**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-KSB**

** **

**ý****ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31, 2004**

** **

**or**

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF**

**THE SECURITIES EXCHANGE ACT OF1934**

** **

**Commission file****No. 000-50875**

** **

**VITACUBE SYSTEMS HOLDINGS, INC.**

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

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

 

**480 South Holly Street**

**Denver, CO 80246**

(Address of principal executive offices)

 

**(303)-316-8577**

(Issuer’s telephone number)

 

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

 

Securities registeredunder Section 12(g) of the Exchange Act: Common Stock, par value $.001 pershare

 

Check whether the issuer(1) filed all reports to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES  ý     NO  o

 

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B isnot contained in this form and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB. o

 

Issuer’s revenues for theyear ended December 31, 2004 were $803,640.

 

Aggregate market value ofvoting stock held by non-affiliates of 2,249,105 shares outstanding at March 2,2005 was approximately $7,984,323. Amount was computed using the average bidand ask price as of March 2, 2005, which was $3.55. Shares of common stockheld by the officers and directors named in Item 9, and each person who owns10% or more of the common stock have been excluded from the calculation in thatsuch persons may be deemed affiliates.

 

As of March 2, 2005,the Company had 6,534,043 shares of its $.001 par value common stock issued andoutstanding.

 

 

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**Indexto VitaCube Systems Holdings, Inc. 2004 Form 10-KSB**

 
|      | Cautionary Note Regarding Forward-Looking Statements                                              |   |
|-----------|---------------------------------------------------------------------------------------------------|--------|
|      | Risk Factors Associated with Our Business                                                         |   |
|      |                                                                                              |   |
| PART I    |                                                                                              |   |
| Item 1.   | Description of Business                                                                           |   |
| 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                                                                                          |   |
| Item  14. | Principal  Accountant Fees and Services                                                           |   |
|      |                                                                                              |   |
|      | Signatures                                                                                        |   |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Form 10-KSB for VitaCube Systems Holdings,Inc. (“the Company”) contains “forward-looking statements” within the meaningof Section 27A of the Securities Act and Section 21E of the SecuritiesExchange Act of 1934, as amended. All statements other than statements ofhistorical fact are “forward-looking statements” for purposes of federal andstate securities laws, including any projections of earnings, revenue or otherfinancial items; any statements of the plans, strategies and objectives ofmanagement for future operations; any statements concerning proposed newproducts or developments; any statements regarding future economic conditionsor performance; any statements of belief; and any statements of assumptionsunderlying any of the foregoing. Forward-looking statements may include thewords “may,” “will,” “estimate,” “intend,” “continue,”“believe,” “expect” or “anticipate” and other similar words.

 

Although we believe that the expectationsreflected in any of our forward-looking statements are reasonable, actualresults could differ materially from those projected or assumed in any of ourforward-looking statements. Our future financial condition and results ofoperations, as well as any forward-looking statements, are subject to changeand to inherent risks and uncertainties. Actual future results may differsignificantly from the results discussed in the forward-looking statements. Someof the risks that may affect our performance are discussed below under “RiskFactors Associated with Our Business.”

 

**RISK FACTORS ASSOCIATED WITH OUR BUSINESS**

 

The Company is subject to various risks thatcould have a negative effect on the Company and its financial condition. Theserisks could cause actual operating results to differ from those expressed incertain “forward looking statements” contained in this Form 10-KSB as well asin other Company communications.

 

**We have a history of operating losses and asignificant accumulated deficit, and we may never achieve profitability.**

 

We have not been profitable since inceptionin 2001. We had net losses for the years ended December 31, 2004 and 2003of $2,513,999 and $2,267,533, respectively. At December 31, 2004, we had an accumulated deficit of $7,564,955.We may never achieve or maintain profitability. Our ability to achieve andmaintain a profit is dependent upon our attracting and maintaining a large baseof independent distributors who generate significant sales.

 

**We may be unable to continue as a goingconcern in which case our securities will have little or no value.**

 

Our independent auditors have noted in theirreports concerning our financial statements as of December 31, 2004 and 2003, 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.

 

**Our limited operating history and recentchange in marketing strategy make it difficult to evaluate our prospects.**

 

We have a limited operating history on whichto evaluate our business and prospects. Our products were formulated in 2000and 2001, and we began selling our products to the general public in early2002. In late 2003, we began to refocus our sales and marketing efforts ondirect sales of products through our network of independent distributors. Thereis no assurance that we will achieve significant sales as a result of this newstrategy. Our revenue for the year ended December 31, 2004 decreased by34% compared to 2003 due in large part to the start up efforts relating to ourdirect sales program. There is no assurance that we will achieve significantsales as a result of our new marketing strategy.

 

We also may not be successful in addressingour operating challenges such as establishing a viable network of independentdistributors, developing brand awareness and expanding our market presence. Ourprospects for

 

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profitabilitymust be considered in light of our evolving business model. These factors makeit difficult to assess our prospects.

 

**Our failure to recruit, maintain and motivatea large base of productive independent distributors could limit our ability togenerate revenues.**

 

To increase revenue, we must increase thesales and recruiting productivity of our independent distributors. We cannotassure you that we will be successful in recruiting and retaining productiveindependent distributors, particularly since direct sales organizations usuallyexperience high turnover rates of independent distributors. Our independentdistributors can terminate their relationships with us at any time. Thedistributors also typically work on a part-time basis and may engage in otherbusiness activities, which may reduce their efforts for us.

 

In recruiting and keeping independentdistributors, we will be subject to significant competition from other directsales organizations, both inside and outside our industry. Our ability toattract and retain independent distributors will be dependent on theattractiveness of our compensation plan, our product mix, and the support weoffer 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 our knowledge of the direct sellingindustry, we anticipate that our independent distributor organization will beheaded by a relatively small number of key independent distributors whotogether with their downline network will be responsible for a disproportionateamount of revenues. We believe this structure is typical in the direct sellingindustry, as sales leaders emerge in these organizations, and it is the currentsituation with us. The loss of key independent distributors will adverselyaffect our revenues and could adversely affect our ability to attract otherindependent distributors, especially if an independent distributor takes otherindependent distributors of ours to a competitor or to any other organization.

 

**A change in the amount of compensation paidto our independent distributors could reduce our ability to recruit and retainthem and to realize a profit.**

 

We expect that one of our significantexpenses will be payment of compensation to our independent distributors. Thiscompensation includes commissions, bonuses, awards and prizes. From the date wechanged our sales method to direct sales through independent distributors, August 1,2003, through December 31, 2004, compensation paid to our independentdistributors represented 29% of our total revenues. We may change ourindependent distributor compensation plan in seeking to better manage theseincentives, to monitor the amount of independent distributor compensation paidand to prevent independent distributor compensation from having a significantadverse effect on our revenues. Changes to our independent distributorcompensation plan may make it difficult for us to recruit and retain qualifiedand motivated independent distributors. We do not have any current plans to changeour distributor compensation plan.

 

**We are not in a position to exert the samelevel of influence or control over our independent distributors as we could ifthey were our employees, and we may be subject to significant costs andreputational harm in the event our independent distributors violate any laws orregulations applicable to our operations.**

 

Our independent distributors are independentcontractors and, accordingly, we are not in a position to provide the samelevel of control and oversight as we would if independent distributors were ouremployees. While we have implemented independent distributor policies andprocedures designed to govern independent distributor conduct and to protectour goodwill, there can be no assurance that our independent distributors willcomply with our policies and procedures. Violations by our independentdistributors of applicable law or of our policies and 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 andlocal laws regulate our direct selling program. The Federal Trade Commission (“FTC”)or a court could hold us liable for the actions of our independentdistributors. The FTC could also find us liable civilly for deceptiveadvertising if health benefit representations made by our independentdistributors are not supported by competent and reliable scientific evidence.If any of these representations made by our independent distributors weredeemed fraudulent, the FTC could refer the matter to the Department of Justice

 

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for criminalfraud prosecution. Also, the Food and Drug Administration (“FDA”) could seek tohold us civilly and criminally liable for misbranding, for adulteration, or forsale of an unapproved new drug if an independent distributor were to make falseor misleading claims, sell a product past its shelf life, or represent that anyof our products were intended for use in the cure, treatment, or prevention ofa disease or health-related condition. While we train our independentdistributors and attempt to monitor our independent distributors’ marketingclaims and sales materials, we cannot ensure that all of these materials complywith applicable law.

 

**Our direct selling program throughindependent distributors could be found not to be in compliance with current ornewly adopted laws or regulations, which could subject us to increased costsand reduced distributor participation in sales efforts, and our revenues would decrease significantly.**

 

Our direct marketing program could be foundto violate laws or regulations applicable to direct selling marketingorganizations. These laws and regulations generally are directed at preventingfraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales”schemes, by ensuring that product sales ultimately are made to consumers andthat advancement within an organization is based on sales of the organization’sproducts rather than investments in the organization or other non-retail sales-relatedcriteria. The regulations concerning these types of marketing programs do notinclude “bright line” rules and are inherently fact-based. Thus, even injurisdictions where we believe that our direct selling program is in fullcompliance with applicable laws or regulations governing direct sellingprograms, we are subject to the risk that these laws or regulations or theenforcement or interpretation of them by governmental agencies or courts canchange. The failure of our direct selling program to comply with current or newlyadopted laws or regulations could result in costs and fines to us and make ourindependent distributors reluctant to continue their sales efforts, which wouldreduce our revenues significantly.

 

We are also subject to the risk of privateparty challenges to the legality of our direct selling program. Direct sellingprograms of some other companies have been successfully challenged in the past.The challenges centered on whether the marketing programs of direct sellingcompanies are investment contracts in violation of applicable securities lawsand pyramid schemes in violation of applicable FTC rules and regulations. Thesechallenges have caused direct selling companies to focus greater attention ongenerating product sales to non-participants or non-distributors. Directselling companies have addressed these issues by promoting retail salesincentives, tying sales commissions more directly to retail sales andreclassifying those persons who enroll as distributors but do not make sales toother persons as retail customers. An adverse judicial determination withrespect to our direct selling program, or in proceedings not involving usdirectly but which challenge the legality of direct selling systems, could havea material adverse effect on our sales efforts, leading to lower revenues. Todate, we have not been subject to any adverse judicial determination withrespect to our direct selling program.

 

**We may be held responsible for taxes orassessments relating to the activities of our independent distributors resultingin greater costs to us.**

 

We treat our independent distributors asindependent contractors and do not pay social security or similar taxes withrespect to compensation paid to them. In the event that we are required totreat our independent distributors as employees, rather than independentcontractors, we may be held responsible for social security and related taxes,plus any related assessments and penalties, which could significantly increaseour operating costs.

 

**We are affected by extensive laws,governmental regulations, administrative determinations, court decisions andsimilar constraints which can make compliance costly and subject us toenforcement actions by governmental agencies.**

 

The formulation, manufacturing, packaging,labeling, holding, storage, distribution, advertising and sale of our productsare affected by extensive laws, governmental regulations and policies,administrative determinations, court decisions and similar constraints at thefederal, state and local levels. There can be no assurance that we or ourindependent distributors will be in compliance with all of these regulations. Afailure by us or our distributors to comply with these laws and regulationscould lead to governmental investigations, civil and criminal prosecutions,administrative hearings and court proceedings, civil and criminal penalties,injunctions against product sales or advertising, civil and criminal liabilityfor the Company and/or its principals, bad publicity, and tort claims arisingout of governmental or judicial findings of fact or conclusions of law adverseto the Company or its principals. In addition, the adoption of new regulationsand policies or changes in the interpretations of existing regulations andpolicies may result in significant new compliance costs or discontinuation ofproduct sales and may adversely affect the marketing of our products, resultingin decreases in revenues.

 

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The FDA regulates our products and ourproduct labeling. Among other matters the FDA regulates nutrient content andingredient information, claims of the effect of a dietary supplement or dietaryingredient on a body structure or function, and claims of the effect of adietary supplement or dietary ingredient on disease or risk of disease. The FDAcan initiate civil and criminal proceedings against persons who make false ormisleading claims on labels or in labeling, who engage in misbranding, whoevidence an intent to sell their products for a therapeutic use not approved bythe agency, who sell misbranded products, or who sell adulterated products. TheFDA can also require the recall of all products that are misbranded oradulterated.

 

The FTC has jurisdiction over our productadvertising. The FTC can initiate civil proceedings for deceptive advertisingand deceptive advertising practices. It can seek for companies to make paymentsto consumers or disgorgement of profits from the sale of any product held tohave been deceptively advertised. The FTC or a federal court can require acompany found liable to give notice of the availability of refunds in part orwhole for the product purchase price for all products sold through use ofadvertising deemed deceptive.

 

State authorities may likewise bringenforcement actions for misbranding, adulteration, and deceptive advertising.Those actions may be pursued simultaneously with federal actions.

 

On March 13, 2003, the FDA proposed anew regulation to require current Good Manufacturing Practice guidelines (“cGMPs”)in the manufacture, packing, holding, and distribution of nutritionalsupplements. The proposed rules would establish minimum standards that must bemet by all companies that manufacture, package, and hold nutritionalsupplements in the United States. Violation of those standards would render theproducts in question presumptively adulterated and unlawful to sell. Theproposed cGMPs would require manufacturers to follow procedures that wouldtrack nutrients from source to finished product, test nutrients for identity,purity, quality, strength, and composition at each stage of production, andrecord full compliance with specific regulations governing production,manufacture, and holding of nutritional supplements. The cGMPs are expected tobe adopted in 2005 and may become fully effective by 2007. We expect that thecGMPs will increase our product costs by requiring our various contractmanufacturers to expend additional capital and resources on quality controltesting, new personnel, plant redesign, new equipment, facilities placement,recordkeeping and ingredient and product testing.

 

The FDA and some state agencies invite thepublic to complain if they experience any adverse effects from the consumptionof nutritional supplements. These complaints may be made public. Regardless ofwhether complaints of this kind are substantiated or proven, public release ofcomplaints of this type may have an adverse effect upon public perception ofus, the quality of our products or the prudence of taking our products. Changesin consumer attitudes based on adverse event reports could adversely affect thepotential market for and sales of our products and make it more difficult torecruit and retain independent distributors and obtain endorsers.

 

**We are dependent on a limited number ofindependent suppliers and manufacturers of our products, which may affect ourability to deliver our products in a timely manner. If we are not able toensure timely product deliveries, potential distributors and customers may notorder our products, and our revenues may decrease.**

 

We rely entirely on a limited number of thirdparties to supply and manufacture our products. Our manufacturers produce ourproducts on a purchase order basis only and can terminate their relationshipswith us at will. Our two primary supplement manufacturers are VitatechInternational Inc. and GMP Laboratories of America, Inc. These third partiesmay be unable to satisfy our supply requirements, manufacture our products on atimely basis, fill and ship our orders promptly, provide services atcompetitive costs or offer reliable products and services. The failure to meetof any of these critical needs would delay or reduce product shipment andadversely affect our revenues, as well as jeopardize our relationships with ourindependent distributors and customers. In the event any of our third partymanufacturers were to become unable or unwilling to continue to provide us withproducts in required volumes and at suitable quality levels, we would berequired to identify and obtain acceptable replacement manufacturing sources.There is no assurance that we would be able to obtain alternative manufacturingsources on a timely basis. An extended interruption in the supply of ourproducts would result in decreased product sales and our revenues would likelydecline. We believe that we can meet our current supply and manufacturingrequirements with our current suppliers and manufacturers or with availablesubstitute suppliers and manufacturers. Historically, we have not experiencedany delays or disruptions to our business caused by difficulties in obtainingsupplies.

 

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**We are dependent on our third partymanufacturers to supply our products in the compositions we require, and we donot independently analyze our products. Any errors in our product manufacturingcould result in product recalls, significant legal exposure, and reducedrevenues and the loss of distributors.**

 

While we require that our manufacturersverify the accuracy of the contents of our products, we do not have theexpertise or personnel to monitor the production of products by these thirdparties. We rely exclusively, without independent verification, on certificatesof analysis regarding product content provided by our third party suppliers andlimited safety testing by them. We cannot be assured that these outsidemanufacturers 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.

 

**We face significant competition from existingsuppliers of products similar to ours. If we are not able to compete with thesecompanies effectively, then we may not be profitable.**

 

We face intense competition from numerousresellers, manufacturers and wholesalers of energy drinks, protein shakes andnutritional supplements similar to ours, including retail, online and mailorder providers. We consider the significant products in the U.S. market to beMyoplex® for protein drinks, Gatorade®, Powerade®, Acclerade® and All Sport®for energy drinks, and that Nature’s Bounty, Inc. and General NutritionCenters, Inc. are the significant producers of vitamins. Most of ourcompetitors have longer operating histories, established brands in themarketplace, revenues significantly greater than ours, more capital and betteraccess to capital than us. We expect that these competitors may use theirresources to engage in various business activities that could result in reducedsales of our products. Companies with greater capital and research capabilitiescould re-formulate existing products or formulate new products that could gainwide marketplace acceptance, which could have a depressive effect on our futuresales. In addition, aggressive advertising and promotion by our competitors mayrequire us to compete by lowering prices because we do not have the resourcesto engage in marketing campaigns against these competitors, and the economicviability of our operations likely would be diminished.

 

**We may not be able to attract high visibilityendorsers, which may result in reduced product sales for us.**

 

A principal component of our marketingprogram is the use and endorsement of our products by well-known professionaland Olympic athletes and others associated with professional sports teams.Although we have obtained several well-known sports celebrities as endorsers ofour products, some of these persons may not continue their endorsements, maynot continue to succeed in their fields, may engage in activities which couldbring disrepute on themselves and, in turn, on us and our products, and ourrevenues could suffer. We also may not be able to attract new endorsers,especially sports celebrities that may emerge in the future. Competition forendorsers is significant and adverse publicity regarding us or our industrycould make it more difficult to attract and retain endorsers.

 

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

 

Adverse publicity concerning any actual orpurported failure of our Company or our independent distributors to comply withapplicable laws and regulations regarding any aspect of our business could havean adverse effect on the public perception of our Company. This, in turn, couldnegatively affect our ability to obtain endorsers and attract, motivate andretain independent distributors, which would have a material adverse effect onour ability to generate sales and revenues.

 

Our independent distributors’ and customers’perception of the safety and quality of our products as well as similarproducts distributed by others can be significantly influenced by nationalmedia attention, publicized scientific research or findings, product liabilityclaims and other publicity concerning our products or similar productsdistributed by others. Adverse publicity, whether or not accurate, thatassociates consumption of our products or any similar products with illness orother adverse effects, will likely diminish the public’s perception of ourproducts. Claims that any products are ineffective, inappropriately labeled orhave inaccurate instructions as to their use, could have a material adverseeffect on the market demand for our products, including reducing our sales andrevenues.

 

The results of new nutritional dietarysupplement studies could be contrary to general industry knowledge on which theformulation and marketing of our products are based and could materially andadversely impact our

 

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product sales.The federal government, research institutes, universities and others regularlyconduct research into the use, effectiveness and potential for adverse resultsfrom the use of nutritional dietary supplements. Even if adverse studies aresubject to substantial criticism or not supported by accepted scientificmethodology, publicity surrounding the reports of these studies may result inflat or decreased sales of our products. In the past few years, theeffectiveness of, and potential for harm from, some of the leading herbalsupplements, which contain ingredients not in our products, have come intoquestion as a result of research studies. These negative study results andother negative publicity could adversely affect the potential market and salesof our products, as well as increase our product returns, resulting inincreased expenses to us.

 

While we have not received any directnegative publicity, recent negative publicity such as the ban from the FDA onthe ingredient ephedra and the publicized studies associating increasedmortality rates with high dosages of Vitamin E has increased awareness of ourconsumers relating to the safety of the ingredients in our supplements.

 

**Nutritional supplement products may besupported by only limited conclusive clinical studies resulting in less marketacceptance of these products and lower revenues or lower growth rates inrevenues.**

 

Our nutritional supplement products are madefrom vitamins, minerals, amino acids, herbs, botanicals, and other substancesfor which there is a long history of human consumption. However, there islittle long-term experience with human consumption of certain productingredients or combinations of ingredients in concentrated form. Although webelieve all of our products fall within the generally known safe limits fordaily doses of each ingredient contained within them, nutrition science isimperfect. Moreover, some people have peculiar sensitivities or reactions tonutrients commonly found in foods and may have similar sensitivities orreactions to nutrients contained in our products. Furthermore, nutritionscience is subject to change based on new research. New scientific evidence maydisprove the efficacy of our products or prove our products to have effects notpreviously known. We could be adversely affected in the event that our productsshould prove to be or if they are asserted to be ineffective or harmful toconsumers, or if adverse effects are associated with a competitor’s similarproducts.

 

**Our products have higher prices than theproducts of most of our competitors, which may make it difficult for us toachieve significant revenues.**

 

We may have difficulty in achieving marketacceptance of our products because our products are among the highest priced intheir categories due to the ingredients that we require in our products. Whilewe believe that our products are superior to competing, lower priced products,consumers must be educated about our products. If we are unable to achievemarket acceptance, we will have difficulty in achieving revenue growth, whichwould likely result in continuing operating losses.

 

**The sale of our products involves productliability and related risks that could expose us to significant insurance andloss expenses.**

 

We face an inherent risk of exposure toproduct liability claims if the use of our products results in, or is believedto have resulted in, illness or injury. Most of our products containcombinations of ingredients, and there is little long-term experience with theeffect of these combinations. In addition, interactions of these products withother products, prescription medicines and over-the-counter drugs have not beenfully explored or understood and may have unintended consequences. While ourthird party manufacturers perform tests in connection with the formulations ofour products, these tests are not designed to evaluate the inherent safety ofour products.

 

Although we maintain product liabilityinsurance, it may not be sufficient to cover product liability claims and suchclaims could have a material adverse effect on our business. The successfulassertion or settlement of an uninsured claim, a significant number of insuredclaims or a claim exceeding the limits of our insurance coverage would harm usby adding further costs to our business and by diverting the attention of oursenior management from the operation of our business. Even if we successfullydefend a liability claim, the uninsured litigation costs and adverse publicitymay be harmful to our business.

 

Any product liability claim may increase ourcosts, and adversely affect our revenues and operating income. Moreover,liability claims arising from a serious adverse event may increase our coststhrough higher insurance premiums and deductibles, and may make it moredifficult to secure adequate insurance coverage in the future. In addition, ourproduct liability insurance may fail to cover future product liability claims,which if adversely determined could subject us to substantial monetary damages.

 

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**We have primarily used one individual toformulate all of our products, and the loss of his services may result indelays in formulating new products and our revenues may decrease.**

 

The loss of the services of Dr. WilliamWheeler, a nutritionist, could have an adverse effect on our future revenues,as he is the primary person responsible for the formulation of all of ourexisting products. Although we have entered into a consulting agreementproviding us with certain services by Dr. Wheeler, there is no assurance thathe will be available to formulate new products for us. In addition, Dr. Wheelerformulates nutritional products for others, including his own company, andthese products may compete with our products. Dr. Wheeler formulated andmarkets Gold Standard Protein®, a protein shake which competes with our VitaPro®shakes, although we sell our products through direct marketing and his proteinshake is sold directly to consumers without network marketing. If he is unavailable to us for any reason, our ability to formulatenew products may be impaired, which could result in lower revenues.

