**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-KSB**

 

**ý****ANNUAL REPORT UNDER SECTION 13 OR 15(d) OFTHESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2005**

 

**or**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

# **Commission file No. 00**0-50875

# ** **

**VITACUBE SYSTEMS HOLDINGS, INC.**

(Exactname of small business issuer as specified in its charter)

 

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

 

**480 SouthHolly StreetDenver, CO 80246**

(Address of principal executiveoffices)

 

**(303)-316-8577**

(Issuer’s telephone number)

 

Securities registered under Section 12(b) ofthe Exchange Act:  **None**

 

Securities registered under Section 12(g) ofthe Exchange Act: **Common Stock, par value$.001 per share**

 

Check whether the issuer is not required to filereports pursuant to Section 13 or 15(d) of the Exchange Act. o

 

Check whether the issuer (1) filed all reports tobe filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

 

YES ý     NOo

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B is not contained in this form andno disclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-KSB or any amendment to this Form 10-KSB. o

 

Indicate by check mark whether the registrantis a Shell Company (as defined by Rule 12b-2 of the Act).  o  Yes    ý  No

 

Issuer’s revenues for the year ended December 31,2005 were $1,227,803.

 

Aggregate market value of voting stock held bynon-affiliates of 5,314,562 shares outstanding at March 6, 2006 wasapproximately $7,971,843. Amount was computed using the average bid and askprice as of March 6, 2006, which was $1.50. Shares of common stock held bythe officers and directors named in Item 9, and each person who owns 10% ormore of the common stock have been excluded from the calculation in that suchpersons may be deemed affiliates.

 

As of March 6, 2006, the Company had 9,618,900shares of its $.001 par value common stock issued and outstanding.

 

 

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**Indexto VitaCube Systems Holdings, Inc. 2005 Form 10-KSB**

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

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Form 10-KSB for VitaCube SystemsHoldings, Inc. (“the Company”) contains “forward-looking statements” withinthe meaning of Section 27A of the Securities Act and Section 21E ofthe Securities Exchange Act of 1934, as amended. All statements other thanstatements of historical fact are “forward-looking statements” for purposes offederal and state securities laws, including any projections of earnings,revenue or other financial items; any statements of the plans, strategies andobjectives of management for future operations; any statements concerningproposed new products or developments; any statements regarding future economicconditions or performance; any statements of belief; and any statements ofassumptions underlying any of the foregoing. Forward-looking statements may includethe words “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.”

 

**PART I**

 

**ITEM 1. DESCRIPTION OF BUSINESS**

 

### **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. During 2005 weformulated a new line of products that would have a wider appeal to the generalpublic, as they were more functional foods than nutritional supplements, andbegan marketing them though our existing independent distributors in the latterpart of 2005. In conjunction with this, we rebranded the network marketingcompany and all the products with the name of XELR8 – WHAT MOVES YOU.

 

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 — three Super Bowl teams;

 

•                  RandyJohnson (baseball): Pitcher—five-time Cy Young Award Winner and 2001 World Series Co-MVP;

 

•                  BrianGriese (football): All Pro Quarterback;

 

•                  CarolineLalive (skier) - 2-Time Olympian andWorld Cup Medalist;

 

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

 

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•                  BeckyQuinn (cycling) – 2-Time Silver medalist World Track Cycling Championship,

 

•                  GaryGait (lacrosse): Forward, six-time National Lacrosse League MVP and member ofNLL Hall of Fame

 

We were formed in 2001, under the name “Instanet, Inc.”to provide Internet fund transfers. Instanet, which had no operating revenues,was a development stage company. Instanet’s business model was not successfuland 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 the time of theacquisition had $810,743 of current and long-term assets and $3,000,080 ofcurrent and long-term liabilities. V3S’s assets included cash and cashequivalents, inventory, product formulations, an office information technologysystem and office equipment and furniture. The acquisition of V3S by Instanetis considered a reverse acquisition and accounted for under the purchase methodof accounting. Under reverse acquisition accounting, V3S is considered theacquirer for accounting and financial reporting purposes. In September 2005we changed the name of the network marketing subsidiary from Vitacube Network,Inc to XELR8, Inc.

 

The description of our business describes thebusiness being conducted by V3S and now XELR8, Inc. Instanet discontinuedits business prior to the stock-for-stock exchange.

