. There is no certainty that the FDA will accept anyparticular evidence of safety for any new dietary ingredient. The FDA’s refusalto accept such evidence could prevent the marketing of such dietaryingredients.

The FDA issued aconsumer warning in 1996, followed by proposed regulations in 1997, coveringnutritional supplements that contain ephedra or its active substance, ephedrinealkaloids. We have never produced or sold products containing ephedra. InFebruary 2004, the FDA issued a final regulation declaring nutritionalsupplements containing ephedra under the FDCA because they present anunreasonable risk of illness or injury under the conditions of use recommendedor suggested in labeling, or if no conditions of use are suggested orrecommended in labeling, under ordinary conditions of use. The rule took effecton April 12, 2004, and bans the sale of nutritional supplement productscontaining ephedra. Similarly, the FDA issued a consumer advisory in 2002 withrespect to nutritional supplements that contain the ingredient Kava, and theFDA is currently investigating adverse effects associated with ingestion ofthis ingredient. We have never produced or sold any products containing Kava.

DSHEA permitsstatements of nutritional support to be included in labeling for nutritionalsupplements without FDA premarket approval. These statements must be submittedto the FDA within 30 days of marketing and must bear a label disclosure that “Thisstatement has not been evaluated by the Food and Drug Administration. Thisproduct is not intended to diagnose, treat, cure, or prevent any disease.”These statements may describe a benefit related to a nutrient deficiencydisease, the role of a nutrient or nutritional ingredient intended to affectthe structure or function in humans, the documented mechanism by which anutrient or dietary ingredient acts to maintain such structure or function, thegeneral well-being from consumption of a nutrient or dietary ingredient, butmay not expressly or implicitly represent that a nutritional supplement willdiagnose, cure, mitigate, treat or prevent a disease. An entity that uses astatement of nutritional support in labeling must possess scientific evidencesubstantiating that the statement is truthful and not misleading. If the FDAdetermines that a particular statement of nutritional support is anunacceptable drug claim or an unauthorized version of a disease claim for afood product, or if the FDA determines that a particular claim is notadequately supported by existing scientific data or is false or misleading, wewould be prevented from using the claim.

In addition, DSHEAprovides that so-called “third-party literature,” e.g., a reprint of apeer-reviewed scientific publication linking a particular nutritionalingredient with health benefits, may be used in connection with the sale of anutritional supplement to consumers without the literature being subject toregulation as labeling. Such literature must not be false or misleading; theliterature may not promote a particular manufacturer or brand of

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nutritional supplement;the literature must present a balanced view of the available scientificinformation on the nutritional supplement; if displayed in an establishment,the literature must be physically separate from the nutritional supplement; andthe literature may not have appended to it any information by sticker or anyother method. If the literature fails to satisfy each of these requirements, wemay be prevented from disseminating it with our products, and any disseminationcould subject our products to regulatory action as an illegal drug. Moreover,any written or verbal representation by us that would associate a nutrient in aproduct that we sell with an effect on a disease will be deemed evidence of anintent to sell the product as an unapproved new drug, a violation of the FDCA.

We expect that theFDA will adopt in the future the final regulations, originally proposed inMarch 2003, regarding current Good Manufacturing Practice guidelines (“cGMPs”)in manufacturing, packing, holding and distributing dietary ingredients andnutritional supplements. These regulations will require nutritional supplementsto be prepared, packaged, and held in compliance with strict rules, and willrequire quality control provisions that may mandate redundant testing ofproduct ingredients at each separate stage of manufacture. We or our third-partysuppliers or vendors could incur substantial additional expenses in order tocomply with any new rules. If the FDA issues the final cGMPs for dietarysupplements in 2007, as we expect, we and our manufacturers will have up to ayear to ensure compliance. We expect to see an increase in our manufacturingcosts as a result of the necessary increase in testing of raw ingredients andfinished products and compliance with higher quality standards, although we arenot certain of the amount of these costs.

The proposedregulations would establish standards to ensure that nutritional supplementsand dietary ingredients are not adulterated with contaminants or impurities,and are labeled to reflect accurately the ingredients in the products. It alsoincludes proposed requirements for designing and constructing physical plants,establishing quality control procedures, and testing manufactured dietaryingredients and nutritional supplements, as well as proposed requirements formaintaining records and for handling consumer complaints related to cGMPs. Weare evaluating this proposal with respect to our manufacturers. However, theproposed regulation can be expected to result in additional costs and possiblythe need to seek alternate suppliers.

The FDA has broadauthority to enforce the provisions of the FDCA applicable to nutritionalsupplements, including powers to issue a public warning letter to an entity, topublicize information about illegal products, to request a recall of illegalproducts from the market, and to request the Department of Justice to initiatea seizure action, an injunction action, or a criminal prosecution in the UnitedStates courts. The regulation of nutritional supplements may increase or becomemore restrictive in the future.

In 2004,legislation was introduced in both houses of Congress that imposed substantialnew regulatory requirements for dietary supplements.  These bills did not pass and are no longer pending,but we believe the 2004 proposed legislation evidences a continuing effort tofurther regulate dietary supplements.

On April 12, 2004,the FDA adopted a new test for determining when a nutritional supplement isadulterated. Under this test, the FDA may declare a nutritional supplementadulterated (i.e., to present an unreasonable risk of illness or injury) if itfinds any benefit provided by the supplement outweighed by a risk of illness ofinjury. The new risk/benefit test is ill-defined and can be interpreted topermit FDA to hold a wide range of nutritional supplements adulterated. It ispossible that FDA might hold more nutritional supplements adulterated in thefuture, reducing the nutritional ingredients available for use in our products.

The FTC exercisesjurisdiction over the advertising of nutritional supplements. In recent years,the FTC has instituted numerous enforcement actions against nutritionalsupplement companies for deceptive advertising based on those companies’alleged failure to possess competent and reliable scientific evidence insupport of claims made in advertising.

The FTC maymonitor our advertising and could request all evidence in support of ouradvertising claims, which evidence is required to be kept by us in advance of advertising.Discerning what constitutes “competent and reliable scientific evidence”involves, to a degree, a subjective assessment of the relative level, degree,quality, and quantity of scientific evidence and its acceptance in thescientific community as proof of the advertising statement. It is thereforepossible that we may think evidence we have as sufficient but the FTC may deemthe evidence inadequate. We believe we are in material compliance withapplicable federal, state and local rules.

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On December 9,2006, President Bush signed the Dietary Supplement & Nonprescription DrugConsumer Protection Act into law. The legislation requires manufacturers ofdietary supplement and over-the-counter products to notify the FDA when theyreceive reports of serious adverse events. We already have an internal adverseevent reporting system that has been in place for several years. Based on ourunderstanding of the new law’s requirements, we believe we will have to makesome changes to our existing reporting system, but are still in the process offully evaluating the effect that this will have on the Company. We will knowmore when the FDA issues implementing regulations later in 2007, which we wouldintend to fully comply with.

***Direct Selling Program.***  Our direct selling program is subject to anumber of federal and state regulations administered by the FTC and variousstate agencies. These regulations include anti-pyramid laws, securities laws,and laws and regulations governing business opportunities, franchises,lotteries and deceptive trade practices.

The anti-pyramidlaws generally are directed at ensuring that product sales ultimately are madeto the retail consumers, that advancement within an organization is based onsales of the organization’s products rather than the recruitment of newdistributors, and that distributors are not saddled with large quantities ofnon-returnable inventory. We remain subject to the risk that, in one or moremarkets, our marketing system could be found not to be in compliance withapplicable anti-pyramid laws. Failure by us to comply with these regulationscould have a material adverse effect on our business in a particular market orin general.

We also aresubject to the risk of private party challenges to the legality of our directselling program. For example, in *Webster v.Omnitrition International, Inc.*, 79 F.3d 776 (9th Cir. 1996), the multi-level marketingprogram of Omnitrition International, Inc. (“Omnitrition”) was successfullychallenged in a class action by Omnitrition distributors who alleged thatOmnitrition was operating an illegal “pyramid scheme” in violation of federaland state laws. We believe that our direct selling program satisfies thestandards set forth in the Omnitrition case and other applicable statutes andcase law defining a legal marketing system, in part based upon what we believeare differences between our marketing system and that described in theOmnitrition case.

We monitor andrespond to regulatory and legal developments, including those that may affectour direct selling program. However, the regulatory requirements concerningdirect selling programs do not include bright line rules and are inherentlyfact-based. An adverse judicial determination with respect to our directselling program could have a material adverse effect on our business. Anadverse determination could: (1) require us to make modifications to our directselling program, (2) result in negative publicity, (3)have a negative impact onindependent distributor morale, (4) result in reduced revenues, (5) result infewer celebrity endorsers of our products, and (6) potentially lead to thefailure of the Company. In addition, adverse rulings by courts in anyproceedings challenging the legality of multi-level marketing systems,even in those not involving us directly, could have a material adverse effecton our operations.

Regulatoryenforcement by the FTC against direct sales programs that it believes arepyramids or that are engaging, or have engaged in, significant deceptiveconsumer practices have resulted in complete failure of entities prior to anadverse ruling by a court in a contested hearing or trial. The FTC’s practiceis to conduct an investigation into a company’s practices and activities aswell as the practices and activities of its independent distributors. If theFTC believes that it has developed sufficient evidence, it will apply to acourt for an *ex parte* temporaryrestraining order, an asset freeze, and the appointment of a receiver to runthe company. The FTC has been successful in receiving such extraordinary relieffrom the courts. Once the temporary restraining order is issued, theindependent distributors commonly abandon the selling company and move to otheropportunities quickly. This can result in the failure of a direct sellingcompany before a contested judicial proceeding occurs.

Federal and statesecurities laws may also apply to network marketing programs. If a networkmarketing company’s compensation plan is not properly designed or implemented,the plan itself can fall within the definition of an “investment contract,”which is a form of a security. Promoting such a program without registration isa violation of the securities laws and regulations. A violation could beprosecuted by the Securities and Exchange Commission, state securitiescommissions, or a civil cause of action could be instituted by private parties,and may result in significant damage to, or the closure of, a direct sellingcompany.

The FTC and manystates have “Business Opportunity” laws and regulations. Business opportunitiesthat have a required investment threshold that exceeds a specified amount aresubject to registration and disclosure obligations. Some states also requirethe promoter of the program to secure a surety bond before offering thebusiness opportunity in the state and impose a “cooling off” period before thepromoter can sell the business opportunity to a prospect. If a state or the FTCdetermines that our program is subject to regulation under the businessopportunity laws or regulations, we will be required to register and adhere tothe applicable obligations imposed by the respective states to which thedetermination applies. This could impede the enrollment of new distributors andslow the sales of our products.

During 2006, theFTC proposed a new business opportunity rule. It is currently in the “comment”period during which the FTC is accepting comments from those who wish to make asubmission. The new rule proposes the following amendments to the way thatnetwork marketing companies do business:

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1.               The DisclosureDocument. At least seven days before a new distributor can sign a distributorapplication or make any type of payment to join a program, the sponsor orparent company must provide the prospective distributor with a disclosuredocument. This document must disclose: (a) Identifying information: Thisincludes the name, address and telephone number of the direct selling company,the name of the sponsor, and the date on which the disclosure document isprovided to the prospect; (b) Earnings claim information: If the company ordistributor makes earnings claims (which includes “quality of life” claims suchas pictures of boats, expensive cars, homes, etc.), an earnings claim statementmust be provided which discloses the beginning and ending dates when therepresented earnings were achieved, the number and percentage of alldistributors who achieved that level of earnings within such time period, andany specific characteristics applicable to the person making the earnings claimthat differ from the characteristics of the prospect (e.g., a differentgeographic location); (c) Legal Claim Disclosures: If the seller, or anyaffiliate or prior business of the seller, or any of the seller’s officers,directors, managers or similar individuals have been the subject of any civilor criminal action involving misrepresentation, fraud, securities lawviolations, or unfair or deceptive practices in the prior ten years, the sellermust disclose the name of the action, the caption, the court, case number, andthe names of the parties; (d) Refund Policy: The seller must disclose the termsof its refund policy; (e) Cancellation and Refund Requests: The seller mustdisclose the total number of purchasers who have cancelled their businesswithin the preceding two years; (f) Reference List: The seller must state thename, city, state, and telephone numbers of ten people who have purchased thebusiness opportunity within the last three years who are located nearest to theprospect’s location. Otherwise, the company can disclose all of itsdistributors. The company’s application must also disclose to prospects that ifthey join, their personal contact information may be disclosed to other futurebuyers.

2.               Record Retention:The direct sales companies must archive for three years: (a) Each materiallydifferent version of all disclosure and earnings claim documents; (b) Eachpurchaser’s disclosure receipt; (c) Each oral or written cancellation or refundrequest; (d) All substantiation upon which the seller relies for earningsclaims.

The impact of theproposed rule could be: (1) the advance seven day disclosure will cause areduction in enrollments; (2) providing 10 references closest to an applicantwill require a significant investment in advanced software systems; (3) thereference requirement creates a confidentiality problem, as it completelyignores distributors’ right to have their personal information maintainedconfidential; the identity of our distributors is deemed a trade secret; and(4) the disclosure of legal claims within the specified categories applies toeven those claims that were settled without admission of liability, and evenapplies to disclosure of claims in which the company prevailed on the claims.

The application ofthe Federal Franchise Rule and state franchise laws have similar application asthe business opportunity laws. If found to be a franchise, we would be requiredto prepare and submit a Uniform Franchise Offering Circular or similardisclosure document to independent distributors before they could enroll in theprogram. Additional compliance obligations would also be imposed. This couldhave a material adverse impact on the enrollment of new distributors and thesales of our products.

The United StatesPostal Services (“USPS”) has determined that some network marketing programsconstitute illegal postal lotteries. If a participant in the program must giveconsideration to participate, and the selling entity remunerates theparticipants based on the element of chance, the program constitutes a postallottery. A determination that we are operating a postal lottery would have amaterial adverse consequence on us as the USPS would discontinue all mailservice and could pursue criminal prosecution.

**Researchand Development**

We incurred$73,921 on research and development for the year ended December 31, 2006compared with $70,037 for the same period in 2005. We developed a replacementproduct for our Basic VitaCube® with a combination of existing vitamins as wellas new formulations. We also developed a new liquid nutrition drink, BaziTMduring 2006, which was launched in January 2007. This product will not requireFDA or other regulatory approval. During 2007, we will continue to evaluate ourproduct line and either update existing products or find new complimentaryproducts to sell through our independent distributors. We estimate aggregateamounts to continue development and testing of these products to beapproximately $90,000.

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**Patents,Trademarks and Proprietary Rights**

We have obtainedregistration on trademarks for nine of our supplements: “Alpha Nac,” “AO Elite,”“Complex SPP,” “CP Complex,” “GC Elite,” “JSH,” and “M32+”. We have alsoobtained trademarks for our rehydration drink “eForce” and our protein shakeproduct “VitaPro,” as well as for other products, all of which we havediscontinued the use of the name. We have abandoned or not pursued efforts toregister marks identifying other items in our product line for various reasonsincluding the inability of some names to qualify for registration. We alsoreceived federal trademark registration for six names or expressions that weuse or intend to use to distinguish ourselves from others: “Cube Up,” “GetCubed,” “Simple, Innovative, Complete Nutrition,” “The Power of Nutrition,” “VitaCube”and “V3S.” All trademark registrations are protected for a period of 10 yearsand then are renewable thereafter if still in use. We are currently pursuing atrademark for “XELR8,” “What Moves You,” “Bazi” and the “Shendong Jujube” to beused in association with our direct sales marketing program.

**Employees**

We had 12full-time employees as of March 9, 2007. We consider our employee relations tobe good.

**ITEM 1A RISKFACTORS**

We are subject tovarious risks that could have a negative effect on the Company and itsfinancial condition. These risks could cause actual operating results to differfrom those expressed in certain “forward looking statements’ contained in thisForm 10-KSB as well as in other communications.

**We havea history of operating losses and a significant accumulated deficit, and wemay never achieve profitability.**

We have not beenprofitable since inception in 2001. We had net losses for the year endingDecember 31, 2006 and year ended December 31, 2005 of $4,669,449 and$5,015,877, respectively. At December 31, 2006, we had an accumulated deficitof $17,250,281. We may never achieve or maintain profitability. Ourability to achieve and maintain a profit is dependent upon our attracting andmaintaining a large base of independent distributors who generate significantsales.

**We may need to raise additionalfunds to fund operations which cannot be assured and would result in dilutionto the existing shareholders.**

To date, ouroperating funds have been provided primarily from sales of our common stock($11,280,587), and by loans from our founder, our chairman and by variousstockholders ($4,239,209), through December 31, 2006, and to a lesser degree,cash flow provided by sales of our products. We used $2,992,028 of cash for operationsin the year ended December 31, 2006, and we used $4,936,422 of cash foroperations in the year ended December 31, 2005. If our business operations donot result in increased product sales, our business viability, financialposition, results of operations and cash flows will likely be adverselyaffected. Further, if we are not successful in achieving profitability,additional capital will be required to conduct ongoing operations. We cannotpredict the terms upon which we could raise such capital or if any capitalwould be available at all, and what dilution will be casued to the existingshareholders.

**Wemay be unable to continue as a going concern in which case our securitieswill have little or no value.**

Our independentauditors have noted in their reports concerning our financial statements as ofDecember 31, 2006 and 2005 that we have incurred substantial losses sinceinception, which raises substantial doubt about our ability to continue as agoing concern. In the event we are not able to continue operations, you willlikely suffer a complete loss of your investment in our securities. See theauditors’ reports on our consolidated financial statements elsewhere in thisForm 10-KSB.

**Ourlimited operating history and recent change in marketing strategy make itdifficult to evaluate our prospects.**

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We have a limitedoperating history on which to evaluate our business and prospects. Our productswere formulated in 2000 and 2001, and we began selling our products to thegeneral public in early 2002. In late 2003, we began to refocus our sales andmarketing efforts on direct sales of products through our network ofindependent distributors. In 2005, we rebranded the network marketing companyand launched new products. In January 2007, we continued the development of ourproduct base, launching our latest product offering, a liquid dietarysupplement drink. There is no assurance that we will achieve significant salesas a result of this new strategy.

We alsomay not be successful in addressing our operating challenges such asestablishing a viable network of independent distributors, developing brandawareness and expanding our market presence. Our prospects for profitabilitymust be considered in light of our evolving business model. These factors makeit difficult to assess our prospects.

**Ourfailure to recruit, maintain and motivate a large base of productiveindependent distributors could limit our ability to generate revenues.**

To increaserevenue, we must increase the sales and recruiting productivity of ourindependent distributors. We cannot assure you that we will be successful inrecruiting and retaining productive independent distributors, particularlysince direct sales organizations usually experience high turnover rates ofindependent distributors. Our independent distributors can terminate theirrelationships with us at any time. The distributors also typically work on apart-time basis and may engage in other business activities, whichmay reduce their efforts for us.

In recruiting andkeeping independent distributors, we will be subject to significant competitionfrom other direct sales organizations, both inside and outside our industry.Our ability to attract and retain independent distributors will be dependent onthe attractiveness of our compensation plan, our product mix, and the supportwe offer to our independent distributors. Adverse publicity concerning directsales marketing and public perception of direct selling businesses generallycould negatively affect our ability to attract, motivate and retain independentdistributors.

Based on ourknowledge of the direct selling industry, we anticipate that our independentdistributor organization will be headed by a relatively small number of keyindependent distributors who together with their downline network will beresponsible for a disproportionate amount of revenues. We believe thisstructure is typical in the direct selling industry, as sales leaders emerge inthese organizations, and it is the current situation with us. The loss of keyindependent distributors will adversely affect our revenues and could adverselyaffect our ability to attract other independent distributors, especially if anindependent distributor takes other independent distributors of ours to acompetitor or to any other organization.

**A changein the amount of compensation paid to our independent distributors could reduceour ability to recruit and retain them and to realize a profit.**

One of oursignificant expenses is the payment of compensation to our independent distributors.This compensation includes commissions, bonuses, awards and prizes. From thedate we changed our sales method to direct sales through independentdistributors, August 1, 2003, through December 31, 2006, compensationpaid to our independent distributors represented 62% of our total revenues. Wemay change our independent distributor compensation plan in seeking tobetter manage these incentives, to monitor the amount of independentdistributor compensation paid and to prevent independent distributorcompensation from having a significant adverse effect on our revenues. Changesto our independent distributor compensation plan may make it difficult forus to recruit and retain qualified and motivated independent distributors. Wedo not have any current plans to change our distributor compensation plan.

**We arenot in a position to exert the same level of influence or control over ourindependent distributors as we could if they were our employees, and wemay be subject to significant costs and reputational harm in the event ourindependent distributors violate any laws or regulations applicable to ouroperations.**

Our independentdistributors are independent contractors and, accordingly, we are not in aposition to provide the same level of control and oversight as we would ifindependent distributors were our employees. While we have implementedindependent distributor policies and procedures designed to govern independentdistributor conduct and to protect our goodwill, there can be no assurance thatour independent distributors will comply with our policies and procedures.Violations by our independent distributors of applicable law or of our policiesand

 

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procedures dealing withcustomers could reflect negatively on our products and operations and harm ourbusiness reputation. To date, we have not experienced any significant problemsaffecting our products, operations or business reputation caused by distributorviolations of our policies and procedures.