 

**A slower growth rate in the nutritionalsupplement industry could lessen our sales and make it more difficult for us toachieve growth and become profitable.**

 

According to the Nutrition Business Journal(May/June 2004), nutritional supplement companies, analysts, publicationsand other industry sources have indicated that the nutritional supplementindustry has experienced a significantly slower rate of growth in recent years,although available data revealed this trend was reversed in 2003, and numbersfor 2004 are not available. In our view, this slowdown may be attributable inpart to the maturing of the market for nutritional supplements, the lack of anysignificant developments of new products over the past few years, negative publicityabout the effectiveness of some ingredients in certain nutritional supplements,the increase in the number of products competing in the industry, and theincreased number of private label brands. Despite the growth in 2003, aslowdown in the industry’s rate of growth could continue over the long term andimpair the prospects for increasing the sale of and the demand for ourproducts.

 

**New products may render our products obsoleteand our sales may suffer.**

 

The nutritional supplement market historicallyhas been influenced by “fad” products that became popular due to changingconsumer tastes and media attention. Our products may be rendered obsolete bychanges in popular tastes as well as media attention on new products or adversemedia attention on nutritional supplements, which could reduce our sales. Itmay be difficult for us to change our product line to adapt to changing tastes.In addition, other “fad” food regimens, such as low carbohydrate diets, maydecrease the overall popularity and use of our products, as well as result inhigher returns of our products, thereby increasing our expenses.

 

**We may from time to time write off obsoleteinventories resulting in higher expenses and consequently greater net losses.**

 

Because we maintain high levels ofinventories to meet the product needs of our independent distributors andcustomers, a change by us of our product mix could result in writedowns of ourinventories. For example, in 2003 and 2004 we discontinued certain products andsales tools that we deemed obsolete, and we incurred a writedown againstinventory in 2003 of $177,896 and a charge against obsolete inventory of$22,319 in 2004. Writedowns and charges of this type have historicallyincreased our net losses, and if experienced in the future, will make it moredifficult for us to achieve profitability.

 

**Product returns in excess of our estimatescould require us to incur significant additional expenses, which would make itdifficult for us to achieve profitability.**

 

We have established a reserve in ourfinancial statements for product returns which is based upon our limitedhistorical experience. If this reserve were to be inadequate, we may incursignificant expenses for product returns. We began our direct selling marketingin the last quarter of 2003 and expanded our return policy in May 2004 to allowproduct returns for up to 12 months after purchase. We may need to revise ourreserves for product returns as we gain more operating experience.

 

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**If we are not able to adequately protect ourintellectual property, then we may not be able to compete effectively and wemay not be profitable.**

 

Our existing proprietary rights may notafford remedies and protections necessary to prevent infringement,reformulation, theft, misappropriation and other improper use of our productsby competitors. We own the formulations contained in our products. We considerour product formulations our critical proprietary property, which must beprotected from competitors. We do not have any patents because we do notbelieve they are necessary to protect our proprietary rights. Although tradesecret, trademark, copyright and patent laws generally provide such protectionand we may attempt to protect ourselves through contracts with manufacturers ofour products, we may not be successful in enforcing our rights. In addition,enforcement of our proprietary rights may require lengthy and expensivelitigation. We have attempted to protect the trade names and trademarks used forour products by registering them with the U.S. Patent and Trademark Office, butwe must rely on common law trademark rights to protect our unregisteredtrademarks. Common law trademark rights do not provide the same remedies as aregranted to federally registered trademarks and the rights of a common lawtrademark are limited to the geographic area in which the trademark is actuallyused. Our inability to protect our intellectual property could have a materialadverse impact on our ability to compete and could make it difficult for us toachieve a profit.

 

**Interruptions to or failure of ourinformation processing systems may disrupt our business and our sales maysuffer.**

 

We are dependent on our informationprocessing systems to timely process customer orders, oversee and manage ourdistributor network and control our inventory, and for our distributors tocommunicate with their customers and distributors in their network. Since theinitial purchase of our technology system in 2001 through December 31, 2004,we had spent $180,151 on technology system upgrades. We have experiencedinterruptions and may in the future experience interruptions to or failure ofour information processing system; however, none of the interruptions to datehave materially disrupted our business. Interruptions to or failure of ourinformation processing systems may be costly to fix and may damage ourrelationships with our customers and distributors, and cause us to losecustomers and distributors. If we are unable to fix problems with ourinformation processing systems in a timely manner our sales may suffer.

 

**Loss of key personnel could impair ourability to operate.**

 

Our success depends on the skills, experienceand efforts of our senior management and skilled employees, including EarnestMathis, Jr., our Chief Executive Officer, Timothy Transtrum, our Chief Operating Officer,  David Litt, our Vice President of Sales andMarketing and Sanford D. Greenberg, our founder, in order to expand ourbusiness. As with all personal service providers, our officers can terminatetheir relationship with us at will. Our inability to retain these individualsmay result in our reduced ability to operate our business.  We do not have key man life insurance on anyof our executive officers.

 

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**PART I**

 

**ITEM1.** DESCRIPTION OFBUSINESS

 

### **Overview**

###  

We develop, sell, market and distributenutritional supplement products primarily through a direct sales or networkmarketing system in which independent distributors sell our products, as wellas purchase them for their own personal use. We also sell our products directlyto professional and Olympic athletes and to professional sports teams.

 

We formulated our products in 2000 and 2001for sale to professional and Olympic athletes. We launched our sales andmarketing programs to the general public in early 2002 through our internalsales force targeting specialty retail stores, health clubs and personaltrainers. During 2003, we refocused our marketing and sales strategy on directselling through independent distributors. We believe, based upon our salesexperience in 2001 and 2002, our products can be more effectively sold throughthe face-to-face sales method afforded by direct selling.

 

A key part of our marketing strategy, inconjunction with our direct sales program, is the endorsement of our productsby sports celebrities. Some of our celebrity endorsers include:

 

•                            MikeShanahan (football): Head Coach, Denver Broncos—five Super Bowl teams;

 

•                            RandyJohnson (baseball): Pitcher, New York Yankees—four-time Cy Young Award Winnerand 2001 World Series Co-MVP;

 

•                            MikeAlstott (football): Fullback, Tampa Bay Buccaneers—four-time Pro Bowlselection;

 

•                            JohnLynch (football): Safety, Denver Broncos—six-time Pro Bowl selection;

 

•                            GaryGait (lacrosse): Forward, Colorado Mammoth—six-time National Lacrosse LeagueMVP; and

 

•                            MeganAddy (track and field): world-ranked 400 meter hurdler.

 

In addition, we supply our products to thefollowing professional sports teams:

 

•                            NationalFootball League (“NFL”): Denver Broncos, Buffalo Bills, Chicago Bears, GreenBay Packers, New England Patriots, Seattle Seahawks;

 

•                            MajorLeague Baseball (“MLB”): Arizona Diamondbacks, Boston Red Sox, Cincinnati Reds,Chicago White Sox, Milwaukee Brewers and Oakland Athletics;

 

•                            NationalBasketball Association (“NBA”): Denver Nuggets, Los Angeles Clippers, MemphisGrizzlies, Washington Wizards; and

 

•                            NationalHockey League (“NHL”): Columbus Blue Jackets and Florida Panthers.

 

We were formed in 2001, under the name “Instanet,Inc.” to provide Internet fund transfers. Instanet, which had no operatingrevenues, was a development stage company. Instanet’s business model was notsuccessful and it was searching for an operating business. V3S, a Colorado corporationformed in October 2000, contacted Instanet in May 2003. The partiescompleted a stock-for-stock exchange on June 20, 2003, in which Instanetacquired V3S. The acquisition was conducted on an “arms-length” basis. In theexchange, the then existing stockholders of V3S exchanged their stock in V3Sfor 2,714,403 shares of common stock of Instanet, then representing a 90%ownership interest in Instanet. V3S then became a wholly-owned subsidiary ofInstanet and V3S’s management became management of Instanet. Instanet changedits name to VitaCube Systems Holdings, Inc. V3S at thetime of the acquisition had $810,743 of current and long-term assets and$3,000,080 of current and long-term liabilities. V3S’s assets included cash andcash equivalents, inventory, product formulations, an office informationtechnology system

 

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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.

 

The description of our business describes thebusiness conducted by V3S. Instanet discontinued its business prior to thestock-for-stock exchange.

 

### **IndustryOverview**

###  

### ***The Nutrition Industry***

###  

According to the latest industry overview, *Nutrition Business Journal* (May/June 2004),despite the changing regulatory atmosphere surrounding supplements, thefundamentals of growth for the nutrition industry—aging baby boomers’ healthconcerns, the obesity epidemic and rising health care costs—were strong enoughto propel nutritional industry growth overall to 8.2% and total U.S. consumersales to $62.9 billion in 2003, the first increase in sales growth in severalyears. The supplements segment contributed $19.8 billion to nutrition industrysales and increased 5.7% in 2003 over the prior year, the highest annual growthrate since 1999. Vitamin sales grew 7.6% over 2002 or the highest growth ratesince 1997. Topping the growth list were minerals and specialty supplements,both of which advanced sales by 15% in 2003. Rounding out the supplementcategories is sports nutrition that gained 8% in sales in 2003 over 2002.

 

We believe that the size of the supplementmarket is due to public awareness of the positive effects of nutritionaldietary supplements. Helping to increase awareness are reports and industrymarketing that provides a correlation between the consumption of nutritionaldietary supplements and better health. Both the United States government anduniversities have increased sponsorship of research relating to nutritionaldietary supplements. For example, in fiscal year 2002, the National Institutesof Health (NIH) continued to lead all Federal agencies with a total of $917million spent on research and training. This total represents the combinedindividual contributions of the 18 NIH institutes and three centers thatsupported biomedical nutrition research and training. In addition, as part ofthe NIH, Congress has established the Office of Alternative Medicine, whichfocuses on alternative medical treatments, and the Office of DietarySupplements, which conducts and coordinates research regarding the role ofdietary supplements in maintaining health and preventing disease. Newdevelopments in 2004 have been the FDA’s ban on ephedra and the steroidscandals in Major League Baseball and Track and Field. While these scandals maybe perceived as having a negative effect on the nutritional supplementbusiness, we have never produced or sold any products with the ingredientsunder public scrutiny.

 

### ***The Direct Selling Industry***

###  

Firms that use direct sales as theirdistribution method have grown in numbers, sales and profits, both domesticallyand abroad. Results of the 2004 Direct Selling Association’s Annual Growth andOutlook Survey indicate a 10.7% increase in direct sales over the previous twoyears to a record high of $29.55 billion. This represents the 19thconsecutive year of growth for the industry. The survey, which measures thesize and activity of the U.S. direct selling industry, is conducted annuallyand includes responses from a cross-section of direct selling companies.Other major results of the survey indicate wellness products, such as weightloss products and nutritional supplements, account for approximately 15.3% ofdirect sales. The Direct Selling Association’s published figures for 1999-2003indicate that annual U.S. retail sales for the five years ended December 31,2003, have grown from $24.5 billion to nearly $30 billion along with theindependent distributor base growing from 10.3 million to nearly 13.3 millionduring the same time period.

 

We believe the prospects for continued growthin direct sales are good and should benefit us, and we perceive several reasonsas to 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.

 

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•                  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.

 

### **Our Products**

###  

Currently we offer 18 different nutritionalproducts. None of our products contain substances that have been the subject ofpublicized health concerns by the medical community such as ephedra, creatine,androstene, androstenedione, aspartame, steroids or human growth hormones. Ourproducts include:

 

***eForce******® Sports Drink***

 

eForce® is a sports drink that has beenreformulated to support sustained energy without the levels of sugar andcaffeine of most colas, and with one-tenth the amount of carbohydrates and twoadditional hydrating electrolytes not found in Gatorade®, a competing sportsdrink. eForce® has been reformulated to provide support for sustained energybefore activity by incorporating the ingredients D-Ribose, 5 ginsengs and acomplete B-Vitamin Complex (B1, B2, B6 and B12). eForce®also contains antioxidants such as Vitamins A, C and E and pomegranateextract in its formulation designed to benefit the body after activity.

 

***VitaPro®Nutrition Shake***

 

VitaPro® is a balanced shake that has a blendof proteins, carbohydrates and sugars and is available in chocolate or vanillaflavors. Its blend of proteins is designed to support metabolism and provideenergy.

 

VitaPro® is formulated with 27 vitamins,minerals and antioxidants delivered in a shake form to help providenourishment. VitaPro® combines various protein sources, vitamins, and mineralswith ingredients such as Aminogen®—an ingredient that contributes amino acidsto the body and Fibersol-2®, a fiber that aids in digestion.

 

***Vitaminsand Minerals***

 

Our vitamins, minerals, and specialtyformulations are sold in various VitaCubes®, and consist of tablets, capsulesand soft gel formulations. The VitaCube® is a compartmentalized container inwhich each supplement is separated into its own compartment, with a label aboveto designate the location of supplement. This label also provides thesupplement name, a photograph, its benefits, the main ingredients and dosages,and the time to take it. VitaCubes® are divided into three primary and gender-specificpackages:

 

•                  VitaCube®Basic, designed for individuals who are new to nutritional supplement programsor who are recreational athletes;

 

•                  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.

 

*Supplements found inour VitaCube® and their product description:*

 

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| **Name  of Supplement**           | ** ** | **Product Description/Intended  Benefits**                                                                                           |
|-----------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|
| M32+® (Multi System Formula) |       | 32 vitamins and minerals—multivitamins                                                                                          |
|                              |       |                                                                                                                                 |
| 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) |
|                              |       |                                                                                                                                 |
| 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                                                             |
|                              |       |                                                                                                                                 |
| Q-Zyme®*                     |       | CoEnzyme Q10—support energy metabolism in  the heart                                                                            |

 

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*                                         Alsosold separately from our VitaCube®

 

*Products soldindividually:*

 
| **Name of Supplement** | ** ** | **Product  Description/Intended Benefits**                             |
|------------------------|------------|------------------------------------------------------------------------|
| Complex SPP®      |       | Saw Palmetto—support prostate health in men  over 30              |
|                   |       |                                                                   |
| Visual Eyes®      |       | Lutein and Vitamin A—support eye health                           |
|                   |       |                                                                   |
| Enduro Max             |       | B Vitamins and 5 Types of Ginsengs—support  endurance and stamina |
|                   |       |                                                                   |
| Pure Heat®        |       | Cayenne, Boswellia and Turmeric—support  soft tissue health       |

 

***Qualityin Our Products***

 

In seeking quality in our products, werequire that before a product is brought to market, all:

 

•                  supplements are supported with publicly available scientificresearch and references;

 

•                  our manufacturers carry applicable manufacturing licenses;

 

•                  ingredients are combined so that their effectiveness is notimpaired;

 

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

 

•                  products do not contain adulterated ingredients such asephedra, creatine, androstenedione, aspartame, steroids or human growthhormones;

 

•                  formulations have a two year shelf life;

 

•                  products are 100% free of lead and the typical allergens ofwheat, corn and yeast; and

 

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•                  tablets, capsules and soft gels are designed to readilydissolve in the body to facilitate absorption.

 

### **ProductDevelopment and Advisory Boards**

###  

In February of 2001, we retained theservices of William E. Wheeler, PhD., ACSM, to act as our Director of Scienceand Technology. Dr. Wheeler has over 25 years of experience in the nutritionalindustry with over 260 senior author scientific publications as well as threePresidential Awards for Excellence in Research. Dr. Wheeler also served asstaff nutritionist to the President of the United States (1976-1981) and servedas staff nutritionist to the 1996 U.S. Olympic Decathlon Team. We employed Dr.Wheeler from February 2001 until April 2002. During this time, Dr.Wheeler headed a team of manufacturers and third party experts to research, formulate and test our products, the proprietaryrights to which are solely ours. Currently, we have entered into a consultingagreement providing us with Dr. Wheeler’s services on a limited basis,including advising us on product formulations and updates on nutritionalscience, for $2,000 per month plus reasonable expenses. The agreement expiresin March 2007, and may be terminated by either party upon 30 days writtennotice.

 

Over the past two years, we have assembled aScientific Review and Medical Advisory Board and a Professional Athletic AdvisoryBoard. Our Scientific Review and Medical Advisory Board iscomposed of Dr. Wheeler (chairman), Herbert Jacobs, M.D., FACS, FACOG, and PaulDragul, M.D. These health and medical professionals emphasize nutrition andnutritional supplement in their practices. They advise us on potentialproducts, ingredients and formulations, and they review our existing productsfor potential enhancements to improve effectiveness and marketability.

 

Due to the number of professional athletesusing our products, we created a Professional Athletic Advisory Board made upof strength coaches and trainers from various professional sports. Members ofour Professional Athletic Advisory Board are Steve Hess, Professional Strengthand Conditional Coach for the Denver Nuggets, National Basketball Association,Dave Page, Strength and Conditioning Coach for the Arizona Diamondbacks, MajorLeague Baseball, and Mark Casterline, Strength and Conditioning Coach for theColumbus Blue Jackets, National Hockey League. This board provides feedback onthe use and perceived benefits of our products.

 

***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 from two to fournew products within the next 12 to 18 months.

 

### **CelebrityEndorsements**

###  

As part of our marketing efforts, wecompensate several sports celebrities for endorsing our products. We believethese endorsements lead health and fitness conscious consumers to use ourproducts.

 

Our endorsers have agreed to provide writtentestimonials to advertise our products including the use of their name,likeness, and pictures for print, radio, electronic media, and videoannouncements. Additionally some endorsers have agreed to make personalappearances, participate in website chats, and wear apparel containing ourlogo.

 

The terms of our endorsement contracts vary.These contracts are generally for a period of one to three years and theendorsers are provided with our products for personal use on a reduced or nocost basis. In addition to receiving our products, these endorsers may receivecash compensation, stock options, stock grants, a percentage of net revenues,or other consideration. Some of our endorsement contracts also provide that theendorser will not endorse any competing products.

 

### **OurIndependent Distributors and Customers**

###  

***Overview.***  We distribute products through a directselling program with independent distributors. Our distributors purchaseproducts for their own consumption and for sale to their customers. Generallydistributors do not maintain an inventory of products, but rather introduce newcustomers who purchase directly from us.

 

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Independent distributors are encouraged torecruit and sign up new independent distributors and customers for us, theresult of which is the creation of new “levels” within their salesorganizations. These new enrollees are referred to as the “downline” of theirenrolling distributor. Downline independent distributors are also encouraged torecruit new independent distributors, thereby creating additional levels intheir organizations, but still connected to the original enrolling distributor.Enrollments occur based on personal introduction regardless of geographiclocation. We have no sales territories. Our independent distributors arecompensated with commissions and bonuses on sales generated through theirdownline.

 

We believe direct selling is an effective wayto distribute our products because:

 

•                  distributors can educate consumers about our products inperson;

 

•                  direct sales allows for actual product sampling by potentialconsumers;

 

•                  comparedto other distribution methods our distributors can provide customers high levelsof service and attention;

 

•                  direct selling has benefited from advancements intechnology, including low-cost telephone services and the Internet; and

 

•                  products can be introduced to the market throughperson-to-person selling, resulting in lower up front capital outlays for usthan conventional methods.

 

Our marketing team utilizes multimedia CDsand video e-mail to enhance the selling and recruiting capabilities of ourindependent distributors. These materials are sold to the independentdistributors so that the ongoing advertising costs borne by us are notsubstantial. In addition, we utilize print, telecommunications and the Internetto recruit and train independent distributors. We have created a compensationplan that we believe motivates independent 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, and costs $40.The business builder packs contain the starter kit, a selection of ourproducts, and other materials, and range in price from $199 to $399.

 

***Compensation Plan.***  Independent distributors can earncompensation in four 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;

 

•                  qualifyingfor bonuses based on sales performance by distributors and their downlineorganization; and

 

•                  participatingin Company contests and promotions.

 

***Independent Distributor Training, Support andMotivation.*** We believe that training, support and motivation are key elements in ourindependent distributors achieving success. Training from our corporate managementincludes live training events, conference calls and video e-mail. We haveconference call capabilities which are available any time and can be accessedfrom any U.S. location for use by our independent distributors. In addition,every independent distributor is provided with an online “back office” orwebsite. This provides the distributors the ability to send e-mails directly tohis or her downline database along with tools for placing and reviewing ordersand managing his or her downline.

 

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For motivation, we recognize our independentdistributors with pins and awards based upon sales achievements. In addition,from time to time, we use memorabilia signed by our celebrity endorsers as afurther incentive. In August 2004, we had our first leadership retreat ata resort in Colorado Springs, Colorado, and we plan on utilizing trips andvacations as a primary component of our motivation strategy.

 

***Additional Methods of Distribution.******* Wealso sell directly to professional and Olympic athletes using our in-housestaff. Many of these athletes purchase our products at a discounted price,although some endorse our products in return for receiving them at no charge.We believe the endorsements of these high-profile athletesprovides credibility to our products.

 

We are not dependent on one customer or agroup of customers.

 

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

###  

The ability to efficiently managedistribution, compensation, inventory control, and communication functionsthrough the use of sophisticated and dependable information processing systemsis critical to our success.

 

We continue to upgrade systems and introducenew technologies to facilitate our continued growth and support independentdistributor activities. These systems include: (1) an internal network serverthat manages user accounts, print and file sharing, firewall management, andwide area network connectivity; (2) a Microsoft SQL database server to managesensitive transactional data, and corporate accounting and sales information;(3) a centralized host computer located in Utah supporting our customized orderprocessing, fulfillment and independent distributor management software; (4) astandardized Nortel Meridian telecommunication switch and system; (5) a hostedindependent distributor website system designed specifically for networkmarketing and direct sales companies; and (6) procedures to perform daily andweekly backups with both onsite and offsite storage of backups.

 

Importantly, our technology systems providekey financial and operating data for management, timely and accurate productordering, commission payment processing, inventory management and detailedindependent distributor records. Additionally, these systems deliver real-timebusiness management, reporting and communications tools to assist in retainingand developing our sales leaders and independent distributors. We intend tocontinue to invest in our technology systems in order to strengthen our operatingplatform.

 

### **ProductReturns**

###  

We revised our return policy in 2004 toprovide an initial purchase guarantee to all first-time customers and first-timeindependent distributors who are not satisfied with our products for anyreason. These customers and distributors may return to us any productspurchased within 60 days of their initial order for a full refund. After 60days and on all subsequent orders, customers and independent distributors mayreturn unused, unopened and undamaged product that is currently being sold byus for a refund of 100% of the sales price less a 10% restocking fee, providedit is returned to us within 12 months of the purchase date. Returned productdamaged during shipment is replaced. Historically, product returns as apercentage of our net sales have ranged from 1.7% to 3.8% of our monthly netsales.

 

### **OurCompetition**

###  

We compete with many companies engaged inselling nutritional supplements. We also compete with direct selling companieswho sell products similar to ours. Most of our competitors have significantlymore financial and human resources than we do, and have operating historieslonger than ours. We seek to differentiate our products and marketing from ourcompetitors based on our product quality, the use of sportscelebrity endorsers, our attractive compensation plan for ourindependent distributors and through our simple selling program.