 

### **IndustryOverview**

###  

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

###  

According to the latest industry overview, *Nutrition Business Journal* (NBJ) (May/June 2005),the year 2004 produced an odd mix of results in the nutrition industry. Overallgrowth was 7.8% to a total of $68.6 billion in U.S. sales, down from 8.8% theyear before but still higher than annual growth rates of 7-7.6% from 2000-2002... The Nutrition industry is subdivided into four common categories: NutritionalSupplements; Natural and Organic Foods; Functional Foods and Natural PersonalCare. U.S. consumer sales of all vitamins tallied $6.9 billion in 2004 on 3.7%growth, according to NBJ. Again, the mass market fared worst with an overall 1%decline, with a 4% gain in natural channels and 8% in direct sales. Whileherbal & botanical supplements lagged the growth of three supplementsegments in 2004 at 9%, it moved up from being last in the six supplementcategories in 2003. Functional food totaled $24.5 billion in sales in 2004 ongrowth of 7.6%. Leading nutritional industry growth again in 2004 was organicfoods with a 17% increase in sales to $12.1 billion. Natural and organicpersonal care and household products gained 11.3% to $5.5 billion. Combinedwith the natural and organic foods total of $18.4 billion (and 13.2% growth)the food and non-food categories yielded total U.S. natural and organic productsales of $23.9 billion in 2004.

 

We believe that the size of the supplement market isdue to public awareness of the positive effects of nutritional dietarysupplements. The 2004 Consumer Confidence Survey by the Council for ResponsibleNutrition found high consumer confidence in supplements – as well as asignificant increase in supplement usage. Fully 78% of U.S. adults surveyedreplied that they are very or somewhat confident in supplements, while theoverwhelming majority (85%) believes vitamin and mineral supplements are safe. Overtwo-thirds (66%) have confidence in the safety of herbal supplements. However,just 57% are confident that supplements deliver what labels promise – and 59%only believe claims on supplements if they are familiar with the manufacturer,demonstrating the importance of branding. Regular supplement use rose from 27%to 33%, while 62% of consumers reported using supplements at leastoccasionally.

 

While organic foods growth continues to be a leadstory, 2004 will likely most be remembered as the peak and demise of low-carb. Forall its negative impact on bars, meal replacements, functional foods and evensome supplements, the low-carb phenomenon did illustrate just how quickly a fadcan still take hold. NBJ’s conservative forecast looks for industry growth at5-7% for the next four years in a stabilized market.

 

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

###  

Firms that use direct sales as their distributionmethod have grown in numbers, sales and profits, both domestically and abroad.Stated in a press release issued on February 15, 2006, by the DirectSelling Association, the direct selling industry contributed $72 billion to theU.S. economy in 2004, according to an economic impact study conducted by Ernst &Young.

 

The $72 billion includes direct, indirect, and inducedimpacts from $27.8 billion in wages, commissions, bonuses, and othercompensation earned by the more than 13.6 million Americans who work in thedirect selling industry, as well as impact from sales to customers, productionactivities, capital investments and tax revenue. The study also foundsignificant social benefits that flow to those who work as independent sellers.These include the flexibility that allows them to own and operate a businesswhile caring for their families, higher self-esteem and confidence as a resultof their direct selling experiences, and high levels of satisfaction (more than89 percent described satisfaction with their direct selling experience.).

 

Results of the 2004 Direct Selling Association’sAnnual Growth and Outlook Survey indicate a 10.7% increase in direct sales overthe previous two years to a record high of $29.55 billion. This represents the19th consecutive year of growth forthe industry. The survey, which measures the size and activity of the U.S.direct selling industry, is conducted annually and includes responses from across-section of direct selling companies. Other major results of thesurvey indicate wellness products, such as weight loss products and nutritionalsupplements, account for approximately 15.3% of direct sales. The DirectSelling Association’s published figures for 1999-2003 indicate 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 the independent distributor basegrowing from 10.3 million to nearly 13.3 million individuals during the sametime period.

 

We believe the prospects for continued growthin direct sales are good and should benefit us, and we perceive several reasonswhy such growth has occurred:

 

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

 

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

 

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

 

### **Our Products**

###  

Currently we offer 13 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:

 

***XELR8EDS System***

 

The EDS System is the packaged concept forthree of our products, EAT, DRINK and SNACK which allows the distributor orcustomer to purchase the complete system of products bundled together. Theproducts can also be purchased individually.

 

***XELR8EAT***

 

TheEAT product is a functional food drink that was formulated as a mealreplacement. It combinesall the health benefits of a protein-based meal replacement drink with thehigh-impact nutrition value of pure whole food supplements. The foods andnutrients in the EAT are based on the Harvard Healthy Food Pyramid developed atthe

 

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HarvardMedical School, and includes ingredients from the eight essential food groupsthat their studies have shown people should eat from everyday: Whole Grains;Vegetables; Fruits; Poultry, Eggs and Fish; Plant Oils; Nuts; Legumes; andMulti-Vitamin and Calcium Supplements. Added to the product are essentialenzymes, pro-biotics and SerotainTM.