In addition,extensive federal, state and local laws regulate our direct selling program.The Federal Trade Commission (“FTC”) or a court could hold us liable for theactions of our independent distributors. The FTC could also find us liablecivilly for deceptive advertising if health benefit representations made by ourindependent distributors are not supported by competent and reliable scientificevidence. If any of these representations made by our independent distributorswere deemed fraudulent, the FTC could refer the matter to the Department ofJustice for criminal fraud prosecution. Also, the Food and Drug Administration(“FDA”) could seek to hold us civilly and criminally liable for misbranding,for adulteration, or for sale of an unapproved new drug if an independentdistributor were to make false or misleading claims, sell a product past itsshelf life, or represent that any of our products were intended for use in thecure, treatment, or prevention of a disease or health-related condition. Whilewe train our independent distributors and attempt to monitor our independentdistributors’ marketing claims and sales materials, we cannot ensure that allof these materials comply with applicable law.

**Our directselling program through independent distributors could be found not to be incompliance with current or newly adopted laws or regulations, which couldsubject us to increased costs and reduced distributor participation in salesefforts, and our revenues would decrease significantly.**

Our directmarketing program could be found to violate laws or regulations applicable todirect selling marketing organizations. These laws and regulations generallyare directed at preventing fraudulent or deceptive schemes, often referred toas “pyramid” or “chain sales” schemes, by ensuring that product salesultimately are made to consumers and that advancement within an organization isbased on sales of the organization’s products rather than investments in theorganization or other non-retail sales-related criteria. The regulationsconcerning these types of marketing programs do not include “bright line”rules and are inherently fact-based. Thus, even in jurisdictions where webelieve that our direct selling program is in full compliance with applicablelaws or regulations governing direct selling programs, we are subject to therisk that these laws or regulations or the enforcement or interpretation ofthem by governmental agencies or courts can change. The failure of our directselling program to comply with current or newly adopted laws or regulationscould result in costs and fines to us and make our independent distributorsreluctant to continue their sales efforts, which would reduce our revenuessignificantly.

We are alsosubject to the risk of private party challenges to the legality of our directselling program. Direct selling programs of some other companies have beensuccessfully challenged in the past. The challenges centered on whether themarketing programs of direct selling companies are investment contracts inviolation of applicable securities laws and pyramid schemes in violation ofapplicable FTC rules and regulations. These challenges have caused directselling companies to focus greater attention on generating product sales tonon-participants or non-distributors. Direct selling companies have addressedthese issues by promoting retail sales incentives, tying sales commissions moredirectly to retail sales and reclassifying those persons who enroll as distributorsbut do not make sales to other persons as retail customers. An adverse judicialdetermination with respect to our direct selling program, or in proceedings notinvolving us directly but which challenge the legality of direct sellingsystems, could have a material adverse effect on our sales efforts, leading tolower revenues. To date, we have not been subject to any adverse judicialdetermination with respect to our direct selling program.

During 2006, the FTCproposed a new business opportunity rule. It is currently in the “comment”period during which the FTC is accepting comments from those who wish to make asubmission. The new rule proposes the following amendments to the way thatnetwork marketing companies do business:

1.             The Disclosure Document. At least seven days before anew distributor can sign a distributor application or make any type of paymentto join a program, the sponsor or parent company must provide the prospectivedistributor with a disclosure document. This document must disclose: (a)Identifying information: This includes the name, address and telephone numberof the direct selling company, the name of the sponsor, and the date on whichthe disclosure document is provided to the prospect; (b) Earnings claiminformation: If the company or distributor makes earnings claims (whichincludes “quality of life” claims such as pictures of boats, expensive cars,homes, etc.), an earnings claim statement must be provided which discloses thebeginning and ending dates when the represented earnings were achieved, thenumber and percentage of all distributors who achieved that level of earningswithin such time period, and any specific characteristics applicable to theperson making the earnings claim that differ from the characteristics of theprospect (e.g., a different geographic location); (c) Legal Claim

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Disclosures: If theseller, or any affiliate or prior business of the seller, or any of the seller’sofficers, directors, managers or similar individuals have been the subject ofany civil or criminal action involving misrepresentation, fraud, securities lawviolations, or unfair or deceptive practices in the prior ten years, the sellermust disclose the name of the action, the caption, the court, case number, andthe names of the parties; (d) Refund Policy: The seller must disclose the termsof its refund policy; (e) Cancellation and Refund Requests: The seller mustdisclose the total number of purchasers who have cancelled their businesswithin the preceding two years; (f) Reference List: The seller must state thename, city, state, and telephone numbers of ten people who have purchased thebusiness opportunity within the last three years who are located nearest to theprospect’s location. Otherwise, the company can disclose all of itsdistributors. The company’s application must also disclose to prospects that ifthey join, their personal contact information may be disclosed to other futurebuyers.

2.             Record Retention: The direct sales companies mustarchive for three years: (a) Each materially different version of alldisclosure and earnings claim documents; (b) Each purchaser’s disclosurereceipt; (c) Each oral or written cancellation or refund request; (d) Allsubstantiation upon which the seller relies for earnings claims.

The impact of theproposed rule could be: (1) the advance seven day disclosure will cause areduction in enrollments; (2) providing 10 references closest to an applicantwill require a significant investment in advanced software systems; (3) thereference requirement creates a confidentiality problem, as it completelyignores distributors’ right to have their personal information maintainedconfidential; the identity of our distributors is deemed a trade secret; and(4) the disclosure of legal claims within the specified categories applies toeven those claims that were settled without admission of liability, and evenapplies to disclosure of claims in which the company prevailed on the claims.

**Wemay be held responsible for taxes or assessments relating to the activitiesof our independent distributors resulting in greater costs to us.**

We treat ourindependent distributors as independent contractors and do not pay socialsecurity or similar taxes with respect to compensation paid to them. In theevent that we are required to treat our independent distributors as employees,rather than independent contractors, we may be held responsible for socialsecurity and related taxes, plus any related assessments and penalties, whichcould significantly increase our operating costs.

**We areaffected by extensive laws, governmental regulations, administrativedeterminations, court decisions and similar constraints which can makecompliance costly and subject us to enforcement actions by governmentalagencies.**

The formulation,manufacturing, packaging, labeling, holding, storage, distribution, advertisingand sale of our products are affected by extensive laws, governmentalregulations and policies, administrative determinations, court decisions andsimilar constraints at the federal, state and local levels. There can be noassurance that we or our independent distributors will be in compliance withall of these regulations. A failure by us or our distributors to comply withthese laws and regulations could lead to governmental investigations, civil andcriminal prosecutions, administrative hearings and court proceedings, civil andcriminal penalties, injunctions against product sales or advertising, civil andcriminal liability for the Company and/or its principals, bad publicity, andtort claims arising out of governmental or judicial findings of fact orconclusions of law adverse to the Company or its principals. In addition, theadoption of new regulations and policies or changes in the interpretations ofexisting regulations and policies may result in significant new compliancecosts or discontinuation of product sales and may adversely affect themarketing of our products, resulting in decreases in revenues.

The FDA regulatesour products and our product labeling. Among other matters, the FDA regulatesnutrient content and ingredient information, claims of the effect of a dietarysupplement or dietary ingredient on a body structure or function, and claims ofthe effect of a dietary supplement or dietary ingredient on disease or risk ofdisease. The FDA can initiate civil and criminal proceedings against personswho make false or misleading claims on labels or in labeling, who engage inmisbranding, who evidence an intent to sell their products for a therapeuticuse not approved by the agency, who sell misbranded products, or who selladulterated products. The FDA can also require the recall of all products thatare misbranded or adulterated.

The FTC hasjurisdiction over our product advertising. The FTC can initiate civilproceedings for deceptive advertising and deceptive advertising practices. Itcan seek for companies to make payments to consumers or disgorgement of profitsfrom the sale of any product held to have been deceptively advertised. The FTCor a federal

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court can require acompany found liable to give notice of the availability of refunds inpart or whole for the product purchase price for all products sold throughuse of advertising deemed deceptive.

State authoritiesmay likewise bring enforcement actions for misbranding, adulteration, anddeceptive advertising. Those actions may be pursued simultaneously withfederal actions.

On March 13,2003, the FDA proposed a new regulation to require current Good ManufacturingPractice guidelines (“cGMPs”) in the manufacture, packing, holding, anddistribution of nutritional supplements. The proposed rules wouldestablish minimum standards that must be met by all companies that manufacture,package, and hold nutritional supplements in the United States. Violation ofthose standards would render the products in question presumptively adulteratedand unlawful to sell. The proposed cGMPs would require manufacturers to followprocedures that would track nutrients from source to finished product, testnutrients for identity, purity, quality, strength, and composition at eachstage of production, and record full compliance with specific regulationsgoverning production, manufacture, and holding of nutritional supplements. ThecGMPs are expected to be adopted in 2007. We expect that the cGMPs willincrease our product costs by requiring our various contract manufacturers toexpend additional capital and resources on quality control testing, newpersonnel, plant redesign, new equipment, facilities placement, recordkeepingand ingredient and product testing.

The FDA and somestate agencies invite the public to complain if they experience any adverseeffects from the consumption of nutritional supplements. These complaintsmay be made public. Regardless of whether complaints of this kind are substantiatedor proven, public release of complaints of this type may have an adverseeffect upon public perception of us, the quality of our products or theprudence of taking our products. Changes in consumer attitudes based on adverseevent reports could adversely affect the potential market for and sales of ourproducts and make it more difficult to recruit and retain independentdistributors and obtain endorsers.

**We aredependent on a limited number of independent suppliers and manufacturers of ourproducts, which may affect our ability to deliver our products in a timelymanner. If we are not able to ensure timely product deliveries, potentialdistributors and customers may not order our products, and our revenuesmay decrease.**

We rely entirelyon a limited number of third parties to supply and manufacture our products.Our manufacturers produce our products on a purchase order basis only and canterminate their relationships with us at will. Our six primary manufacturersare New Sun Nutrition, LLC, FoodPharma, LLC, Valentine Industries, Inc.,Natural Alternatives International Inc., Arizona Packaging and GMP Laboratoriesof America, Inc. These third parties may be unable to satisfy oursupply requirements, manufacture our products on a timely basis, fill and shipour orders promptly, provide services at competitive costs or offer reliableproducts and services. The failure to meet of any of these critical needs woulddelay or reduce product shipment and adversely affect our revenues, as well asjeopardize our relationships with our independent distributors and customers.In the event any of our third party manufacturers were to become unable orunwilling to continue to provide us with products in required volumes and atsuitable quality levels, we would be required to identify and obtain acceptablereplacement manufacturing sources. There is no assurance that we would be ableto obtain alternative manufacturing sources on a timely basis. An extendedinterruption in the supply of our products would result in decreased productsales and our revenues would likely decline. We believe that we can meet ourcurrent supply and manufacturing requirements with our current suppliers andmanufacturers or with available substitute suppliers and manufacturers.Historically, we have not experienced any delays or disruptions to our businesscaused by difficulties in obtaining supplies.

**We aredependent on our third party manufacturers to supply our products in thecompositions we require, and we do not independently analyze our products. Anyerrors in our product manufacturing could result in product recalls,significant legal exposure, and reduced revenues and the loss of distributors.**

While we requirethat our manufacturers verify the accuracy of the contents of our products, wedo not have the expertise or personnel to monitor the production of products bythese third parties. We rely exclusively, without independent verification, oncertificates of analysis regarding product content provided by our third partysuppliers and limited safety testing by them. We cannot be assured that theseoutside manufacturers will continue to supply products to us reliably in thecompositions we require. Errors in the manufacture of our products could resultin product recalls, significant legal exposure, adverse publicity, decreasedrevenues, and loss of distributors and endorsers.

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**We facesignificant competition from existing suppliers of products similar to ours. Ifwe are not able to compete with these companies effectively, then we may notbe profitable.**

We face intensecompetition from numerous resellers, manufacturers and wholesalers of energydrinks, protein shakes and nutritional supplements similar to ours, includingretail, online and mail order providers. We consider the significant competingproducts in the U.S. market to be Myoplex® for protein drinks, Gatorade®,Powerade®, Acclerade®, and All Sport® for energy drinks, and that Nature’sBounty, Inc. and General Nutrition Centers, Inc. are the significantproducers of vitamins and Xango® and Monavie® for a liquid nutrition drink.Most of our competitors have longer operating histories, established brands inthe marketplace, revenues significantly greater than ours, more capital andbetter access to capital than us. We expect that these competitors may usetheir resources to engage in various business activities that could result inreduced sales of our products. Companies with greater capital and researchcapabilities could re-formulate existing products or formulate new products thatcould gain wide marketplace acceptance, which could have a depressive effect onour future sales. In addition, aggressive advertising and promotion by ourcompetitors may require us to compete by lowering prices because we do nothave the resources to engage in marketing campaigns against these competitors,and the economic viability of our operations likely would be diminished.

**Customersand distributors may not be able to distinguish our products by name fromcompetitor’s products.**

Due to thesimilarity of our products name to those of many of our competitor’s productsmay result in the loss of customers and distributors as well as impair therecruiting efforts of our independent distributors. This could result in theloss of repeat business as well as the inability to generate increased revenueand attract future independent distributors.

**Adversepublicity associated with our products, ingredients or direct selling program,or those of similar companies, could adversely affect our sales and revenues.**

Adverse publicityconcerning any actual or purported failure of our Company or our independentdistributors to comply with applicable laws and regulations regarding anyaspect of our business could have an adverse effect on the public perception ofour Company. This, in turn, could negatively affect our ability to obtainendorsers and attract, motivate and retain independent distributors, whichwould have a material adverse effect on our ability to generate sales andrevenues.

Our independentdistributors’ and customers’ perception of the safety and quality of ourproducts as well as similar products distributed by others can be significantlyinfluenced by national media attention, publicized scientific research orfindings, product liability claims and other publicity concerning our productsor similar products distributed by others. Adverse publicity, whether or notaccurate, that associates consumption of our products or any similar productswith illness or other adverse effects, will likely diminish the public’sperception of our products. Claims that any products are ineffective,inappropriately labeled or have inaccurate instructions as to their use, couldhave a material adverse effect on the market demand for our products, includingreducing our sales and revenues.

The results of newnutritional dietary supplement studies could be contrary to general industryknowledge on which the formulation and marketing of our products are based andcould materially and adversely impact our product sales. The federalgovernment, research institutes, universities and others regularly conductresearch into the use, effectiveness and potential for adverse results from theuse of nutritional dietary supplements. Even if adverse studies are subject tosubstantial criticism or not supported by accepted scientific methodology,publicity surrounding the reports of these studies may result in flat ordecreased sales of our products. In the past few years, the effectiveness of,and potential for harm from, some of the leading herbal supplements, whichcontain ingredients not in our products, have come into question as a result ofresearch studies. These negative study results and other negative publicitycould adversely affect the potential market and sales of our products, as wellas increase our product returns, resulting in increased expenses to us.

While we have notreceived any direct negative publicity, the publicized studies associatingincreased mortality rates with high dosages of Vitamin E has increasedawareness of our consumers relating to the safety of the ingredients in oursupplements. Additionally, in 2007 there was a study published regardingincreased mortality rates in higher doses of antioxidants other than those fromnatural fruit, berry and vegetable sources which again increased awarenessamoung our consumers relating to the safety of the ingredients in our products.

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**Nutritionalsupplement products may be supported by only limited conclusive clinicalstudies resulting in less market acceptance of these products and lowerrevenues or lower growth rates in revenues.**

Our nutritionalsupplement products are made from vitamins, minerals, amino acids, herbs,botanicals, fruits, berries and other substances for which there is a longhistory of human consumption. However, there is little long-term experiencewith human consumption of certain product ingredients or combinations ofingredients in concentrated form. Although we believe all of our products fallwithin the generally known safe limits for daily doses of each ingredientcontained within them, nutrition science is imperfect. Moreover, some peoplehave peculiar sensitivities or reactions to nutrients commonly found in foodsand may have similar sensitivities or reactions to nutrients contained inour products. Furthermore, nutrition science is subject to change based on newresearch. New scientific evidence may disprove the efficacy of ourproducts or prove our products to have effects not previously known. We couldbe adversely affected in the event that our products should prove to be or ifthey are asserted to be ineffective or harmful to consumers, or if adverseeffects are associated with a competitor’s similar products.

**Ourproducts may have higher prices than the products of most of ourcompetitors, which may make it difficult for us to achieve significantrevenues.**

We may havedifficulty in achieving market acceptance of our products because our productsare among the highest priced in their categories due to the ingredients that werequire in our products. While we believe that our products are superior tocompeting, lower priced products, consumers must be educated about ourproducts. If we are unable to achieve market acceptance, we will havedifficulty in achieving revenue growth, which would likely result in continuingoperating losses.

**The saleof our products involves product liability and related risks that could exposeus to significant insurance and loss expenses.**

We face aninherent risk of exposure to product liability claims if the use of our productsresults in, or is believed to have resulted in, illness or injury. Most of ourproducts contain combinations of ingredients, and there is little long-termexperience with the effect of these combinations. In addition, interactions ofthese products with other products, prescription medicines and over-the-counterdrugs have not been fully explored or understood and may have unintendedconsequences. While our third party manufacturers perform tests inconnection with the formulations of our products, these tests are not designedto evaluate the inherent safety of our products.

Although wemaintain product liability insurance, it may not be sufficient to coverproduct liability claims and such claims could have a material adverse effecton our business. The successful assertion or settlement of an uninsured claim,a significant number of insured claims or a claim exceeding the limits of ourinsurance coverage would harm us by adding further costs to our business and bydiverting the attention of our senior management from the operation of ourbusiness. Even if we successfully defend a liability claim, the uninsuredlitigation costs and adverse publicity may be harmful to our business.

Any productliability claim may increase our costs, and adversely affect our revenuesand operating income. Moreover, liability claims arising from a serious adverseevent may increase our costs through higher insurance premiums anddeductibles, and may make it more difficult to secure adequate insurancecoverage in the future. In addition, our product liability insurancemay fail to cover future product liability claims, which if adverselydetermined could subject us to substantial monetary damages.

**A slowergrowth rate in the nutritional supplement industry could lessen our sales andmake it more difficult for us to achieve growth and become profitable.**

According to theNutrition Business Journal (June/July 2006), after a promising recovery in2003, U.S. Supplement growth flattened overall from 5.7% in 2003 to growthrates of 4.5% and 2.9% in 2005 and 2004, respectively, for total dollar salesof $21.3 billion in 2005.  The largestmajor channel for supplement sales remained natural & specialty retail,which rose 6.2% to $7.74 billion or 36% of the supplement consumer market, whilethe mass market continued to lose ground, declining 1.5% in 2005 to $6.04billion. Other channels had more success, with multi-level marketers up 8.6% to$4.2 billion and practitioner and internet sales up 6.7% and 25%, respectively,to $1.54 billion and $0.5 billion, respectively. The negative impacts ofEchinacea, Ephedra and low-carb products

 

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affected minerals andliquid meal replacements. The negative tide of media is no longer puttingproblematic categories like ephedra or prohormones at stake, but foundationcategories like E, C and even multivitamins.

**Newproducts may render our products obsolete and our sales may suffer.**

The nutritionalsupplement market historically has been influenced by “fad” products thatbecame popular due to changing consumer tastes and media attention. Ourproducts may be rendered obsolete by changes in popular tastes as well asmedia attention on new products or adverse media attention on nutritionalsupplements, which could reduce our sales. It may be difficult for us tochange our product line to adapt to changing tastes. In addition, other “fad”food regimens, such as low carbohydrate diets, may decrease the overallpopularity and use of our products, as well as result in higher returns of ourproducts, thereby increasing our expenses.

**Wemay from time to time write off obsolete inventories resulting in higherexpenses and consequently greater net losses.**

Because wemaintain high levels of inventories to meet the product needs of ourindependent distributors and customers, a change by us of our product mix couldresult in write downs of our inventories. For example, in 2006 and 2005 wediscontinued certain products and sales tools that we deemed obsolete, and weincurred a write-down against inventory for the year ended December 31, 2006 of$123,511 and a charge against obsolete inventory of $70,335 in 2005. Write downsand charges of this type have historically increased our net losses, and ifexperienced in the future, will make it more difficult for us to achieveprofitability.

**Productreturns in excess of our estimates could require us to incur significant additionalexpenses, which would make it difficult for us to achieve profitability.**

We haveestablished a reserve in our financial statements for product returns which isbased upon our limited historical experience. If this reserve were to beinadequate, we may incur significant expenses for product returns. As wegain more operating experience, we may need to revise our reserves forproduct returns.