 

The retail market for nutritional supplementsis characterized by a few dominant national companies, including GeneralNutrition Centers, Vitamin World, Vitamin Shoppe, and Great Earth VitaminStores. Others have a presence within local markets, such as Vitamin Cottage inDenver, Colorado. Three companies dominate the Internet—Vitamins.com (owned byPuritan’s Pride), GNC.com and VitaminShoppe.com, the latter two having retailsales locations as well.

 

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Major competitors in the sports nutrition andweight-loss markets consist of companies such as EAS, Inc., Weider NutritionInternational, Inc. and Twinlab Corporation, which dominate the market withsuch products as Myoplex (EAS), Body Shaper (Weider) and Ripped Fuel (Twinlab).

 

Competitors for our sports energy drinkinclude Gatorade®, Powerade®, Accelerade® and All Sport®. Indirect competitionincludes soft drinks and orange juice and related products such as SunnyDelight®, CapriSun® and other fruit drinks.

 

We compete with a number of large directselling firms selling nutritional, diet, health, personal care andenvironmental products, and numerous small competitors. The principal directselling competitors are Amway Corporation, Nature’s Bounty, Inc., SunriderCorporation, New Vision USA, Inc., Herbalife International of America, Inc.,USANA, Inc., and Melalecua, Inc.

 

### **OurManufacturers**

###  

We use four principal manufacturers for thecomponents of our products, and multiple vendors for packaging and labeling. Wehave contracts with our two main manufacturers. Our relationship with any ofour manufacturers 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.

 

**Product Delivery**

 

All of our products are shipped by ourmanufacturers directly to us for storage at our facilities in Denver, Colorado.Products sold to our independent distributors and their customers are shippeddirectly by us to the distributors or customers. We collect sales tax onproducts based upon the address of the consumer to whom products are sentregardless of how the order is placed. Sales to our professional and Olympicathletes, our sports teams and from our non-distributor customers are shippeddirectly to them from our facilities.

 

**Regulatory Matters**

 

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

 

•                  the formulation, 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;

 

•                  our direct selling program; and

 

•                  taxation of independent distributors (which in someinstances could impose an obligation on us to collect the taxes and maintainappropriate records).

 

The formulation, manufacturing, packaging,labeling, holding, storage, distribution, advertising, and sale of our productsare subject to regulation by one or more federal agencies, including the FDA,the FTC, the Consumer Product Safety Commission (“CPSC”), the OccupationalSafety and Health Administration (“OSHA”), the Department of Agriculture (“USDA”)and the Environmental Protection Agency (“EPA”). These activities are alsoregulated by various agencies of the states and localities in which our productsare sold. Pursuant to the Federal Food, Drug, and Cosmetic Act (“FDCA”), theFDA regulates the processing, formulation, safety, manufacture, packaging,labeling, holding, sale, and distribution of foods and nutritional supplements(including vitamins, minerals, amino acids, herbs, and botanicals). The FTC hasjurisdiction to regulate the advertising of these products. The CPSC is chargedwith protecting the public from risks of serious injury or death associatedwith the use of consumer products. Nutritional supplements are among the over15,000 types of consumer products under CPSC’s jurisdiction. When consumerscomplain to the CPSC about alleged harm stemming from ingestion of anutritional supplement, CPSC may contact the entity concerned, inform it of thenature of the complaint, and invite a response.

 

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CPSC has conducted several recalls of iron-containing dietarysupplements that do not comply with the child-resistant packaging requirement.The OSHA is charged with protecting workplace safety. Nutritional supplementcompanies must maintain a safe workplace and may from time to time be subjectto queries from OSHA if manufacturing methods or procedures raise a question ofworker safety. The USDA has jurisdiction over animal food and animal feed,including regulatory control over the harvesting of animal-based sourcematerials, including animal-derived proteins, and animal-derived gelatincapsules, used in the making of dietary supplements. The EPA regulates dietarysupplement compliance with standards established under the Clean Air Act, theClean Water Act, the Occupational Safety and Health Act, and the PollutionPrevention Act as they affect the use, maintenance, and disposal of substancesused in and facilities used for the manufacture of nutritional supplements.

 

The FDCA has been amended several times withrespect to nutritional supplements, in particular by the Dietary SupplementHealth and Education Act of 1994 (“DSHEA”), which established a new frameworkgoverning the composition, safety, labeling and marketing of nutritionalsupplements. Nutritional supplements are defined as vitamins, minerals, herbs,other botanicals, amino acids and other dietary substances for human use tosupplement the diet, as well as concentrates, metabolites, constituents,extracts or combinations of such dietary ingredients. Generally, under DSHEA,dietary ingredients that were on the market prior to October 15, 1994, maybe used in nutritional supplements without notifying the FDA. New dietaryingredients, consisting of dietary ingredients that were not marketed in theUnited States before October 15, 1994, are subject to a FDA pre-market newdietary ingredient notification requirement unless the ingredient has beenpresent in the food supply as an article used for food without beingchemically altered. A new dietary ingredient notification must provide the FDAwith evidence of a history of use or other evidence of safety establishing thatuse of the dietary ingredient will reasonably be expected to be safe. A newdietary ingredient notification must be submitted to the FDA at least 75 daysbefore the initial marketing of the new dietary ingredient. There is nocertainty that the FDA will accept any particular evidence of safety for anynew dietary ingredient. The FDA’s refusal to accept such evidence could preventthe marketing of such dietary ingredients.

 

The FDA issued a consumer warning in 1996,followed by proposed regulations in 1997, covering nutritional supplements thatcontain ephedra or its active substance, ephedrine alkaloids. We have neverproduced or sold products containing ephedra. In February 2004, the FDAissued a final regulation declaring nutritional supplements containing ephedraunder the FDCA because they present an unreasonable risk of illness or injuryunder the conditions of use recommended or suggested in labeling, or if noconditions of use are suggested or recommended in labeling, under ordinaryconditions of use. The rule took effect on April 12, 2004, and bans thesale of nutritional supplement products containing ephedra. Similarly, the FDAissued a consumer advisory in 2002 with respect to nutritional supplements thatcontain the ingredient Kava, and the FDA is currently investigating adverse effectsassociated with ingestion of this ingredient. We have never produced or soldany products containing Kava.

 

DSHEA permits statements of nutritionalsupport to be included in labeling for nutritional supplements without FDApremarket approval. These statements must be submitted to the FDA within 30days of marketing and must bear a label disclosure that “This statement has notbeen evaluated by the Food and Drug Administration. This product is notintended to diagnose, treat, cure, or prevent any disease.” These statementsmay describe a benefit related to a nutrient deficiency disease, the role of anutrient or nutritional ingredient intended to affect the structure or functionin humans, the documented mechanism by which a nutrient or dietary ingredientacts to maintain such structure or function, the general well-being fromconsumption of a nutrient or dietary ingredient, but may not expressly orimplicitly represent that a nutritional supplement will diagnose, cure,mitigate, treat or prevent a disease. An entity that uses a statement ofnutritional support in labeling must possess scientific evidence substantiatingthat the statement is truthful and not misleading. If the FDA determines that aparticular statement of nutritional support is an unacceptable drug claim or anunauthorized version of a disease claim for a food product, or if the FDAdetermines that a particular claim is not adequately supported by existingscientific data or is false or misleading, we would be prevented from using theclaim.

 

In addition, DSHEA provides that so-called “third-partyliterature,” e.g., a reprint of a peer-reviewed scientific publication linkinga particular nutritional ingredient with health benefits, may be used inconnection with the sale of a nutritional supplement to consumers without theliterature being subject to regulation as labeling. Such literature must not befalse or misleading; the literature may not promote a particular manufactureror brand of nutritional supplement; the literature must present a balanced viewof the available scientific information on the nutritional supplement; ifdisplayed in an establishment, the literature must be physically separate fromthe nutritional supplement; and the literature may not have appended to it anyinformation by sticker or any other method. If the literature fails to satisfyeach of these requirements, we may be prevented from disseminating it with

 

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our products, andany dissemination could subject our products to regulatory action as an illegaldrug. Moreover, any written or verbal representation by us that would associatea nutrient in a product that we sell with an effect on a disease will be deemedevidence of an intent to sell the product as an unapprovednew drug, a violation of the FDCA.

 

We expect that the FDA will adopt in thefuture the final regulations, originally proposed in March 2003, regardingcGMPs in manufacturing, packing, holding and distributing dietary ingredientsand nutritional supplements. These regulations will require nutritionalsupplements to be prepared, packaged, and held in compliance with strict rules,and will require quality control provisions that may mandate redundant testingof product 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 2005, as we expect, we will have up to a year to ensurecompliance. We expect to see an increase in our manufacturing costs as a resultof the necessary increase in testing of raw ingredients and finished productsand compliance with higher quality standards, although we are not certain ofthe amount of these costs.

 

The proposed regulations would establishstandards to ensure that nutritional supplements and dietary ingredients arenot adulterated with contaminants or impurities, and are labeled to reflectaccurately the ingredients in the products. It also includes proposedrequirements for designing and constructing physical plants, establishingquality control procedures, and testing manufactured dietary ingredients andnutritional supplements, as well as proposed requirements for maintainingrecords and for handling consumer complaints related to cGMPs. We areevaluating this proposal with respect to our manufactures. However, theproposed regulation can be expected to result in additional costs and possiblythe need to seek alternate suppliers.

 

The FDA has broad authority to enforce theprovisions of the FDCA applicable to nutritional supplements, including powersto issue a public warning letter to an entity, to publicize information aboutillegal products, to request a recall of illegal products from the market, andto request the Department of Justice to initiate a seizure action, aninjunction action, or a criminal prosecution in the United States courts. Theregulation of nutritional supplements may increase or become more restrictivein the future.

 

In 2004, legislation was introduced in bothhouses of Congress that imposed substantial new regulatory requirements fordietary supplements.  These bills did notpass and are no longer pending, but we believe the 2004 proposed legislationevidences a continuing effort to further regulate dietary supplements.

 

On April 12, 2004, the FDA adopted a newtest for determining when a nutritional supplement is adulterated. Under thistest, the FDA may declare a nutritional supplement adulterated (i.e., topresent an unreasonable risk of illness or injury) if it finds any benefitprovided by the supplement outweighed by a risk of illness of injury. The newrisk/benefit test is ill-defined and can be interpreted to permit FDA to hold awide range of nutritional supplements adulterated. It is possible that FDAmight hold more nutritional supplements adulterated in the future, reducing thenutritional ingredients available for use in our products.

 

The FTC exercises jurisdiction over theadvertising of nutritional supplements. In recent years, the FTC has institutednumerous enforcement actions against nutritional supplement companies fordeceptive advertising based on those companies’ alleged failure to possesscompetent and reliable scientific evidence in support of claims made inadvertising.

 

The FTC may monitor our advertising and couldrequest all evidence in support of our advertising claims, which evidence isrequired to be kept by us in advance of advertising. Discerning whatconstitutes “competent and reliable scientific evidence” involves, to a degree,a subjective assessment of the relative level, degree, quality, and quantity ofscientific evidence and its acceptance in the scientific community as proof ofthe advertising statement. It is therefore possible that we may think evidencewe have as sufficient but the FTC may deem the evidence inadequate. We believewe are in material compliance with applicable federal, state and local rules.

 

***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-pyramid laws generally are directedat ensuring that product sales ultimately are made to the retail consumers,that advancement within an organization is based on sales of the organization’sproducts rather than the

 

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recruitment ofnew distributors, and that distributors are not saddled with large quantitiesof non-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 are subject to the risk of privateparty challenges to the legality of our direct selling program. For example, in*Webster v. Omnitrition International, Inc.*,79 F.3d 776 (9th Cir. 1996), the multi-level marketing program ofOmnitrition International, Inc. (“Omnitrition”) was successfully challenged ina class action by Omnitrition distributors who alleged that Omnitrition wasoperating an illegal “pyramid scheme” in violation of federal and state laws.We believe that our direct selling program satisfies the standards set forth inthe Omnitrition case and other applicable statutes and case law defining alegal marketing system, in part based upon what we believe are differencesbetween our marketing system and that described in the Omnitrition case.

 

We monitor and respond to regulatory andlegal developments, including those that may affect our direct selling program.However, the regulatory requirements concerning direct selling programs do notinclude bright line rules and are inherently fact-based. An adverse judicialdetermination with respect to our direct selling program could have a materialadverse effect on our business. An adverse determination could: (1) require usto make modifications to our direct selling program, (2) result in negativepublicity, (3)have a negative impact on independent distributor morale, (4)result in reduced revenues, (5) result in fewer celebrity endorsers of ourproducts, and (6) potentially lead to the failure of the Company. In addition,adverse rulings by courts in any proceedings challenging the legality of multi-levelmarketing systems, even in those not involving us directly, could have amaterial adverse effect on our operations.

 

Regulatory enforcement by the FTC againstdirect sales programs that it believes are pyramids or that are engaging, orhave engaged in, significant deceptive consumer practices have resulted incomplete failure of entities prior to an adverse ruling by a court in acontested hearing or trial. The FTC’s practice is to conduct an investigationinto a company’s practices and activities as well as the practices andactivities of its independent distributors. If the FTC believes that it hasdeveloped sufficient evidence, it will apply to a court for an *ex parte* temporary restraining order, anasset freeze, and the appointment of a receiver to run the company. The FTC hasbeen successful in receiving such extraordinary relief from the courts. Oncethe temporary restraining order is issued, the independent distributorscommonly abandon the selling company and move to other opportunities quickly.This can result in the failure of a direct selling company before a contestedjudicial proceeding occurs.

 

Federal and state securities laws may alsoapply to network marketing programs. If a network marketing company’scompensation plan is not properly designed or implemented, the plan itself canfall within the definition of an “investment contract,” which is a form of asecurity. Promoting such a program without registration is a violation of thesecurities laws and regulations. A violation could be prosecuted by theSecurities and Exchange Commission, state securities commissions, or a civilcause of action could be instituted by private parties, and may result insignificant damage to, or the closure of, a direct selling company.

 

The FTC and many states have “BusinessOpportunity” laws and regulations. Business opportunities that have a requiredinvestment threshold that exceeds a specified amount are subject toregistration and disclosure obligations. Some states also require the promoterof the program to secure a surety bond before offering the business opportunityin the state and impose a “cooling off” period before the promoter can sell thebusiness opportunity to a prospect. If a state or the FTC determines that ourprogram is subject to regulation under the business opportunity laws orregulations, we will be required to register and adhere to the applicableobligations imposed by the respective states to which the determinationapplies. This could impede the enrollment of new distributors and slow thesales of our products.

 

The application of theFederal Franchise Rule and state franchise laws have similar applicationas the business opportunity laws. If found to be a franchise, we would berequired to 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 States Postal Services (“USPS”)has determined that some network marketing programs constitute illegal postallotteries. If a participant in the program must give consideration toparticipate, and the selling entity remunerates the participants based on theelement of chance, the program constitutes a postal lottery. A

 

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determinationthat we are operating a postal lottery would have a material adverseconsequence on us as the USPS would discontinue all mail service and couldpursue criminal prosecution.

 

**Research and Development**

 

We incurred $6,498 on research anddevelopment for the year ended December 31, 2004. We spent no funds in2003 on research and development.. We are developingan appetite suppressant chocolate raspberry chew and a protein based liquidmeal. Neither product will require FDA or other regulatory approval. Weanticipate marketing efforts for the chocolate raspberry chew will begin in March 2005and marketing efforts for the liquid meal will begin in the third quarter of2005, and that estimated aggregate amounts to complete development and testingof these products are approximately $25,000.

 

**Patents, Trademarks and Proprietary Rights**

 

We have obtained registration on trademarksfor nine of our supplements: “Alpha Nac,” “AO Elite,” “Complex SPP,” “CPComplex,” “GC Elite,” “JSH,” “M32+,” “Pure Heat,” “Q-Zyme,” and “Visual Eyes.”We have also obtained trademarks for our energy drink “eForce” and our proteinshake product “VitaPro,” as well as for three products we have discontinued. Wehave abandoned or not pursued efforts to register marks identifying other itemsin our product line for various reasons including the inability of some namesto qualify for registration. We also received federal trademark registrationfor six names or expressions that we use or intend to use to distinguishourselves from others: “Cube Up,” “Get Cubed,” “Simple, Innovative, CompleteNutrition,” “The Power of Nutrition,” “VitaCube” and “V3S.” All trademarkregistrations are protected for a period of 10 years and then are renewablethereafter if still in use. We are currently pursuing a trademark for “PROformance”to be used in association with our direct sales marketing program.

 

In January 2004, we abandoned efforts toobtain a patent for the VitaCube® delivery system. We felt that to continuethis effort was not warranted in light of the costs involved and the limitedprotection we might have been able to achieve. We are not currently pursuingany patents and do not expect to do so for the foreseeable future.

 

**Employees**

 

We had 12 full-time employees as of March 2,,2005. We consider our employee relations to be good.

 

**ITEM2.** DESCRIPTION OFPROPERTY

 

**Facilities**

 

We lease an office, located at 480 SouthHolly Street, Denver, Colorado, from the father of Sanford D. Greenberg, ourfounder, for $3,090 per month, with the lease expiring in December 31,2005, with a one-year extension right with rent of $3,180 per month. Our annualoffice rent for 2004 and 2003 was $36,000 and $42,000, respectively.

 

On June 1, 2003, we contracted on amonth-to-month basis with Stonepath Logistics, Inc. (“Stonepath”) tomanage and store our products. Stonepath stores our products in a controlled-environmentwarehouse in Denver, Colorado, and accepts bulk shipments on our behalf. We payfor these services on a per transaction basis, and our costs have beenapproximately $1,000 per month.

 

**Insurance**

 

We maintain commercial general liability,including product liability coverage, and property insurance. Our policyprovides for a general liability limit of $1 million per occurrence, and $2million annual aggregate umbrella coverage. We also have a casualty insurancepolicy with a limit of $1.5 million on our main facility, including inventory,and $500,000 on our products not located at our main facility.

 

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**ITEM3.** LEGALPROCEEDINGS 

 

We are involved in two legal proceedingsincidental to the conduct of our business, involving breach of contractclaims.  Although the results oflitigation and claims cannot be predicted with certainty, we do not believethat any such proceeding will have a material adverse effect on our business orresults of operations.  Regardless of theoutcome, because of defense costs and diversion of management resources,litigation has a negative impact on us.

 

We are a defendant in a lawsuit filed inDenver, Colorado District Court in 2001, by Jordan Simons.  Mr. Simons claims that we hired him to createa website and breached our contract by terminating him after he had performedsome work for us but had not completed the project.  Mr. Simons claims that we agreed to pay him apercentage of gross sales and issue him stock warrants and restricted commonstock.  We have denied all materialallegations of the complaint, including that we entered into a contract withMr. Simons and that he provided any services that had any value to us.  We have denied that we owe any amount to Mr.Simons and have asserted a counterclaim for damages.  Mr. Simons’ lawsuit was dismissed withprejudice on January 15, 2004, for his failure to prosecute the case andparticipate in discovery; however, on November 22, 2004, the DenverDistrict Court reinstated Mr. Simons’ lawsuit. Although the case has been set for trial, no discovery has beenconducted and no other material action has been taken in this case.  We believe that Mr. Simons is not likely toprevail and, even if he prevails, the little work he did for us will not entitlehim to recover any material amounts from us.

 

We are also a defendant in a lawsuit filed inthe District Court for El Paso County, Colorado, in late 2004, by MassachusettsMutual Life Insurance Company, d/b/a Cheyenne Mountain Resort (“CMR”).  The action was not served upon us until February 2005.  CMR claims a breach of contract and damagesin the amount of $54,424.  We have notyet filed an answer, and no other activity, other than the filing of thecomplaint, has taken place.  We intend tovigorously defend against CMR’s claims. Even if CMR prevails, we do not believe the proceeding will have amaterial adverse effect on our business.

 

**ITEM 4.** SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

On October 15, 2004, by written consent, holders of 59% of ourcommon stock approved the following actions:

 

1.               A 1-for-5 reversestock split of our common stock, with no change in the number of authorizedshares of common stock.

 

2.               An amendment to our2003 Stock Incentive Plan to increase the number of shares of common stockeligible for awards under the Plan from 4,000,000 pre-split (800,000post-split) to 5,000,000 pre-split (1,000,000 post-split) shares.

 

The 1-for-5 reverse stock split approved bythe stockholders was effected on December 8,2004.

 

On November 29, 2004, by writtenconsent, the holders of 59% of our common stock approved the grant ofdiscretional authority to our Board of Directors to effect up to a 1-for-2reverse stock split of our common stock, with no change in the number ofauthorized shares of common stock.  TheBoard of Directors has not effected a reverse stocksplit under this discretionary authority.

 

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**PART II**

 

**ITEM5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

### **MarketInformation**

 

Our common stock commenced trading on the OTCBulletin Board on December 26, 2001. Our trading symbol is “VCUB.OB.”Since there is only a limited trading market for our stock, stockholders, mayfind it difficult to sell their shares. Until June 20, 2003, the commonstock trades reflected the business of Instanet prior to the share exchangewith V3S.

 

The following table sets forth high and lowbid prices for our common stock for the calendar quarters indicated as reportedby the OTC Bulletin Board for the fiscal quarters indicated. These prices havebeen stated after giving retroactive effect to a 1-for-5 reverse split of ourcommon stock consummated on December 8, 2004, and represent quotationsbetween dealers without adjustment for retail markup, markdown, or commissionand may not represent actual transactions.

 
| ** **                                       | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------------------|------------|----------|------------|---------|------------|
| First  Quarter 2005 (through March 2, 2005) |       | $        | 3.90       |    | $          | 3.50 |   |
| Fourth  Quarter 2004                             |       | $        | 3.75       |    | $          | 2.00 |   |
| Third  Quarter 2004                              |       | $        | 4.25       |    | $          | 1.55 |   |
| Second  Quarter 2004                             |       | $        | 7.55       |    | $          | 3.50 |   |
| First  Quarter 2004                              |       | $        | 7.55       |    | $          | 4.00 |   |
| Fourth  Quarter 2003                             |       | $        | 15.00      |    | $          | 7.00 |   |
| Third  Quarter 2003                              |       | $        | 16.25      |    | $          | 14.00 |   |
| Second  Quarter 2003                             |       | $        | 14.00      |    | $          | 0.75 |   |
| First  Quarter 2003                              |       | $        | 6.25       |    | $          | 0.75 |   |

 

### **Holders**

 

As of March 2, 2005, we hadapproximately 170 holders of record of our common stock. A significant numberof our shares were held in street name and, as such, we believe that the actualnumber of beneficial owners is significantly higher.

 

### **Dividends**

###  

We have never declared or paid any cashdividends on our common stock. For the foreseeable future, we intend to retainany earnings to finance the development and expansion of our business, and wedo not anticipate paying any cash dividends on our common stock. Any futuredetermination to pay dividends will be at the discretion of our board ofdirectors and will be dependent upon then existing conditions, including ourfinancial condition and results of operations, capital requirements,contractual restrictions, business prospects, and other factors that our boardof directors considers relevant.