 

***XELR8DRINK***

 

TheDRINK product is an energy drink that has been formulated with the healthbenefits of antioxidants. The DRINK is sugar free, low in carbohydrates, highin flavonoid antioxidants and has an ORAC value (measurement of antioxidantstrength) of 6,000, which is equilivant to three servings of blueberries.

 

***XELR8SNACK***

 

The SNACK is a raspberry-chocolate chew thatcontains SeroTONETM, a proprietary complex that works with your body’s naturallevels of serotonin helping to satisfy cravings between meals. SNACK is alsoformulated to be low in fat and calories at approximately 60 calories and 2.5gof fat per serving.

 

***eForce® SportsDrink***

 

eForce® is a sports drink that has been formulatedto support sustained energy without the levels of sugar and caffeine of mostcolas, and with one-tenth the amount of carbohydrates and two additionalhydrating electrolytes not found in Gatorade®, a competing sports drink.eForce® has been formulated to provide support for sustained energy beforeactivity by incorporating the ingredients D-Ribose, 5 ginsengs and a completeB-Vitamin Complex (B1, B2, B6 and B12). eForce® also contains antioxidants suchas Vitamins A, C and E and pomegranate extract in its formulation designedto 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 provide energy.

 

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.

 

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

 
| **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                                                                            |

 

***Qualityin Our Products***

 

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

 

•                  supplementsare supported with publicly available scientific research and references;

 

•                  ourmanufacturers carry applicable manufacturing licenses;

 

•                  ingredientsare combined so that their effectiveness is not impaired;

 

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

 

•                  productsdo not contain adulterated ingredients such as ephedra, creatine,androstenedione, aspartame, steroids or human growth hormones;

 

•                  formulationshave a minimum two year shelf life;

 

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

 

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

 

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### **ProductDevelopment and Advisory Boards**

###  

In May of 2005, we entered into a twelvemonth contract for the services of UTEK, Inc., a knowledge transferenterprise, under a strategic alliance services contract. UTEK are the primary organizationresponsible for the acquisition of new technologies, primarily fromuniversities, medical centers and federal research laboratories for theformulation of all of our new products. The service works as follows:

 

1.               The UTEK scientificteam works with us to create a profile of new technology or intellectualproperty needs,

2.               Using theirpartnerships with over 250 universities and research laboratories combined withtheir database of over 30,000 technologies available for immediate license;UTEK search, filter and present the best two to three possible discoveries permonth which are available for immediate exclusive license,

3.               UTEK conducts thedue diligence on selected technologies,

4.               If we wish toacquire a technology, UTEK will provide a term sheet describing the transactionfor us to acquire the technology.

 

In February 2001, we retained theservices of William E. Wheeler, PhD., ACSM, to act as our Director ofScience and Technology. Dr. Wheeler has over 25 years of experience in thenutritional industry with over 260 senior author scientific publications aswell as three Presidential Awards for Excellence in Research. Dr. Wheeleralso served as staff nutritionist to the President of the United States(1976-1981) and served as staff nutritionist to the 1996 U.S. Olympic DecathlonTeam. We employed Dr. Wheeler from February 2001 until April 2002.During this time, Dr. Wheeler headed a team of manufacturers and thirdparty 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 dayswritten notice.

 

***NewProduct Identification.***From time to time weexpand our product line through the development of new products. New productideas are derived from a number of sources, including UTEK, trade publications,scientific and health journals, consultants, distributors, and other thirdparties. Prior to introducing new products, we investigate product formulationsas they relate to regulatory compliance and other issues. We expect toformulate from two to four new 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.

 

### **Our IndependentDistributors and Customers**

###  

***Overview.***We distribute products through a direct sellingprogram with independent distributors. Our distributors purchase products fortheir own consumption and for sale to their customers. Generally distributorsdo not maintain an inventory of products, but rather introduce new customerswho purchase directly from us.

 

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 geographic

 

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location. We have no sales territories. Our independent distributorsare compensated with commissions and bonuses on sales generated through theirdownline.

 

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

 

•                  distributorscan educate consumers about our products in person;

 

•                  directsales allows for actual product sampling by potential consumers;

 

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

 

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

 

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

 

Our marketing team utilizes multimedia DVDs, CDsand 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.

 

***Structureof Our Direct Selling Program.***To become one ofour independent distributors, a person must be enrolled through an existingindependent distributor and must purchase a starter kit or business builder pack,except in states where a purchase of a starter kit is optional due to stateregulations, in which case the distributor is given a starter kit at no charge.The starter kit consists of forms, policy and procedures and selling aids, andcosts $29. The business builder packs contain the starter kit, a selection ofour products, and other materials, and range in price from $199 to $499.