**If weare not able to adequately protect our intellectual property, then wemay not be able to compete effectively and we may not be profitable.**

Our existingproprietary rights may not afford remedies and protections necessary toprevent infringement, reformulation, theft, misappropriation and other improperuse of our products by competitors. We own the formulations contained in someour products. We consider these product formulations our critical proprietaryproperty, which must be protected from competitors. We do not have any patentsbecause we do not believe they are necessary to protect our proprietary rights.Although trade secret, trademark, copyright and patent laws generally providesuch protection and we may attempt to protect ourselves through contractswith manufacturers of our products, we may not be successful in enforcingour rights. In addition, enforcement of our proprietary rights may requirelengthy and expensive litigation. We have attempted to protect some of thetrade names and trademarks used for our products by registering them with theU.S. Patent and Trademark Office, but we must rely on common law trademarkrights to protect our unregistered trademarks. Common law trademark rights donot provide the same remedies as are granted to federally registered trademarksand the rights of a common law trademark are limited to the geographic area in whichthe trademark is actually used. Our inability to protect our intellectualproperty could have a material adverse impact on our ability to compete andcould make it difficult for us to achieve a profit.

**Interruptionsto or failure of our information processing systems may disrupt ourbusiness and our sales may suffer.**

We are dependenton our information processing systems to timely process customer orders,oversee and manage our distributor network and control our inventory, and forour distributors to communicate with their customers and distributors in theirnetwork. Since the initial purchase of our technology system in 2001 throughDecember 31, 2006, we had spent $321,530 on technology system upgrades. Wehave experienced interruptions and may in the future experienceinterruptions to or failure of our information processing system; however, noneof the interruptions to date have materially disrupted our business.Interruptions to or failure of our information processing systems may becostly to fix and may damage our relationships with our customers anddistributors, and cause us to lose customers and distributors. If we are unableto fix problems with our information processing systems in a timely manner oursales may suffer.

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**Loss ofkey personnel could impair our ability to operate.**

Our success alsodepends on hiring, retaining and integrating senior management and skilledemployees, including Sanford D. Greenberg, our founder, John Pougnet, our ChiefExecutive Officer and Chief Financial Officer, Douglas Ridley, our President,and Timothy Transtrum, our Vice President of Operations, Sanjeev Javia, ourVice President of Product Development and Endorser Relations, in order toexpand our business. Certain of our officers have employment agreements thathave stipulated service terms. As with all personal service providers, ourofficers can terminate their relationship with us at will. Our inability toretain these individuals may result in our reduced ability to operate ourbusiness. We do not have key man life insurance on any of our executiveofficers.

**ITEM 2.**                    DESCRIPTION OFPROPERTY

**Facilities**

We lease anoffice, located at 480 South Holly Street, Denver, Colorado, from the father ofSanford D. Greenberg, our founder, for $3,390 per month. The lease expired onMarch 31, 2006, with an automatic monthly extension right and a two monthnotice period for the Company to terminate the lease. Our annual office rentfor 2006 and 2005 was $40,680 and $38,830, respectively. We currently do nothave any plans for renovation, improvement or development of our corporateoffice.

In January 2006,we contracted a twelve month contract with GA Wright Marketing, Inc. (“GAW”) tomanage and store our products as well as perform the fulfillment functions forus. GAW stores our products in a controlled-environment warehouse inDenver, Colorado, and accepts bulk shipments on our behalf. We pay for theseservices on a per transaction basis, and our costs have been approximately$6,400 per month. In July 2006 we contracted with Holden MSS, Inc. (“Holden”),to assume our warehouse functions from GAW. Holden acquired the warehousing andfulfillment operation from GAW and operates a facility in the vicinity of theGAW warehouse. Holden continues to bill us on a per transaction basis plus amonthly inventory storage fee.

**Insurance**

We maintaincommercial general liability, including product liability coverage, andproperty insurance. Our policy provides for a general liability limit of $2million per occurrence, and $2 million annual aggregate umbrella coverage. Wealso have a casualty insurance policy with a limit of $1.0 million on our mainfacility, including inventory, and $600,000 on our products located at theHolden facility.

**ITEM 3.**                    LEGALPROCEEDINGS

We are notcurrently involved in any legal proceedings.

**ITEM 4.**                    SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

The followingmatters were submitted to a vote by the shareholders at the meeting held onMarch 7, 2007:

1.                 Toelect five directors of the Company.

2.                 Toincrease the number of shares issuable under our Stock Incentive Plan from1,800,000 shares to 2,200,000 shares.

3.                 Toapprove the issuance and sale of greater than 20% of our outstanding stock atless than the current market price.

4                    Toapprove a Distributor Stock Option Plan.

5.                 Toamend the Articles of Incorporation to change the name of the Company fromVitaCube Systems Holdings, Inc. to XELR8 Holdings, Inc.

6.                 Totransact such other business as may properly come before the meeting.

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Details relating to the above matters were set forthin the Proxy Statement dated February 15, 2007. All of our shareholders ofrecord as of the close of business on February 6, 2007 will be entitled tonotice of and to vote at such meeting.

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**PART II**

**ITEM 5.**                    MARKET FORCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS

### **MarketInformation**

Our common stock commenced trading on the OTC Bulletin Board on December26, 2001. Our trading symbol was “VCUB.OB.” Since there is only a limitedtrading market for our stock, stockholders may find it difficult to sell theirshares. Until June 20, 2003, the common stock trades reflected the business ofInstanet prior to the share exchange with V3S. On April 5, 2005, the Companymoved to the American Stock Exchange and started trading under the symbol “PRH”in conjunction with a secondary offering of shares. On March 19, 2007, theCompany changed its name to XELR8 Holdings, Inc. and on March 19, 2007, startedtrading under the symbol “BZI”.

The following table sets forth high and low bid pricesfor our common stock for the calendar quarters indicated as reported by the OTCBulletin Board until April 4, 2005 and on the American Stock Exchange fromApril 5, 2005. These prices have been stated after giving retroactive effect toa 1-for-5 reverse split of our common stock consummated on December 8, 2004,and represent quotations between dealers without adjustment for retail markup,markdown, or commission and may not represent actual transactions.

|                | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2005           |       |     |       |    |       |
| First Quarter  |       | $        | 3.90       |    | $          | 3.30 |   |
| Second Quarter |       | $        | 3.30       |    | $          | 1.17 |   |
| Third Quarter  |       | $        | 1.97       |    | $          | 1.25 |   |
| Fourth Quarter |       | $        | 1.86       |    | $          | 1.25 |   |
| 2006           |       |     |       |    |       |
| First Quarter  |       | $        | 1.52       |    | $          | 1.22 |   |
| Second Quarter |       | $        | 1.79       |    | $          | 0.62 |   |
| Third Quarter  |       | $        | 0.65       |    | $          | 0.39 |   |
| Fourth Quarter |       | $        | 0.62       |    | $          | 0.27 |   |

 

### **Holders**

As of March 9, 2007, we had approximately 611 holders of record of ourcommon stock. A significant number of our shares were held in street name and,as such, we believe that the actual number of beneficial owners issignificantly higher.

### **Dividends**

We have neverdeclared or paid any cash dividends on our common stock. For the foreseeablefuture, we intend to retain any earnings to finance the development andexpansion of our business, and we do not anticipate paying any cash dividendson our common stock. Any future determination to pay dividends will be at thediscretion of our board of directors and will be dependent upon then existingconditions, including our financial condition and results of operations, capitalrequirements, contractual restrictions, business prospects, and other factorsthat our board of directors considers relevant.

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**ITEM 6.**                    MANGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*Youshould read the following discussion and analysis in conjunction with ourfinancial statements, including the notes thereto contained in this report.This discussion contains forward-looking statements that involve risks,uncertainties and assumptions. Our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of avariety of certain factors, including those set forth under “Risk FactorsAssociated with Our Business” and elsewhere in this report.*

**Overview**

We are in thebusiness of developing, selling, marketing and distributing nutritionalsupplement products and functional foods. We market our products primarilythrough direct selling or network marketing, in which independent distributorssell our products. In addition, we sell our products directly to professionaland Olympic athletes and professional sports teams.

Our product linesconsist of four powdered beverages, 12 individual supplements packaged in ourVitaCube® or a box , and a nutritional chew. Our VitaCube® is an easy to use,compartmentalized box with instructions for which supplements to take and theproper times to take them. In 2006 the Company repackaged the Basic VitaCube®into a box of supplements with the four daily vitamins conveniently packaged inpillow-packs for each serving. Our EAT, DRINK and SNACK System is a packagedproduct that consists of functional foods and energy drinks that can bepurchased as a whole system or individually. In January 2007 we launched ourlatest product offering BaziTM, a liquid nutrition drink.

During the thirdquarter of 2003, we initiated a transition of our sales and marketing effortsfrom sales to retail outlets and in-house telemarketing to direct sellingthrough independent distributors and we launched our direct sales program inthe second quarter of 2004. As of February 28, 2007 we had 3,145 independentdistributors and 714 customers (excluding professional athletes and sportsteams) who had purchased our products within the prior twelve months.

We maintain aninventory of our products to insure that we can timely fill our customerorders. We can have large increases in inventory levels if we have multipleproduct reorders in the same period. In addition, our manufacturers typicallymay take up to 12 weeks to deliver products after we place an order, and theyhave minimum order requirements, which also adds to higher inventory levels.Our inventory, net of our allowance for obsolescence, was $411,364 at December31, 2006, a decrease from $542,749 at December 31, 2005.

The decrease ofinventory was a result of the launch of the three new products in the EDSSystem near the year end in the prior year that required sufficient inventorylevels for the projected demand and lead time in product ordering, coupled withthe lower demand for the Vitacube® in the current year, which resulted in anability to lower our inventory levels for this product. Even though ourinventory level currently is relatively high based on our sales for the yearended December 31, 2006, we believe our inventory is appropriately classifiedas a current asset based on the ongoing implementation of our new marketingplan which is designed to increase our distributor base and sales.

During the yearended December 31, 2006, we replaced the Basic Vitacube® with the XELR8 SupportPack, which containes a new combination of supplements. Additionally, we sawthe demand for the Essential Vitacube® decrease as customers favored theconvenience of the Support Pack with the supplements in pillow packs for eachserving. Both of these factors resulted in taking a charge against operationsfor obsolete inventory of $123,511. Our allowance for obsolete inventoryincreased to $41,655 from $16,879 for the years ended December 31, 2006 and2005, respectively.  We believe ourreserve for obsolescence is reasonable because (i) substantially all of ourinventory has been recently purchased, (ii) the shelf life of our productsaverages three years, and (iii) we have no current plans to eliminate any ofour products, instead choosing to repackage them in the new product brandingstrategy.

Our networkmarketing program is designed to provide an incentive for independentdistributors to build, maintain and motivate a sales organization of customersand other independent distributors to enhance earning potential. Ourindependent distributors are compensated with commissions and bonuses on salesgenerated through

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their downlineorganization. Independent distributors advance in distributor levels as theydevelop their sales organization and increase their sales volume, whichincreases their compensation.

We recognizerevenue when products are shipped to our customers. Revenue is reduced byproduct returns at the time we take the product either back into inventory ordispose of it. In addition, we estimate a reserve total for future returns.Cost of our sales consists of expenses directly related to the production anddistribution of the products and certain sales materials. Included in the salesand marketing expenses are independent distributor commissions, bonus andincentives along with other general selling expenses. We expect our independentdistributor expenses, as a percentage of net revenues, to decrease asindependent distributors receive less additional incentives and rely on theincentives in our direct sales program. General and administrative expensesinclude salaries and benefits, rent and building expenses, legal, accounting,telephone and professional fees.

Our revenue willdepend on the number and productivity of our independent distributors, whopurchase products and sales materials from us for resale to their customers orfor personal use. Because we will distribute substantially all of our productsthrough our independent distributors, our failure to retain our existingdistributors and recruit additional distributors could have an adverse effecton our revenue.

Due to the earlystage of our direct sales program we believe that the number of ourdistributors and customers are an important indicator to monitor. In addition,we will monitor the sales generated per independent distributor as well as thesuccess of our independent distributors in recruiting new independentdistributors and customers.

With respect toindustry and market factors that may affect us directly, we believe thatindustry credibility in both direct selling and nutritional supplements will becritical elements in whether we can increase revenues and become profitable.Any adverse developments in either of these two areas, to us or in ourindustry, could lead to a lower number of our independent distributors andreduced sales and recruiting efforts by existing distributors, as well as aloss or no increase in the number of sports celebrity endorsers of ourproducts. We do not know what industry growth was for 2006 or will be for 2007nor do we have enough experience in the direct sales channel to determinewhether a slower industry growth rate, which occurred for several years leadingup to 2003 and which has subsequently been slow, will adversely affect us.

Our operating planfor 2007 is focused on the launch of our new product offering, BaziTM, andincreasing the number of independent distributors and customers, growingrevenues, and generating gross profits. Due to the relatively recentcommencement of our direct selling program through independent distributors, wecannot predict our revenue, gross profit, net income or loss or use of cash andcash equivalents; however, we expect net losses will continue for at least thenext 9 months.

On April 8, 2005we closed a public offering of 1,500,000 units that was comprised of two sharesof common stock and one Class A common stock warrant to purchase common stockat $4.50 and one Class B warrant to purchase common stock at $6.00 for netproceeds of $7,742,682. On March 5, 2007 we announced that the company hadraised $2,000,000 in gross proceeds in a private placement transaction, whichwould close subject to shareholder and American Stock Exchange approval. OnMarch 7, 2007 the shareholders approved the placement transaction, and on March27, 2007, we closed the transaction. At the time of closing, we paid in fullthe short-term loans of $500,000 plus accrued interest of $13,424.66 leaving uswith no short-term or long-term debt at this time.

Our independentauditors have noted in their reports on our financial statements as of December31, 2006 and 2005 and for the years then ended, that there is substantial doubtregarding our ability to continue as a going concern. To date this contingencyhas not affected our ability to secure funding for our operations; however,going forward, in the event this uncertainty is not resolved, we may experiencemore difficulty in raising funds to operate our Company, if we are required toraise such capital.

**Critical Accounting Polices andEstimates**

Discussion andanalysis of our financial condition and results of operations are based uponfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenue and expenses, and relateddisclosure of contingent assets and liabilities. On an on-going basis, weevaluate our estimates; including those related to collection of receivables,

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inventory obsolescence,sales returns and non-monetary transactions such as stock and stock optionsissued for services and beneficial conversion features of notes payable. Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. We believe the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of ourfinancial statements.

***Revenue Recognition****.* In accordance with Staff Accounting Bulletin 104 “Revenue Recognition inFinancial Statements”, revenue is recognized at the point of shipment, at whichtime title is passed. Net sales include sales of products, sales of marketingtools to independent distributors and freight and handling charges. With theexception of approved professional sports teams, we receive the net sales pricefrom all of our orders in the form of cash or credit card payment prior toshipment. Professional sports teams with approved credit have been extendedpayment terms of net 30 days.

***Allowances for Product Returns****.* Allowances for product returns are recorded at the time product isshipped. These accruals are based upon the historical return rate since theinception of our network marketing program in the third quarter of 2003, andthe specific historical return patterns by product. Our return rate since thethird quarter of 2003 has varied from 0.7% to 7.7% of our net sales.

We offer a 60-day,100% money back unconditional guarantee to all customers and independentdistributors who have never before purchased products from us. As of December31, 2006, orders shipped that are subject to our 60-day money back guaranteewere approximately $61,447. All other product may be returned to us by anycustomer or independent distributor if it is unopened and undamaged for a 100%sales price refund, less a 10% restocking fee, provided the product is returnedwithin 12 months of purchase and is being sold by us at the time of return. Weare not able to estimate the amount of revenue we have recognized that is heldby these buyers of product and which is returnable, because it is not possibleto determine the amount of product that is unopened and undamaged. Productdamaged during shipment is replaced wholly at our cost, which historically hasbeen negligible.

Wemonitor our return estimate on an ongoing basis and may revise allowances toreflect our experience.  Our reserve forproduct returns at the year ended December 31, 2006 and 2005 was $45,327 and$20,314, respectively. To date, product expiration dates have not played anyrole in product returns, and we do not expect they will in the future becauseit is unlikely that we will ship product with an expiration date earlier thanthe latest allowable product return date.

***Inventory Valuation****.* Inventories are stated at the lower of cost or market on a first-infirst-out basis. A reserve for inventory obsolescence is maintained and isbased upon assumptions about current and future product demand, inventory whoseshelf life has expired and market conditions. A change in any of thesevariables may require additional reserves to be taken. We reserved $41,655 forobsolete inventory as of December 31, 2006 and $16,879 as of December 31, 2005.

***Stock Based Compensation. ***Effective January 1, 2006, we adopted SFASNo. 123 (revised 2004), Share-Based Payment (SFAS 123R), whichrequires compensation costs related to share-based transactions, includingemployee stock options, to be recognized in the financial statements based onfair value. SFAS 123R revises SFAS No. 123, Accounting for Stock-BasedCompensation, (SFAS 123) and supersedes Accounting Principles BoardOpinion (APB) No. 25, Accounting for Stock Issued to Employees. In March 2005,the Securities and Exchange Commission (the SEC) issued Staff AccountingBulletin No. 107 (SAB 107) regarding the SEC’s interpretation ofSFAS 123R and the valuation of share-based payments for public companies.We have applied the provisions of SAB 107 in its adoption ofSFAS 123R. We adopted the provisions of SFAS 123R using the modifiedprospective transition method. In accordance with this transition method, thecompany’s consolidated financial statements for prior periods have not beenrestated to reflect the impact of SFAS 123R. Under the modified prospectivetransition method, share-based compensation expense for the year ended December31, 2006 includes compensation expense for all share-based compensation awardsgranted prior to, but for which the requisite service has not yet beenperformed as of January 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of SFAS 123. Share-basedcompensation expense for all share-based compensation awards granted afterJanuary 1, 2006 is based on the grant date fair value estimated in accordancewith the provisions of SFAS 123R.

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### **Resultsof Operations**

*Thediscussion below first presents the results of 2006 year followed by theresults of 2005 year.*

**For yearended December 31, 2006, compared the year ended December 31, 2005.**

***Net Sales****. *Net sales were$2,148,420 compared to $1,227,803, an increase of 75%. The increase in saleswas the result of executing our sales and marketing plan of increasing ourdistributor and customer base along with creating greater brand recognition,along with the full years sales from the three products that were released inSeptember 2005.  Independent distributors purchase our products for resaleto customers and for their own personal consumption.

The percentagethat each product category represented of our net sales is as follows:

|                                                 | ** ** | **Year Ended**      | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **December 31,**    | ** ** |
| ** **                                      | ** ** | **2006**                 | ** ** | **2005** | ** ** |
| **Product Category**                       | ** ** | **% of Sales** | ** ** | **% of Sales** | ** ** |
| HYDRATE  (formerly eForce® sports drink)   |       | 11                       | %          | 25 | % |
| BUILD (formerly  VitaPro® nutrition shake) |       | 5                        | %          | 10 | % |
| EAT                                             |       | 18                       | %          | 7 | % |
| DRINK                                           |       | 28                       | %          | 6 | % |
| SNACK                                           |       | 10                       | %          | 11 | % |
| Vitamins and  minerals (including SUPPORT)      |       | 13                       | %          | 29 | % |
| Other — educational  materials, apparel    |       | 15                       | %          | 12 | % |

 

***Gross Profit****. *Gross profitincreased to $1,372,658 from $686,887, an increase of 100%. Gross profit as apercentage of revenue (gross margin) increased to 64% compared to 56%, a resultof higher sales of the EDS products that have higher gross margins and offsetby charges that we took against inventory of $123,511. The overall increase ingross profit also reflects the increase in net revenue.

***Sales and Marketing Expenses****. *Salesand marketing expenses decreased to $2,626,613 from $2,856,351 a decrease of8%. Sales and marketing activities decreased due to our focused efforts toattract multilevel marketing industry leaders to become independentdistributors of ours and the rebranding strategy in the prior year. We incurred$483,987 during the year ended December 31, 2006, compared to $952,026 in theyear ended December 31, 2005, in costs to attract experienced sales leaders forour distributor network, which was offset by the increase in the amount we paidour Independent Distributors in sales commissions as a result of the increasedsales.  We expect to continue to incur highersales and marketing expenses for the next 12 months as we implement ourmarketing plan.

***General and Administrative Expenses****. *Generaland administrative expenses were $3,275,689 compared to $2,844,633, or anincrease of 15%. The increase in 2006 is a result of expenses associated withthe recording of Stock Based Compensation Expense in the Statement ofOperations in the year ended December 31, 2006 while it was only disclosed inthe notes to the financial statements in the year ended December 31, 2005.Additionally, the Company recorded an expense of $540,000 for the amendment toSanford Greenberg’s employment contract. These increases were offset bydecreases in the expense of business consultants used in the web development,public company expenses and lower executive compensation.  Executive compensation decreased as a resultof amendments to the employment agreements with Earnest Mathis, Jr., our formerChief Executive Officer and John D. Pougnet, our Chief Financial Officereffective May 28, 2006 and the subsequent departure of Mr. Mathis in October2006 and the assumption of his duties by Mr. Pougnet.

***Research and Development Expenses***.  Research and development expenses increasedto $73,921 from $70,073. We are continuing to research and develop ingredientsand manufacturing technologies for our product line.  We continued to engage in a strategicalliance agreement with UTEK Corporation until October 2006, a technologytransfer company to assist us with introductions to university research ingredientsand processes. We also engaged a number of authorities on the Jujube fruit, theprinciple ingredient in the new product, Bazi, that the Company launched inJanuary 2007.