 

**Recent Sales of Unregistered Securities**

 

In October 2004, we issued options topurchase 80,000 shares of our common stock under our 2003 Stock Incentive Planto David Litt, our Vice President of Sales and Marketing, pursuant to hisemployment agreement. The options are exercisable for five years, provided heis still employed by us, at an exercise price of $5.00 per share, and vest overfour years.  Options to purchase 30,000shares are contingent on meeting certain performance criteria.  We issued these securities in reliance on anexemption from registration under Section 4(2) of the Securities Act of1933, as amended, based on the limited number of recipients, access to materialinformation, and status as an accredited investor.

 

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**ITEM6. MANGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

*You shouldread the following discussion and analysis in conjunction with our financialstatements, including the notes thereto contained in this report. Thisdiscussion 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 a varietyof certain factors, including those set forth under “Risk Factors Associatedwith Our Business” and elsewhere in this report.*

 

**Overview**

 

We are in the business of developing,selling, marketing and distributing nutritional supplement products. We marketour products primarily through direct selling or network marketing, in whichindependent distributors sell our products. In addition, we sell our productsdirectly to professional and Olympic athletes and professional sports teams.

 

Our product lines consist of two powderedbeverages, 12 individual supplements packaged in our VitaCube®, and foursupplements sold separately. Our VitaCube® is an easy to use, compartmentalizedbox with instructions for which supplements to take and the proper times totake them.

 

During the third quarter of 2003, weinitiated a transition of our sales and marketing efforts from sales to retailoutlets and in-house telemarketing to direct selling through independentdistributors and we launched our direct sales program in the second quarter of2004. As of March 2, 2005 we had 1,086 independent distributors and 1,016customers (excluding professional athletes and sports teams) who had purchasedour products within the prior eight months.

 

We maintain an inventory of our products toinsure that we can timely fill our customer orders. We can have large increasesin inventory levels if we have multiple product reorders in the same period. Inaddition, our manufacturers typically may take up to 12 weeks to deliverproducts after we place an order, and they have minimum order requirements,which also adds to higher inventory levels. In connection with our change todirect selling in the third quarter of 2003, we discontinued several specialtysupplements and various combinations of supplements sold in our VitaCube®,taking a charge against inventory at September 30, 2003 of $177,896. Wealso established at that date a provision for future obsolete inventory of$31,782. Our inventory net of our allowance for obsolescence was $478,300 at December 31,2004 an increase from $286,037 at December 31, 2003, a historically lowlevel compared to inventory of $527,055 at December 31, 2002, and $419,309at December 31, 2001.

 

The increase of inventory was a result of areorder for five supplements used in all of our VitaCubes® and our initialmanufacturing order of eForce®. Even though our inventory level currently isrelatively high based on our sales for the year ended December 31, 2004,we believe our inventory is appropriately classified as a current asset basedon the ongoing implementation of our new marketing plan which is designed toincrease our distributor base and sales.

 

During the year ended December 31, 2004,we discontinued some sales and marketing tools, taking a charge againstoperations for obsolete inventory of $11,518. Our allowance for obsoleteinventory was increased to $43,300 from $31,782 for the year ended December 31,2004 and 2003, respectively.  We believeour reserve 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.

 

Our network marketing program is designed toprovide an incentive for independent distributors to build, maintain andmotivate a sales organization of customers and other independent distributorsto enhance earning potential. Our independent distributors are compensated withcommissions and bonuses on sales generated through their downline organization.Independent distributors advance in distributor levels as they develop theirsales organization and increase their sales volume, which increases theircompensation.

 

We recognize revenue when products areshipped to our customers. Revenue is reduced by product returns at the time wetake the product either back into inventory or dispose of it. In addition, weestimate a reserve total for future returns. Cost of our sales consists ofexpenses directly related to the production and distribution of the

 

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products and certain sales materials. Included in the sales andmarketing 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 increase asindependent distributors reach the higher levels of incentives in our directsales program. General and administrative expenses include salaries andbenefits, rent and building expenses, legal, accounting, telephone andprofessional fees.

 

Our revenue will depend on the number andproductivity of our independent distributors, who purchase products and salesmaterials from us for resale to their customers or for personal use. Because wewill distribute substantially all of our products through our independentdistributors, our failure to retain our existing distributors and recruitadditional distributors could have an adverse effect on our revenue.

 

Due to the recent start-up of our directsales program we believe we need to gain more operating experience in order todiscern and discuss key indicators of our performance. To date, however, webelieve that the number of our distributors is an important indicator tomonitor. In addition, we will monitor the sales generated per independentdistributor as well as the success of our independent distributors inrecruiting new independent distributors. At this time it is too early todetermine what indicators will be necessary for us to be profitable.

 

With respect to industry and market factorsthat may affect us directly, we believe that industry credibility in bothdirect selling and nutritional supplements will be critical elements in whetherwe can increase revenues and become profitable. Any adverse developments ineither of these two areas, to us or in our industry, could lead to a lower numberof our independent distributors and reduced sales and recruiting efforts byexisting distributors, as well as a loss or no increase in the number of sportscelebrity endorsers of our products. We do not know what industry growth wasfor 2004 or will be for 2005 nor do we have enough experience in the directsales channel to determine whether a slower industry growth rate, whichoccurred for several years leading up to 2003, will adversely affect us.

 

Our operating plan for 2005 is focused onincreasing the number of independent distributors, growing revenues, andgenerating gross profits. Due to the recent commencement of our direct sellingprogram through independent distributors, we cannot predict our revenue, grossprofit, net income or loss or use of cash and cash equivalents; however, weexpect net losses will continue for at least the next 12 months.

 

Our independent auditors have noted in theirreports on our financial statements as of December 31, 2004 and 2003 andfor the years then ended, that there is substantial doubt regarding our abilityto continue as a going concern. To date this qualification has not affected ourability to secure funding for our operations; however, going forward, in theevent this uncertainty is not resolved, we may experience more difficulty inraising adequate funds to operate our Company.

 

We have filed an Amendment No. 1 to ourpreviously filed Form 10-KSB for the year ended December 31, 2003 for arestatement of our financial statements for the fiscal year ended December 31,2003 and the related disclosures.  Acalculation error in computing the fair value of options granted using theBlack-Scholes option pricing model resulted in an $182,551 understatement of2003 stock-based compensation expense and the reported net loss.  In addition, we reclassified $211,746 fromgeneral and administrative expenses to cost of goods sold accounts causing arestatement of gross profits.

 

**Critical Accounting Polices and Estimates**

 

Discussion and analysis of our financialcondition and results of operations are based upon financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States. The preparation of these financial statements requires usto make estimates and judgments that affect the reported amounts of assets,liabilities, revenue and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to collection of receivables, inventory obsolescence, salesreturns and non-monetary transactions such as stock and stock options issuedfor services and beneficial conversion features of notes payable. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. Webelieve the following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our financial statements.

 

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***RevenueRecognition****.*  In accordance with Staff Accounting BulletinNo. 104 “Revenue Recognition”, revenue is recognized at the point of shipment,at which time title is passed. Net sales include sales of products, sales ofmarketing tools to independent distributors and freight and handling charges.With the exception of approved professional sports teams, we receive the netsales price from all of our orders in the form of cash or credit card paymentprior to shipment. Professional sports teams with approved credit have beenextended payment terms of net 30 days.

 

***Allowancesfor Product Returns****.*  Allowances forproduct returns are recorded at the time product is shipped. These accruals arebased upon the historical return rate since the inception of our network marketingprogram in the third quarter of 2003, and the specific historical returnpatterns by product. Our return rate since the third quarter of 2003 has variedfrom 1.7% to 3.8% of our monthly net sales.

 

We offer a 60-day, 100% money backunconditional guarantee to all customers and independent distributors who havenever before purchased products from us. As of December 31, 2004, ordersshipped that are subject to our 60-day money back guarantee were approximately$40,600. All other product may be returned to us by any customer or independentdistributor if it is unopened and undamaged for a 100% sales price refund, lessa 10% restocking fee, provided the product is returned within 12 months ofpurchase and is being sold by us at the time of return. We are not able toestimate the amount of revenue we have recognized that is held by these buyersof product and which is returnable, because it is not possible to determine theamount of product that is unopened and undamaged. Returned product damagedduring shipment is replaced wholly at our cost, which historically has beennegligible.

 

We monitor our returnestimate on an ongoing basis and may revise allowances to reflect ourexperience. We established our allowance for product returns of $2,857 on September 30,2003. We have no relevant historical data on product returns before September 2003,as we did not market in the direct sales channel until August 1,2003.  Our reserve for product returns atthe year ended December 31, 2004 and 2003 was $4,110 and $1,660,respectively. To date, product expiration dates have not played any role inproduct returns, and we do not expect they will in the future because it isunlikely that we will ship product with an expiration date earlier than thelatest allowable product return date.

 

***InventoryValuation****.*  Inventories are stated at the lower of costor market on a first-in first-out basis. A reserve for inventory obsolescenceis maintained and is based upon assumptions about current and future productdemand, inventory whose shelf life has expired and market conditions. A changein any of these variables may require additional reserves to be taken. Wereserved $43,300 for obsolete inventory as of December 31, 2004 and$31,782 as of December 31, 2003. Prior to September 30, 2003, we didnot provide for a reserve for obsolete inventory due to lack of historicalinformation on which to base a reserve.

 

***StockBased Compensation. ***Weaccount for our stock-based compensation using Accounting Principles Board’sOpinion No. 25 (“APB No. 25”).  Under APBNo. 25, compensation expense is recognized for stock options with an exerciseprice that is less than the market price on the grant date of the option andfor options granted to non-employees. For stock options with exercise prices at or above the market value ofthe stock on grant, we have adopted the disclosure-only provisions of Statementof Financial Accounting Standards No. 123 “Accounting for Stock-BasedCompensation” (“SFAS 123”).  We haveadopted the disclosure-only provisions of SFAS 123 for the stock optionsgranted to the employees and directors of ours. Accordingly, no compensation cost has been recognized for theseoptions.  Many equity instrumenttransactions are valued based on pricing models such as Black-Scholes, whichrequire judgments by us.  Values for suchtransactions can very widely and are often material to the financialstatements.

 

### **Results ofOperations**

###  

**For year ended December 31, 2004,compared the year ended December 31, 2003.**

 

*The discussion belowfirst presents the results of 2004 year followed by the results of 2003 year.*

 

***NetSales****. *Net sales were $803,640 comparedto $1,211,402, a decrease of 34%. The decrease in sales was the result ofrefocusing of sales and marketing efforts from in-house sales to direct sellingthrough independent

 

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distributors. Independent distributors purchase our products for resaleto customers and for their own personal consumption.

 

The percentage that each product categoryrepresented of our net sales is as follows:

 
| ** **                              | ** ** | **Year Ended****December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| **Product Category**                    | ** ** | **% of Sales**                      | ** ** | **% of Sales** | ** ** |
| eForce®  sports drink              |       | 10                                  | %          | 1 | % |
| VitaPro®  nutrition shake          |       | 17                                  | %          | 33 | % |
| Vitamins and  minerals                  |       | 71                                  | %          | 64 | % |
| Other -  educational materials, apparel |       | 2                                   | %          | 2 | % |

 

***GrossProfit****. *Gross profit decreased to $522,299from $585,426, a decrease of 11%. Gross profit as a percentage of revenue(gross margin) increased to 65% compared to 48%, a result of obtaining higherprofit margin sales through independent distributors and the elimination ofsales to low margin retail outlets. Also during the year ended December 31,2003, we took a charge against inventory of $177,896 for items that wedetermined would not sell well through the independent distributor marketingplan that contributed to the lower gross margin for 2003. The overall decreasein gross profit also reflects the decrease in net revenue.

 

***Salesand Marketing Expenses****. *Sales and marketingexpenses decreased to $1,098,550 from $1,273,497 a decrease of 14%. Sales andmarketing activities decreased due to our transition to sales through ourindependent distributors. Costs previously incurred with maintaining anin-house sales staff have been eliminated. The independent distributors now incurmost of the costs of print and radio advertising. Therefore, we expect that theprimary expense items will be the direct compensation to our independentdistributors in the form of commissions, promotions and sales events and thecontinued commitments to our sports celebrity endorsers.

 

***Generaland Administrative Expenses****. *Generaland administrative expenses were $1,569,730 compared to $1,273,830 or anincrease of 23%. In 2004, we incurred higher consulting and compensationexpenses. Executive compensation increased as a result of an employmentagreement with Sanford D. Greenberg effective April 1, 2004. Prior to that time, Mr. Greenberg drew anominal salary. In addition, on October 1, 2004 we hired and entered intoan employment agreement with our Vice President of Sales and Marketing, priorto that we utilized consultants.

 

***Researchand Development Expenses***.  Research and development expenses wererelatively minor increasing to $6,498 from $0. We completed the introduction ofour reformulated eForce® sports energy drink during the third quarter of 2004.We are developing an appetite suppressant chocolate raspberry chew and aprotein based liquid meal. We anticipate marketing efforts for the chocolateraspberry chew to begin in March 2005 and marketing efforts for the liquidmeal to begin in the third quarter of 2005. The estimated aggregate amounts tocomplete development and testing of these products are approximately $25,000.

 

***InterestExpense***. Interest expense was $300,872 compared to $225,075 an increase of34%.  This increase was due to $205,000of beneficial conversion feature interest on bridge loans in 2004 compared to$50,000 for 2003.

 

***NetLoss****.*Ournet loss was $2,513,999 or $(0.44) per share compared to $2,267,533 or $(0.77)per share, an increase of 11% . The increase in net loss is a result of lowerrevenue and increased general and administrative costs.

 

### **Liquidity andCapital Resources**

###  

To date, our operating funds have beenprovided primarily by loans from our founder, our Chief Executive Officer andby various stockholders ($3,624,209), and from sales of our common stock($3,537,905), through December 31, 2004, and to a lesser degree, cash flowprovided by sales of our products.

 

On January 31, 2004, we closed a privateoffering of our common stock that was begun in 2003 with the total issuance of207,999 shares for gross proceeds of $1,039,980. On April 15, 2004, weclosed a second offering of our common stock issuing 1,665,290 shares for grossproceeds of $2,497,925. In conjunction with the second offering, both ourfounder  and one of our former directorsconverted outstanding loans plus accrued interest into 1,391,087 shares of ourcommon stock at March 31, 2004, further reducing our debt. In April 2004,we repaid all of

 

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our then existing debt of $220,000. As of December 31, 2004, wehad no outstanding interest bearing short-term or long-term debt.

 

We used $2,061,929 of cash for operations inthe year ended December 31, 2004, and we used $1,073,761 of cash in theyear ended December 31, 2003. The use of cash in our operations resultsfrom incurring and accruing expenses to suppliers necessary to generatebusiness and service our customers at a time when revenues did not keep pacewith expenses. As of December 31, 2004, we had $114,794 in cash and cashequivalents available to fund future operations. Working capital increased froma deficit of $1,056,203 at December 31, 2003, to positive working capitalof $94,369 at December 31, 2004. This increase in working capital was theresult of the completion of a private placements of our common stock and debtconversions as described in “Notes to Consolidated Financial Statements—Note 2Shareholders’ Equity.” From the initial purchase of our technology system in2001 through December 31, 2004, we had spent $180,151 on technology systemupgrades.

 

We do not havesufficient capital to meet our anticipated working capital needs through fiscalyear 2005. We have filed a registration statement with the Securities andExchange Commission with respect to a proposed public offering of $8 to $10million of our equity securities. If the offering is completed, we expect thenet proceeds from the offering together with our operating revenues, should besufficient to fund our operations for at least the next 12 to 18 months afterthe completion of the offering. However, there can be no assurance that ourproposed public offering will be successful. No offer of our securities shouldbe inferred and no such offer is intended to be implied by us as result of thisdisclosure of our capital plan.

 

In order forus to conserve cash, certain of our officers have deferred approximately$100,000 of salary and related payroll tax for the first four payrolls of 2005.We cannot assume that these individuals will be willing or able to continuedeferment in the future. These deferred salaries and related payroll tax wouldbe repaid from proceeds of the offering, if completed.

 

On March 1,2005, we obtained a $25,000 short term loan from Christopher Marlett, asignificant shareholder.  In addition, onMarch 2, 2005, we obtained short term loans from our Chief Executive Officerand an unrelated party, each to loan us up to $200,000 on an as neededbasis.  The loans provide for interest at10% per annum and are due and payable on the earlier of May 30, 2005, orclosing of the proposed public offering.

 

Our independent auditors have noted in theirreports on our financial statements as of December 31, 2004 and 2003 andfor the years then ended, that there is substantial doubt regarding our abilityto continue as a going concern. To date this qualification has not affected ourability to secure funding for our operations; however, going forward, in theevent this uncertainty is not resolved, we may experience more difficulty inraising adequate funds to operate our Company.

 

In the event that we successfully completeour planned public offering of common stock and depending up the profitabilityof sales levels achieved, we believe that our cash resources will be sufficientto fund our operations for the next 12 to 18 months. If our business operationsdo not 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.

 

***ContractualObligations****.*  We lease office space from the father of ourfounder with the lease expiring at December 31, 2005. We also have variousoperating leases for automobiles, computer and telephone equipment. At December 31,2004, our commitments under these obligations were as follows:

 
| **Contractual Obligations** | ** ** | **Less than  1 year** | ** ** | **2 – 3 years** | ** ** | **4 – 5 years** | ** ** |
|-----------------------------|------------|-----------------------|------------|----------------------|------------|----------------------|------------|
| Office lease                |       | $                     | 37,080     |                 | $          | —               |       | $ | — |   |
| Operating  leases           |       | 97,421                |       | 59,617               |       | 9,614                |       |
| Total                       |       | $                     | 134,501    |                 | $          | 59,617               |       | $ | 9,614 |   |

 

The Company has commitments for contractservices with an unrelated party totaling approximately $280,000.  The agreement provides for various paymentsto be made over a two-year period and contains provisions to terminate the paymentof obligations with a contract buyout of $75,000.

 

The Company maintains employment agreementswith certain key management.  Theagreements provide for minimum base salaries, eligibility for stock options andperformance bonuses and severance payments.

 

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***CustomerConcentrations****.*  We had no single customer that accounted forany substantial portion of our revenues.

 

***Off-BalanceSheet Items****.*  We had no off-balance sheet items as of December 31,2004.

 

**ITEM7. FINANCIAL STATEMENTS**

 

The financial statements are included in thisannual report on Form 10-KSB at page F-1.

 

### **Index toFinancial Statements**

 
| Reports of Independent Registered Public  Accounting Firms                                                                     |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets as of December 31, 2004 and 2003                                                              |   |
| Consolidated Statements of Operations for  the years ended December 31, 2004 and 2003                                     |   |
| Consolidated Statements of Changes in Shareholders’ Equity (Deficit)  for the years ended December 31, 2004 and 2003 |   |
| Consolidated Statements of Cash Flows for  the Years Ending December 31, 2004 and 2003                                    |   |
| Notes to Consolidated Financial Statements                                                                                     |   |

 

**ITEM8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

 

On August 12, 2003, Ehrhardt KeefeSteiner & Hottman PC, was replaced as our independent accountant effectiveupon completion of its review of our financial statements for the year ended December 31,2002, and Spicer Jeffries LLP (“Spicer”), was appointed as our new independentaccountant. The board of directors approved the appointment on August 13,2003. We did not have any disagreement with Ehrhardt Keefe Steiner &Hottman, PC, on any accounting principles or practices, financial statementdisclosure or auditing scope of procedure. Neither the Company nor anyone onour behalf consulted Spicer on any matter relating to the application ofaccounting principles to a specified completed or contemplated transaction orthe type of audit opinion that might be rendered on our financial statements.

 

On March 19, 2004, Spicer resigned asour principal independent accountants and Staley Okada & Partners (“Staley”),was appointed as the principal independent accountants to replace Spicer forthe year ended December 31, 2003. Spicer resigned due to its inability toobtain professional liability insurance coverage for public reportingcompanies. Our Audit Committee recommended the nomination of Staley as our newindependent accountants to the board of directors and the appointment wasapproved on March 24, 2004. We did not have any disagreement with Spiceron any accounting principles or practices, financial statement disclosure orauditing scope of procedure. Neither the Company nor anyone on our behalfconsulted Staley on any matter relating to the application of accountingprinciples to a specified completed or contemplated transaction or the type ofaudit opinion that might be rendered on our financial statements.

 

On October 6, 2004, Staley Okada &Partners resigned as our principal independent accountant and on October 8,2004, we engaged Gordon, Hughes & Banks, LLP (“GHB”) as our principalindependent accountant to audit our financial statements. Our Audit Committeerecommended and approved the change in accountants.

 

The report on the financial statementsprepared by Staley for the fiscal year ended December 31, 2003, did notcontain an adverse opinion or a disclaimer of opinion, nor was it qualified ormodified as to audit scope or accounting principles. However, the reportincluded a going concern emphasis paragraph. We did not have any disagreementswith Staley on any accounting principles or practices, financial statementdisclosure, or auditing scope or procedure. Neither us nor anyone on our behalfconsulted GHB on any matter relating to the application of accountingprinciples to a specified completed or contemplated transaction or the type ofaudit opinion that might be rendered on our financial statements.

 

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**ITEM8A. CONTROLS AND PROCEDURES**

 

### **Evaluation ofDisclosure Controls and Procedures**

###  

The Company’s Chief Executive Officer andChief Financial Officer have concluded that the Company’s controls and otherprocedures designed to ensure that information required to be disclosed by theCompany in the reports that it files or submits under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the Commission’s rules and forms are effective,based upon their evaluation of these controls and procedures as of a date within90 days of the filing date of this Form 10-KSB.

 

### **Changes inInternal Controls**

###  

There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthose controls subsequent to the date of this evaluation, including anycorrective actions with regard to significant deficiencies and weaknesses.

 

**ITEM 8B. OTHER INFORMATION**

 

None

 

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**PART III**

 

**ITEM9. DIRECTORS AND EXECUTIVE OFFICERS**

 

### **Directors andExecutive Officers**

###  

The following sets forth certain informationregarding each of our directors and executive officers:

 
| **Name**                 | ** ** | **Age** | ** ** | **Position**                                      | ** ** | **Committee**      |
|--------------------------|------------|---------|------------|---------------------------------------------------|------------|--------------------|
| Earnest Mathis, Jr.      |       | 45      |       | Chairman , Chief Executive Officer and  President |       | -                  |
| Sanford D Greenberg      |       | 46      |       | Founder                                           |       | -                  |
| Timothy Transtrum        |       | 41      |       | Chief Operating Officer                           |       | -                  |
| Mary Pat O’Halloran |       | 47      |       | Chief Financial Officer                           |       | -                  |
| David Litt               |       | 39      |       | Vice President Sales and Marketing                |       | -                  |
| Doug Ridley              |       | 48      |       | Director                                          |       | Compensation       |
| John B McCandless        |       | 56      |       | Director                                          |       | Audit/Compensation |
| Anthony DiGiandomenico   |       | 38      |       | Director                                          |       | Audit/Compensation |

 

Directors hold office until the next annualmeeting of stockholders following their election unless they earlier resign orare removed as provided in the bylaws. Our board of directors has determinedthat our directors, other than Mr. Mathis, are “independent directors” underthe American Stock Exchange listing standards. Our officers serve at thediscretion of our board of directors.