 

***CompensationPlan.***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.

 

***IndependentDistributor Training, Support and Motivation.***Webelieve that training, support and motivation are key elements in ourindependent distributors achieving success. Training from our corporatemanagement includes live training events, conference calls and 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 totheir downline database along with tools for placing and reviewing orders andmanaging his or her downline.

 

For motivation, we recognize our independentdistributors with recognition and awards based upon sales achievements. Inaddition, from time to time, we use memorabilia signed by our celebrityendorsers as a further incentive. We plan on utilizing trips and vacations as aprimary component of our motivation strategy. During March 2005 we held adistributor recognition and training conference in Phoenix, Arizona.

 

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In September 2005 we held a nationaldistributor event in Denver, Colorado to launch the XELR8 brand strategy, newEAT, DRINK, SNACK and EDS System products as well as to train the distributorsin the new marketing tools available. The September event was also used torecognize the achievements out top performing distributors.

 

***AdditionalMethods of Distribution.***We also sell directly toprofessional and Olympic athletes using our in-house staff. Many of theseathletes purchase our products at a discounted price, although some endorse ourproducts in return for receiving them at no charge. We believe the endorsementsof these high-profile athletes provides 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 networkserver that manages user accounts, print and file sharing, firewall management,and wide area network connectivity; (2) a Microsoft SQL database server tomanage sensitive transactional data, and corporate accounting and salesinformation; (3) a centralized host computer located in Utah supportingour customized order processing, fulfillment and independent distributormanagement software; (4) a standardized Nortel Meridian telecommunicationswitch and system; (5) a hosted independent distributor website systemdesigned specifically for network marketing and direct sales companies; and (6) proceduresto perform daily and weekly backups with both onsite and offsite storageof 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 ouroperating platform.

 

### **Product Returns**

###  

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 may returnunused, unopened and undamaged product that is currently being sold by us for arefund of 100% of the sales price less a 10% restocking fee, provided it isreturned to us within 12 months of the purchase date. Product damaged duringshipment is replaced. Historically, product returns as a percentage of our netsales have ranged from 1.7% to 4.9% of our monthly net sales.

 

### **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 significantly greaterfinancial and human resources than we do, and have operating histories longerthan ours. We seek to differentiate our products and marketing from ourcompetitors based on our product quality, the use of sports celebrityendorsers, our attractive compensation plan for our independent distributorsand 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— Puritan.com, GNC.comand VitaminShoppe.com, the latter two having retail sales locations as well.

 

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

 

Competitors for our sports and energy drinksinclude Gatorade®, Red Bull®, Powerade®, Accelerade® and All Sport®. Indirectcompetition includes soft drinks and orange juice and related products such asSunny Delight®, CapriSun® and other fruit drinks. Our protein drink and mealreplacement compete with Myoplex®, Atkins Advantage®, Ensure® and Prolab®. TheSNACK product competes in the market with low carbohydrate bars like AtkinsAdvantage®, Balance® and EAS AdvantageEdge®.

 

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 five 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 extensive laws,governmental regulations, administrative determinations, court decisions andenforcement policies. These requirements exist at the federal, state and locallevels in the United States, including laws and regulations pertaining to:

 

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

 

•                  productclaims and advertising, including direct claims and advertising by us, as wellas claims and advertising by independent distributors, for which we may beheld responsible;

 

•                  ourdirect selling program; and

 

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

 

The formulation, manufacturing, packaging,labeling, holding, storage, distribution, advertising, and sale of our 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 ourproducts are sold. Pursuant to the Federal Food, Drug, and Cosmetic Act (“FDCA”),the FDA regulates the processing, formulation, safety, manufacture, packaging,labeling, holding, sale, and distribution 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

 