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***Interest Expense***.  Interest expense was $33,888 compared with$2,841, an increase of 1,093% due to the short term bridge note that thecompany entered into in November 2006.

***Net Loss****.*Our net loss was $4,669,449 or $(0.48) per share, comparedto $5,015,877 or $(0.57) per share, a decrease of 7% . The decrease in net lossis a result of increased sales and gross margin.

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### **Liquidity andCapital Resources**

To date, ouroperating funds have been provided primarily from sales of our common stock($11,280,587), and by loans from our founder, our chairman and by variousstockholders ($4,239,209), through December 31, 2006, and to a lesser degree,cash flow provided by sales of our products.

During March 2005,we obtained a $170,000 short-term loan from our Chairman, a $25,000 short-termloan from a significant shareholder and a $170,000 short-term loan from anunrelated party for a total of $365,000.  All of these loans provided forinterest at 10% per annum.  These loans were paid in full with accruedinterest of $2,841 on April 12, 2005 leaving us with no short-term or long-termdebt at that time.

On April 8, 2005we closed a public offering of 1,500,000 units that was comprised of two sharesof common stock and one Class A common stock warrant to purchase common stockat $4.50 and one Class B warrant to purchase common stock at $6.00 for netproceeds of $7,742,682.

On November 21,2006 we obtained a $250,000 short-term loan from an unrelated party. We werealso able to obtain a commitment for an additional $250,000 from an unrelatedparty to be funded in January 2007. Each loan provided for the issuance of400,000 restricted shares and interest at 10% per annum. The loans matured atthe earlier of six months from funding or the final closing of a privateplacement.

On March 5, 2007we announced that the company had raised $2,000,000 in gross proceeds in aprivate placement transaction, which would close subject to shareholder andAmerican Stock Exchange approval. On March 7, 2007 the shareholders approvedthe placement transaction, and on March 27, 2007, we closed the transaction. Atthe time of closing, we paid in full the short-term loans of $500,000 plusaccrued interest of $13,424.66 leaving us with no short-term or long-term debtat this time, other than trade accounts payable and other accrued liabilities.

We used $2,992,028of cash for operations in the year ended December 31, 2006, and we used$4,936,422 of cash for operations in the year ended December 31, 2005. The useof cash in our operations results from incurring and accruing expenses tosuppliers necessary to generate business and service our customers at a timewhen revenues did not keep pace with expenses. As of December 31, 2006, we had$76,147 in cash and cash equivalents available to fund future operations aswell as a commitment from a lender to fund the company $250,000 by January 15,2007. Net working capital decreased to ($409,328) at December 31, 2006, from$3,310,034 at December 31, 2005. This decrease in working capital was theresult of the continued losses from operations as sales have not increasedsufficiently to sustain the expenses of the company. Additionally, the accruedpayables include an amount of $540,000 that is payable to an employee for anamendment to his employment contract that will be satisfied with the issuanceof restricted stock. From the initial purchase of our technology system in 2001through December 31, 2006, we have spent $321,530 on technology systemupgrades. Subsequent to December 31, 2006 we completed a private placementtransaction with accredited individual and institutional investors for grossproceeds of $2,000,000. We used these funds to retire all short-term debt andfund our working capital requirements.

Our independentauditors have noted in their reports on our financial statements as of December31, 2006 and 2005 and for the years then ended, that there is substantial doubtregarding our ability to continue as a going concern. To date this contingencyhas not affected our ability to secure funding for our operations; however,going forward, we may experience more difficulty in raising additional funds tooperate our Company.

In the event thatwe are successful in completing our business plan of increasing the number ofdistributors, sales levels and consequently increased profitability, we believethat our cash resources will be sufficient to fund our operations for the next12 months. If our business operations do not result in increased product sales,our business viability, financial position, results of operations and cashflows will likely be adversely affected. Further, if we are not successful inachieving profitability, additional capital will be required to conduct ongoingoperations. We cannot predict the terms upon which we could raise such capitalor if any capital would be available at all.

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***Customer Concentrations****.* We had no single customer that accounted for any substantial portion ofour revenues.

***Off-Balance Sheet Items****.* We had no off-balance sheet items as of December 31, 2006.

**ITEM 7.**                    FINANCIALSTATEMENTS

The financialstatements are included in this annual report on Form 10-KSB at page F-1.

### **Index to FinancialStatements**

| Report of Independent  Registered Public Accounting Firm                                                                   |   | F-1 |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|-----|--------|
| Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                              |   | F-2 |   |
| Consolidated  Statements of Operations for the years ended December 31, 2006 and 2005.                                     |   | F-3 |   |
| Consolidated  Statements of Changes in Shareholders’ Equity (Deficit) for the years ended  December 31, 2006 and 2005 |   | F-4 |   |
| Consolidated  Statements of Cash Flows for the Years Ending December 31, 2006 and 2005                                     |   | F-5 |   |
| Notes to Consolidated  Financial Statements                                                                                |   | F-6 |   |

 

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

None.

**ITEM 8A.**           CONTROLS AND PROCEDURES

### **Evaluation of Disclosure Controls andProcedures**

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to management, including the chief executive officer and chieffinancial officer, as appropriate, to allow timely decisions regarding requireddisclosure. Management necessarily applied its judgment in assessing the costsand benefits of such controls and procedures, which, by their nature, canprovide only reasonable assurance regarding management’s control objectives.

With theparticipation of management, our Chief Executive Officer and Chief FinancialOfficer evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures at the conclusion of the period endedDecember 31, 2006. Based upon this evaluation, the Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures were effective in ensuring that material information required to bedisclosed is included in the reports that we file with the Securities andExchange Commission.

### **Changesin Internal Controls**

There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect those controls subsequent to the date of thisevaluation, including any corrective actions with regard to significantdeficiencies and weaknesses.

**ITEM 8B.**           OTHER INFORMATION

**Entryinto a Material Definitive Agreement — Sanford D. Greenberg Amended EmploymentAgreement**

Effective March26, 2007, the Registrant entered into an Amendment to theEmployment Agreement with Sanford Greenberg, a copy of which has beenfiled herewith. The Amendment provides for the assignment of the benefits andobligations of the Employee Agreement from XELR8 Holdings, Inc. to XELR8, Inc.The Amendment

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provides thatMr. Greenberg will receive annual compensation of $1. Additionally, the Employee waives any and allrights to participate in any incentive executive bonus plan of Employer, butwill receive a bonus equal to one percent (1%) of the net sales of Employer tobe paid monthly in arrears on the first normal payroll date subsequent toNovember 1, 2006 for a period of 12 years. Further, Employee shall receive 1,500,000 restricted shares of XELR8Holdings, Inc. restricted common stock, and the Employee hereby agrees to waiveand forfeit options for 250,000 shares of the Employer’s common stock that weregranted on April 1, 2004.

**Entryinto a Material Definitive Agreement — John D. Pougnet Amended EmploymentAgreement**

Effective March 26, 2007, the Registrant entered intoan Amendment to the Employment  Agreement with John D. Pougnet, thecompany’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), acopy of which has been filed herewith. The Amendment provides thatMr. Pougnet will serve as in both capacities of Chief Executive Officerand Chief Financial Officer, the term of Employee’s employment as ChiefExecutive Officer pursuant to this Second Amendment shall commence effective asof October 11, 2006 and shall continue to February 1, 2008 (“CEO Amended Term”)and the term of Employee’s employment as Chief Financial Officer pursuant tothis Amendment shall commence effective as of October 11, 2006 and terminate onDecember 31, 2008. Employee will receive as compensation for allresponsibilities a base salary (“Base Salary”) of $127,000 per year. So long asthe Employee is employed as the Company’s CEO and CFO, the Base Salary shallincrease: (i) to $150,000 per year upon the completion of the PrivatePlacement, (ii) to $14,583/month (1/12 of $175,000) for each month the companyis at or above breakeven (defined as when net monthly sales meet or exceed netmonthly expenses on a cash basis) and $12,500/month (1/12 of $150,000) for eachmonth the company is below breakeven, and (iii) to $205,000 per year commencingOctober 1, 2007. Employee’s salary as CFO shall be $150,000 per year as long asnet revenues are above financial breakeven and $175,000 per year after thefirst month that monthly net sales exceed $900,000. In addition the Employeeshall receive options to purchase an aggregate of an additional 100,000 sharesof Employer’s common stock pursuant to the ISOP at an exercise price equalclosing market price on the date of this agreement, the Options shall vest on apro-rata basis at the end of each month of Employee’s employment beginning March2007 and ending December 31, 2008 pursuant to this Agreement. The Agreementprovides for compensation to be paid in the event the Employee is terminatedfor cause or if the Company chooses to appoint a new Chief Executive Officerduring the term of this agreement.

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**PART III**

**ITEM 9.**                    DIRECTORS ANDEXECUTIVE OFFICERS

### **Directors andExecutive Officers**

The following setsforth certain information regarding each of our directors and executiveofficers:
| **Name**                 | ** ** | **Age** | ** ** | **Position**                                        | ** ** | **Committee**      |
|--------------------------|------------|---------|------------|-----------------------------------------------------|------------|--------------------|
| Earnest Mathis, Jr. |       | 46      |       | Chairman                                            |       | —             |
| Douglas Ridley           |       | 50      |       | President and Director                              |       | —             |
| John D. Pougnet          |       | 36      |       | Chief Executive Officer and Chief Financial Officer |       | —             |
| Timothy Transtrum        |       | 43      |       | Vice President Operations                           |       | —             |
| David Litt               |       | 40      |       | Vice President Sales and Marketing                  |       | —             |
| Sanjeevkumar Javia       |       | 31      |       | Vice President Product Development                  |       | —             |
| John B. McCandless       |       | 58      |       | Director                                            |       | Audit/Compensation |
| AJ Robbins               |       | 60      |       | Director                                            |       | Audit/Compensation |
| Anthony DiGiandomenico   |       | 39      |       | Director                                            |       | Audit/Compensation |

 

Directors hold office until the next annual meeting ofstockholders following their election unless they resign or are removed asprovided in the bylaws. Our Board of Directors has determined that ourdirectors, other than Mr. Mathis and Mr. Ridley, are “independentdirectors” under the American Stock Exchange listing standards. Our officersserve at the discretion of our Board of Directors.

The following is a summary of our directors’ andexecutive officers’ business experience. The Board recommends a vote of FOR theelection of each nominee below.

**Earnest Mathis, Jr.,Chairman.  **Mr. Mathis was appointed as theChairman and Chief Executive Officer on March 2, 2005. OnOctober 11, 2006, Mr. Mathis resigned his position as Chief ExecutiveOfficer. Prior to the merger with VitaCube Systems, Inc. Mr. Mathisserved as Instanet’s Chief Executive Officer and a director fromFebruary 2001 to June 2003. Mr. Mathis is the current Presidentand a Director of Inverness Investments, Inc., a private financialconsulting company and he has served in these positions since January 1987.Mr. Mathis is currently serving as Manager of Amerigolf, LLC, a privategolf course development company, and he has served in this position sinceFebruary 1998. Mr. Mathis is the Founder and manager of WavelandVentures, LLC, a private capital management company managing governmentaleconomic redevelopment programs and he has served in this position since March2002.

Mr. Mathis is a manager with Waveland ColoradoVentures, LLC, a Colorado certified capital company, that invests and loansmoney to Colorado-based businesses and he has served in this position sinceMarch 2002. Mr. Mathis is currently Chief Executive Officer, ChiefFinancial Officer and a Director for Petramerica, a public development stagecompany, and he has served in this position since April 2002.Mr. Mathis was managing Director of Integrated MedicalServices, Inc., a private medical waste transport company, fromJanuary 1997 to December 2004. From February 2001 throughDecember 2002, Mr. Mathis served as President, Chief Financial Officerand a Director of Care Concepts I, Inc., a public development stagecompany, that acquired Ibid America, Inc in December 2002.

**Douglas Ridley, President andDirector.  **Mr. Ridley was appointed as aDirector on January 1, 2004, and in June 2005, Mr. Ridley joinedthe Company as President. Mr. Ridley was an independent consultant to usfrom April 2003 until December 31, 2003. Mr. Ridley is currentlyPresident of Simply Because, a gift products network marketing company, andsince 1997, has been President of Chad Management Co., LLC, a nutritionalproducts network marketing company.

**John D. Pougnet, Chief ExecutiveOfficer and Chief Financial Officer.  **Mr. Pougnetwas appointed Chief Executive Officer on October 11, 2006. Prior to that,Mr. Pougnet was appointed as Chief Financial Officer inSeptember 2005. Immediately prior to joining the Company, Mr. Pougnetwas Assurance Senior Manager at KPMG, LLP, a global network of professionalservices firm providing Audit, Tax and Advisory services to both public andprivate companies from January 2003 to September 2005. Prior to this,Mr. Pougnet operated an independent

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consultingbusiness from August 2002 to June 2003. He also served as VicePresident of Finance and Corporate Secretary at Future Beef Operations, LLC,from May 2001 to August 2002, where he was responsible for thestrategic planning, development and leadership of the Corporate Financedepartment for this multi-state meat packing company. Prior to this,Mr. Pougnet was senior auditor with Deloitte & Touche fromSeptember 1996 to May 2001.

**Timothy Transtrum, Vice President ofOperations.  **Mr. Transtrum joined us onFebruary 2, 2004, as Operating Officer. Prior to that, he was Presidentand Chief Operating Office for NutriHealth USA, a division of the globalnutrition company, Natural Health Holdings LTD, from May 2002 toFebruary 2004. From February 1999 to May 2000, he served as VicePresident of Operations and International Development for Oasis WellnessNetwork, a network marketing company. From February 1998 toFebruary 2004, Mr. Transtrum also was President of TF TranstrumAssociates, an operations and retention consulting firm. From 1991 to 1998, heworked for Melaleuca Inc., a network marketing company, during which time he becameDirector of International Operations.

**David Litt, Vice President of Salesand Marketing.  **Mr. Litt joined us as ourVice President of Sales and Marketing on October 1, 2004. Mr. Littwas an independent consultant for us from February 2004 untilOctober 1, 2004, through his consulting business. Mr. Litt operatedan independent consulting business from January 2003 untilOctober 2004. From October 1998 to January 2003, Mr. Littwas the Chief Sales and Marketing Officer for Oasis Wellness Network, a networkmarketing company, and from June 1996 to October 1998 he was the VicePresident of Marketing for Mercantile Stores, Inc., a retail departmentstore.

**Sanjeevkumar Javia, Vice President ofProduct Development.  **Mr. Javia joined theCompany in July 2001 and manages and oversees product development andproduct training and is a liaison to the Company’s external scientific andmedical research resources. Prior to joining the Company, Mr. Javia wasthe Director of Affiliate Publishers for Worldpages.com, an independent publisher,from September 1998 to July 2001.

**John B. McCandless,Director.  **Mr. McCandless was appointed as adirector on February 19, 2004, and serves on our Audit and CompensationCommittees. He is currently providing consulting services to nutrition and directselling companies. From October 2003 until December 2006Mr. McCandless served as the Vice President of Technical Services atWeider Nutrition International. Mr. McCandless provided operations andproduct consulting services to nutrition and direct selling companies as aconsultant from November 2002 to October 2003, and fromOctober 1995 to November 2002, he served as Senior Vice President andChief Operating Officer for USANA Health Sciences, a health science company.

**AJ Robbins, Director.  **Mr. Robbinswas appointed as a director on July 10, 2006, and serves on our Audit andCompensation Committees. Mr. Robbins is currently the Managing Partner ofAJ Robbins PC, which he founded in 1986. Mr. Robbin’s practice focuses onaccounting and auditing for corporate andsecurities work for both private and public companies. Mr. Robbins is aCertified Public Accountant registered in Colorado, New York and California aswell as a member of the American Institute of Certified Public Accountants andregistered with Public Company Accounting Oversight Board.

**Anthony DiGiandomenico,Director.  **Mr. DiGiandomenico was appointedas a director on May 25, 2004, and serves on our Audit and CompensationCommittees. Mr. DiGiandomenico co-founded MDB Capital Group LLC, a NASDmember broker-dealer, in 1997 and serves as a managing director of the firm.From 1990 to 1995, he served as President and Chief Executive Officer of theDigian Company, a real estate development company. He currently serves on theBoard of Directors of Orion Acquisition Corp. II, a corporation which filesreports pursuant to the Securities Exchange Act of 1934, which was formed in1995 to acquire an operating business by purchase, merger or otherwise.

There are no family relationships between or among ourexecutive officers and directors.

**BOARD OF DIRECTORS**

**Board Committees**

The standing committees of the Board of Directors arecomprised of the Audit Committee and the Compensation Committee.

The Audit Committee oversees our conduct of thefinancial reporting processes, including (i) reviewing with management andthe outside auditors the audited financial statements included in our AnnualReport, (ii) reviewing with the outside auditors the interim financialresults included in our quarterly reports filed with the SEC,

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(iii) discussingwith management and the outside auditors the quality and adequacy of internalcontrols, and (iv) reviewing the independence of the outside auditors. TheAudit Committee met five times during 2006.

The Compensation Committee is comprised ofMessrs. Robbins, McCandless and DiGiandomenico. At the direction of thefull Board, the Compensation Committee reviews and makes recommendations withrespect to compensation of our directors, executive officers and seniormanagement. The Compensation Committee administers our Stock Incentive Plan.The Compensation Committee met once during 2006 and approved various othermatters by unanimous written consent.

**Attendance at Meetings**

The Board held six meetings during 2006. Variousmatters were also approved by the unanimous written consent of the directorsduring the last fiscal year. Each director attended at least 80% of theaggregate of (i) the total number of meetings of the Board and(ii) the total number of meetings held by all committees of the Board onwhich such director served. We have no formal policy with respect to theattendance of Board members at the annual meeting of shareholders but encourageall incumbent directors and director nominees to attend each annual meeting ofshareholders.

**Nomination of Directors**

The full Board acts in place of a nominating committeeto investigate qualified nominees for election to the Board when vacanciesoccur.

**Board Charters**

The Board has adopted a charter with respect to itsgovernance which includes consideration of director nominees. Additionally, theCompensation and Audit Committees have adopted Charters with respect to theirgovernance and operation.

The Board strivesto identify and attract director nominees with a variety of experience who havethe business background and personal integrity to represent the interests ofall shareholders. Although the Board has not established any specific minimumqualifications that must be met by a director nominee, factors considered inevaluating potential candidates include educational achievement, managerialexperience, business acumen, financial sophistication, insurance industryexpertise and strategic planning and policy-making skills. Depending upon thecurrent needs of the Board, some factors may be weighed more or less heavilythan others in the Board’s deliberations. The Board evaluates the suitabilityof a potential director nominee on the basis of written information concerningthe candidate, discussions with persons familiar with the background andcharacter of the candidate and personal interviews with the candidate.

### **Codeof Ethics**

We have adopted aCode of Ethics that applies to all of our directors, officers and employees. Wepublicize the Code of Ethics through posting the policy on our website,http://www.XELR8.com. We will disclose on our website any waivers of, oramendments to, our Code of Ethics.

**ITEM 10.**             EXECUTIVECOMPENSATION

**Compensation Discussion and Analysis**

The objective of the Company’s compensation program isto attract, retain and reward management that demonstrates the required skillto develop the Company into a leader in the nutrition and network marketingfield. Through the development of the Company’s business plan, the compensationprogram is designed to incentivize management in the creation of shareholdervalue. The compensation program has been designed to reward executives forestablishing the Company in the network marketing field, developing productsthat can be successfully sold in that channel and creating shareholder wealth.

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Currently the Company has used two elements ofcompensation for management, current compensation, in the form of cash, andlong-term equity compensation in the form of grants of stock option awards. TheCompany has also used the award of options to replace cash compensation foremployees and the issuance of stock as a method of fulfilling its obligationsunder employment contracts. As the Company has not been profitable since itsinception, the Company has not had a cash bonus program, but rather relied onthe potential of the long-term awards as incentives to compensate itsexecutives. Typically the current compensation is set at a base level, withvariances based on the achievement of certain benchmarks.

The cash compensation enables the Company to attractmanagement with the required skills and experience while the awards of stockoptions are used as a method of retaining executives for long term growth.Additionally, the Company has used the awards of stock and options as a methodof reducing cash outflow

The Company has determined the amount of short andlong term compensation based on a number of factors: level of experience of theemployee in his or her respective field, prevailing market rates forindividuals performing similar functions at competing companies in a similarindustry and stage of development of the Company. The Company has attempted toevenly balance the compensation between current and long-term for itsexecutives, with the long-term award requiring some form of vesting, typicallyover a two or four year period. During the current year, the executives thatwere granted what is typically a long-term compensation award, stock options,in lieu of short term cash compensation, were vested into their options over ayear long period. The Company has also used options on a performance basis forcertain individuals, with the achievement of certain goals resulting in thevesting in the options. When evaluating the compensation of executives on anannual basis, the Company has reviewed past compensation received by theexecutive in both current and long-term awards when determining any additionalawards.