 

**Earnest Mathis, Jr.,Chairman, Chief Executive Officer and President.**  Mr. Mathis was appointed as the Chairman,Chief Executive Officer and President on March 2, 2005.  Prior to the merger with VitaCube Systems,Inc.  Mr. Mathis served as Instanet’sChief Executive Officer and a director from February 2001 to June 2003.  Mr. Mathis is the current President and adirector of Inverness Investments, Inc., a privately-held financial consultingcompany in Denver, Colorado. He has served in these positions since January 1987.  Mr. Mathis is currently serving as Manager ofAmerigolf, LLC, a private golf course development company. He has served inthis position since February 1998. Mr. Mathis is a Founder and currentManager of Waveland Ventures, LLC, a private capital management company,managing governmental economic redevelopment programs. He has served in thisposition since March, 2002.  Mr. Mathisis a Manager with Waveland Colorado Ventures, LLC, a Colorado certified capitalcompany that invests and loans money to Colorado-based businesses. He hasserved in this position since March 2002. Mr. Mathis is currently Chief Executive Officer, Chief Financial Officerand a director for Petramerica, a public development stage company. He hasserved in this position since April 2002. Mr. Mathis was managing director of Integrated Medical Services, Inc., aprivate medical waste transport company, from January 1997 to December 2004.  From February 2001 through December 2002,Mr. Mathis served as President, Chief Financial Officer and a director of CareConcepts I, Inc., a public development stage company, that acquired IbidAmerica, Inc in December 2002.  From January 1999 through January 2002, Mr. Mathis served asChief Executive Officer, Chief Financial Officer and as the sole director ofMilestone Capital, Inc., a public company that acquired Elite Agents, Inc. in January 2002.  From April 1987 to June 2000, Mr.Mathis was President and a director of Haleakala Enterprises, Inc., a publicdevelopment stage company that merged with One Dentist.Com in June 2000.

 

**Sanford D. Greenberg, Founder. **Mr. Greenberg is oneof our founders and served as our Chairman and Chief Executive Officer from ourinception in October 2000 through March 2, 2005.  He also served as our President from July 2002until March 2, 2005.  On March 2,2005, Mr. Greenberg resigned his positions of director, Chief Executive Officerand President to devote his full-time business efforts to train, motivate andrecruit our independent distributors. From April 2002 to October 2004, Mr. Greenberg was also apart-time stockbroker for GunnAllen Financial, Inc.  From October 2000 to April 2002 hewas a part-time stockbroker for Wachovia Securities and its predecessors.  From 1999 to October 2000, Mr. Greenbergwas the Executive Vice President for GSG Securities, Inc., a broker-dealer.

 

From 1989 through 1998, Mr. Greenberg was theChief Executive Officer of Chatfield Dean, Inc., a broker-dealer.  In late 1993, without admitting or denyingwrongdoing, Mr. Greenberg agreed to settle allegations made by the SEC and theNational Association of Securities Dealers, Inc. (“NASD”) that as ChiefExecutive Officer of Chatfield Dean he failed to properly supervise itsassociates.  In connection with thesettlements, Mr. Greenberg

 

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agreed to the SEC entering an order which provided for his six-monthsuspension from association with a broker-dealer, investment adviser ormunicipal securities dealer, and he entered into a letter of acceptance, waiverand consent  with the NASD agreeing to afour-month suspension from association with a broker-dealer, which suspensionsoccurred concurrently from February 1994 through July 1994.  Thereafter, Mr. Greenberg rejoined ChatfieldDean as its Chief Executive Officer.  Heserved in that capacity with Chatfield Dean until it was sold to GSGSecurities, Inc. at the end of 1998.

 

**Timothy Transtrum,Chief Operating Officer.**  Mr. Transtrum joined us on February 2,2004, as Chief Operating Officer. Prior to that, he was President and ChiefOperating Office for NutriHealth USA, a division of the global nutritioncompany Natural Health Holdings LTD, from May 2002 to February 2004. From February 1999to May 2000, he served as Vice President of Operations and InternationalDevelopment for Oasis Wellness Network, a network marketing company. From February 1998to February 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 hebecame Director of International Operations.

 

**Mary Pat O’Halloran,Chief Financial Officer.**  Ms. O’Halloran has served as our ChiefFinancial Officer since January 1, 2002. Ms. O’Halloran served as aconsultant to us from October 2001 until January 1, 2002. From July 1998to October 2001, Ms. O’Halloran was the Information Systems Manager forEAS, Inc., a nutritional supplement company. From September 1997 to July 1998,Ms. O’Halloran performed financial consulting through her consulting companyMpatt System and from November 1989 to September 1997 she was theChief Financial Officer for Page Digital, Inc., a software company thatdevelops and markets an enterprise software package for the catalog industry.

 

**David Litt, VicePresident of Sales and Marketing.**  Mr. Litt joined us as our Vice President ofSales and Marketing on October 1, 2004. Mr. Litt was an independentconsultant for us from February 2004 until October 1, 2004, throughhis consulting business that he conducted from January 2003 until October 2004.From October 1998 to January 2003, Mr. Litt was the Chief Sales andMarketing Officer for Oasis Wellness Network, a network marketing company andfrom June 1996 to October 1998 he was the Vice President of Marketingfor Mercantile Stores, Inc., a retail department store.

 

**Doug Ridley,Director.**  Mr.Ridley was appointed as a director on January 1, 2004, and serves on ourCompensation Committee. Mr. Ridley was an independent consultant to us from April 2003until December 31, 2003. Mr. Ridley is currently President of SimplyBecause, a gift products network marketing company and since 1997, has beenPresident of Chad Management Co., LLC, a nutritional products network marketingcompany.

 

**John B. McCandless,Director.**  Mr.McCandless was appointed as a director on February 19, 2004, and serves onour Audit and Compensation Committees. Mr. McCandless is currently the VicePresident of Technical Services at Weider Nutrition International, Inc. Mr.McCandless provided operations and product consulting services to nutrition anddirect selling companies as a consultant from November 2002 to October 2003,and from October 1995 to November 2002, he served as Senior VicePresident and Chief Operating Officer for USANA Health Sciences, a health sciencecompany.

 

**AnthonyDiGiandomenico, Director.**  Mr. DiGiandomenico was appointed as adirector on May 25, 2004, and he serves on our Audit and CompensationCommittees. Mr. DiGiandomenico co-founded MDB Capital Group LLC, a NASD memberbroker-dealer, in 1997 and serves as a managing director of the firm. From 1990to 1995, he served as President and Chief Executive Officer of the DigianCompany, a real estate development company. He currently serves on the board ofOrion Acquisition Corp. II, a corporation which files reports pursuant to theSecurities Exchange Act of 1934, which was formed in 1995 to acquire anoperating business by purchase, merger or otherwise.

 

There are no family relationships between oramong our executive officers and directors.

 

Mr. McCandless works for a competitor of oursin the nutritional supplement market, Weider Nutrition International, Inc. Webelieve that his services as a board member are valuable to us. In the event aconflict arises between Mr. McCandless and us in connection with his boardduties, he will recuse himself from board deliberations and decisions relatingto the conflict.

 

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**Director Compensation**

 

Our directors who are also employees do notreceive any additional compensation for their services as directors. During theyear ended December 31, 2003, non-employee directors received no fees.During the fiscal year ended December 31, 2004, non-employee directors didnot receive fees for service as directors but were reimbursed for reasonabletravel expenses in attending meetings. We do not expect to pay director fees toour non-employee directors during 2005; however, directors will be reimbursedfor reasonable travel expenses in attending meetings.

 

In connection with their appointment to theboard of directors, Doug Ridley, John B. McCandless and Anthony DiGiandomenicowere each granted stock options to purchase 10,000 shares of our common stockat an exercise price of $5.00 per share. Each option was exercisable for 2,500shares on the date the option was granted. The options held by Mr. Ridley andMr. McCandless vested with respect to an additional 2,500 shares on December 1,2004 and will vest with respect to the remaining 5,000 shares on December 1,2005. The options held by Mr. DiGiandomenico vest with respect to an additional2,500 shares on May 20, 2005 and with respect to the remaining 5,000 shares onMay 20, 2006.

 

**Board Committees**

 

Our board of directors has appointed an AuditCommittee and a Compensation Committee. The composition of the Audit Committeewill comply with the requirements of the Sarbanes-Oxley Act of 2002.

 

### **AuditCommittee**

###  

Mr. McCandless and Mr. DiGiandomenico serveon the Audit Committee. Our Audit Committee’s main function is to oversee our accountingand financial reporting processes, internal systems of control, independentauditor relationships and the audits of our financial statements. The AuditCommittee’s responsibilities include:

 

•                  selecting,hiring, and compensating our independent auditors;

 

•                  evaluatingthe qualifications, independence and performance of our independent auditors;

 

•                  overseeingand monitoring the integrity of our financial statements and our compliancewith legal and regulatory requirements as they relate to financial statementsor accounting matters;

 

•                  approvingthe audit and non-audit services to be performed by our independent auditor;

 

•                  reviewingwith the independent auditor the design, implementation, adequacy andeffectiveness of our internal controls and our critical accounting policies;and

 

•                  preparingthe report that the Securities and Exchange Commission requires in our annualproxy statement.

 

The board of directors has adopted an AuditCommittee Charter.  The board ofdirectors has determined that it does not have an audit committee financialexpert serving on its Audit Committee. The board of directors does not believe any of its current membersqualify as audit committee financial expert.

 

**Compensation Committee**

 

Messrs. Ridley, McCandless and DiGiandomenicoserve on the Compensation Committee. Our Compensation Committee’s mainfunctions are assisting our board of directors in discharging itsresponsibilities relating to the compensation of outside directors, the ChiefExecutive Officer and other executive officers, as well as administering our2003 Stock Incentive Plan. The Compensation Committee’s responsibilitiesinclude the following:

 

•                  reviewingand recommending to our board of directors the compensation of our ChiefExecutive Officer and other executive officers, and the outside directors;

 

•                  conductinga performance review of our Chief Executive Officer;

 

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•                  reviewingour compensation policies;

 

•                  administeringand overseeing our 2003 Stock Incentive Plan; and

 

•                  ifrequired, preparing the report of the Compensation Committee for inclusion inour annual proxy statement.

 

The board of directors has adopted aCompensation Committee Charter.

 

The Compensation Committee’s policy is tooffer our executive officers competitive compensation packages that will permitus to attract and retain highly qualified individuals and to motivate andreward these individuals in an appropriate fashion aligned with the long-terminterests of our Company and our stockholders.

 

**Compensation Committee and InsiderParticipation**

 

Our Compensation Committee is responsible forestablishing the compensation to be paid to our executive officers. None of ourexecutive officers serve as a member of the board of directors or compensationcommittee of any entity that has one or more of its executive officers servingas a member of our board of directors or Compensation Committee.

 

### **Section 16(a)Beneficial Ownership Reporting Compliance**

###  

Section 16(a) of the Securities ExchangeAct of 1934, as amended requires our executive officers and directors andpersons who own more than 10% of a registered class of our equity securities tofile reports of ownership and changes in ownership with the Securities andExchange Commission.  Executive officers,directors and greater than 10% stockholders are required by Commissionregulation to furnish us with copies of all Section 16(a) forms theyfile.  Except for David Litt, who waslate filing his initial report of Form 3, we believe all of our executiveofficers and directors complied with all applicable filing requirements duringthe fiscal year ended December 31, 2004.

 

### **Code of Ethics**

###  

We have adopted a Code of Ethics that appliesto all of our directors, officers and employees. We publicize the Code ofEthics through posting the policy on our website, http://www.vitacube.com. Wewill disclose on our website any waivers of, or amendments to, our Code ofEthics.

 

**ITEM10. EXECUTIVE COMPENSATION**

 

The following table sets forth informationwith respect to compensation earned by Sanford D. Greenberg, our ChiefExecutive Officer, in 2003 and 2004. No other executive officer received cashcompensation from us of $100,000 or more in 2003 or 2004.

 

**Summary Compensation Table**

 
| ** **                       | ** ** | ** **              | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** **                     | ** ** | **Long Term  Compensation** | ** **                  | ** ** | ** ** |
|----------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|------------|------------|--------------------------------|------------|-----------------------------|-----------------------------|------------|------------|
| ** **                       | ** ** | **Annual Compensation** | ** ** | **Securities  Underlying  Securities  Options** | ** ** | ** ** | ** ** |
| **Name and Principal  Position** | ** ** | **Years**               | ** ** | **Salary**                                      | ** ** | **Bonus**  | ** ** | **Other Annual  Compensation** | ** ** | ** **                  | **All Other  Compensation** | ** ** |
| ** **                       | ** ** | ** **              | ** ** | **($)**                                         | ** ** | **($)**    | ** ** | **($)**                        | ** ** | **(#)**                     | ** **                  | **($)**    | ** ** |
| Sanford D.  Greenberg,           |       | 2004                    |       | 114,905                                         |       | -0-        |       | 17,631                         | (1)        | 800,000                     |                        | -0-        |       |
| Chief  Executive Officer         |       | 2003                    |       | 4,445                                           |       | -0-        |       | 4,127                          | (1)        | -0-                         |                        | -0-        |       |

 

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(1)                                  Includesauto allowance.

 

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### **EmploymentContracts**

 

Sanford D. Greenberg entered into anemployment agreement with us, effective as of April 1, 2004. Mr. Greenberg’semployment agreement provided for his employment as our Chief Executive Officerand President.  On March 2, 2005, inconnection with Mr. Greenberg’s resignation as Chairman, Chief Executive Officer,and President, Mr. Greenberg’s employment agreement was amended and restated toprovide that his primary duties involve training, motivating, and recruitingindependent distributors. Mr. Greenberg will receive a salary of $150,000 peryear and may receive bonuses in such amounts as determined by our board ofdirectors. Mr. Greenberg will also be eligible to participate in bonuses on thesame basis as our executives under any executive bonus plan adopted by us.Either party may terminate the agreement upon 30 days prior written notice.Additionally, Mr. Greenberg may be terminated for “just cause” as defined inthe employment agreement upon one business day’s prior written notice. Mr.Greenberg may terminate his employment for “good reason” as defined in employmentagreement.  If we terminate Mr. Greenbergwithout just cause or he terminates his employment for good reason, he isentitled to three years salary payable over 36 months. Mr. Greenberg’semployment agreement also includes a non-competition provision for a period oftwo years after his termination of employment or, if later, one year afterfinal payment of any pay-out provision upon termination.

 

In connection with his employment agreement,dated April 1, 2004, Mr. Greenberg also received stock options to purchase800,000 shares of our common stock at $3.00 per share. The options vest overfour years provided that Mr. Greenberg is still employed by us and areexercisable for five years after vesting. If Mr. Greenberg is terminatedwithout just cause, all his unvested options vest and are exercisable for aperiod of five years from the date of termination. If Mr. Greenberg isterminated for just cause, all unexercised options terminate as of his date oftermination. On March 2, 2005, in connection with Mr. Mathis’ employmentas Chief Executive Office, Mr. Greenberg forfeited options to purchase 275,000shares.  In addition, Mr. Greenberg hasagreed to forfeit options to purchase 50,000 shares if the planned publicoffering is completed.

 

Earnest Mathis entered into an employment agreement with us, effective March 2, 2005, providing for his employment as our Chief Executive Officer and President.  The employment agreement is for a two-year term and provides that he will devote approximately 80% of his time and energies to the business of the Company.  Mr. Mathis will receive a salary of $150,000 per year and may receive bonuses in such amounts as determined by our Compensation Committee.  Mr. Mathis will also be eligible to participate in bonuses on the same basis as other executives under any executive bonus plan adopted by us.  Either party may terminate the agreement upon 30 days prior written notice.  Additionally, Mr. Mathis may be terminated immediately for “just cause” as defined in the employment agreement.  Mr. Mathis may also terminate his employment for “good reason” as defined in the employment agreement.  If we terminate Mr. Mathis without just cause or he terminates his employment for good reason, he is entitled to one year’s salary payable over 12 months.  Mr. Mathis’ employment agreement also includes a non-competition provision for a period of one year after his termination of employment.

 

Pursuant to his employment agreement,Mr. Mathis also received stock options to purchase 275,000 shares of ourcommon stock at $3.00 per share. One half of the options were vested as of thedate of the grant and the balance vest on the one-year anniversary of the grantprovided that Mr. Mathis is still employed by us.  The options are exercisable for five yearsafter vesting. If Mr. Mathis is terminated without just cause or heterminates his employment for good reason, all his unvested options vest andare 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.

 

Timothy Transtrum entered into an employmentagreement with us, effective as of February 2, 2004. Mr. Transtrum’semployment agreement provides for his employment as our Chief OperatingOfficer. Mr. Transtrum will receive a salary of $110,000 per year and mayreceive bonuses in such amount as determined by the Compensation Committee. Mr.Transtrum will also be eligible to participate in bonuses on the same basis asother executives under any executive bonus plan adopted by us. Either party mayterminate the agreement upon 14 days prior written notice. Additionally, Mr.Transtrum may be terminated for “just cause” as defined in the employmentagreement upon one business day’s prior written notice. If Mr. Transtrum isterminated by us without just cause, he is entitled to a minimum six monthssalary payable over six equal monthly installments, and 50% of his unvestedstock options would vest immediately. In the event we experience a change incontrol, Mr. Transtrum, at his option, may terminate his employment and requireus to pay him two months of his then existing salary for each full year ofemployment with us, up to a maximum of six months salary.

 

Pursuant to his employment agreement, Mr.Transtrum also received stock options to purchase 50,000 shares of our commonstock at $5.00 per share. The options vest over four years provided that Mr.Transtrum is still employed by us and are exercisable for five years. If Mr.Transtrum is terminated for just cause, all unexercised options terminate as ofhis date of termination.

 

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David Litt entered into an employmentagreement with us, effective as of October 1, 2004. Mr. Litt’s employmentagreement provides for his employment as our Vice President of Sales andMarketing. Mr. Litt will receive a base salary of $150,000 per year plus abonus of up to a maximum of $150,000 per year based on the performance of theCompany. He will be eligible for bonuses based on certain performance criteriaas set forth in his employment agreement and may receive additional bonuses insuch amount as determined by our board. Either party may terminate theagreement upon 15 days prior written notice. Additionally, Mr. Litt may beterminated for “just cause,” as defined in the employment agreement, upon onebusiness day’s prior written notice. If Mr. Litt is terminated by us withoutjust cause he is entitled to two months’ base salary, any performance salaryearned and any accrued but unpaid bonus. Mr. Litt will not be entitled to anyseverance benefits if, within six months of his termination of employment, heis employed by or becomes an advisor to one of our competitors.

 

Pursuant to his employment agreement, Mr. Littalso received stock options to purchase 80,000 shares of our common stock at$5.00 per share, 30,000 of which are contingent based on meeting certainperformance criteria as set forth in his employment agreement. The 50,000non-contingent options vest over four years, with the first 10,000 sharesvesting on October 1, 2004. Once the performance criteria are met, thecontingent options will vest on the same schedule as the non-contingentoptions. The non-contingent options and the contingent options, if earned, areexercisable for five years provided that Mr. Litt is still employed by us. IfMr. Litt is terminated without just cause, he is entitled to any earned but notissued stock options based on the performance criteria and all vested options,all of which will terminate in accordance with the provisions of our equityincentive plan. All unvested stock options will terminate as of his date oftermination.

 

**Stock Options**

 

The following table sets forth optionsgranted to our Chief Executive Officer in 2004:

 

**OptionGrants in 2004**

 
| **Name**              | ** ** | **Number of securities  underlying options  granted (#)** | ** ** | **Percent of total options  granted to employees in  fiscal year** | ** ** | **Exercise or base  price ($/Sh)** | ** ** | **Expiration date** | ** ** |
|-----------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------|------------|---------------------|------------|
| Sanford D.  Greenberg |       | 800,000                                                   |       | 86                                                                 | %          | $                                  | 3.00       |                | 2013       |   |
|                       |            |                                                           |            |                                                                    |            |                                    |            |                     |            |  |

 

The following table sets forth informationwith respect to the December 31, 2004 option values held by Mr. Greenberg:

 

**AggregatedOption Exercises in 2004**

**andOptions Values at December 31, 2004**

 
| **Name**              | ** ** | **Shares  Acquired  On  exercise(#)** | ** ** | **Value  realized  ($)** | ** ** | **Number of unexercised  options at  December 31, 2004** | ** ** | **Value of unexercised in-the  money  options at  December 31, 2004(1)** | ** ** |
|-----------------------|------------|---------------------------------------|------------|--------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **Exercisable**       | ** ** | **Unexercisable**                     | ** ** | **Exercisable**          | ** ** | **Unexercisable**                                             | ** ** |
| Sanford D.  Greenberg |       | -0-                                   |       | -0-                      |       | 16,000                                                        |       | 800,000                                                                       |       | $ | -0- |   | $ | 440,000 |   |
|                       |            |                                       |            |                          |            |                                                               |            |                                                                               |            |  |  |  |  |  |  |

 

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(1)                                  Thevalue of each option is based on $3.55, the last reported sales price of thecommon stock as reported by the OTC Bulletin Board Market on December 31,2004, less the exercise price payable for such shares.

 

**ITEM11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDERS MATTERS**

 

**Securities Authorized for Issuance UnderEquity Compensation Plans**

 

The following table provides informationabout our equity compensation plans as of March 2, 2005.