Each element of the compensation program is designedto further the Company’s goals of attracting and retaining high caliberindividuals with the experience to grow the Company and ultimately create andincrease shareholder wealth. The incentive based awards were directly tied tothe achievement of an objective, whereas the other awards that were based onthe vesting period were used as a mechanism to retain skilled executives. Inthe performance based awards, where either long-term awards are vested or thereis an increase in current cash compensation, it is the practice of the Companyto link the overall objectives of the Company with the respective objectivesfor that executive and his or her ability to exercise influence over theoutcome.

The following table sets forth information withrespect to compensation earned by the executive officers of the Company for2006 and 2005.

**Summary Compensation Table**
| **Name and  Principal Position**                            | ** ** | **Year**   | ** ** | **Salary ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)(7)** | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All  Other  Compensation  ($)(1)** | ** ** | **Total  ($)**   | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|---------------------|------------|----------------|------------|------------------------|------------|----------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------|------------|
| John Pougnet,  Chief Executive Officer and Chief Financial Officer(5) |       | 2006  2005 |       | 116,891  40,385     |       | 0  0           |       | 0  0                   |       | 138,878  0                 |       | 0  0                                               |       | 0  0                                                                                             |       | 0  0                                 |       | 255,769  40,385  |       |
| Earnest  Mathis, Jr., Chairman(2)                                |       | 2006  2005 |       | 91,269  122,845     |       | 0  0           |       | 0  0                   |       | 59,988  0                  |       | 0  0                                               |       | 0  0                                                                                             |       | 9,231  9,831                         |       | 160,488  132,676 |       |
| Sanford D.  Greenberg, Founder(6)                                     |       | 2006  2005 |       | 95,192  150,000     |       | 0  0           |       | 540,000  0             |       | 59,988  0                  |       | 0  0                                               |       | 0  0                                                                                             |       | 15,231  18,000                       |       | 710,411  168,000 |       |
| Douglas Ridley,  President(3)                                         |       | 2006  2005 |       | 163,814  100,962    |       | 0  25,000      |       | 0  0                   |       | 0  0                       |       | 0  0                                               |       | 0  0                                                                                             |       | 0  0                                 |       | 163,814  125,962 |       |
| David Litt, Vice  President Sales and Marketing(5)                    |       | 2006  2005 |       | 145,817  173,077    |       | 0  25,000      |       | 0  0                   |       | 0  0                       |       | 0  0                                               |       | 0  0                                                                                             |       | 5,308  462                           |       | 151,125  198,539 |       |

 

37

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| Timothy  Transtrum, Vice President of Operations           |   | 2006  2005 |   | 122,209  130,000 |   | 0  0 |   | 0  0 |   | 0  0 |   | 0  0 |   | 0  0 |   | 5,225  0 |   | 127,434  130,000 |   |
|------------------------------------------------------------|--------|------------|--------|------------------|--------|------|--------|------|--------|------|--------|------|--------|------|--------|----------|--------|------------------|--------|
| Sanjeevkumar Javia, Vice  President of Product Development |   | 2006  2005 |   | 107,936  102,714 |   | 0  0 |   | 0  0 |   | 0  0 |   | 0  0 |   | 0  0 |   | 0  0     |   | 107,936  102,714 |   |

----

(1)                 Includes auto allowance.

(2)                 Mr. Mathis joined the Company in March 2005as Chief Executive Officer. On October 11, 2006 he resigned his positionas Chief Executive Officer and remained as Chairman. Mr. Mathis wasreplaced as Chief Executive Officer by Mr. John Pougnet.

(3)                 Mr. Ridley joined the Company in June 2005.

(4)                 Includes the 20,000 common stock options thatMr. Ridley earned as a Director prior to joining the Company.

(5)                 Mr. Pougnet joined the Company inSeptember 2005 as Chief Financial Officer. On October 11, 2006 hereplaced Mr. Mathis as Chief Executive Officer.

(6)                 On November 17, 2006 the Company agreed to issueto Mr. Greenberg  1,500,000 shares of its common stock in return foran amendment to his current employment agreement pursuant to which he willforfeit all future base salary amounting to $396,923 due under the agreementand 250,000 vested options in exchange for the issuance of the shares andpayment of a sales commission equal to 1% of the net sales until 2019.

(7)                 The company uses a Black-Scholesoption-pricing model (Black-Scholes model) to estimate the fair value of thestock option grant. The use of a valuation model requires the company to makecertain assumptions with respect to selected model inputs. Expected volatilitywas calculated based on the historical volatility of the company’s stock price.In the future the average expected life will be based on the contractual termof the option and expected employee exercise and post-vesting employmenttermination behavior. Currently it is based on the simplified approach providedby SAB 107. The risk-free interest rate is based on U.S. Treasury zero-couponissues with a remaining term equal to the expected life assumed at the date ofthe grant. The following were the factors used in the Black Sholes model tocalculate the compensation expense:

|                           | ** ** | **For the year ended  December 31, 2006** | ** ** |
|---------------------------|------------|--------------------------------------------------------------------|------------|
| Stock price  volatility   |       | 93.4% to 94.1                                                      | %          |
| Risk-free rate  of return |       | 4.76% to 5.02                                                      | %          |
| Annual dividend  yield    |       | 0                                                                  | %          |
| Expected life             |       | 3 to 4.5 Years                                                     |       |

**Grants of Plan-Based Awards**

In 2006, we issued the options listed below. Therewere no stock options exercised in 2006. The following table sets forth theoptions granted in 2006:
| ** **                                                         | ** ** | ** **           | ** ** | **Number of  Non-Equity  Incentive Plan  Units** | ** ** | **Estimated Future Payouts Under  Non-Equity Incentive Plan Awards** | ** ** | **Estimated Future Payouts Under  Equity Incentive Plan Awards** | ** ** | **All Other  Stock Awards:  Number of  Shares of  Stock or** | ** ** | **All Other  Option Awards:  Number of  Securities  Underlying** | ** ** | **Exercise or  Base Price  of Option** | ** ** |
|--------------------------------------------------------------------|------------|----------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Grant**            | ** ** | **Granted**                                                | ** ** | **Threshold**                                                                                      | ** ** | **Target**                                                                                     | ** ** | **Maximum**                                                                           | ** ** | **Threshold**                                                                   | ** ** | **Target**                                            | ** ** | **Maximum** | ** ** | **Units** | ** ** | **Options** | ** ** | **Awards** | ** ** |
| **Name**                                                           | ** ** | **Date(1)**          | ** ** | **(#)**                                                    | ** ** | **($)**                                                                                            | ** ** | **($)**                                                                                        | ** ** | **($)**                                                                               | ** ** | **(#)**                                                                         | ** ** | **(#)**                                               | ** ** | **(#)** | ** ** | **(#)** | ** ** | **(#)** | ** ** | **($ / Sh)(1)** | ** ** |
| John Pougnet, Chief  Executive Officer and Chief Financial Officer |       | 3/10/2006  7/10/2006 |       | 0  0                                                       |       | 0  0                                                                                               |       | 0  0                                                                                           |       | 0  0                                                                                  |       | 0  0                                                                            |       | 0  0                                                  |       | 0  0 |   | 0  0 |   | 100,000  100,000 | (2)  (3) | $                 1.39  $                 0.65 |   |
| Sanford D. Greenberg,  Founder(6)                                  |       | 7/10/2006            |       | 0                                                          |       | 0                                                                                                  |       | 0                                                                                              |       | 0                                                                                     |       | 0                                                                               |       | 0                                                     |       | 0 |   | 0 |   | 150,000 | (3) | $                 0.65 |   |
| Earnest Mathis, Jr., Chairman                                 |       | 7/10/2006            |       | 0                                                          |       | 0                                                                                                  |       | 0                                                                                              |       | 0                                                                                     |       | 0                                                                               |       | 0                                                     |       | 0 |   | 0 |   | 150,000 | (3) | $                 0.65 |   |

----

(1)                 The Company uses the same date for the Grant Date andthe Approval Date. The Company’s closing market price for the Grant Date isused to determine the exercise price of the options.

(2)                 The award was granted under the Company’s 2003 StockIncentive Plan. The employee has five years from the date of issue to exercisethe option, and the award will vest over a four year period. The terms of theaward are determined by the 2003 Stock Incentive Plan.

(3)                 These awards are non plan options. Theemployee has five years from the date of issue to exercise the options. The options will vest for each employeeover the term of one year.

**Employment Contracts**

During the current year the Company entered amendedemployment contracts with Mr. Mathis, Mr. Greenberg andMr. Pougnet.

On March 2, 2005, in connection withMr. Greenberg’s resignation as Chairman, Chief Executive Officer, andPresident, Mr. Greenberg’s employment agreement was amended and restatedto provide that his primary duties involve training, motivating, and recruitingindependent distributors. Mr. Greenberg received a salary of $150,000 peryear and may recieve bonuses in such amounts as determined by our Board ofDirectors. On July 10, 2006, Mr. Greenberg’s contract was amended toreduce his base salary for a period of one year to $75,000 and

38

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Mr. Greenbergwas granted 150,000 options to purchase the Company’s common stock.Mr. Greenberg will also be eligible to participate in bonuses on the samebasis as our executives under any executive bonus plan adopted by us. Eitherparty may terminate the agreement upon 30 days prior written notice.Additionally, Mr. Greenberg may be terminated for “just cause” as definedin the employment agreement upon one business day’s prior written notice.Mr. Greenberg may terminate his employment for “good reason” as defined inemployment agreement. If we terminate Mr. Greenberg without just cause orhe terminates his employment for good reason, he is entitled to three yearssalary payable over the 36 month period commencing October 1, 2006regardless of when terminated. Mr. Greenberg’s employment agreement alsoincludes a non-competition provision for a period of two years after histermination of employment or, if later, one year after final payment of anypay-out provision upon termination. On March 2, 2005, in connection withMr. Mathis’ employment as Chief Executive Office, Mr. Greenbergforfeited options to purchase 275,000 shares. In addition, Mr. Greenberghas agreed to forfeit options to purchase 50,000 shares when theApril 2005 public offering was completed. On November 17, 2006 theCompany agreed to issue to Mr. Greenberg  1,500,000 shares of itscommon stock in return for an amendment to his current employment agreementpursuant to which he will forfeit all future base salary amounting to $396,923due under the agreement and 250,000 vested options in exchange for the issuanceof the shares and payment of a sales commission equal to 1% of the net salesuntil 2019.

Earnest Mathis entered into an employment agreementwith us, effective March 2, 2005, providing for his employment as ourChief Executive Officer and President. The employment agreement was for atwo-year term and provided that he will devote approximately 80% of his timeand energies to the business of the Company. Mr. Mathis would receive asalary of $150,000 per year and may receive bonuses in such amounts asdetermined by our Compensation Committee. On July 10, 2006 Mr. Mathis’contract was amended to reduce his base salary for a period of one year to$75,000 and Mr. Mathis was granted 150,000 options to purchase commonstock of the Company. Mr. Mathis will also be eligible to participate inbonuses on the same basis as other executives under any executive bonus planadopted by us. Either party may terminate the agreement upon 30 days priorwritten notice. Additionally, Mr. Mathis may be terminated immediately for“just cause” as defined in the employment agreement. Mr. Mathis may alsoterminate his employment for “good reason” as defined in the employmentagreement. If we terminate Mr. Mathis without just cause or he terminateshis employment for good reason, he is entitled to one year’s salary payableover 12 months. Mr. Mathis’ employment agreement also includes anon-competition provision for a period of one year after his termination ofemployment.

Pursuant to his employment agreement, Mr. Mathisalso received stock options to purchase 275,000 shares of our common stock at$3.00 per share. One half of the options were vested as of the date of thegrant and the balance vest on the one-year anniversary of the grant providedthat Mr. Mathis is still employed by us. The options are exercisable forfive years after vesting. If Mr. Mathis is terminated without just causeor he terminates his employment for good reason, all his unvested options vestand are exercisable for a period of five years from the date of termination. IfMr. Mathis is terminated for just cause, all unexercised options terminateas of his date of termination.

On September 12, 2005, John D. Pougnet joined usas our Chief Financial Officer and effective October 1, 2006 was appointedalso as our Chief Executive Officer. Mr. Pougnet’s employment agreement isfor a two-year term and he will receive a base salary of $140,000, and mayreceive bonuses in such amounts as determined by our Compensation Committee.Additionally, Mr. Pougnet will have an option to purchase 50,000 shares ofour common stock, with an exercise price of $1.80. The options will vest inequal amounts over a four-year period on December 31 starting on December 31,2005. On March 3, 2006 Mr. Pougnet was granted additional options topurchase 100,000 shares of our common stock. On July 10, 2006Mr. Pougnet’s contract was amended to reduce his base salary to $90,000for a year and Mr. Pougnet was granted options to purchase 100,000 sharesof our common stock. Mr. Pougnet will also be eligible to participate inbonuses on the same basis as other executives under any executive bonus planadopted by us. If Mr. Pougnet’s employment were terminated other than forcause, disability or without good reason by Mr. Pougnet, he would beprovided severance pay equal to twelve months, payable in equal monthlyinstallments.

39

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**Outstanding Equity Awards as ofDecember 31, 2006**
| ** **                                                         | ** ** | **Option Awards**  | ** ** | **Stock Awards** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | ** **              | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** **            | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity Incentive** | ** ** | **Plan Awards:** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** **            | ** ** | **Incentive** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Plan Awards:** | ** ** | **Market or** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | ** **            | ** ** | **Plan Awards:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Market** | ** ** | **Number of** | ** ** | **Payout Value** | ** ** |
| ** **                                                         | ** ** | **Number of**      | ** ** | **Number of**    | ** ** | **Number of** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number of** | ** ** | **Value of** | ** ** | **Unearned** | ** ** | **of Unearned** | ** ** |
| ** **                                                         | ** ** | **Securities**          | ** ** | **Securities**        | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares or** | ** ** | **Shares or** | ** ** | **Shares, Units** | ** ** | **Shares, Units** | ** ** |
| ** **                                                         | ** ** | **Underlying**          | ** ** | **Underlying**        | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** | **Units of** | ** ** | **Units of** | ** ** | **or Other** | ** ** | **or Other** | ** ** |
| ** **                                                         | ** ** | **Unexercised**         | ** ** | **Unexercised**       | ** ** | **Unexercised** | ** ** | **Option** | ** ** | ** ** | ** ** | **Stock That** | ** ** | **Stock That** | ** ** | **Rights That** | ** ** | **Rights That** | ** ** |
| ** **                                                         | ** ** | **Options**             | ** ** | **Options**           | ** ** | **Unearned** | ** ** | **Exercise** | ** ** | **Option** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** |
| ** **                                                         | ** ** | **(#)**                 | ** ** | **(#)**               | ** ** | **Options** | ** ** | **Price** | ** ** | **Expiration** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** |
| **Name**                                                           | ** ** | **Exercisable**         | ** ** | **Unexercisable**     | ** ** | **(#)** | ** ** | **($)** | ** ** | **Date** | ** ** | **(#)** | ** ** | **($)** | ** ** | **(#)** | ** ** | **($)** | ** ** |
| John Pougnet,  Chief Executive Officer and Chief Financial Officer |       | 25,000  20,833  59,615  |       |                  |       | 25,000  79,167  40,385 |   | $                   1.80  $                   1.39  $                   0.65 |   | 9/11/2015  3/9/2011  5/27/2011 |   |   |   |   |   |   |   |   |   |
| Earnest Mathis,  Jr., Chairman                                     |       | 275,000  89,423         |       |                  |       | 0  60,577 |   | $                   3.20  $                   0.65 |   | 1/1/2013  5/27/2011 |   |   |   |   |   |   |   |   |   |
| Sanford D.  Greenberg, Founder                                     |       | 475,000

89,423         |       |                  |       | 0  60,577 |   | $                   3.00  $                   0.65 |   | 1/1/2013  5/27/2011 |   |   |   |   |   |   |   |   |   |
| Douglas Ridley,  President                                         |       | 10,000  20,000  100,000 |       |                  |       | 0  0  100,000 |   | $                   5.00  $                   3.20  $                   1.58 |   | 12/2/2010  5/12/2010 5/30/2009 |   |   |   |   |   |   |   |   |   |
| David Litt, Vice  President Sales and Marketing                    |       | 32,500  0  25,000       |       |                  |       | 17,500  30,000  25,000 |   | 5.00  5.00  1.50 |   | 5/30/2009  5/30/2009  7/21/2010 |   |   |   |   |   |   |   |   |   |
| Timothy  Transtrum, Vice President of Operations                   |       | 32,500  25,000          |       |                  |       | 17,500  25,000 |   | $                   5.00  $                   1.50 |   | 2/1/2009  7/21/2010 |   |   |   |   |   |   |   |   |   |
| Sanjeevkumar Javia, Vice  President of Product Development         |       | 40,000  160,000         |       |                  |       | 0  0 |   | $                   5.00  $                   1.50 |   | 12/31/2006  7/21/2010 |   |   |   |   |   |   |   |   |   |

 

**Stock Option Exercises and Stock Vested**

There were no options exercised by the named executiveofficers during the year ended December 31, 2006 and there were no optionsheld by these officers that were in the money at December 31, 2006.
| ** **                                                         | ** ** | **Option Awards**             | ** ** | **Stock Awards**   | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **Number of Shares**     | ** ** | **Value Realized** | ** ** | **Number of Shares** | ** ** | **Value Realized** | ** ** |
| ** **                                                         | ** ** | **Acquired on Exercise** | ** ** | **on Exercise**    | ** ** | **Acquired on Vesting** | ** ** | **on Vesting** | ** ** |
| **Name**                                                           | ** ** | **(#)**                            | ** ** | **($)**                 | ** ** | **(#)** | ** ** | **($)** | ** ** |
| John Pougnet,  Chief Executive Officer and Chief Financial Officer |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |
| Earnest Mathis, Jr.,  Chairman                                     |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |
| Sanford D.  Greenberg,  Founder                                    |       | 0                                  |       | 0                       |       | 1,500,000 |   | $                 540,000 |   |
| Douglas Ridley,  President                                         |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |
| David Litt,  Vice President Sales and Marketing                    |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |
| Timothy  Transtrum,  Vice President of Operations                  |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |
| Sanjeevkumar Javia,  Vice President of Product Development         |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |

 

40

----

 

**Post-Employment Compensation, PensionBenefits, Nonqualified Deferred Compensation**

There were no post-employment compensation, pension ornonqualified deferred compensation benefits earned by the executive officersduring the year ended December 31, 2006.

**Director Compensation**
| ** **             | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Change in** | ** ** | ** **         | ** ** | ** ** | ** ** |
|------------------------|------------|------------------------------|------------|------------|------------|------------|------------|-------------------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **             | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Pension**        | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Value and** | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Nonqualified**   | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-Equity**          | ** ** | **Deferred**       | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Fees Earned or** | ** ** | **Stock**  | ** ** | **Option** | ** ** | **Incentive Plan** | ** ** | **Compensation**   | ** ** | **All Other** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Paid in Cash**   | ** ** | **Awards** | ** ** | **Awards** | ** ** | **Compensation**        | ** ** | **Earnings**       | ** ** | **Compensation**   | ** ** | **Total**  | ** ** |
| **Name**               | ** ** | **($)**                      | ** ** | **($)**    | ** ** | **($)(1)** | ** ** | **($)**                 | ** ** | **($)**            | ** ** | **($)**            | ** ** | **($)**    | ** ** |
| AJ Robbins             |       | 8,000                        |       | 0          |       | 15,901     |       | 0                       |       | 0                  |       | 0                  |       | 23,901     |       |
| John McCandless        |       | 0                            |       | 0          |       | 10,987     |       | 0                       |       | 0                  |       | 0                  |       | 10,987     |       |
| Anthony DiGiandomenico |       | 0                            |       | 0          |       | 10,987     |       | 0                       |       | 0                  |       | 0                  |       | 10,987     |       |

----

(1)             Thecompany uses a Black-Scholes option-pricing model (Black-Scholes model) toestimate the fair value of the stock option grant. The use of a valuation modelrequires the company to make certain assumptions with respect to selected modelinputs. Expected volatility was calculated based on the historical volatilityof the company’s stock price. In the future the average expected life will bebased on the contractual term of the option and expected employee exercise andpost-vesting employment termination behavior. Currently it is based on thesimplified approach provided by SAB 107. The risk-free interest rate is basedon U.S. Treasury zero-coupon issues with a remaining term equal to the expectedlife assumed at the date of the grant. The following were the factors used inthe Black Sholes model to calculate the compensation expense:

|                           | ** ** | **For the year ended  December 31, 2006** | ** ** |
|---------------------------|------------|--------------------------------------------------------------------|------------|
| Stock price  volatility   |       | 92.95                                                              | %          |
| Risk-free rate  of return |       | 5.07% to 5.27                                                      | %          |
| Annual dividend  yield    |       | 0                                                                  | %          |
| Expected life             |       | 3 Years                                                            |       |

 

During 2006 the Company compensated Mr. Robbins$8,000 for his services as the Chairman of the Compensation and AuditCommittee. No cash compensation was paid to any of the other independentdirectors in 2006, except reimbursement of expenses. Additionally,Messrs. McCandless, Robbins and DiGiandomenico were granted 40,000 optionsto purchase common stock for their services.

**ITEM 11.**             SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

**Security Ownership of CertainBeneficial Owners and Management**

The following table sets forth certain informationwith respect to the ownership of our Common Stock as of the record date, by(i) each person who is known by us to own of record or beneficially morethan 5% of our Common Stock, (ii) each of our directors and officers.Unless otherwise indicated, the stockholders listed in the table have solevoting and investment powers with respect to the shares of Common Stock.Shareholdings include shares held by family members. The addresses of theindividuals listed below are in the Company’s care at 480 South Holly Street,Denver, Colorado 80246 unless otherwise noted.
| ** **                          | ** ** | **Number of** | ** ** | **Percent of** | ** ** |
|-------------------------------------|------------|--------------------|------------|---------------------|------------|
| **Name and Address**      | ** ** | **Shares(1)**      | ** ** | **Class(2)**        | ** ** |
| Earnest  Mathis, Jr.  Chairman |       | 607,843            | (3)        | 5.8                 | %          |

 

41

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| Doug Ridley  President and Director                                 |   | 142,500   | (4)    | 1.4  | %      |
|---------------------------------------------------------------------|--------|-----------|--------|------|--------|
| John D Pougnet  Chief Executive Officer and Chief Financial Officer |   | 139,549   | (5)    | 1.4  | %      |
| David Litt  Vice President Sales and Marketing                      |   | 63,125    | (6)    | *    |   |
| Timothy  Transtrum  Vice President of Operations                    |   | 68,750    | (7)    | *    |   |
| Sanjeevkumar  Javia  Vice President of Product Development          |   | 200,000   | (8)    | 1.9  | %      |
| John B.  McCandless  Director                                       |   | 76,667    | (10)   | *    |   |
| AJ Robbins  Director                                                |   | 30,000    | (12)   | *    |   |
| Anthony  DiGiandomenico  Director                                   |   | 262,620   | (9)    | 2.6  | %      |
| Total officer  and director                                         |   | 1,591,054 |   | 13.9 | %      |
| Sanford D  Greenberg                                                |   | 3,006,917 | (13)   | 28.1 | %      |
| Warren Cohen  595 South Broadway Suite 200  Denver, CO 80209   |   | 1,338,800 | (11)   | 13.3 | %      |
| Total beneficial  ownership                                         |   | 5,936,771 |   | 49.2 | %      |

----

*Less than 1%

(1)             Allentries exclude beneficial ownership of shares issuable pursuant to optionsthat have not vested or that are not otherwise exercisable as of the datehereof and which will not become vested or exercisable within 60 days ofFebruary 6, 2007.

(2)             Percentagesare rounded to nearest one-tenth of one percent. Percentages are based on10,097,170 shares of common stock outstanding. Options that are presentlyexercisable or exercisable within 60 days are deemed to be beneficially ownedby the person holding the options for the purpose of computing the percentageownership of that person, but are not treated as outstanding for the purpose ofcomputing the percentage of any other person.

(3)             Includesshares either held directly or through entities that are controlled by EarnestMathis, Jr. Includes 435,511 shares issuable pursuant to options which arepresently exercisable or which become exercisable within 60 days of the filingof February 6, 2007, and 172,332 shares held of record.

(4)             Comprisedof 142,500 shares issuable pursuant to options which are presently exercisableor which become exercisable within 60 days of February 6, 2007.

(5)             Comprisedof 139,549 shares issuable pursuant to options which are presently exercisableor which become exercisable within 60 days of February 6, 2007.

(6)             Comprisedof 63,125 shares issuable pursuant to options which are presently exercisableor which become exercisable within 60 days of February 6, 2007, 10,000 sharesheld of record.

(7)             Comprisedof 68,750 shares issuable pursuant to options which are presently exercisableor which become exercisable within 60 days of February 6, 2007.

(8)             Comprisedof 200,000 shares issuable pursuant to options which are presently exercisableor which become exercisable within 60 days of February 6, 2007.

(9)             Comprisedof 99,095 shares issuable pursuant to public warrants and 76,667 sharespursuant to options which are presently exercisable or which become exercisablewithin 60 days of February 6, 2007, and 66,800 shares held of record and10,029 Class A warrants and 10,029 Class B warrants.

42

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(10)       Comprisedof 76,667 shares issuable pursuant to options which are presently exercisableor which become exercisable within 60 days of February 6, 2007.

(11)       Comprisedof 1,338,800 shares held of record.

(12)       Comprisedof 30,000 shares issuable pursuant to options which are presently exercisableor which become exercisable within 60 days of February 6, 2007.

(13)       Includesshares either held directly or as custodian for a minor child and includes617,511 shares issuable pursuant to options which are presently exercisable orwhich become exercisable within 60 days of February 6, 2007, and2,389,406 shares held of record.

**ITEM 12.**             CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS

We lease our current corporate office space fromArnold Greenberg, the father of our Founder, Sanford D. Greenberg. We paid$38,830 and $38,790 in rent for the years ended December 31, 2005 and2006, respectively. Our current lease at $3,390 per month expired at the end ofMarch 2006, and has been replaced with a month to month lease at the sameamount.

On March 1, 2005, Christopher Marlett, asignificant shareholder, loaned the Company $25,000 evidenced by a promissory note.The note provides that the principal together with interest at 10% per annum,are due and payable on the earlier of May 30, 2005 or the closing of theApril 2005 public offering. On April 12, 2005 the Company re-paid thenote plus accrued interest of $288.

On March 2, 2005, Mr. Mathis advanced theCompany a total of $170,000 evidenced by a promissory note. The note bearsinterest at 10% per annum with principal and interest payable by the earlier ofMay 30, 2005, or the closing of the April 2005 public offering. OnApril 12, 2005 the Company re-paid the note plus accrued interest of$1,236.

43

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**ITEM 13.**             EXHIBITS

(a)          Exhibits
| Exhibit No | ** ** | **Description**                                                                                                                                                                                                                           |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1        |       | Articles of Incorporation incorporated by reference  to Exhibit 3.01 filed with Form SB-2 filed February 27, 2001                                                                                                                         |
| 3.1.1      |       | Certification of Amendment to the Articles of Incorporation  incorporated by reference to Exhibit 3.1.1 filed with Form 10-QSB filed  November 14, 2003                                                                                   |
| 3.2        |       | Amended and Restated By-laws filed with Form 10-KSB  on March 3, 2005, as Exhibit 3.2, and incorporated herein by reference.                                                                                                              |
| 4.1        |       | Warrant — MDB Capital Group filed with Form SB-2 on  June 29, 2004, and incorporated herein by reference                                                                                                                             |
| 4.2        |       | Sample Stock Purchase Agreement with Registration  Rights filed with Form SB-2 on June 29, 2004, and incorporated herein by  reference                                                                                                    |
| 4.3        |       | Warrant — Anthony DiGiandomenico filed with Form  SB-2 on June 29, 2004, and incorporated herein by reference                                                                                                                        |
| 4.4        |       | Warrant — Christopher A. Marlett filed with Form  SB-2 on June 29, 2004, and incorporated herein by reference                                                                                                                        |
| 10.1       |       | VitaCube Systems Holdings, Inc. 2003 Stock Incentive  Plan incorporated by reference to Exhibit 10.1 filed with Form 10-QSB filed  November 14, 2003                                                                                      |
| 10.1.1     |       | Form of Incentive Stock Option Agreement under the  2003 Stock Incentive Plan filed with Form 10-KSB on March 3, 2005, as Exhibit  10.1.1, and incorporated herein by reference.                                                          |
| 10.1.2     |       | Form of Nonqualified Stock Option Agreement under  the 2003 Stock Incentive Plan filed with Form 10-KSB on March 3, 2005, as  Exhibit 10.1.2, and incorporated herein by reference.                                                       |
| 10.2       |       | Agreement Concerning the Exchange of Securities by  and between the Company and VitaCube Systems, Inc. and the Security Holders  of VitaCube Systems, Inc. incorporated by reference to Exhibit 2 filed with  Form 8-K filed July 1, 2003 |
| 10.3       |       | Employment Agreement — Sanford D. Greenberg filed  with Form 8-K on April 2, 2004, as Exhibit 10.1, and incorporated herein by  reference                                                                                            |
| 10.4       |       | Option Agreement — Sanford D. Greenberg filed with  Form 8-K on April 2, 2004, as Exhibit 10.2, and incorporated herein by  reference                                                                                                |
| 10.5       |       | Lockup Agreements — Sanford D. Greenberg and Warren  Cohen filed with Form SB-2 on June 29, 2004, and incorporated herein by  reference                                                                                              |
| 10.6       |       | Employment Agreement — Timothy Transtrum filed with  Form SB-2 on June 29, 2004, and incorporated herein by reference                                                                                                                |
| 10.7       |       | MDB Capital Group, LLC — Engagement Letter filed  with Form SB-2 on June 29, 2004, and incorporated herein by reference                                                                                                              |
| 10.8       |       | Employment Agreement — David Litt filed with Form  8-K on November 5, 2004, and incorporated herein by reference                                                                                                                     |
| 10.9       |       | Incentive Stock Option Agreement — David Litt .  filed with Form 10-KSB on March 3, 2005, as Exhibit 10.10, and incorporated  herein by reference.                                                                                   |
| 10.10      |       | Office Lease and Addendums — A.L. Greenberg filed  with Form SB-2 on January 18, 2005, and incorporated herein by reference                                                                                                          |
| 10.11      |       | Consulting Agreement — Dr. William Wheeler filed  with Form SB-2 on January 18, 2005, and incorporated herein by reference                                                                                                           |
| 10.12      |       | Restated Employment Agreement — Sanford D. Greenberg  filed with Form 10-KSB on , March 4, 2005 as Exhibit 10.3, and incorporated herein  by reference.                                                                              |
| 10.13      |       | Employment Agreement — Earnest Mathis, Jr. filed  with Form 10-KSB on March 3, 2005, as Exhibit 10.10, and incorporated herein  by reference.                                                                                        |
| 10.14      |       | Stock Option Agreement — Earnest Mathis, Jr. filed  with Form 10-KSB on March 3, 2005, as Exhibit 10.11, and incorporated herein  by reference.                                                                                      |
| 10.15      |       | Strategic alliance agreement with UTEK Corporation  filed on Form 8-K on May 23, 2005, as Exhibit 10.1 and 10.2, and incorporated  herein by reference.                                                                                   |
| 10.16      |       | Employment Agreement — Douglas Ridley filed with  Form 8-K on June 2, 2005, as Exhibit 10.1, and incorporated herein by  reference.                                                                                                  |
| 10.17      |       | Service Agreement with Elite Financial  Communications Group, LLC file on Form 8-K on September 6, 2005, , as Exhibit  10.11, and incorporated herein by reference.                                                                       |
| 10.18      |       | Employment Agreement — John D. Pougnet filed with  Form 8-K on September 14, 2005, as                                                                                                                                                |

 

44

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|         |   | Exhibit 10.1, and incorporated herein by reference.                                                                                                                                |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19   |   | Consulting Agreement with Eastgate Associates Ltd  filed with Form 10-KSB on March 31, 2006 and incorporated herein by  reference.                                                 |
| 10.20.1 |   | Endorser Agreement with Carnell Williams filed with  Form 10-KSB on March 31, 2006 and incorporated herein by reference.                                                           |
| 10.21   |   | Consent Agreement with PouchTec Industries, L.L.C.,  filed with Form 8-K on July 6, 2006, as Exhibit 99.1, and incorporate herein  by reference.                                   |
| 10.22   |   | Amended Earnest Mathis, Jr. Employment Agreement,  filed with Form 8-K on July 14, 2006, as Exhibit 10.1, and incorporate herein  by reference.                                    |
| 10.23   |   | Amended Sanford Greenberg Employment Agreement,  filed with Form 8-K on July 14, 2006, as Exhibit 10.2, and incorporate herein  by reference.                                      |
| 10.24   |   | Amended John Pougnet Employment Agreement, filed  with Form 8-K on July 14, 2006, as Exhibit 10.3, and incorporate herein by  reference.                                           |
| 10.25   |   | Bridge Financing Agreement with Asset Protection  Fund filed with Form 8-K on November 28, 2006, as Exhibit 10.1, and  incorporate herein by reference.                            |
| 10.26   |   | Bridge Financing Agreement with Global Project  Finance AG filed with Form 8-K on December 19, 2006, as Exhibit 10.1, and  incorporate herein by reference.                        |
| 10.27   |   | Referral Agreement with Lighthouse Capital filed  with Form 8-K on December 19, 2006, as Exhibit 10.2, and incorporate herein  by reference.                                       |
| 10.28   |   | Amended Sanford Greenberg Employment Agreement file  herein as Exhibit 10.28                                                                                                       |
| 10.29   |   | Amended John Pougnet Employment Agreement filed  herein as Exhibit 10.29                                                                                                           |
| 14.1    |   | Code of Ethics filed herewith                                                                                                                                                      |
| 21.1    |   | Subsidiaries of VitaCube Systems Holdings, Inc.  filed herewith                                                                                                                    |
| 31.1    |   | Certification of CEO as Required by Rule  13a-14(a)/15d-14 filed herewith                                                                                                          |
| 31.2    |   | Certification of CFO as Required by Rule  13a-14(a)/15d-14 filed herewith                                                                                                          |
| 32.1    |   | Certification of CEO as Required by Rule 13a-14(a)  and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of  Title 18 of the United States Code filed herewith |
| 32.2    |   | Certification of CFO as Required by Rule 13a-14(a)  and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of  Title 18 of the United States Code filed herewith |
| 99.1    |   | Press release announcing 2006 year end results filed  herein as Exhibit 99.1                                                                                                  |

 

45

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**ITEM 14.**             PRINCIPAL ACCOUNTANTFEES AND SERVICES

Set forth beloware fees paid to the Company’s independent accountants for the past two yearsfor the professional services performed for the Company.

**AuditFees and Audit Related**

We paid Gordon,Hughes & Banks, LLP a total of $27,159 for professional services renderedin review of the March 31, June 30 and September 30, 2005 Form 10-QSB and auditof our financials for the year ended December 31, 2005.

 We paid Gordon, Hughes & Banks, LLP atotal of $25,510 for professional services rendered in review of our filing aForm SB-2 in the year ended December 31, 2005.

We paid Gordon,Hughes & Banks, LLP a total of $25,966 for professional services renderedin review of the March 31, June 30 and September 30, 2006 Form 10-QSB and auditof our financials for the year ended December 31, 2006.

We paid Gordon,Hughes & Banks, LLP a total of $250 for professional services rendered inreview of our private placement transaction.

**Tax Fees**

We paid Gordon,Hughes & Banks, LLP a total of $3,750 professional services rendered inconnection with the preparation of our federal and state income tax returns forthe year ended December 31, 2004.

We paid Gordon,Hughes & Banks, LLP a total of $4,000 professional services rendered inconnection with the preparation of our federal and state income tax returns forthe year ended December 31, 2005.

**AllOther Fees**

None.

46

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**SIGNATURES**

In accordance withSection 13 or 15(d) of Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, on March 30, 2007.
|            | **XELR8 HOLDINGS, INC.** |
|------------|--------------------------|
| ** ** |                     |   |
| ** ** |                     |   |
|       | By                       | */s/ John D. Pougnet.* |
|       |                     | John D. Pougnet |
|       |                     | Chief Executive Officer |
|       |                     |   |
|       | By                       | */s/ John D. Pougnet* |
|       |                     | John D. Pougnet |
|       |                     | Chief Financial Officer |
|       |                     |   |
|       | By                       | */s/ Earnest Mathis, Jr.* |
|       |                     | Earnest Mathis, Jr. |
|       |                     | Chairman |
|       |                     |   |
|       | By                       | */s/ Doug Ridley* |
|       |                     | Doug Ridley |
|       |                     | President and Director |
|       |                     |   |
|       | By                       | */s/ Anthony DiGiandomenico* |
|       |                     | Anthony DiGiandomenico |
|       |                     | Director |
|       |                     |   |
|       | By                       | */s/ John B. McCandless* |
|       |                     | John B. McCandless |
|       |                     | Director |
|       |                     |   |
|       | By                       | */s/ AJ Robbins* |
|       |                     | AJ Robbins |
|       |                     | Director |

 

47

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To theBoard of Directors

XELR8 Holdings, Inc.

Denver, Colorado

We have audited theaccompanying consolidated balance sheets of XELR8 Holdings, Inc. (formerly VitacubeSystems Holdings, Inc.) as of December31, 2006 and 2005 and the related consolidated statements of operations,changes in shareholders’ equity (deficit) and cash flows for each of the twoyears then ended.  These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audits to obtain reasonable assuranceabout whether the consolidated financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as abasis  for designing audit proceduresthat are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of XELR8 Holdings, Inc. as of December 31, 2006 and 2005, and theresults of its operations and its cash flows for each of years then ended, inconformity with accounting principles generally accepted in the United Statesof America.

The accompanyingfinancial statements have been presented assuming that the Company willcontinue as a going concern, which contemplates the realization of assets andthe satisfaction of liabilities in the normal course of business.  As discussed in Note 1 to the consolidatedfinancial statements, the Company has incurred a net loss of $4,669,449 for theyear ended December 31, 2006 and incurred significant net losses sinceinception.  These factors raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  The financial statements do notinclude any adjustments to reflect the possible future effect on the recoverabilityand classification of assets or the amounts and classification of liabilitiesthat might result from the outcome of this uncertainty.

*** Gordon,Hughes & Banks, LLP***

Greenwood Village,Colorado

March 19, 2007

1

----

 

**XELR8 HOLDINGS,INC.Formerly Vitacube Systems Holdings, Inc.CONSOLIDATED BALANCE SHEETSFor the Years Ended December 31, 2006 and 2005**

** **
| ** **                                                                                                                  | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                                                                                                        |       |        |       |        |       |
| **ASSETS**                                                                                                                  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Current assets:                                                                                                             |       |        |       |        |       |
| Cash                                                                                                                        |       | $           | 76,147     |        | $          | 2,805,021 |   |
| Short term investments                                                                                                      |       | —      |       | 110,000     |       |
| Accounts  receivable, net of allowance for doubtful accounts of $10,706 and $5,463,  respectively                           |       | 4,785       |       | 8,758       |       |
| Inventory, net  of allowance for obsolescence of $41,655 and $16,879, respectively                                          |       | 411,364     |       | 542,749     |       |
| Prepaid expenses  and other current assets                                                                                  |       | 259,292     |       | 279,502     |       |
| Total current  assets                                                                                                       |       | 751,588     |       | 3,746,030   |       |
|                                                                                                                        |       |        |       |        |       |
| Property and equipment,  net (Note 4)                                                                                       |       | 123,943     |       | 93,423      |       |
| Intangible assets, net  (Note 5)                                                                                            |       | 11,212      |       | 36,219      |       |
| Deferred offering and  loan costs (Notes 2 and 10)                                                                          |       | 133,889     |       | —      |       |
|                                                                                                                        |       |        |       |        |       |
| Total assets                                                                                                                |       | $           | 1,020,632  |        | $          | 3,875,672 |   |
|                                                                                                                        |       |        |       |        |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY (DEFICIT)**                                                                    | ** ** | ** **  | ** ** | ** **  | ** ** |
| Current liabilities:                                                                                                        |       |        |       |        |       |
| Accounts payable  and accrued expenses                                                                                      |       | $           | 1,160,916  |        | $          | 455,996 |   |
| Short-tem note  payable                                                                                                     |       | 250,000     |       | —      |       |
|                                                                                                                        |       |        |       |        |       |
| Total  Liabilities                                                                                                          |       | 1,410,916   |       | 455,996     |       |
|                                                                                                                        |       |        |       |        |       |
| Commitments and  Contingencies (Note 8)                                                                                     |       |        |       |        |       |
|                                                                                                                        |       |        |       |        |       |
| **SHAREHOLDERS’ EQUITY (DEFICIT)  (Note 2):**                                                                          | ** ** | ** **  | ** ** | ** **  | ** ** |
| Preferred stock,  authorized 5,000,000 shares, $.001 par value, none issued or outstanding                                  |       | —      |       | —      |       |
| Common stock, authorized  50,000,000 shares, $.001 par value, 10,097,170 and 9,618,900 issued and  outstanding respectively |       | 10,097      |       | 9,619       |       |
| Additional paid in  capital                                                                                                 |       | 16,849,900  |       | 15,990,889  |       |
| Accumulated (deficit)                                                                                                       |       | (17,250,281 | )          | (12,580,832 | )          |
|                                                                                                                        |       |        |       |        |       |
| Total  shareholders’ equity (deficit)                                                                                  |       | (390,284    | )          | 3,419,676   |       |
|                                                                                                                        |       |        |       |        |       |
| Total liabilities and  shareholders’ equity (deficit)                                                                  |       | $           | 1,020,632  |        | $          | 3,875,672 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

2

----

 