 

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**EquityCompensation Plan Information**

 
| **Plan Category**                                       | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plan** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by stockholders     |       | 680,500                                                                                                 |       | $                                                                                  | 5.00       |                                                                                               | 319,500    |   |
| Equity  compensation plans not approved by stockholders |       | -0-                                                                                                     |       | N/A                                                                                |       | -0-                                                                                                |       |
| Total                                                   |       | 680,500                                                                                                 |       | $                                                                                  | 5.00       |                                                                                               | 319,500    |   |

 

The following table sets forth informationconcerning ownership of our common stock as of March 2, 2005 by ourexecutive officers and directors, and persons known by us to own more than 5%of our issued and outstanding shares of common stock.

 
| **Name and Address**                                                       | ** ** | **Number of  Shares (1)** | ** ** | **Percent of  Class (2)** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Earnest Mathis, Jr.(12)c                                                   |       | 334,432                   | (3)        | 5.0                       | %          |
| Chief  Executive Officer and Director                                      |       |                      |       |                      |       |
|                                                                       |       |                      |       |                      |       |
| Sanford D. Greenberg (12)                                                  |       | 2,735,406                 | (4)        | 40.5                      | %          |
| Founder                                                                    |       |                      |       |                      |       |
|                                                                       |       |                      |       |                      |       |
| Timothy Transtrum (12)                                                     |       | 12,500                    | (5)        |                      | *          |
| Chief  Operating Officer                                                   |       |                      |       |                      |       |
|                                                                       |       |                      |       |                      |       |
| Mary Pat O’Halloran (12)                                              |       | 24,750                    | (6)        |                      | *          |
| Chief  Financial Officer                                                   |       |                      |       |                      |       |
|                                                                       |       |                      |       |                      |       |
| David Litt (12)                                                            |       | 10,000                    | (7)        |                      | *          |
| Vice  President of Sales and Marketing                                     |       |                      |       |                      |       |
|                                                                       |       |                      |       |                      |       |
| Doug Ridley (12)                                                           |       | 5,000                     | (8)        |                      | *          |
| Director                                                                   |       |                      |       |                      |       |
|                                                                       |       |                      |       |                      |       |
| John B. McCandless (12)                                                    |       | 5,000                     | (8)        |                      | *          |
| Director                                                                   |       |                      |       |                      |       |
|                                                                       |       |                      |       |                      |       |
| Anthony DiGiandomenico                                                     |       | 168,395                   | (9)        | 2.5                       | %          |
| Director 401  Wilshire Blvd. Ste. 1020  Santa Monica, CA 90401             |       |                      |       |                      |       |
|                                                                       |       |                      |       |                      |       |
| All officers and directors as a group (8 persons)                          |       | 3,295,483                 |       | 50.0                      | %          |
|                                                                       |       |                      |       |                      |       |
| Christopher  Marlett  401 Wilshire Blvd. Ste. 1020  Santa Monica, CA 90401 |       | 458,958                   | (10)       | 6.7                       | %          |
|                                                                       |       |                      |       |                      |       |
| Warren Cohen  595 South Broadway, Suite 200  Denver, CO 80209              |       | 1,338,800                 | (11)       | 20.5                      | %          |

 

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| *      |   | Less than 1%                                                                                                                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                               |
| (1)    |   | All entries exclude beneficial ownership of  shares issuable pursuant to options that have not vested or that are not  otherwise exercisable as of March 2, 2005 and which will not become vested or  exercisable within 60 days of the filing of the form 10-KSB. |

 

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| (2)    |   | Percentages are rounded to nearest  one-tenth of one percent. Percentages are based on 6,534,043 shares of common  stock outstanding. Options that are presently exercisable or exercisable  within 60 days are deemend to be beneficially owned by the person holding the  options for the purpose of computing the percentage ownership of that person,  but are not treated as outstanding for the purpose of computing the  percentage of any other person.              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3)    |   | Includes shares either held directly or  through entities that are controlled by Earnest Mathis, Jr. or as custodian  for a minor child and includes 171,500 shares issuable pursuant to options  which are presently exercisable or which become exercisable within 60 days of  the filing of the Form 10-KSB , and 162,932 shares held of record.                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)    |   | Includes shares either held directly or as  custodian for a minor child and includes 216,000 shares issuable pursuant to  options which are presently exercisable or which become exercisable within 60  days of the filing of the Form 10-KSB, and 2,519,406 shares held of record.  The voting rights associated with Mr. Greenberg’s shares are subject to a  voting trust agreement. See — “Item 12 Certain Relationship and Related  Transactions.” |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)    |   | Includes 12,500 shares issuable pursuant to  options which are presently exercisable or which become exercisable within 60  days of the filing of the Form 10-KSB.                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (6)    |   | Includes 14,750 shares issuable pursuant to  options which are presently exercisable or which become exercisable within 60  days of the filing of the Form 10-KSB, 10,000 shares held of record.                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (7)    |   | Includes 10,000 shares issuable pursuant to  options which are presently exercisable or which become exercisable within 60  days of the filing of the Form 10-KSB.                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (8)    |   | Includes 5,000 shares issuable pursuant to  options which are presently exercisable or which become exercisable within 60  days of the filing of the Form 10-KSB.                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (9)    |   | Includes 99,095 shares issuable pursuant to  public warrants and 2,500 shares pursuant to options which are presently  exercisable or which become exercisable within 60 days of the filing of the  Form 10-KSB, and 66,800 shares held of record.                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (10)   |   | Includes shares either held directly or through  entities that are controlled by Christopher A. Marlett. Includes 271,958  shares issuable pursuant to public warrants which are presently exercisable  or which become exercisable within 60 days of the filing of the Form 10-KSB ,  and 187,000 shares held of record.                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (11)   |   | Includes 1,338,800 shares held of record.                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (12)   |   | Address: 480 South Holly Street, Denver,  Colorado 80246                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

**ITEM12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

We lease our current corporate office spacefrom Arnold Greenberg, the father of our founder, Sanford D. Greenberg. We paid$42,000 and $36,000 in rent for the years ended December 31, 2003 and2004, respectively. Our current lease at $3,090 per month expires at the end ofDecember 2005, with a one-year extension right with rent of $3,180 permonth.

 

On June 30, 2002, prior to the Instanetmerger with V3S, V3S agreed to repurchase 2,131,952 shares of its common stockfrom Warren Cohen, a founder and former director; in exchange he returned anadditional 116,925 shares and received a long-term subordinated note for$1,335,861, which included additional monies loaned to V3S and accruedinterest. V3S did not have a market for its common stock at the time of thistransaction. The note provided for interest at 8% per year with principal andinterest payable from 25% of adjusted quarterly net income. Accrued interest onthe note as of December 31, 2003, was $160,450. On March 31, 2004,this note and all accrued interest were converted into 1,015,304 shares of ourcommon stock at a conversion price of $1.50 per share, the price for whichshares of common stock were being sold in a private offering of our securities.This price was determined pursuant to arms-length negotiations between thirdparty investors and us, and the conversion of the

 

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above debt owed to Mr. Cohen was a condition to completing the privateoffering. On March 31, 2004, the trading price for our common stock was$2.55 per share; however, our common stock was thinly traded.

 

Sanford D. Greenberg converted $133,127 and$166,873 that he advanced us plus accrued interest into long-term subordinatedloans on June 30, 2002 and September 30, 2002, respectively. Thesenotes provided for interest at 8% per year with principal and interest payablefrom 5% of our adjusted quarterly net income. Accrued interest on the notes asof December 31, 2003, was $34,040. Also on June 30, 2002, Mr.Greenberg contributed $788,780 of advances as additional paid in capital. On December 31,2002, Mr. Greenberg converted $200,000 that he advanced us into a bridge loanwith interest at 10% per year, principal and interest due December 31,2003. As part of the terms of the bridge loan, Mr. Greenberg was granted anoption to purchase 16,000 shares of our common stock at $5.00 per share. As of December 31,2003, Mr. Greenberg had advanced an additional $110,040 which was due on demandaccruing interest at 10% per year. As of December 31, 2003, accruedinterest on the advance was $6,776. On March 31, 2004, Mr. Greenbergconverted $500,000 of principal and $63,674 of accrued interest on the longterm subordinated loan and the bridge loan into 375,783 shares of our commonstock at a conversion price of $1.50 per share, the price for which shares of commonstock were being sold in a private offering of our securities. This price wasdetermined pursuant to arms-length negotiations between third party investorsand us, and the conversion of the above debt owed to Mr. Greenberg was acondition to completing the private offering. On March 31, 2004, thetrading price for our common stock was $2.55 per share; however, our commonstock was thinly traded.

 

On February 28, 2005, Sanford D.Greenberg entered into a Voting Trust Agreement covering all of the shares ofour common stock held by him and any shares of common stock subsequentlyacquired by him.  The Voting TrustAgreement does not become effective unless our securities are listed fortrading on the American Stock Exchange. The Voting Trust Agreement is for a term of five years and willterminate earlier on the happening of certain events.  During the term of the Voting TrustAgreement, the voting trustee is entitled to vote the shares covered by thetrust in connection with any shareholder action.  The voting trustee is required to vote theshares subject to the trust, as directed by the Company’s independent boardmembers.  If the independent boardmembers fail to instruct the voting trustee, the voting trustee must vote theshares in the same manner as the votes cast by a majority of votes received bythe Company on the matter.  The initialvoting trustee is Earnest Mathis.  Mr.Greenberg is permitted to transfer the shares subject to the voting trustagreement subject to compliance with the securities laws and any lock-upagreement covering the shares.

 

In December 2003, Earnest Mathis, Jr.advanced us $50,000, evidenced by a promissory note.  As part of the consideration for the loan,Mr. Mathis received an option to purchase 2,000 shares of our common stock at$5.00 per share.  The option is fullyvested and exercisable for five years. The promissory note provided forinterest at 18% per annum and was due 30 days after the loan was funded.  The note further provided that, in the eventthe note was not paid when due, Mr. Mathis was entitled to (i) an additionaloption to purchase 20,000 shares of our common stock at $5.00 per share (withthis option having the same terms as the option for 2,000 shares) and (ii)conversion of the note into shares of our common stock at a price of $2.50 pershare.  This note was not paid when due,and in January 2004, Mr. Mathis was granted the second option to purchase20,000 shares of our common stock at $5.00 per share.  During January 2004, we borrowed anadditional $50,000 from Mr. Mathis.  Theterms of the note were the same as the loan made in December 2003.  An option to purchase 2,000 shares of ourcommon stock at $2.50 per share was granted as partial consideration for thisloan. This note was not paid when due, and in February 2004, Mr. Mathiswas granted a second option to purchase 10,000 shares of our common stock at$2.50 per share.  In February 2004,Mr. Mathis converted the principal of the notes payable totaling $100,000 into40,000 shares of our common stock at $2.50 per share, forgiving a total of$2,441 in accrued interest.

 

On March 2, 2005, Mr Mathis agreed toadvance funds (“Advances”) to us on an as needed basis up to a maximum of$200,000, evidenced by a promissory note. The note provides that the Advances together with interest at 10% perannum are due and payable on the earlier of May 30, 2005, or the closing of ourproposed public offering.  The note alsoprovides for acceleration on the event of certain defaults and a defaultinterest rate of 12%.

 

Mr. DiGiandomenico, a Director, is a managingmember of MDB Capital LLC, (“MDB”) the placement agent in a private offering ofour common stock to accredited investors which we completed in April 2004.As compensation, MDB received a warrant to purchase 224,398 shares of commonstock exercisable at $1.50 per share until April 15, 2009. In addition,employees and owners of MDB received warrants with the same terms with respectto 210,026 shares of our common stock, including a warrant for 99,095 sharesissued to Mr. DiGiandomenico. The

 

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conversion price of the warrants was based on the offering price of ourcommon stock in the then just completed private offering. At the time thetrading price for our common stock was $2.55 per share; however, our commonstock was thinly traded.

 

Mr. Ridley, a Director, served as aconsultant to us in 2003, assisting us in establishing our network marketingprogram, for approximately 10 hours per week. He received total fees of$36,000.

 

Mr. Litt, our Vice President of Sales andMarketing, served as a consultant to us in 2004, regarding sales and marketingactivities including the launch of our network marketing program. Mr. Littconsulted for 16 to 24 hours per week and received total fees of $75,000, priorto his employment on October 1, 2004.

 

**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 herewith                                                                                                                                                                                                 |
| 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                                                                                                                     |
| 9.1             |       | Voting Trust Agreement for Sanford D.  Greenberg filed herewith                                                                                                                                                                             |
| 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 herewith                                                                                                                                                 |
| 10.1.2          |       | Form of Nonqualified Stock Option Agreement under the 2003 Stock Incentive Plan filed herewith                                                                                                                                              |
| 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            |       | Restated Employment Agreement – Sanford D. Greenberg filed herewith.                                                                                                                                                                   |
| 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                                                                                               |
| 10.4.1          |       | Amendment No 1 to Stock Option Agreement – Sanford D. Greenberg filed herewith                                                                                                                                                         |
| 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 herewith                                                                                                                                                                           |
| 10.10           |       | Employment Agreement – Earnest Mathis Jr. filed herewith                                                                                                                                                                               |
| 10.11           |       | Stock Option Agreement – Earnest Mathis Jr. filed herewith                                                                                                                                                                             |
| 10.12           |       | Office Lease and Addendums – A.L. Greenberg filed with Form SB-2 on January 18, 2005, and incorporated herein by reference                                                                                                        |
| 10.13           |       | Consulting Agreement – Dr. William Wheeler filed with Form SB-2 on January 18, 2005, and incorporated herein by reference                                                                                                         |

 

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| 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   |

 

**ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Set forth below are fees paid to the Company’sindependent accountants for the past two years for the professional servicesperformed for the Company.

 

**Audit Fees**

 

We paid Spicer Jefferies LLP, a total of$28,000 for professional services rendered in connection with the review of theJune 30, 2003 and September 30, 2003 Form 10-QSB and audit of ourfinancials for the year ended December 31, 2003.

 

We paid Staley Okada & Partners, a totalof $9,350 for professional services rendered in connection with the audit ofour financials for the year ended December 31, 2003 Form 10-KSB, review ofthe March 31, 2004 and June 30, 2004 Form 10-QSB.

 

We have been billed by Gordon, Hughes &Banks, LLP a total of $2,497 for professional services rendered in review ofthe September 30, 2004 Form 10-QSB and audit of our financials for theyear ended December 31, 2004.

 

**Audit Related Fees**

 

None

 

**Tax Fees**

 

We paid Spicer Jefferies LLP, a total of$4,880 for professional services rendered in connection with the preparation ofour federal and state income tax returns for the year ended December 31,2003.

 

**All Other Fees**

 

We paid Spicer Jefferies, LLP a total of$2,600 for professional services rendered in review of our filing a Form SB-2.

 

We have paid Gordon, Hughes & Banks, LLPa total of $773 been billed for $2,500 for professional services rendered inreview of our filing a registration statement on Form SB-2.

 

# **Audit Committee Policies andProcedures**

 

                The Audit Committee has adopted certain policiesand procedures regarding permitted audit and non-audit services and the annualpre-approval of such services.  Eachyear, the Audit Committee will ratify the types of audit and non-audit servicesto which the Company may wish to avail itself, subject to pre-approval ofspecific services.  Each year, managementand the independent auditors will jointly submit a pre-approval request, whichwill list each known and/or anticipated audit and non-audit service for the upcomingcalendar year and which will include associated budgeted fees.  The Audit Committee will review the requestand approve a list of annual pre-approved non-audit services.  The Audit Committee will also designate amember to have the authority to pre-approve interim requests for additionalnon-audit services that were not contained in the annual pre-approvalrequest.  Such member shall approve orreject any interim non-audit service requests and report any interim servicepre-approvals at the following Audit Committee meeting.

 

41

----

 

**SIGNATURES**

 

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

 
|                                                                                                                                                                                  | **VITACUBE SYSTEMS HOLDINGS, INC.** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|
|                                                                                                                                                                                  | ** **                          |
|                                                                                                                                                                                  | ** **                          |
|                                                                                                                                                                                  | By:                                 | */s/ Earnest  Mathis, Jr.* | * * |
|                                                                                                                                                                                  |                                | Earnest Mathis, Jr. |   |
|                                                                                                                                                                                  |                                | Chairman, Chief Executive Officer and  President |   |
|                                                                                                                                                                                  |                                |   |   |
|                                                                                                                                                                                  |                                |   |   |
| In accordance with the Exchange Act, this  report has been signed below by the following persons on behalf of the  Registrant and in the capacities indicated on March 4, 2005.  |
|                                                                                                                                                                                  |
|                                                                                                                                                                                  |                                | */s/ Earnest  Mathis, Jr.* | * * |
|                                                                                                                                                                                  |                                | Earnest Mathis, Jr. |   |
|                                                                                                                                                                                  |                                | Chairman, Chief Financial Officer,  President and Director |   |
|                                                                                                                                                                                  |                                |   |   |
|                                                                                                                                                                                  |                                |   |   |
|                                                                                                                                                                                  |                                | */s/ Mary Pat  O’Halloran* | * * |
|                                                                                                                                                                                  |                                | Mary Pat O’Halloran |   |
|                                                                                                                                                                                  |                                | Chief Financial Officer (Principal Financial  and Accounting Officer ) |   |
|                                                                                                                                                                                  |                                |   |   |
|                                                                                                                                                                                  |                                |   |   |
|                                                                                                                                                                                  |                                | */s/ Anthony  DiGiandomenico* | * * |
|                                                                                                                                                                                  |                                | Anthony DiGiandomenico |   |
|                                                                                                                                                                                  |                                | Director |   |
|                                                                                                                                                                                  |                                |   |   |
|                                                                                                                                                                                  |                                |   |   |
|                                                                                                                                                                                  |                                | */s/ John B.  McCandless* | * * |
|                                                                                                                                                                                  |                                | John B. McCandless |   |
|                                                                                                                                                                                  |                                | Director |   |
|                                                                                                                                                                                  |                                |   |   |
|                                                                                                                                                                                  |                                |   |   |
|                                                                                                                                                                                  |                                | */s/ Doug Ridley* | * * |
|                                                                                                                                                                                  |                                | Doug Ridley |   |
|                                                                                                                                                                                  |                                | Director |   |
|                                                                                                                                                                                       |                                     |  |  |  |

 

42

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors

VitaCube Systems Holdings, Inc

Denver, Colorado

 

We have audited the accompanying consolidated balance sheet of VitaCubeSystems Holdings, Inc. as of December 31,2004 and the related consolidated statements of operations, changes inshareholders’ equity (deficit) and cash flows for the year then ended.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolodiated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of VitaCubeSystems Holdings, Inc. as of December 31,2004, and the results of their operations and their cash flows for theyear then ended, in conformity with accounting principles generally accepted inthe United States of America.

 

The accompanying consolidated financial statements have been presentedassuming that the Company will continue as a going concern which contemplatesthe realization of assets and the satisifaction of liabilities in the normalcourse of business.  As discussed in Note1 to the consolidated financial statements, the Company has incurred a net lossof $2,513,999, for the year ended December 31, 2004 and has incurredsignificant net losses since inception. These factors raise substantial doubt about the Company’s ability tocontinue as a going concern.  Thefinancial statements do not include any adjustments to reflect the possiblefuture effect on the recoverability and classification of assets or the amountsand classification of liabilities that might result from the outcome of thisuncertainity.

 

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

 

 

Greenwood Village, Colorado

January 27, 2005

 

F-1

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors

VitaCube Systems Holdings, Inc. and Subsidiaries

 

We have audited the accompanying balance sheet of VitaCube SystemsHoldings, Inc. and Subsidiaries as of December 31, 2003, the relatedstatements of operations, changes in shareholders’ deficit, and cash flows forthe year then ended.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the 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 audit provides areasonable basis for our opinion.

 

As discussed in Note 1 to the financial statements, these financialstatements have been restated to reflect the correct fair value of stock optionexpense based on correct volatility assumptions.  The effect of this restatement is quantifiedin Note 1.  In addition, there was areclassification of the Company’s obsolescence reserve for inventory, whichreclassification did not affect net loss or primary and fully diluted net lossper share.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of VitaCube SystemsHoldings, Inc. and Subsidiaries as of December 31, 2003 and the results oftheir operations and their cash flows for the year then ended, in conformitywith accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming thatthe Company will continue as a going concern. As discussed in Note 1, the Company has incurred a net loss of$2,267,533 for the year ended December 31, 2003 and has incurred netlosses since inception.  In addition, at December 31,2003, current liabilities exceed current assets by $1,056,203.  These factors raise substantial doubt aboutthe Company’s ability to continue as a going concern.  The financial statements do not include anyadjustments relating to the recoverability of and classification of recordedassets, or the amounts and classification of liabilities that might benecessary in the event the Company cannot continue in existence.

 

 
| ***/s/ STALEY, OKADA  & PARTNERS*** |   |
|-----------------------------------------|--------|

 

Vancouver, Canada

March 22, 2004, *except as to Note 11,which is as of December 8, 2004 and Notes 1 and 3, which are as of February 25,2005.*

 

F-2

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**For theYears Ended December 31, 2004 and 2003**

 
| ** **                                                                                                                  | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **ASSETS**                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                                                                             |       |       |       |       |       |
| Cash                                                                                                                        |       | $          | 114,794    |       | $          | 7,963 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $237 and $136,  respectively                                |       | 4,358      |       | 6,672      |       |
| Inventory,  net of allowance for obsolescence of $43,300 and $31,782, respectively                                          |       | 478,300    |       | 286,037    |       |
| Prepaid  expenses and other current assets                                                                                  |       | 108,315    |       | 55,477     |       |
| Total  current assets                                                                                                       |       | 705,767    |       | 356,149    |       |
|                                                                                                                        |       |       |       |       |       |
| Intangible  assets, net (Note 5)                                                                                            |       | 40,015     |       | 43,352     |       |
|                                                                                                                        |       |       |       |       |       |
| Property and  equipment, net (Note 4)                                                                                       |       | 109,275    |       | 167,271    |       |
|                                                                                                                        |       |       |       |       |       |
| Deferred  offering costs (Note 10)                                                                                          |       | 269,106    |       | —     |       |
|                                                                                                                        |       |       |       |       |       |
| Total assets                                                                                                                |       | $          | 1,124,163  |       | $          | 566,772 |   |
|                                                                                                                        |       |       |       |       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                                                    |       |       |       |       |       |
|                                                                                                                        |       |       |       |       |       |
| Current  liabilities:                                                                                                       |       |       |       |       |       |
| Accounts  payable and accrued expenses                                                                                      |       | $          | 611,398    |       | $          | 954,812 |   |
| Advances  from shareholder (Note 6)                                                                                         |       | —     |       | 110,040    |       |
| Related  party bridge loan (Note 9)                                                                                         |       | —     |       | 200,000    |       |
| Bridge loan  (Note 9)                                                                                                       |       | —     |       | 147,500    |       |
|                                                                                                                        |       |       |       |       |       |
| Total  current liabilities                                                                                                  |       | 611,398    |       | 1,412,352  |       |
|                                                                                                                        |       |       |       |       |       |
| Long term  subordinated loans (Note 6)                                                                                      |       | —     |       | 1,635,861  |       |
|                                                                                                                        |       |       |       |       |       |
| **COMMITMENTS  (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, 6,534,043 and 3,241,006  issued and outstanding, respectively |       | 6,534      |       | 3,241      |       |
| Additional  paid in capital                                                                                                 |       | 8,071,186  |       | 2,566,274  |       |
| Accumulated  (deficit)                                                                                                      |       | (7,564,955 | )          | (5,050,956 | )          |
| Total  shareholders’ equity (deficit)                                                                                  |       | 512,765    |       | (2,481,441 | )          |
|                                                                                                                        |       |       |       |       |       |
| Total  liabilities and shareholders’ equity (deficit)                                                                  |       | $          | 1,124,163  |       | $          | 566,772 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-3

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**Forthe Years Ended December 31, 2004 and 2003**

 
| ** **                                                           | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                 |       |       |       |       |       |
| Net sales                                                            |       | $          | 803,640    |       | $          | 1,211,402 |   |
| Cost of goods sold                                                   |       | 281,341    |       | 625,976    |       |
| Gross profit                                                         |       | 522,299    |       | 585,426    |       |
|                                                                 |       |       |       |       |       |
| Operating  expenses:                                                 |       |       |       |       |       |
| Selling and  marketing expenses                                      |       | 1,098,550  |       | 1,273,497  |       |
| General and  administrative expenses                                 |       | 1,569,730  |       | 1,273,830  |       |
| Research and  development expenses                                   |       | 6,498      |       | —     |       |
| Depreciation  and amortization                                       |       | 65,339     |       | 82,353     |       |
| Total  operating expenses                                            |       | 2,740,117  |       | 2,629,544  |       |
|                                                                 |       |       |       |       |       |
| Operating  income (loss)                                             |       | (2,217,818 | )          | (2,042,458 | )          |
| Other income  (expense)                                              |       |       |       |       |       |
| Interest  income                                                     |       | 4,691      |       | —     |       |
| Interest  (expense)                                                  |       | (300,872   | )          | (225,075   | )          |
|                                                                 |       |       |       |       |       |
| Total other  income (expense)                                        |       | (296,181   | )          | (225,075   | )          |
|                                                                 |       |       |       |       |       |
| Net (loss)                                                           |       | $          | (2,513,999 | )          | $          | (2,267,533 | ) |
|                                                                 |       |       |       |       |       |
| Net (loss)  per common share  Basic and diluted net (loss) per share |       | $          | (.44       | )          | $          | (.77 | ) |
|                                                                 |       |       |       |       |       |
| Weighted  average common shares  outstanding, basic and diluted      |       | 5,716,404  |       | 2,952,907  |       |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-4