**XELR8 HOLDINGS,INC.Formerly Vitacube Systems Holdings, Inc.CONSOLIDATED STATEMENTS OF OPERATIONSFor the Years Ended December 31, 2006 and 2005**
| ** **                                                   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                         |       |       |       |       |       |
| Net revenues                                                 |       | $          | 2,148,420  |       | $          | 1,227,803 |   |
| Cost of goods sold                                           |       | 775,762    |       | 540,916    |       |
| Gross profit                                                 |       | 1,372,658  |       | 686,887    |       |
|                                                         |       |       |       |       |       |
| Operating expenses:                                          |       |       |       |       |       |
| Selling and  marketing expenses                              |       | 2,626,613  |       | 2,856,351  |       |
| General and  administrative expenses                         |       | 3,275,689  |       | 2,844,633  |       |
| Research and  development expenses                           |       | 73,921     |       | 70,037     |       |
| Depreciation and  amortization                               |       | 66,333     |       | 25,682     |       |
| Total operating  expenses                                    |       | 6,042,556  |       | 5,796,703  |       |
|                                                         |       |       |       |       |       |
| Net (loss) from  operations                                  |       | (4,669,898 | )          | (5,109,816 | )          |
| Other income (expense)                                       |       |       |       |       |       |
| Interest income                                              |       | 34,337     |       | 96,780     |       |
| Interest  (expense)                                          |       | (33,888    | )          | (2,841     | )          |
|                                                         |       |       |       |       |       |
| Total other  income (expense)                                |       | 449        |       | 93,939     |       |
|                                                         |       |       |       |       |       |
| Net (loss)                                                   |       | $          | (4,669,449 | )          | $          | (5,015,877 | ) |
|                                                         |       |       |       |       |       |
| Net (loss) per common  share                                 |       |       |       |       |       |
| Basic and  diluted net (loss) per share                      |       | $          | (0.48      | )          | $          | (0.57 | ) |
|                                                         |       |       |       |       |       |
| Weighted average common sharesoutstanding, basic and diluted |       | 9,714,021  |       | 8,768,452  |       |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

3

----

 

**XELR8 HOLDINGS,INC.Formerly Vitacube Systems Holdings, Inc.**CONSOLIDATEDSTATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)For the Years Ended December 31, 2006 and 2005
| ** **                                                                                        | ** ** | ** **            | ** ** | ** **       | ** ** | ** **      | ** ** | ** **    | ** ** | **Total**              | ** **  |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------------|------------|---------------|------------|------------------------|-------------|
| ** **                                                                                        | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**  | ** ** | ** **    | ** ** | **shareholders’** | ** **  |
| ** **                                                                                        | ** ** | **Common Stock** | ** ** | **paid in** | ** ** | **Accumulated** | ** ** | **equity**    | ** ** |
| ** **                                                                                        | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**     | ** ** | **(deficit)** | ** ** | **(deficit)**          | ** **  |
| **Balances, January 1, 2005**                                                                     |       | 6,534,043             |       | $                | 6,534      |            | $          | 8,071,186     |       | $                      | (7,564,955  | ) | $ | 512,765 |   |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Public offering of  common stock and warrants, April 5, 2005, net of offering costs of $1,839,425 |       | 3,000,000             |       | 3,000            |       | 7,095,937       |       | —        |       | 7,098,937              |        |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Issuance of common  stock warrants                                                                |       | —                |       | —           |       | 286,638         |       | —        |       | 286,638                |        |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Issuance of common  stock for services                                                            |       | 84,857                |       | 85               |       | 144,615         |       | —        |       | 144,700                |        |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Stock-based compensation                                                                          |       | —                |       | —           |       | 392,513         |       | —        |       | 392,513                |        |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Net (loss)                                                                                        |       | —                |       | —           |       | —          |       | (5,015,877    | )          | (5,015,877             | )           |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| **Balances, December 31, 2005**                                                                   |       | 9,618,900             |       | 9,619            |       | 15,990,889      |       | (12,580,832   | )          | 3,419,676              |        |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Issuance of common  stock warrants                                                                |       | —                |       | —           |       | 72,936          |       | —        |       | 72,936                 |        |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Issuance of common  stock for services                                                            |       | 478,270               |       | 478              |       | 222,522         |       | —        |       | 223,000                |        |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Stock-based  compensation                                                                         |       | —                |       | —           |       | 563,553         |       | —        |       | 563,553                |        |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Net (loss)                                                                                        |       | —                |       | —           |       | —          |       | (4,669,449    | )          | (4,669,449             | )           |
|                                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| **Balances, December 31, 2006**                                                                   |       | 10,097,170            |       | $                | 10,097     |            | $          | 16,849,900    |       | $                      | (17,250,281 | ) | $ | (390,284 | ) |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

4

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**XELR8 HOLDINGS,INC.Formerly Vitacube Systems Holdings, Inc.CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended December 31, 2006 and 2005**
| ** **                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
|                                            |       |       |       |       |       |
| Cash flows from  operating activities:          |       |       |       |       |       |
| Net income  (loss)                              |       | $          | (4,669,449 | )          | $          | (5,015,877 | ) |
| Adjustments to  reconcile                       |       |       |       |       |       |
| Depreciation and  amortization                  |       | 66,333     |       | 25,682     |       |
| Stock and stock  options issued for services    |       | 859,489    |       | 537,213    |       |
| Change in  allowance for doubtful accounts      |       | 5,243      |       | 5,225      |       |
| Change in  allowance for inventory obsolescence |       | 24,776     |       | (26,421    | )          |
| Change in  allowance for product returns        |       | 25,013     |       | 16,204     |       |
| Changes in  assets and liabilities:             |       |       |       |       |       |
| Accounts  receivable                            |       | (1,270     | )          | (9,625     | )          |
| Inventory                                       |       | 106,609    |       | (38,028    | )          |
| Other current  assets                           |       | (88,679    | )          | (243,585   | )          |
| Accounts payable  and accrued expenses          |       | 679,907    |       | (187,210   | )          |
| Net cash (used)  by operating activities        |       | (2,992,028 | )          | (4,936,422 | )          |
|                                            |       |       |       |       |       |
| Cash flows from  investing activities:          |       |       |       |       |       |
| Capital  expenditures                           |       | (71,846    | )          | (6,033     | )          |
| Sales of short  term investments                |       | 110,000    |       | —     |       |
| Purchase of  short term investments             |       | —     |       | (110,000   | )          |
| Net cash  provided by investing activities      |       | 38,154     |       | (116,033   | )          |
|                                            |       |       |       |       |       |
| Cash flow from  financing:                      |       |       |       |       |       |
| Proceeds from  bridge loan financing            |       | 250,000    |       | 195,000    |       |
| Proceeds from  loan to shareholder              |       | —     |       | 170,000    |       |
| Repayments of  loan to shareholder              |       | —     |       | (170,000   | )          |
| Repayments of  bridge financing                 |       | —     |       | (195,000   | )          |
| Issuance of  common stock and warrants, net     |       | —     |       | 7,742,682  |       |
| Deferred  offering costs                        |       | (25,000    | )          | —     |       |
| Net cash  provided by financing activities      |       | 225,000    |       | 7,742,682  |       |
|                                            |       |       |       |       |       |
| NET (DECREASE) /  INCREASE IN CASH              |       | (2,728,874 | )          | 2,690,227  |       |
|                                            |       |       |       |       |       |
| CASH, BEGINNING OF  PERIOD                      |       | 2,805,021  |       | 114,794    |       |
|                                            |       |       |       |       |       |
| CASH, END OF PERIOD                             |       | $          | 76,147     |       | $          | 2,805,021 |   |
|                                            |       |       |       |       |       |
| **SUPPLEMENTAL CASH FLOW**                      |       |       |       |       |       |
| Cash paid for interest                          |       | $          | —     |       | $          | 2,841 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

5

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**XELR8 HOLDINGS,INC.Formerly Vitacube Systems Holdings, Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1 — ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES**

***Organization and Business***

The consolidatedfinancial statements include those of XELR8 Holdings, Inc., (BZI) (formerlyVitacube Systems Holdings, Inc.) and its wholly owned subsidiaries, Vita CubeSystems, Inc. and XELR8, Inc. (formerly VitaCube Network, Inc.). Collectively,they are referred to herein as the “the Company.”

The Company is inthe business of selling, marketing and distributing nutritional supplementproducts and functional foods.  Ourproduct lines consist of a sports hydration drink, a protein shake, a sportsenergy drink, a meal replacement drink, a functional food snack and a fullproduct line of vitamins and minerals in the form of tablets, softgels orcapsules, all of which are manufactured using our proprietary productformulations.

The Company sellsand markets the products through a direct selling channel, in which independentdistributors sell our products through a network of customers and otherdistributors.  These activities areconducted through XELR8, Inc., a wholly owned Colorado corporation, formed onJuly 9, 2003.  In addition, we sell ourproducts directly to professional and Olympic athletes and professional sportsteams through Vita Cube Systems, Inc.

***Liquidity and Basis of Presentation***

The accompanying financial statements have beenprepared in conformity with accounting principles generally accepted in theUnited States of America, which contemplates continuation of the Company as agoing concern.  The Company incurred anet loss of $4,669,449 for the year ended December 31, 2006 and has incurredsignificant net losses since inception.

TheCompany has been developing awareness of its products through its marketingplan and product innovation.  Withintime, management believes that demand for its products will develop to allowthe Company to become profitable, through the development of its independent distributorand customer base. Management believes that the cash resources will besufficient to fund its operations for the next twelve months. If the businessoperations do not result in increased product sales, our business viability,financial position, results of operations and cash flow will likely beadversely affected. Consequently, management may elect to raise money duringthe year ended December 31, 2007 to meet any shortfalls from operations, seeNote 10 Subsequent Events regarding the Company’s placement transactioncompleted in March 2007.  However arealization of significant portion of the assets in the accompanying balancesheet is dependent on the continued operations of the Company, which in turn isdependent on the increase in independent distributors and customer base or theadditional capital raised through a placement of its securities. All of thesefactors raise substantial doubt about the Company’s ability to continue as agoing concern.

***Principals of Consolidation***

Theaccompanying financial statements include the accounts of the Company and itswholly-owned subsidiaries VitaCube Systems, Inc. and XELR8, Inc.  All intercompany accounts and transactionshave been eliminated in the preparation of these consolidated statements.

***Use of Estimates***

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period.  Management believesthat the estimates utilized in the preparation of the financial statements areprudent and reasonable.  Actual resultscould differ from these estimates.

6

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***Revenue Recognition***

The Company shipsits products by common carrier and receives payment in the form of cash, creditcard or approved credit terms.  In May2004, the Company revised its product return policy to provide a 60-day moneyback guarantee on orders placed by first-time customers and distributors.  After 60 days and for all subsequent ordersplaced by customers and distributors, the Company allows resalable products tobe returned within 12 months of the purchase date for a 100% sales pricerefund, subject to a 10% restocking fee. Since August 2003, the Company has experienced monthly returns rangingfrom 0.7% to 7.7% of net sales.  Salesrevenue and estimated returns are recorded when the merchandise is shippedsince performance by the Company is considered met when products are in thehands of the common carrier. Amounts received for unshipped merchandise arerecorded as customer deposits and are included in accrued liabilities.

***Cash and Cash Equivalents***

For the purposesof reporting cash flows, the Company considers all cash and highly liquidinvestments with an original maturity of three months or less to be cashequivalents. The Company considers deposits in banks and investments purchasedwith original maturities of more than three months and less than a year to beshort term investments.

***Concentrations***

The Company has no significant off-balance sheet concentrations of creditrisk such as foreign exchange contracts, options contracts or other foreignhedging arrangements.  The Companymaintains the majority of its cash balances with two financial institutions inthe form of demand deposits and money market funds.  Funds in excess of the federally insuredamount of $100,000 are subject to credit risk, and the Company believes thatthe financial institutions are financially sound and the risk of loss isminimal.

During 2006, the Company relied significantly on five suppliers for 61%of its purchases of raw materials for supplements, drinks and marketingmaterials held for sale.  The Companydoes not believe that it has reliance on any single supplier as the mostsignificant accounted for 16% of inventory purchases.  Management believes that its purchasingrequirements can be readily met from alternative sources.

***Short term Investments***

The Companyrecorded the 2005 certificates of deposit as held-to-maturity securities anduses the amortized cost at balance sheet date.

***Fair Value of Financial Instruments***

Substantially allof the Company’s assets and liabilities are carried at fair value or contractedamounts that approximate fair value. Estimates of fair value are made at a specific point in time, based onrelative market information and information about each financial instrument,specifically, the value of the underlying financial instrument.  Assets that are recorded at fair valueconsist largely of cash, short term investments and accounts receivable, whichare carried at contracted amounts that approximate fair value.  Similarly, the Company’s liabilities consistprimarily of short term liabilities recorded at contracted amounts thatapproximate fair value.

7

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***Inventory***

Inventory isstated at the lower of cost or market on a FIFO (first-in first-out)basis.  Provision is made to reduceexcess or obsolete inventory to the estimated net realizable value.  The Company purchases for resale a sportsenergy drink, a sports hydration drink, a protein shake, meal replacementdrink, a functional food snack and other vitamins and nutritional supplements,which it packages in various forms and containers.

Inventory is comprised of the following:

 

|                                | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Purchased materials            |       | $                               | 245,447    |                            | $          | 237,105 |   |
| Finished goods                 |       | 207,572                         |       | 322,523                         |       |
| Reserve for obsolete inventory |       | (41,655                         | )          | (16,879                         | )          |
|                           |       | $                               | 411,364    |                            | $          | 542,749 |   |

 

***A summary of the reserve for obsolete andexcess inventory was as follows as of December 31, 2006 and 2005:***

|                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1          |       | $        | 16,879     |     | $          | 43,300 |   |
| Addition to provision            |       | 123,511  |       | 70,335   |       |
| Write-off of obsolete  inventory |       | (98,735  | )          | (96,756  | )          |
| Balance  as of December 31       |       | $        | 41,655     |     | $          | 16,879 |   |

 

***Property and Equipment***

TheCompany provides for depreciation of property and equipment using thestraight-line method based on estimated useful lives of between three and tenyears.

***Long-Lived Assets***

TheCompany reviews its long-lived assets for impairment whenever changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  For purposes of evaluatingthe recoverability of long-lived assets, the recoverability test is performedusing undiscounted net cash flows estimated to be generated by the asset. Animpairment was not deemed necessary in either 2006 or 2005.

***IntangibleAssets***

TheCompany’s intangible assets, consisting of trademarks and patent costs, arebeing amortized over their estimated life of 15 years. The Company evaluatesthe useful lives of its intangible assets annually and adjusts the livesaccording to the expected useful life. During 2006 the Company recorded animpairment of intangible assets related to product no long sold.

***Advertising Costs***

Advertisingand marketing costs were $612,819 and $773,470 for the years ended December 31,2006 and 2005, respectively, and are expensed as incurred or the first time theadvertising takes place.

***Income Taxes***

The Companyaccounts for income taxes in accordance with Statement of Financial AccountingStandards No. 109, “Accounting for Income Taxes.”  Under the asset and liability method ofStatement 109, deferred tax assets and liabilities are recognized for theestimated future tax consequences attributable to difference between thefinancial statement carrying amounts of existing assets and liabilities andtheir

8

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respective taxbasis.  Deferred tax assets andliabilities are measured using enacted tax rates in effect for the year inwhich those temporary differences are expected to be recovered or settled.

***Stock-Based Compensation***

Effective January 1,2006, the company adopted SFAS No. 123 (revised 2004), *Share-Based Payment*(SFAS 123R),which requires compensation costs related to share-based transactions,including employee stock options, to be recognized in the financial statementsbased on fair value. SFAS 123R revises SFAS No. 123, *Accounting for Stock-Based Compensation,*(SFAS 123) andsupersedes Accounting Principles Board Opinion (APB) No. 25, *Accounting for Stock Issued to Employees.*InMarch 2005, the Securities and Exchange Commission (the SEC) issued StaffAccounting Bulletin No. 107 (SAB 107) regarding the SEC’sinterpretation of SFAS 123R and the valuation of share-based payments forpublic companies. The Company has applied the provisions of SAB 107 in itsadoption of SFAS 123R.

The Company adopted theprovisions of SFAS 123R using the modified prospective transition method. Inaccordance with this transition method, the company’s consolidated financialstatements for prior periods have not been restated to reflect the impact ofSFAS 123R. Under the modified prospective transition method, share-basedcompensation expense for the first quarter of 2006 includes compensationexpense for all share-based compensation awards granted prior to, but for whichthe requisite service has not yet been performed as of January 1, 2006, basedon the grant date fair value estimated in accordance with the originalprovisions of SFAS 123. Share-based compensation expense for allshare-based compensation awards granted after January 1, 2006 is based on thegrant date fair value estimated in accordance with the provisions ofSFAS 123R. The company recognizes compensation costs net of an assumedforfeiture rate and recognizes the compensation costs for nonqualified stockoptions expected to vest on a straight-line basis over the requisite serviceperiod of the award. The company estimates the forfeiture rate based on itshistorical experience.

Total share-basedcompensation expense, for all of the company’s share-based awards recognizedfor the year ended December 31, 2006, was $859,489 or $0.09 per share basic anddiluted compared with the $1,357,748 or $0.11 per share reported as a pro-formadisclosure in the Notes to the financial statements for the same period in2005.

The company uses aBlack-Scholes option-pricing model (Black-Scholes model) to estimate the fairvalue of the stock option grant. The use of a valuation model requires thecompany to make certain assumptions with respect to selected model inputs.Expected volatility was calculated based on the historical volatility of thecompany’s stock price. In the future the average expected life will be based onthe contractual term of the option and expected employee exercise andpost-vesting employment termination behavior. Currently it is based on thesimplified approach provided by SAB 107. The risk-free interest rate is basedon U.S. Treasury zero-coupon issues with a remaining term equal to the expectedlife assumed at the date of the grant. The following were the factors used inthe Black Scholes model in the quarters to calculate the compensation cost:

|                           | ** ** | **Year ended December 31, 2006** | ** ** | **Year ended December 31, 2005** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| Stock price  volatility   |       | 92.9% to 97.1                                        | %          | 96.6% to 116                                         | %          |
| Risk-free rate  of return |       | 4.76% to 5.27                                        | %          | 3.85% to 4.01                                        | %          |
| Annual dividend  yield    |       | 0                                                    | %          | 0                                                    | %          |
| Expected life             |       | 2.5 to 5 Years                                       |       | 3.6 to 7 Years                                       |       |

 

Prior to the adoption ofSFAS 123R, the company recognized share-based compensation expense inaccordance with APB 25. The company provided pro forma disclosure amounts inaccordance with SFAS No. 148, *Accountingfor Stock-Based Compensation-Transition and Disclosure*(SFAS 148),as if the fair value method defined by SFAS 123 had been applied to itsshare-based compensation. The pro forma table below reflects net earnings andbasic and diluted net earnings per share for the year ended December 31, 2005,had the company applied the fair value recognition provisions of SFAS 123:

9

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|                                                                                                                                      | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Net loss, as  reported                                                                                                               |       | $          | (5,015,877 | ) |
|                                                                                                                                 |       |       |       |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects                                  |       | 392,513    |       |
|                                                                                                                                 |       |       |       |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all awards, net of related tax effects |       | (1,357,748 | )          |
|                                                                                                                                 |       |       |       |
| Pro forma net loss                                                                                                                   |       | $          | (5,981,111 | ) |
| Earnings per  share:                                                                                                                 |       |       |       |
| Basic and diluted earnings (loss) per common share                                                                                   |       |       |       |
| As reported                                                                                                                          |       | $          | (0.57      | ) |
| Pro forma                                                                                                                            |       | $          | (0.68      | ) |

 

***Net Loss Per Share***

Earningsper share requires presentation of both basic earnings per common share anddiluted earnings per common share.  Sincethe Company has a net loss for all periods presented, any common stockequivalents would not be included in the weighted average calculation sincetheir effect would be anti-dilutive.

***Recent Accounting Pronouncements***

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157 defines fair value, establishes aframework for measuring fair value in accordance with accounting principlesgenerally accepted in the United States, and expands disclosures about fairvalue measurements. SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007, with earlier application encouraged.Any amounts recognized upon adoption as a cumulative effect adjustment will berecorded to the opening balance of retained earnings in the year of adoption.The Company is currently evaluating the impact of adopting SFAS No. 157 onits consolidated financial statements.

In June 2006,the FASB issued FIN No. 48,*Accountingfor Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109,* which clarifies the accounting for uncertainty inincome tax positions. FIN 48 defines the threshold for recognizing tax returnpositions in the financial statements as “more likely than not” that theposition is sustainable, based on technical merits of the provision. FIN 48also provides guidance on the measurement, classification and disclosure of taxreturn positions in the financial statements. FIN 48 is effective for the firstreporting period beginning after December 15, 2006, with the cumulativeeffect of the change in accounting principle recorded as an adjustment to thebeginning balance of retained earnings in the period of adoption. The Company’saccounting for income tax contingency reserves is not based on the provisionsof FIN 48 because its financial statements for the year-ended December 30,2006 have been issued without the early adoption of the provisions of thisinterpretation. The Company is currently evaluating the impact of adopting FIN 48on its consolidated financial statements.