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF**

**CHANGESIN SHAREHOLDERS’ EQUITY (DEFICIT)**

**Forthe Years Ended December 31, 2004 and 2003**

 
| ** **                                                                                       | ** ** | **Common Stock** | ** ** | **Additional  paid in  Capital** | ** ** | **Accumulated  (deficit)** | ** ** | **Total  shareholders’  equity  (deficit)** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------------------|------------|----------------------------|------------|--------------------------------------------------|------------|
| **Shares**                                                                                       | ** ** | **Amount**       |
| **Balances,  December 31, 2002**                                                            |       | 2,662,019        |       | $                                | 2,662      |                       | $          | 1,086,118                                        |       | $ | (2,783,423 | ) | $ | (1,694,643 | ) |
| Issuance of  common stock for services                                                           |       | 52,384           |       | 52                               |       | 67,149                     |       | —                                           |       | 67,201 |   |
| Common stock  issued in private placement, net of offering costs of $44,381                      |       | 202,000          |       | 202                              |       | 965,417                    |       | —                                           |       | 965,619 |   |
| Shares  issued in connection with reverse acquisition                                            |       | 301,600          |       | 302                              |       | 28,498                     |       | —                                           |       | 28,800 |   |
| Bridge loans  converted to common stock                                                          |       | 23,000           |       | 23                               |       | 114,977                    |       | —                                           |       | 115,000 |   |
| Stock-based  compensation                                                                        |       | —           |       | —                           |       | 254,115                    |       | —                                           |       | 254,115 |   |
| Beneficial  conversion feature interest                                                          |       | —           |       | —                           |       | 50,000                     |       | —                                           |       | 50,000 |   |
| Net (loss)                                                                                       |       | —           |       | —                           |       | —                     |       | (2,267,533                                       | )          | (2,267,533 | ) |
| **Balances,  December 31, 2003**                                                            |       | 3,241,003        |       | 3,241                            |       | 2,566,274                  |       | (5,050,956                                       | )          | (2,481,441 | ) |
|                                                                                             |       |             |       |                             |       |                       |       |                                             |       |   |   |
| Issuance of  common stock for services                                                           |       | 42,000           |       | 42                               |       | 62,958                     |       | —                                           |       | 63,000 |   |
| Issuance of  common stock for payment of accounts payable                                        |       | 66,667           |       | 67                               |       | 99,933                     |       | —                                           |       | 100,000 |   |
| Common stock  issued in private placement                                                        |       | 5,996            |       | 6                                |       | 29,974                     |       | —                                           |       | 29,980 |   |
| Bridge loan  converted to common stock                                                           |       | 149,991          |       | 150                              |       | 224,836                    |       | —                                           |       | 224,986 |   |
| Long term  subordinated debt converted to common Stock                                           |       | 1,241,096        |       | 1,241                            |       | 1,860,402                  |       | —                                           |       | 1,861,643 |   |
| Notes  payable converted to common stock                                                         |       | 122,000          |       | 122                              |       | 304,878                    |       | —                                           |       | 305,000 |   |
| Common stock  issued in private placement into public entity, net of offering costs of  $123,841 |       | 1,665,290        |       | 1,665                            |       | 2,372,419                  |       | —                                           |       | 2,374,084 |   |
| Stock-based  compensation                                                                        |       | —           |       | —                           |       | 294,512                    |       | —                                           |       | 294,512 |   |
| Beneficial  conversion feature interest                                                          |       | —           |       | —                           |       | 255,000                    |       | —                                           |       | 255,000 |   |
| Net (loss)                                                                                       |       | —           |       | —                           |       | —                     |       | (2,513,999                                       | )          | (2,513,999 | ) |
| **Balances,  Decmeber 31, 2004**                                                                 |       | 6,534,043        |       | $                                | 6,534      |                       | $          | 8,071,186                                        |       | $ | (7,564,955 | ) | $ | 512,765 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

F-5

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Forthe Years Ended December 31, 2004 and 2003**

 
| ** **                                                                   | ** ** | **2004**   | ** **     | **2003**   | ** ** |
|------------------------------------------------------------------------------|------------|------------|----------------|------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                   |       |       |           |       |       |
| Net (loss)                                                                   |       | **$**      | **(2,513,999** | **)**      | **$**      | **(2,267,533** | **)** |
| Adjustments  to reconcile net (loss) to cash (used in) operating activities: |       |       |           |       |       |
| Depreciation  and amortization expense                                       |       | 65,339     |           | 82,353     |       |
| Beneficial  conversion feature interest                                      |       | 255,000    |           | 50,000     |       |
| Stock issued  in payment of accounts payable                                 |       | 100,000    |           | —     |       |
| Stock and  stock options issued for services                                 |       | 357,512    |           | 321,316    |       |
| Change in  allowance for inventory obsolescence                              |       | 11,518     |           | 211,745    |       |
| Change in  allowance for doubtful accounts                                   |       | 101        |           | 136        |       |
| Change in  allowance for product returns                                     |       | 2,450      |           | 1,660      |       |
| Interest  forgiven on loans                                                  |       | —     |           | (7,240     | )          |
| Decrease in  accounts receivable                                             |       | 2,214      |           | 73,084     |       |
| (Increases)  decrease in inventory                                           |       | (203,781   | )              | 29,273     |       |
| (Increases)  in prepaids and other current assets                            |       | (52,838    | )              | (27,927    | )          |
| (Decrease)  increase in accounts payable and accrued expenses                |       | (131,317   | )              | 284,297    |       |
| Increase in  accrued interest                                                |       | 45,872     |           | 175,075    |       |
|                                                                         |       |       |           |       |       |
| Net cash  (used in) operating activities                                     |       | (2,061,929 | )              | (1,073,761 | )          |
| ** **                                                                   | ** ** | ** ** | ** **     | ** ** | ** ** |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                   | ** ** | ** ** | ** **     | ** ** | ** ** |
| Purchase of  office equipment                                                |       | (4,007     | )              | —     |       |
| Decrease in  patents and trademarks                                          |       | —     |           | 9,534      |       |
|                                                                         |       |       |           |       |       |
| Net cash  (used in) provided by investing activities                         |       | (4,007     | )              | 9,534      |       |
| ** **                                                                   |       |       |           |       |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                   |       |       |           |       |       |
| Deferred  offering costs                                                     |       | (269,106   | )              | —     |       |
| Advances  from shareholders                                                  |       | 12,481     |           | 96,598     |       |
| Re-payments  of shareholder advances                                         |       | (132,173   | )              | —     |       |
| Re-payments  on bridge loans                                                 |       | (47,500    | )              | (172,500   | )          |
| Proceeds  from notes payable                                                 |       | 205,000    |           | 125,000    |       |
| Acquisition  of VitaCube Systems, Inc., net of cash received                 |       | —     |           | 28,800     |       |
| Issuance of  common stock, net of offering costs                             |       | 2,404,064  |           | 965,619    |       |
|                                                                         |       |       |           |       |       |
| Net cash  provided by financing activities                                   |       | 2,172,766  |           | 1,043,517  |       |
|                                                                         |       |       |           |       |       |
| **NET  INCREASE (DECREASE) IN CASH**                                         |       | 106,831    |           | (20,710    | )          |
| ** **                                                                   |       |       |           |       |       |
| **CASH,  BEGINNING OF PERIOD**                                               |       | 7,963      |           | 28,673     |       |
| ** **                                                                   |       |       |           |       |       |
| **CASH,  END OF PERIOD**                                                     |       | $          | 114,794        |       | $          | 7,963 |   |
|                                                                         |       |       |           |       |       |
| **SUPPLEMENTAL  DISCLOSURE OF NONCASH FINANCING ACTIVITIES:**                |
| Subordinated  notes and interest converted to common stock                   |       | $          | 1,861,643      |       | $          | — |   |
| Bridge loans  and interest converted to common stock                         |       | $          | 224,986        |       | $          | 115,000 |   |
| Interest and  debt forgiveness                                               |       | $          | 8,964          |       | $          | 12,240 |   |
| Notes  payable converted to common stock                                     |       | $          | 305,000        |       | $          | — |   |
|                                                                         |       |       |           |       |       |
| **SUPPLEMENTAL  CASH FLOW**                                                  |       |       |           |       |       |
| Cash paid  for interest                                                      |       | $          | 45,872         |       | $          | — |   |

# ** **

**Theaccompanying notes are an integral part of these consolidated financialstatements.**

 

F-6

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

***Organization and Business***

 

The consolidated financial statements include those ofVitaCube Systems Holdings, Inc., (VSHI) and its wholly owned subsidiaries,VitaCube Systems, Inc. and VitaCube Network, Inc.  Collectively, they are referred to herein asthe “the Company.”

 

The Company is in the business of selling, marketingand distributing nutritional supplement products.  Our product lines consist of a sports energydrink, a protein shake and a full product line of vitamins and minerals in theform of tablets, softgels or capsules, all of which are manufactured using ourproprietary product formulations.

 

During the last 6 months ended December 31, 2003,the Company changed its sales and marketing focus to direct selling, in whichindependent distributors sell our products through a network of customers andother distributors.  These activities areconducted through VitaCube Network Inc., a wholly owned Colorado corporation,formed on July 9, 2003.  In addition,we sell our products directly to professional and Olympic athletes andprofessional sports teams through VitaCube Systems, Inc.

 

***Reorganization in2003***

 

VSHI was incorporated under the laws of the State ofNevada on January 9, 2001 under the name of Instanet, Inc.  On June 20, 2003 VSHI acquired VitaCubeSystems, Inc. (“V3S”), a Colorado corporation incorporated on October 30,2000, in a stock-for stock exchange.  Theacquisition was accomplished through the exchange of all of the outstandingshares of V3S for 2,714,403 common shares of VSHI, then representing acontrolling interest in VSHI.  Coincidentwith the reorganization, VSHI changed its name to VitaCube Systems Holdings,Inc.

 

The acquisition of V3S by VSHI was recorded as arecapitalization effected by a reverse merger wherein V3S is considered theacquirer for accounting and financial purposes, acquiring the assets andassuming the liabilities of VSHI.  Assetsacquired and liabilities assumed are reported at their historical cost, and noadjustments were required to the carrying values since management consideredthe historical cost to approximate fair value and goodwill was notrecorded.  The accompanying financialstatements include the operations of V3S for all periods presented of VSHIsince the date of reorganization, June 20, 2003.

 

***Going Concern***

 

The accompanying financial statements have beenpresented in conformity with accounting principles generally accepted in theUnited States of America, which contemplates continuation of the Company as agoing concern.  The Company has incurreda net loss of $2,513,999 for the year ended December 31, 2004 and has  incurred significant net losses sinceinception.

 

The Company has been developing awareness ofits products through its newly implemented marketing plan.  Within time, management believes that demandfor its products will develop to allow the Company to become profitable,through the development of its independent distributor and customer base.  The Company believes that raising additionalcapital of a minimum of $2.6 million will enable it to sustain operationsthrough at least December 31, 2005. However realization of a significant portion of the assets in theaccompanying balance sheet is dependent on successful continued operations ofthe Company, which in turn is dependent on the ability of the Company to raiseadditional capital.

 

These factors raise substantial doubt aboutthe Company’s ability to continue as a going concern.  The financial statements do not include anyadjustments relating to the recoverability and classification of assets, or theamounts and classification of liabilities that might result from the outcome ofthis uncertainity.

 

F-7

----

 

***Principals ofConsolidation***

 

The accompanying financial statements includethe accounts of the Company and its wholly owned subsidiaries VitaCube Systems,Inc. and VitaCube Network, Inc.  Allintercompany accounts and transactions have been eliminated in the preparationof these consolidated statements.

 

***Reverse Stock Split***

 

On October 15, 2004, a majority of ourshareholders approved a 1-for-5 reverse stock split of our common stock,effective on December 8, 2004, and amended the 2003 Stock Incentive Plan,increasing the number of shares of common stock eligible for awards under thePlan from 800,000 shares to 1,000,000 shares. All shares and per share amounts have been retroactively restated toreflect the effect of the reverse merger.

 

***Use of Estimates***

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period.  Management believes that the estimatesutilized in the preparation of the financial statements are prudent andreasonable.  Actual results could differfrom these estimates.

 

***Revenue Recognition***

 

The Company ships its products by common carrier andreceives payment in the form of cash, credit card or approved creditterms.  In May 2004, the Company revisedits product return policy to provide a 60-day money back guarantee on ordersplaced by first-time customers and distributors.  After 60 days and for all subsequent ordersplaced by customers and distributors, the Company allows resellable 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 returnsranging from 1.7% to 3.6% of net sales. Sales revenue and estimated returns are recorded when the merchandise isshipped since performance by the Company is considered met when products are inthe hands of the common carrier. Amounts received for unshipped merchandise arerecorded as customer deposits and are included in accrued liabilities.

 

***Cash and CashEquivalents***

 

For the purposes of reporting cash flows, the Companyconsiders all cash and highly liquid investments with an original maturity ofthree months or less to be cash equivalents.

 

***Concentration ofCredit Risk and Reliance on Suppliers***

 

The Company has no significantoff-balance sheet concentrations of credit risk such as foreign exchangecontracts, options contracts or other foreign hedging arrangements.  The Company maintains the majority of itscash balances with three financial institutions in the form of demand depositsand money market funds.  Funds in excessof the federally insured amount of $100,000 are subject to credit risk, and theCompany believes that the financial institution is financially sound and therisk of loss is minimal.

 

As of December 31, 2004,the Company has relied significantly on three suppliers for its purchases ofraw materials for its supplements and its energy drink.  These three suppliers accounted for 80% ofinventory purchases for the year ended December 31, 2004.  The reliance on these suppliers are criticalto the Company’s operations.  However,the Company believes the risk of over reliance on one supplier or on a fewsuppliers is mitigated by having access to other available vendors.

 

***Accounts Receivable***

 

The Company uses the allowance method inaccounting for doubtful accounts receivable. At December 31, 2004 and December 31,2003, the Company has recorded a net allowance of $237 and $136, respectively,for uncollectible receivables.

 

F-8

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***Fair Value ofFinancial Instruments***

 

Substantially all of the Company’s assets andliabilities are carried at fair value or contracted amounts that approximatefair value.  Estimates of fair value aremade at a specific point in time, based on relative market information andinformation about each financial instrument, specifically, the value of theunderlying financial instrument.  Assetsthat are recorded at fair value consist largely of short-term receivables andother assets, which are carried at contracted amounts that approximate fairvalue.  Similarly, the Company’sliabilities consist primarily of short term liabilities recorded at contractedamounts that approximate fair value.

 

***Inventory***

 

Inventory is stated at the lower of cost or market ona FIFO (first-in first-out) basis. Provision is made to reduce excess or obsolete inventory to theestimated net realizable value.  TheCompany purchases for resale a sports energy drink, a protein shake and othervitamins and nutritional supplements, which it packages in various forms andcontainers.

 

Inventory is comprised of thefollowing:

 
| ** **                     | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Purchased materials            |       | $                           | 294,529    |                        | $          | 36,854 |   |
| Finished goods                 |       | 227,071                     |       | 280,965                     |       |
| Reserve for obsolete inventory |       | (43,300                     | )          | (31,782                     | )          |
|                           |       | $                           | 478,300    |                        | $          | 286,037 |   |

 

***Asummary of the reserve for obsolete and excess inventory  was as follows as of December 31, 2004and 2003:***

 
| ** **                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1    |       | $        | 31,782     |     | $          | — |   |
| Addition to provision           |       | 33,837   |       | 209,678  |       |
| Write-off of obsolete inventory |       | (22,319  | )          | (177,896 | )          |
| Balance as of December 31  |       | $        | 43,300     |     | $          | 31,782 |   |

 

***Property andEquipment***

 

The Company providesfor depreciation of property and equipment using the straight-line method basedon estimated useful lives of between three and ten years.

 

***Long-Lived Assets***

 

The Company reviews its long-lived assets forimpairment whenever changes in circumstances indicate that the carrying amountof an asset may not be recoverable.  Forpurposes of evaluating the recoverability of long-lived assets, therecoverability test is performed using undiscounted net cash flows estimated tobe generated by the asset.

 

***Intangible Assets***

 

The Company’s intangible assets, consistingof trademark and patent costs, are being amortized over their estimated life of15 years.

 

***Advertising Costs***

 

Advertisingand marketing costs were $321,846 and $405,254 for the year ended December 31,2004 and 2003, respectively and are expensed as incurred.

 

F-9

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***IncomeTaxes***

 

The Company accounts for income taxes in accordancewith Statement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes.”  Under the asset andliability method of Statement 109, deferred tax assets and liabilities arerecognized for the estimated future tax consequences attributable to differencebetween the financial statement carrying amounts of existing assets andliabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax ratesin effect for the year in which those temporary differences are expected to berecovered or settled.

 

***Stock-BasedCompensation***

 

The Company has adopted the disclosure-only provisionsof SFAS NO. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”),and applies Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” (“APB No. 25”), and related interpretations in accountingfor stock options granted to employees.

 

If the Company measured compensation cost based on thefair value of the options at the grant date consistent with the methodprescribed by SFAS 123, the Company’s net loss and loss per common share wouldhave been increased to the pro forma amounts indicated below:

 
| ** **                                                                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net loss, as  reported                                                                                                               |       | $        | (2,513,999 | )        | $          | (2,267,533 | ) |
|                                                                                                                                 |       |     |       |     |       |
| Add:  Stock-based compensation expense included in reported net income, net of  related tax effects                                  |       | 343,192  |       | 321,316  |       |
|                                                                                                                                 |       |     |       |     |       |
| Deduct:  Total stock-based compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (661,129 | )     | (360,278 | )     |
|                                                                                                                                 |       |     |       |     |       |
| Pro forma  net loss                                                                                                                  |       | $        | (2,831,936 | )   | $          | (2,306,495 | )  |
|                                                                                                                                 |       |     |       |     |       |
| Earnings per  share:                                                                                                                 |       |     |       |     |       |
| Basic and  diluted earnings (loss) per common share                                                                                  |       |     |       |     |       |
| As reported                                                                                                                          |       | $        | (.44       | )   | $          | (.77 | )  |
| Pro forma                                                                                                                            |       | (.50     | )          | (.78     | )     |

 

The fair value of each option grant was estimated atthe date of the grant using the Black-Scholes option pricing model with thefollowing assumptions for 2003 and 2004: risk-free interest rate between 3.18%–3.29%and 2.79%-3.93%, respectively; no dividend yield; expected life of 5 years; andvolatility of 86.97% and between 37.2%-37.5%, respectively.

 

During the initial phase-in period of applying SFAS123 for pro forma disclosure purposes, the results may not be representative ofthe effects on reported net income (loss) for future years because options vestover several years and additional grants generally are made each year.

 

The Company accounts for stock-based compensationissued to non-employees and consultants in accordance with the provisions ofSFAS 123 and Emerging Issues Task Force No. 96-18 (“EITF 96-18”), “Accountingfor Equity Instruments that are issued to Other Than Employees for Acquiring orin Conjunction with Selling Goods or Services.”

 

***BeneficialConversion Feature of Debt***

 

In accordance with Emerging Issues Task ForceNo. 98-5, Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratios, and No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments, the Companyrecognizes the value of conversion rights attached to convertible debt. Theserights give the debt holder the ability to convert his debt into common stockat a price per

 

F-10

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share that is less than the trading price to the public on the day theloan is made to the Company. The beneficial value is calculated based on themarket price of the stock at the commitment date in excess of the conversionrate of the debt and related accruing interest and is recorded as a discount tothe related debt and addition to additional paid in capital.  The discount is amortized and recorded asinterest expense over the remaining outstanding period of related debt.

 

***NetLoss Per Share***

 

Earnings per share requires presentation ofboth basic earnings per common share and diluted earnings per commonshare.  Since the Company has a net lossfor all periods presented, any common stock equivalents would not be includedin the weighted average calculation since their effect would be anti-dilutive.

 

***Reclassifications andRestatement***

 

Certain prior year amounts have beenreclassified to conform to the current year presentation. Reclassificationentries of $211,746 for the year ended December 31, 2003 have beenrecorded to reflect the charges or write-offs against the Company’sobsolescence reserve for inventory as cost of goods sold and not as general andadministrative expenses as previously reported.

 

The accompanying 2003 financial statements as well aspreviously filed interim financial statements have been restated.  The restatements are the result of correctingerrors in the application of Black-Scholes in valuing stock options.  The effect of the adjustments on thepreviously reported net losses for the quarterly periods ended September 30,2003, March 31, 2004, September 30, 2004  and year ended December 31, 2003 financialstatements is as follows:

 
| ** **                             | ** ** | **Three  Months  Ended  September  30, 2003** | ** ** | **Three  Months  Ended  December  31, 2003** | ** ** | **Year Ended December 31,  2003** | ** ** | **Three  Months  Ended  March 31,  2004** | ** ** | **Three  Months  Ended  September  30, 2004** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| Net loss                               |       |                                          |       |                                         |       |                                   |       |                                           |       |                                          |       |
| Previously  reported                   |       | $                                             | (677,053   | )                                            | $          | (531,034                               | )          | $                                              | (2,084,982 | )                                             | $          | (702,351 | ) | $ | (568,120 | ) |
| Adjustment                             |       | (109,856                                      | )          | (72,695                                      | )          | (182,551                               | )          | (109,498                                       | )          | (153,940                                      | )          |
| Restated net  loss                     |       | $                                             | (786,909   | )                                            | $          | (603,729                               | )          | $                                              | (2,267,533 | )                                             | $          | (811,849 | ) | $ | (722,060 | ) |
|                                   |       |                                          |       |                                         |       |                                   |       |                                           |       |                                          |       |
| Net loss per  share, basic and diluted |       |                                          |       |                                         |       |                                   |       |                                           |       |                                          |       |
| Previously  reported                   |       | $                                             | (.22       | )                                            | $          | (.17                                   | )          | $                                              | (.71       | )                                             | $          | (.21 | ) | $ | (.09 | ) |
| Adjustment                             |       | (.03                                          | )          | (.02                                         | )          | (.06                                   | )          | (.03                                           | )          | (.02                                          | )          |
| Restated net  loss                     |       | $                                             | (.25       | )                                            | $          | (.19                                   | )          | $                                              | (.77       | )                                             | $          | (.24 | ) | $ | (.11 | ) |

 

***Recent AccountingPronouncements***

 

FASB 151 - Inventory Costs

 

In November 2004, the FASB issued FASBStatement No. 151, which revised ARB No.43, relating to inventory costs. Thisrevision is to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs and wasted material (spoilage).  This Statement requires that these items berecognized as a current period charge regardless of whether they meet thecriterion specified in ARB 43.  Inaddition, this Statement requires the allocation of fixed production overheadsto the costs of conversion be based on normal capacity of the production facilities.This Statement is effective for financial statements for fiscal years beginningafter June 15, 2005.  Earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after the date of this Statement is issued.  Management believes this Statement will haveno impact on the financial statements of the Company once adopted.