In June 2006,the FASB ratified the consensuses of Emerging Issues Task Force (“EITF”) IssueNo. 06-3, “How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross versusNet Presentation).”  EITF 06-3 clarifies that the scope of this Issueincludes any tax assessed by a governmental authority that is imposedconcurrently with or subsequent to a revenue-producing transaction between aseller and a customer and indicates that the income statement presentation oneither a gross basis or a net basis of the taxes within the scope of the Issueis an accounting policy decision that should be disclosed. Furthermore, fortaxes reported on a gross basis, an enterprise should disclose the amounts ofthose taxes in interim and annual financial statements for each period forwhich an income statement is presented. The consensus is effective, throughretrospective application, for periods beginning after December 15, 2006.The Company currently presents taxes on a net basis within the scope of thisissue.

10

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InSeptember 2006, the SEC issued Staff Accounting Bulletin 108 (“SAB 108”) “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.”  SAB 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of a materiality assessment. SAB 108requires registrants to quantify the impact of correcting misstatements on thecurrent year financial statements using both the rollover and iron curtainapproaches. The rollover approach quantifies a misstatement based on the amountof the error originating in the current year income statement. The iron curtainapproach quantifies a misstatement based on the effects of correcting themisstatement existing in the balance sheet at the end of the current year,irrespective of the misstatement’s year(s) of origination. The Company wasrequired to adopt the provisions of SAB 108 for its fiscal year endingDecember 30, 2006. The adoption of SAB 108 did not have a material effecton our financial position or results of operations.

**NOTE 2 — SHAREHOLDERS’ EQUITY**

Theauthorized capital stock of the Company consists of 50,000,000 shares of commonstock at $.001 par value and 5,000,000 shares of preferred stock at $.001 parvalue.  The holders of the common stockare entitled to receive, when and as declared by the Board of Directors,dividends payable either in cash, in property or in shares of the common stockof the Company.  Dividends have nocumulative rights and dividends will not accumulate if the Board of Directorsdoes not declare such dividends.  ThroughDecember 31, 2006, no dividends have been declared or paid by the Company.

On April 5,2005, the Company completed an offering of its securities to the public raising$9,225,000 before expenses and listed its common stock and units on theAmerican Stock Exchange.  The offering was for 1.5 million units at $6.15per unit, each unit consisting of two shares of our common stock, one redeemableClass A public warrant for common stock at $4.50 and one redeemableClass B public warrant for common stock at $6.00.  The net proceedsto the Company, after deducting the underwriter’s discount of 7% ($.43 perunit), direct offering costs and expenses were approximately $7.3 million.

On May 20,2005, the units were separated and the components began trading on the AMEXunder the common stock symbol PRH, Class A public warrant symbol PRH.WS.Aand Class B public warrant symbol PRH.WS.B. Subsequent to December 31,2006 the common stock symbol changed to BZI, the Class A warrant to BZI.WS.Aand the Class B warrant changed to BZI.WS.B.

On May 20,2005, the Company entered into a one-year strategic alliance agreement withUTEK Corporation, a technology transfer company.  In accordance with theterms of the agreement, the Company issued to UTEK 54,857 unregistered sharesof common stock as compensation, with 1/12th ofthe shares (4,571) vesting each month during the term of the agreement. The agreement is terminable by either party upon 30 days notice.  In theevent of termination before the completion of the agreement, all unvestedshares of common stock shall be returned to the Company.  The Companyrecorded a prepaid expense of $96,000 related to this issuance of the 54,857shares of unregistered common stock of the Company.  The value of thistransaction was based upon the Company’s trading price of $1.75 per share onthe day the agreement was reached.  During the year endedDecember 31, 2005, the Company amortized $56,000 of this prepayment andapplied this expense to its operating expenses. In June 2006, the Companyextended the contract for an additional year, which was subsequently terminatedby the Company in October 2006. Under the terms of the agreement, the Companyissued an additional 33,830 shares at the fair value of $23,000. The value ofthis transaction was based upon the Company’s trading price of $0.68 per shareon the day the agreement was reached. The Company recorded a prepaidexpense, and amortized it over the five months of the contract.

InAugust 2005, the Company issued a total of 30,000 shares of its common stock,valued at $1.63 per share to endorsers of the Company’s products.

On March 29, 2006,the Company engaged Carnell Williams, a professional athlete to endorse theCompany’s products. The Company paid Mr. Williams an initial fee of 44,444shares valued at $60,000 based on the Company’s closing common stock price of$1.35, the day that the agreement was reached.

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On November 21, 2006,the Company entered into a Bridge Financing Agreement with Asset ProtectionFund (“APF”), whereby APF loaned the Company the amount of $250,000. The termof the Loan is the shorter of when the Company completes a Private PlacementOffering or six months from the loan origination date and it will accrueinterest at a rate of 10% per annum. Additionally, the Company will issue APF400,000 shares of restricted common stock as a loan fee. The Company recorded aDeferred Loan cost of $140,000 based on the Company’s closing common stockprice on the day that the loan was funded. The Deferred Loan Cost is amortizedover the six month term of the loan and recorded as additional interestexpense.

On December 12,2006, the Company entered into a Bridge Financing Agreement with Global ProjectFinance AG (“GPF”), whereby GPF will loan the Company the amount of $250,000 onor before January 10, 2007. The term of the Loan is the shorter of when theCompany completes a Private Placement Offering or six months from the loanorigination date and it will accrue interest at a rate of 10% per annum.Additionally, the Company will issue GPF 400,000 shares of restricted commonstock as a loan fee. As the loan was not funded during the year ended December31, 2006 the Company did not record any expense associated with this loan. TheCompany will record, as a Deferred Loan Cost, an amount based on the Company’sclosing common stock price on the day that the loan is funded. This DeferredLoan Cost will be amortized over the six month term of the loan and recorded asan additional interest expense. Subsequent to year-end the loan was funded for$250,000.

On December 18,2006 the Company entered into a referral agreement with Lighthouse Capitalwhereby a referral representative has agreed to introduce potential financingcontacts to the Company who is seeking equity, debt or a combination of equityand debt financing. The term of thisAgreement shall be for a period of sixty days from the date of the Agreementand the Company will pay a fee in the amount of 200,000 restrictedshares of Client’s common stock to the referral representative upon fundingreceived from any one or more referrals in the total aggregate amount of$500,000. The agreement did not provide for partial payments for partialperformance. As the second loan was not funded during the year ended December31, 2006 the Company did not record any expense associated with this agreement.The Company will record a consultant expense based on the Company’s closingcommon stock price on the day that the second loan is funded.

**NOTE 3 — STOCK OPTIONS**

Effective July 1,2003, the shareholders of the Company adopted the 2003 Stock Incentive Plan(the “Plan”).  The Plan includesincentive and non-qualified stock options and restricted stock grants.  The initial maximum number of shares ofcommon stock available for grants under the Plan was 800,000 shares. The Planprovides that with respect to incentive stock options (“ISO”) the option priceper share must be at least the fair market value (as determined by theCompensation Committee or, in lieu thereof, the Board of Directors) of thecommon stock on the date the stock option is granted or based on daily quotesfrom an exchange or quotation system designated by the Compensation Committeeas the primary market for the shares. Under the Plan, if an ISO is granted to an employee who owns more than10% of the total combined voting power of all classes of stock of the Companyor any of its subsidiaries, then the option price must be at least 110% of thefair market value of the stock subject to the option, and the term of theoption must not exceed 5 years from the date of grant.  Under the Plan, if for any reason, a changein control of the Company occurred, all shares subject to the Plan immediatelybecome vested and exercisable. On October 15, 2004, the shareholders approvedan amendment to the Plan to increase the number of shares available under thePlan to 1,000,000 shares of common stock.

On July 22,2005, the shareholders approved an amendment to the Plan to increase the numberof shares available under the Plan to 1,800,000 shares of common stock.

A summary of thestatus of the Plan for the years ended December 31, 2006 and 2005, togetherwith changes during each of the years then ended, is presented in the followingtable:

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2003 StockIncentive Plan
| ** **                                           | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | ** **                                                                                            | ** ** | **Weighted**                                                                                          | ** ** |
|------------------------------------------------------|------------|---------------|------------|-------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | ** **                                                                                            | ** ** | **Average**                                                                                           | ** ** |
| ** **                                           | ** ** | **Qualified** | ** ** | **Non-qualified** | ** ** | ** ** | ** ** | **Exercise**                                                                                          | ** ** | **Exercise**                                                                                          | ** ** |
| ** **                                           | ** ** | **Options**   | ** ** | **Options**       | ** ** | **Total**  | ** ** | **Price Range**                                                                                  | ** ** | **Price**                                                                                             | ** ** |
| Balances,  December 31, 2004                         |       | 202,250       |       | 478,250           |       | 680,500    |       | $                5.00 |       | $                5.00 |       |
| Granted                                              |       | 535,000       |       | 331,100           |       | 866,100    |       | $ 1.28 to $3.20                                                                                  |       | $                1.82 |       |
| Forfeited                                            |       | (49,250       | )          | -                 |       | (49,250    | )          | $                5.00 |       | $                5.00 |       |
| Balances,  December 31, 2005                         |       | 688,000       |       | 809,350           |       | 1,477,350  |       | $ 1.28 to $5.00                                                                                  |       | $                3.40 |       |
| Granted                                              |       | 100,000       |       | 201,000           |       | 301,000    |       | $ 0.45 to $3.20                                                                                  |       | $                1.25 |       |
| Forfeited                                            |       | —        |       | —            |       | —     |       | —                                                                                                |       | —                                                                                                |       |
| Balances,  December 31, 2006                         |       | 788,000       |       | 1,010,350         |       | 1,778,350  |       | $ 0.45 to $5.00                                                                                  |       | $                2.94 |       |
| Number of options  exercisable  At December 31, 2006 |       | 489,709       |       | 943,684           |       | 939,517    |       | $ 0.45 to $5.00                                                                                  |       | $                3.14 |       |

 

The followingtable sets forth the exercise price range, number of shares, weighted averageexercise price and remaining contractual lives at December 31, 2006:
| ** **   | ** ** | **Outstanding**    | ** ** | **Exercisable**                                                               | ** ** |
|--------------|------------|--------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **   | ** ** | ** **         | ** ** | ** **                                                                    | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **   | ** ** | ** **         | ** ** | **Weighted**                                                                  | ** ** | **Average** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| **Exercise** | ** ** | **Number of** | ** ** | **Average**                                                                   | ** ** | **Contractual** | ** ** | **Shares** | ** ** | **Average** | ** ** |
| **Prices**   | ** ** | **Outstanding**    | ** ** | **Exercise Price**                                                       | ** ** | **Life (months)** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| 5.00         |       | 611,250            |       | $            5.00 |       | 20.5 |   | 579,625 |   | $                     5.00 |   |
| 3.20         |       | 145,000            |       | $            3.20 |       | 45.1 |   | 145,000 |   | $                     3.20 |   |
| 2.55         |       | 50,000             |       | $            2.55 |       | 44.8 |   | 50,000 |   | $                     2.55 |   |
| 1.28 to 1.80 |       | 840,100            |       | $            1.53 |       | 47.4 |   | 573,433 |   | $                     1.54 |   |
| 0.45 to 0.65 |       | 132,000            |       | $            0.52 |       | 52.8 |   | 65,334 |   | $                     0.53 |   |
|         |       | 1,778,350          |       |                                                                          |       |   |   | 939,517 |   |   |   |

 

At December 31,2006, 21,650 options were available for future grants under the Plan.

**NOTE 4 — PROPERTY AND EQUIPMENT**

Property andequipment consisted of the following:

|                           | ** ** | **December 31,  2006**                 | ** ** | **December 31,  2005**                 | ** ** |
|---------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Furniture &  fixtures |       | $      50,963 |       | $      50,963 |       |
| Office equipment          |       | 18,438                                      |       | 16,855                                      |       |
| Software                  |       | 245,912                                     |       | 175,649                                     |       |
| Leasehold  improvements   |       | 121,605                                     |       | 121,605                                     |       |
|                      |       | 436,918                                     |       | 365,072                                     |       |
| Accumulated  depreciation |       | (312,975                                    | )          | (271,649                                    | )          |
|                      |       |                                        |       |                                        |       |
|                      |       | $    123,943            |       | $      93,423 |       |

 

Depreciationexpense was $41,326 and $21,885 for the years ended December 31, 2006 and 2005,respectively.

**NOTE 5 — INTANGIBLE ASSETS**

The Company hasincurred costs to trademark eight of its current products and marketingnomenclatures.  During the year, theCompany accelerated the amortization on six of the trademarks which

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related to products thatthe Company no longer marketed. Patents and trademarks are being amortized overa period of 15 years.

Intangible assetsare:

|                                          | ** ** | **December 31,  2006**                 | ** ** | **December 31,  2005**                 | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Patents and  trademarks                  |       | $      50,052 |       | $      50,052 |       |
| Accumulated  amortization and Impairment |       | (38,840                                     | )          | (13,833                                     | )          |
| ** **                               |       | $      11,212 |       | $      36,219 |       |

 

**NOTE 6 — DUE TO SHAREHOLDERS AND SHAREHOLDER SUBORDINATED LOANS**

On March 1, 2005,Christopher Marlett, a significant shareholder, loaned the Company $25,000evidenced by a promissory note.  The note provides that the principaltogether with interest at 10% per annum, is due and payable on the earlier ofMay 30, 2005 or the closing of a public offering of stock.   On April12, 2005 the Company re-paid the note plus accrued interest of $288.

On March 2, 2005,the Company’s Chairman advanced the Company a total of $170,000 evidenced by apromissory note.  The note bears interest at 10% per annum with principaland interest payable by the earlier of May 30, 2005, or the closing a publicoffering of stock.  On April 12, 2005 the Company re-paid the note plusaccrued interest of $1,236.

**NOTE 7 — INCOME TAXES**

As of December 31,2006, the Company had approximately $12,231,000 in pretax federal and state netoperating loss carryforwards, expiring beginning in 2023.

The Companyprovides for deferred taxes arising from temporary differences in the book andtax carrying amounts of assets and liabilities. Temporary differences arise primarily from differences in reportingstock based compensation and allowance accounts.

The deferred taxassets that result from such operating loss carryforwards and temporarydifferences of approximately $4,488,000 and $2,759,000 at December 31, 2006 and2005 respectively, have been fully reserved for in the accompanyingconsolidated financial statements as follows.

|                               | ** ** | **Year Ended**                                                                                                                   | ** ** | **Year Ended**                                                                                                                   | ** ** |
|-------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **December 31, 2006**                                                                                                       | ** ** | **December 31, 2005**                                                                                                       | ** ** |
| Deferred tax  liabilities     |       | $                     — |       | $                     — |       |
|                          |       |                                                                                                                                  |       |                                                                                                                                  |       |
| Deferred tax  assets:         |       |                                                                                                                                  |       |                                                                                                                                  |       |
| Net operating loss deductions |       | $         4,533,000                                                                      |       | $         2,743,000                                                                      |       |
| Other deferred assets         |       | (45,000                                                                                                                               | )          | 16,000                                                                                                                                |       |
| Total deferred  tax assets    |       | 4,488,000                                                                                                                             |       | 2,759,000                                                                                                                             |       |
| Valuation  allowance          |       | (4,488,000                                                                                                                            | )          | (2,759,000                                                                                                                            | )          |
|                          |       | $                     — |       | $                     — |       |

 

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Reconciliation ofthe differences between the statutory tax rate and the effective tax rate is asfollows:

 

|                                                 | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
| Federal  statutory tax (benefit) rate           |       | (34.00                          | )%         | (34.00                          | )%         |
| State taxes, net  of federal tax (benefit) rate |       | (3.06                           | )%         | (3.06                           | )%         |
| Effective tax  rate                             |       | (37.06                          | )%         | (37.06                          | )%         |
| Valuation  allowance                            |       | (37.06                          | )%         | (37.06                          | )%         |
| Effective income tax  rate                      |       | —                          |       | —                          |       |

 

**NOTE 8 — COMMITMENTS**

We lease ourcurrent corporate office space from Arnold Greenberg, the father of ourFounder, Sanford D. Greenberg. We paid $38,830 and $40,680 in rent for theyears ended December 31, 2005 and 2006, respectively. Our current lease at$3,390 per month expired at the end of March 2006, and has been replacedwith a month to month lease at the same amount.

 The Company has various operating leases for vehicles,telephone and computer equipment that range from 1 to 5 years in length.  Rental expenses for these operating leaseswere $102,856 and $208,362 for the years ended December 31, 2006 and 2005,respectively. Minimum future rentals under these agreements at December 31,2006 are as follows:

| December 31, | ** ** | ** **    | ** ** |
|-------------------|------------|---------------|------------|
| 2007              |       | $ 44,027 |       |
| 2008              |       | 4,284         |       |
| 2009              |       | 4,284         |       |
| 2010              |       | 4,284         |       |
| Thereafter        |       | 357           |       |
| Total             |       | $ 57,236 |       |

 

The Company hascommitments for contract services with unrelated parties totaling approximately$60,000.  The agreements provide forvarious payments to be made over a one year period.

The Companymaintains employment agreements with certain key management.  The agreements provide for minimum basesalaries, eligibility for stock options and performance bonuses and severancepayments.

**NOTE 9 — RELATED PARTY TRANSACTIONS**

As further described in Note 8, the Company leasesoffice space from a relative of the Company’s founder.

**NOTE 10 — SUBSEQUENT EVENTS**

On December 12,2006, the Company entered into a Bridge Financing Agreement with Global ProjectFinance AG (“GPF”), whereby GPF will loan the Company the amount of $250,000 onor before January 10, 2007. The term of the Loan is the shorter of when theCompany completes a Private Placement Offering or six months from the loanorigination date and it will accrue interest at a rate of 10% per annum.Additionally, the Company will issue GPF 400,000 shares of restricted commonstock as a loan fee. As the loan was not funded during the year ended December31, 2006 the Company did not record any expense associated with this loan.. OnJanuary 15, 2007 the loan was funded for $250,000, and on March 27, 2007 theCompany repaid the loan plus accrued interest of $4,795

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On March 5, 2007the Company announced that it had completed the sale of two million units in aprivate placement transaction for gross proceeds of $2,000,000. The placementwas sold to accredited individual and institutional investors. The units weresold under the exemption provided in Reg D of Rule 506 Section 415 of theSecurities Act. The terms of the private placement provided for a unit offeringat $1.00 per unit.  Each unit was comprised of one share and one half of awarrant to purchase a share of common stock at an exercise price of $1.50 pershare.  The shares of common stock have not been registered under theSecurities Act of 1933, as amended, and may not be offered or sold in theUnited States absent registration or an applicable exemption from registrationrequirements. The terms of the placement require the Company to file aregistration statement with the Securities and Exchange Commission for both theshares and the share underlying the warrants. On March 7, 2007 the shareholdersapproved the placement transaction, and on March 27, 2007, we closed thetransaction.

On March 27, 2007,at the closing of the private placement transaction we repaid the Bridge Loanto Asset Protection Fund of $250,000 plus accrued interest of $8,630.

On March 26, 2007the Company entered into amended employment contracts with Sanford Greenberg toprovide for the assignment of the benefits and obligations of the EmployeeAgreement from XELR8 Holdings, Inc. to XELR8, Inc. The amendment provides thatMr. Greenberg will receive annual compensation of $1. Additionally, the Employee waives any and allrights to participate in any incentive executive bonus plan of the Company, butwill receive a bonus equal to one percent (1%) of the net sales of XELR8, Inc.from November 1, 2006 for a period of 12 years. Further, employee shall receive 1,500,000 restricted shares of theCompany, and the employee agrees to waive and forfeit options for 250,000shares of the Employer’s common stock that were granted on April 1, 2004.

On March 26, 2007,the Company entered into an amendment to the Employment  Agreement withJohn D. Pougnet, the company’s Chief Executive Officer (CEO) and ChiefFinancial Officer (CFO). The term of employee’s employment as Chief ExecutiveOfficer pursuant to this amendment shall commence effective as of October 11,2006 and shall continue to February 1, 2008 and the term of employee’semployment as Chief Financial Officer shall commence effective as of October11, 2006 and terminate on December 31, 2008. Employee will receive as compensationfor all responsibilities a base salary (“Base Salary”) of $127,000 per year. Solong as the employee is employed as the Company’s CEO and CFO, the base salaryshall increase: (i) to $150,000 per year upon the completion of the privateplacement, (ii) to $14,583/month (1/12 of $175,000) for each month the companyis at or above breakeven (defined as when net monthly sales meet or exceed netmonthly expenses on a cash basis) and $12,500/month (1/12 of $150,000) for eachmonth the company is below breakeven, and (iii) to $205,000 per year commencingOctober 1, 2007. Employee’s salary as CFO shall be $150,000 per year as long asnet revenues are above financial breakeven and $175,000 per year after thefirst month that monthly net sales exceed $900,000. In addition the employeeshall receive options to purchase an aggregate of an additional 100,000 sharesof Employer’s common stock The agreement provides for compensation to be paidin the event the employee is terminated for cause or if the Company chooses toappoint a new Chief Executive Officer during the term of this agreement.

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