 

FASB 152 - Accounting for Real EstateTime-Sharing Transactions

 

In December 2004, the FASB issued FASBStatement No. 152, which amends FASB Statement No. 66, Accounting for Sales ofReal Estate, to reference the financial accounting and reporting guidance forreal estate

 

F-11

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time-sharing transactions that is provided in AICPA Statement ofPosition (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions.  This Statement also amends FASB Statement No.67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,to state that the guidance for (a) incidental operations and (b) costs incurredto sell real estate projects does not apply to real-estate time-sharingtransactions.  The accounting for thoseoperations and costs is subject to the guidance in SOP 04-2.  This Statement is effective for financialstatements for fiscal years beginning after June 15, 2005.  Management believes this Statement will haveno impact on the financial statements of the Company once adopted.

 

FASB 153 - Exchanges of Non-monetary Assets

 

In December 2004, the FASB issued FASBStatement No. 153.  This Statementaddresses the measurement of exchanges of non-monetary assets.  The guidance in APB Opinion No. 29,Accounting for Non-monetary Transactions, is based on the principle thatexchanges of non-monetary assets should be measured based on the fair value ofthe assets exchanged.  The guidance inthat Opinion, however, included certain exceptions to that principle.  This Statement amends Opinion 29 to eliminatethe exception for non-monetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of non-monetary assets thatdo not have commercial substance.  Anon-monetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange.  This Statement is effective for financialstatements for fiscal years beginning after June 15, 2005. Earlierapplication is permitted for non-monetary asset exchanges incurred duringfiscal years beginning after the date of this Statement is issued.  Management believes this Statement will haveno impact on the financial statements of the Company once adopted.

 

FASB 123 (revised 2004) - Share-BasedPayments

 

In December 2004, the FASB issued arevision to FASB Statement No. 123, Accounting for Stock BasedCompensation.  This Statement supersedesAPB Opinion No. 25, Accounting for Stock Issued to Employees, and its relatedimplementation guidance.  This Statementestablishes standards for the accounting for transactions in which an entityexchanges its equity instruments for goods or services.  It also addresses transactions in which anentity incurs liabilities in exchange for goods or services that are based onthe fair value of the entity’s equity instruments or that may be settled by theissuance of those equity instruments. This Statement focuses primarily on accounting for transactions in whichan entity obtains employee services in share-based payment transactions.  This Statement does not change the accountingguidance for share-based payment transactions with parties other than employeesprovided in Statement 123 as originally issued and EITF Issue No. 96-18, “Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services.”  This Statement does not address the accountingfor employee share ownership plans, which are subject to AICPA Statement ofPosition 93-6, Employers’ Accounting for Employee Stock Ownership Plans.

 

A nonpublic entity will measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of those instruments, except in certaincircumstances.

 

A public entity will initially measure thecost of employee services received in exchange for an award of liabilityinstruments based on its current fair value; the fair value of that award willbe re-measured subsequently at each reporting date through the settlementdate.  Changes in fair value during therequisite service period will be recognized as compensation cost over thatperiod.  A nonpublic entity may elect tomeasure its liability awards at their intrinsic value through the date ofsettlement.

 

The grant-date fair value of employee shareoptions and similar instruments will be estimated using the option-pricingmodels adjusted for the unique characteristics of those instruments (unlessobservable market prices for the same or similar instruments are available).

 

Excess tax benefits, as defined by thisStatement, will be recognized as an addition to paid-in-capital.  Cash retained as a result of those excess taxbenefits will be presented in the statement of cash flows as financing cashinflows.  The write-off of deferred taxassets relating to unrealized tax benefits associated with recognized compensationcost will be recognized as income tax expense unless there are excess taxbenefits from previous awards remaining in paid-in capital to which it can beoffset.

 

F-12

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The notes to the financial statements of bothpublic and nonpublic entities will disclose information to assist users offinancial information to understand the nature of share-based paymenttransactions and the effects of those transactions on the financial statements.

 

The effective date for public entities thatdo not file as small business issuers will be as of the beginning of the firstinterim or annual reporting period that begins after June 15, 2005.  For public entities that file as smallbusiness issuers and nonpublic entities the effective date will be as of thebeginning of the first interim or annual reporting period that begins after December 15,2005.  Management intends to comply withthis Statement at the scheduled effective date for the relevant financialstatements of the Company.

 

**NOTE 2 – SHAREHOLDERS’ EQUITY**

 

The authorized capital stock of the Companyconsists of 50,000,000 shares of common stock at $.001 par value and 5,000,000shares of preferred stock at $.001 par value. The holders of the common stock are entitled to receive, when and asdeclared by the Board of Directors, dividends payable either in cash, inproperty or in shares of the common stock of the Company.  Dividends have no cumulative rights anddividends will not accumulate if the Board of Directors does not declare suchdividends.  Through December 31,2004, no dividends have been declared or paid by the Company.

 

On January 1, 2003, the Company issued52,384 shares of its common stock at $1.28 per share to certain individuals andentities as compensation.

 

In June 2003, the Company commenced aprivate placement of its common stock, which was completed as of January 31,2004. In this private placement the Company issued 207,996 shares of its commonstock at $5.00 per share. The Company raised a net total of $995,599 aftercommissions and other associated expenses with the private placement. As partof the private placement, one of the bridge loan lenders converted a $25,000note payable into 5,000 shares of common stock at $5.00 per share. In addition,a second bridge lender converted $75,000 of the principal amount of a notepayable and $15,000 of accrued interest due into 18,000 shares of common stockat $5.00 per share.

 

During February 2004, holders of notespayable elected to convert the notes into 122,000 shares of the Company’scommon stock at $2.50 per share, (see Note 9.)

 

During March 2004, the Company undertooka second private offering of a minimum of $2,300,000 (“the Offering”) of itscommon stock.  On April 15, 2004,the Company closed the Offering, raising a total of $2,497,925 through the saleof 1,665,290 shares of the Company’s common stock at $1.50 per share.  The Company incurred associated directexpenses of approximately $123,841 with the Offering.  In addition, the Company issued warrants tothe placement agent for the purchase of 434,424 shares of the Company’s commonstock at an initial exercise price of $1.50 per share, exercisable for 5 years.

 

In connection with the Offering, the Company’sfounder , Sanford Greenberg, converted $300,000 of long term subordinated loansand $200,000 of bridge loans plus $63,674 of accrued interest into 375,783shares of the Company’s common stock valued at $1.50 per share.  One of the Company’s former directors, WarrenCohen, converted $1,335,861 of a long term subordinated loan plus $187,094 ofaccrued interest into 1,015,304 shares of the Company’s common stock at $1.50per share.  In addition, the Companyissued 66,667 shares of the Company’s common stock valued at $1.50 per share toa creditor for $100,000 of previously accrued services.

 

In April 2004, theCompany issued 10,000 shares of its common stock valued at $1.50 per share as abonus to its chief financial officer and 2,000 shares of its common stock at$1.50 per share to its outside video production company for services rendered.

 

In July 2004, the Company issued a totalof 30,000 shares of its common stock, valued at $1.50 per share to endorsers ofthe Company for endorsement of our products.

 

**NOTE 3 – STOCK OPTIONS**

 

Effective July 1, 2003 the shareholdersof the Company adopted the 2003 Stock Incentive Plan (the “Plan”).  The Plan includes incentive and non-qualifiedstock options and restricted stock grants. The maximum

 

F-13

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number of shares of common stock available for grants under the Planwas 800,000 shares.  In connection withthe reverse acquisition of V3S, the Company issued options under the Plan withan exercise price of $5.00 per share in exchange for options that werepreviously issued by V3S under its stock incentive plan.  The Company incurred additional compensationcost for the incremental increase in value, if any, received by theseoptionees.  For vested options, thecompensation cost is the excess of the value of the new options over thepreviously issued options and was recognized in 2003.  Non-vested options are measured similarly,though the excess value, if any, is amortized over the remaining vestingperiod.

 

The Plan provides that with respect toincentive stock options (“ISO”) the option price per share must be at least thefair market value (as determined by the Compensation Committee or, in lieuthereof, the Board of Directors) of the common stock on the date the stockoption is granted or based on daily quotes from an exchange or quotation systemdesignated by the Compensation Committee as the primary market for theshares.  Under the Plan, if an ISO isgranted to an employee who owns more than 10% of the total combined votingpower of all classes of stock of the Company or any of its subsidiaries, thenthe option price must be at least 110% of the fair market value of the stocksubject to the option, and the term of the option must not exceed 5 years fromthe date of grant.  Under the Plan, iffor any reason, a change in control of the Company occurred, all shares subjectto the Plan immediately become vested and exercisable.

 

On October 15, 2004, the shareholdersapproved an amendment to the Plan to increase the number of shares availableunder the Plan to 1,000,000 shares of common stock.

 

A summary of the status of the Plan for theyears ended December 31, 2004 and 2003, together with changes during eachof the years then ended, is presented in the following table:

 

2003 Stock Incentive Plan

 
| ** **                        | ** ** | **Qualified  Options** | ** ** | **Non-qualified  Options** | ** ** | **Total** | ** ** | **Exercise  Price Range** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------------------------|------------|-----------|------------|---------------------------|------------|----------------------------------------|------------|
| Balances, December 31,  2002 |       | 129,500                |       | 73,550                     |       | 203,050   |       | $                         |  5.00 |                                   | $          |  5.00 |   |
| Granted                           |       | 38,000                 |       | 357,600                    |       | 395,600   |       | $                         | 5.00       |                                   | $          | 5.00 |   |
| Forfeited                         |       | (36,375                | )          | (12,000                    | )          | (48,375   | )          | $                         | 5.00       |                                   | $          | 5.00 |   |
| Balances, December 31,  2003 |       | 131,125                |       | 419,150                    |       | 550,275   |       | $                         | 5.00       |                                   | $          | 5.00 |   |
| Granted                           |       | 128,500                | (1)        | 114,600                    |       | 243,100   |       | $                         | 5.00       |                                   | $          | 5.00 |   |
| Forfeited                         |       | (57,375                | )          | (55,500                    | )          | (112,875  | )          | $                         | 5.00       |                                   | $          | 5.00 |   |
| Balances, December 31,  2004 |       | 202,250                |       | 478,250                    |       | 680,500   |       | $                         | 5.00       |                                   | $          | 5.00 |   |
| Number of  options exercisable    |       |                   |       |                       |       |      |       |                      |       |                                   |       |
| At December 31,  2004        |       | 85,000                 |       | 360,750                    |       | 445,750   |       | $                         | 5.00       |                                   | $          | 5.00 |   |

 

----

(1) – Excludes 30,000 qualified options that arecontingent on meeting certain performance criteria, which had not been meet at December 31,2004.

 

The following table sets forth the exercise pricerange, number of shares, weighted average exercise price and remainingcontractual lives at December 31, 2004:

 
| ** **           | ** ** | **Outstanding**            | ** ** | **Exercisable**                       | ** ** |
|----------------------|------------|----------------------------|------------|---------------------------------------|------------|
| **Exercise  Prices** | ** ** | **Number of  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Contractual  Life (months)** | ** ** | **Number of  Shares  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                 |       |                       |       |                                  |       |   |   |   |   |   |   |
| 5.00                 |       | 560,500                    |       | $                                     | 5.00       |   | 54.7 |   | 385,750 |   | $ | 5.00 |   |
| 5.00                 |       | 120,000                    |       | $                                     | 5.00       |   | 102 |   | 60,000 |   | $ | 5.00 |   |
|                 |       | 680,500                    |       |                                  |       |   |   | 445,750 |   |   |   |

 

At December 31, 2004, 319,500 options wereavailable for future grants under the Plan.

 

F-14

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**NOTE 4 – PROPERTY AND EQUIPMENT**

 

Property and equipment consisted of thefollowing:

 
| ** **                | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Furniture  & fixtures |       | $                           | 50,963     |                        | $          | 50,963 |   |
| Office  equipment         |       | 10,822                      |       | 6,815                       |       |
| Software                  |       | 175,649                     |       | 175,649                     |       |
| Leasehold  improvements   |       | 121,605                     |       | 121,605                     |       |
|                      |       | 359,039                     |       | 355,032                     |       |
| Accumulated  depreciation |       | (249,764                    | )          | (187,761                    | )          |
|                      |       |                        |       |                        |       |
|                      |       | $                           | 109,275    |                        | $          | 167,271 |   |

 

Depreciationexpense was $62,002 and $75,653 for the years ended December 31, 2004 and2003, respectively.

 

**NOTE 5 – INTANGIBLE ASSETS**

 

The Company has incurred costs to trademark 14 of itscurrent and former products and 6 specific marketing nomenclatures.  Patents and trademarks are being amortizedover a period of 15 years, at approximately $3,338 per year.  During the year ended December 31, 2003,certain amounts that were previously capitalized were charged to expense thatapproximated $9,500.

 

Intangible assets are:

 
| ** **                | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Patents and  trademarks   |       | $                           | 50,052     |                        | $          | 50,052 |   |
| Accumulated  amortization |       | (10,037                     | )          | (6,700                      | )          |
|                      |       |                        |       |                        |       |
|                      |       | $                           | 40,015     |                        | $          | 43,352 |   |

 

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

 

The Company’s founderr and one of the Company’sshareholders and former directors advanced monies to the Company totaling$1,635,861 as of December 31, 2003, which amounts were represented bysubordinated promissory notes.  The notesto both shareholders bore interest at 8% per annum with principal and interestpayable contingent on a quarterly percentage of net income (as defined).  The notes, if not re-paid in five years, weredue on June 30, 2007 and September 30, 2007, respectively.  On March 31, 2004 both note holdersconverted the principal and accrued interest of $225,782 totaling $2,086,629 into1,391,087 shares of the Company’s common stock at $1.50 per share (Note 2).

 

In addition at various times during 2003, the Company’sfounder advanced the Company a total of $122,521, which was due upon demandwith interest at the rate of 10% per annum. On March 31, 2004 the Company re-paid the loan and accrued interestof $9,652.

 

**NOTE 7 – INCOME TAXES**

 

As of December 31, 2004, the Company hadapproximately $3,808,000 in pretax federal and state net operating losscarryforwards, expiring beginning in 2023.

 

F-15

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The Company provides for deferred taxes arising fromtemporary differences in the book and tax carrying amounts of assets andliabilities.  Temporary differences ariseprimarily from differences in reporting stock based compensation and allowanceaccounts.

 

The deferred tax assets that result from suchoperating loss carryforwards and temporary differences of approximately$1,429,000 at December 31, 2004, have been fully reserved for in theaccompanying consolidated financial statements as follows.

 
| ** **                     | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Deferred tax  liabilities      |       | $                                       | —     |                                    | $          | — |   |
|                           |       |                                    |       |                                    |       |
| Deferred tax  assets:          |       |                                    |       |                                    |       |
| Net  operating loss deductions |       | $                                       | 1,411,000  |                                    | $          | 689,000 |   |
| Stock based  compensation      |       | —                                  |       | 119,000                                 |       |
| Other  deferred assets         |       | 18,000                                  |       | 12,000                                  |       |
| Total  deferred tax assets     |       | 1,429,000                               |       | 820,000                                 |       |
| Valuation  allowance           |       | (1,429,000                              | )          | (820,000                                | )          |
|                           |       | $                                       | —     |                                    | $          | — |   |

 

Reconciliation of the differences between thestatutory tax rate and the effective tax rate is as follows:

 
| ** **                                      | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| 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**

 

The Company leases office space from a related partywith the current lease of $3,090 per month expiring at the end of December 2005,with a one-year extension right with rent of $3,180 per month.  Rent expense for the years ended December 31,2004 and 2003 was $36,000 and $42,000, respectively.  Minimum future rentals at December 31,2004, under this agreement approximate:

 

| **December 31,** | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| 2005                  |       | $          | 37,080     |   |
| Total                 |       | $          | 37,080     |   |

 

 The Company hasvarious operating leases for vehicles, telephone and computer equipment thatrange from 2 to 3 years in length. Rental expenses for these operating leases were $74,692 and $35,374 forthe years ended December 31, 2004 and 2003, respectively Minimum futurerentals under these agreements at December 31, 2004 are as follows:

 

| **December 31,** | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| 2005                  |       | $          | 97,421     |   |
| 2006                  |       | 59,617     |       |
| 2007                  |       | 9,614      |       |
| Total                 |       | $          | 166,652    |   |

 

F-16

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The Company hascommitments for contract services with an unrelated party totalingapproximately $280,000.  The agreementprovides for various payments to be made over a two-year period and containsprovisions to terminate the payment of obligations with a contract buyout of$75,000.

 

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

 

**NOTE 9 – BRIDGE LOANS AND NOTES PAYABLE**

 

As of December 31, 2003 the Company had anoutstanding loan balance of $147,500 from bridge financing obtained from anunrelated party.  In April 2004, theCompany re-paid all outstanding bridge loan financing.

 

In addition, the Company’s founder and majorshareholder advanced $200,000 of bridge financing as of December 31, 2003,and on March 31, 2004, converted the principal of $200,000 and accruedinterest of $24,986 into 149,991 shares of the Company’s common stock at $1.50per share.

 

During October 2003, the Company borrowed $50,000from an unrelated party, evidenced by a promissory note.  As part of the consideration for the loan,the Company granted an option to purchase 2,000 shares of its common stock at$5.00 per share, which option was fully vested and exercisable for 5years.  This option was not part of theCompany’s 2003 Stock Incentive Plan.  Thepromissory note provided for interest at 18% per annum and was due 30 daysafter the loan was funded.  The notefurther provided that, in event the note was not paid when due, the holder ofnote was entitled to (i) an additional option to purchase 20,000 shares of theCompany’s common stock at $5.00 per share (with this option having the sameterms as the option for 2,000 shares) and (ii) conversion of the note intoshares of the Company’s common stock at a price of $2.50 per share.  This note was not paid when due, and in December 2003the holder was granted the second option to purchase 20,000 shares of theCompany’s common stock at $5.00 per share. In connection with this transaction the Company recorded interest of$50,000 in November 2003 related to the beneficial conversion featureembedded in the note.

 

In December 2003, Mr. Mathis, ourcurrent Chief Executive Officer advanced us $50,000, evidenced by a promissorynote.  As part of the consideration forthe loan, Mr. Mathis received an option to purchase 2,000 shares of our commonstock at $5.00 per share.  The option isfully vested and exercisable for five years. This option was not part of our 2003 Stock Incentive Plan.  The promissory note provided for interest at18% per annum and was due 30 days after the loan was funded.  The note further provided that, in the eventthe note was not paid when due, Mr. Mathis was entitled to (i) an additionaloption to purchase 20,000 shares of our common stock at $5.00 per share (withthis option having the same terms as the option for 2,000 shares) and (ii)conversion of the note into shares of our common stock at a price of $2.50 pershare.  This note was not paid when due,and in Janauary 2004, Mr. Mathis was granted the second option to purchase20,000 shares of our common stock at $5.00 per share.  In connection with this transaction, werecorded interest of $50,000 in January 2004 related to the beneficialconversion feature embedded in this note.

 

During January 2004, we borrowed anadditional $50,000 from Mr. Mathis.  Theterms of the note were the same as the loan made in December 2003.  An option to purchase 2,000 shares of ourcommon stock at $2.50 per share was granted as partial consideration for thisloan. This note was not paid when due, and in February 2004, Mr. Mathiswas granted a second option to purchase 10,000 shares of our common stock at$2.50 per share.  Also in February 2004,we recorded interest of $50,000 related to the beneficial conversion featuresembedded in the note.  In February 2004,Mr. Mathis converted the principal of the notes payable totaling $100,000 into40,000 shares of our common stock at $2.50 per share, forgiving a total of$2,441 in accrued interest.

 

During January 2004 the Company borrowed anadditional $155,000 from multiple unrelated parties.  As part of the consideration for these loans,the Company granted options to purchase 14,200 shares of its common stock at$2.50 per share, which options were fully vested and exercisable for 5years.  These options were not part ofthe Company’s 2003 Stock Incentive Plan. The promissory notes provided for interest at 18% per annum and were due30 days after the loans were funded.  Thenotes further provided that, in event the notes were not paid when due, theholders of the notes were entitled to (i) an additional options to purchase21,000 shares of the Company’s common stock at $2.50 per share (with theseoptions having the same terms as the options for 14,200 shares) and (ii)conversion of the notes into shares of the Company’s common stock at a price of$2.50 per share.  The notes were not paidwhen due, and in February 2004 the holders were granted the second optionsto purchase 21,000 shares of the Company’s common stock at $2.50 pershare.  In February 2004 inconnection with this transaction, the Company recorded interest of $155,000related to the beneficial conversion features embedded in the notes.

 

F-17

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In February 2004 certain of the note holders converted the principal of the notes payabletotaling $305,000 into 122,000 shares of the Company’s common stock at $2.50per share.  There was $8,964 of accruedinterest with respect to the notes, which was forgiven when the notes were converted into common stock.

 

**NOTE 10 – DEFFERED OFFERING COSTS**

 

On August 30, 2004 the Company announced that ithad entered into a non-binding letter of intent with an underwriter to raisefrom $8 to $10 million in an offering of the Company’s securities.  In the proposed offering the Company intendsto sell units consisting of shares of common stock and warrants to purchasecommon stock.  The proposed offering isconditioned upon market conditions and other requirements from the letter ofintent.  At December 31, 2004 theCompany had incurred $269,106 of costs in connection with the offering.

 

**NOTE 11 – RELATED PARTY TRANSACTIONS**

 

The Company incurred $7,564 of legal expenseson behalf of a former member of the board of directors for the year ended December 31,2004.

 

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

 

As further described in Note 9, threeshareholders of the Company provided bridge loan financing and notes payable tothe Company.  The three shareholders werealso the founder, chief executive officer and a former director of the Company,respectively.  Subsequently and during2004, the related party bridge loan financing and shareholder notes payablewere converted to common stock.

 

On March 1, 2005, Christopher Marlett, asignificant shareholder loaned the Company $25,000 evidenced by a promissorynote.  The note provides that theprincipal together with interest at 10% per annum, are due and payable on theearlier of May 30, 2005 or the closing of our proposed public offering.  The note also provides for acceleration onthe event of certain defaults and a default interest rate of 12%.

 

On March 2, 2005, Mr. Mathis, our ChiefExecutive Officer and an unrelated party agreed to advance funds (“Advances”)to us on an as needed basis up to a maximum of $400,000, evidenced by apromissory note.  The note provides thatthe Advances together with interest at 10% per annum are due and payable on theearlier of May 30, 2005, or the closing of our proposed public offering.  The note also provides for acceleration onthe event of certain defaults and a default interest rate of 12%.

 

On March 2, 2005, Sanford D. Greenberg,our founder forfeited options to purchase 275,000 shares of the Company commonstock.

 

On March 2, 2005, options to purchase275,000 shares of the Company’s common stock were issued to Earnest Mathisexercisable at $3.00 per share.  Optionsto purchase 137,500 shares were vested on the date of the grant and the balancevest on the March 2, 2006.  Optionsremain exercisable no longer than five years after the vesting date.

 

F-18

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