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jurisdiction. When consumers complain to the CPSC about alleged harmstemming from ingestion of a nutritional supplement, CPSC may contact theentity concerned, inform it of the nature of the complaint, and invite aresponse. 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 besubject to queries from OSHA if manufacturing methods or procedures raise aquestion of worker safety. The USDA has jurisdiction over animal food andanimal feed, including regulatory control over the harvesting of animal-basedsource materials, 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, extractsor combinations of such dietary ingredients. Generally, under DSHEA, dietaryingredients that were on the market prior to October 15, 1994, may beused 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 bansthe sale of nutritional supplement products containing ephedra. Similarly, theFDA issued a consumer advisory in 2002 with respect to nutritional supplementsthat contain the ingredient Kava, and the FDA is currently investigatingadverse effects associated with ingestion of this ingredient. We have neverproduced or sold any 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 statements may describea benefit related to a nutrient deficiency disease, the role of a nutrient ornutritional ingredient intended to affect the structure or function in humans,the documented mechanism by which a nutrient or dietary ingredient acts tomaintain such structure or function, the general well-being from consumption ofa nutrient or dietary ingredient, but may not expressly or implicitlyrepresent that a nutritional supplement will diagnose, cure, mitigate, treat orprevent a disease. An entity that uses a statement of nutritional support inlabeling must possess scientific evidence substantiating that the statement istruthful and not misleading. If the FDA determines that a particular statementof nutritional support is an unacceptable drug claim or an unauthorized versionof a disease claim for a food product, or if the FDA determines that aparticular claim is not adequately supported by existing scientific data or isfalse or misleading, we would be prevented from using the claim.

 

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 particularmanufacturer or brand of nutritional supplement; the literature must present abalanced view of the available scientific information on the nutritionalsupplement; if displayed in an establishment, the literature must be physicallyseparate from the

 

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nutritional supplement; and the literature may not have appendedto it any information by sticker or any other method. If the literature failsto satisfy each of these requirements, we may be prevented fromdisseminating it with our products, and any dissemination could subject ourproducts to regulatory action as an illegal drug. Moreover, any written orverbal representation by us that would associate a nutrient in a product thatwe sell with an effect on a disease will be deemed evidence of an intent tosell the product as an unapproved new 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 redundanttesting of product ingredients at each separate stage of manufacture. We or ourthird-party suppliers or vendors could incur substantial additional expenses inorder to comply with any new rules. If the FDA issues the final cGMPs fordietary supplements in 2006, as we expect, we and our manufactures will have upto a year to ensure compliance. We expect to see an increase in ourmanufacturing costs as a result of the necessary increase in testing of rawingredients and finished products and compliance with higher quality standards,although we are not certain of the 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 morerestrictive in the future.

 

In 2004, legislation was introduced in bothhouses of Congress that imposed substantial new regulatory requirements fordietary supplements. These bills did not pass and are no longer pending, but webelieve the 2004 proposed legislation evidences a continuing effort to furtherregulate 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 andcould request all evidence in support of our advertising claims, which evidenceis required 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 thinkevidence we have as sufficient but the FTC may deem the evidenceinadequate. We believe we are in material compliance with applicable federal,state and local rules.

 

***DirectSelling Program.***Our direct selling program issubject to a number of federal and state regulations administered by the FTCand various state agencies. These regulations include anti-pyramid laws,securities laws, and laws and regulations governing business opportunities,franchises, lotteries and deceptive trade practices.

 

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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 recruitment of new distributors, and that distributorsare not saddled with large quantities of non-returnable inventory. We remainsubject to the risk that, in one or more markets, our marketing system could befound not to be in compliance with applicable anti-pyramid laws. Failure by usto comply with these regulations could have a material adverse effect on ourbusiness in a particular market or in 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 successfullychallenged in a class action by Omnitrition distributors who alleged thatOmnitrition was operating an illegal “pyramid scheme” in violation of federaland state laws. We believe that our direct selling program satisfies thestandards set forth in the Omnitrition case and other applicable statutes andcase law defining a legal marketing system, in part based upon what webelieve are differences between our marketing system and that described in theOmnitrition case.

 

We monitor and respond to regulatory andlegal developments, including those that may affect our direct sellingprogram. However, the regulatory requirements concerning direct sellingprograms do not include bright line rules and are inherently fact-based.An adverse judicial determination with respect to our direct selling programcould have a material adverse effect on our business. An adverse determinationcould: (1) require us to make modifications to our direct selling program,(2) result in negative publicity, (3)have a negative impact on independentdistributor morale, (4) result in reduced revenues, (5) result infewer celebrity endorsers of our products, and (6) potentially lead to thefailure of the Company. In addition, adverse rulings by courts in anyproceedings challenging the legality of multi-level marketing systems, even inthose not involving us directly, could have a material adverse effect on ouroperations.

 

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 ofa security. 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 the Federal Franchise Rule andstate franchise laws have similar application as the business opportunity laws.If found to be a franchise, we would be required to prepare and submit a Uniform FranchiseOffering Circular or similar disclosure document to independent distributorsbefore they could enroll in the program. Additional compliance obligationswould also be imposed. This could have a material adverse impact on theenrollment of new distributors and the sales of our products.

 

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

 

**Research and Development**

 

We incurred $70,037  on research and development for the year endedDecember 31, 2005 compared with $6,498 for the same period in 2004. We aredeveloping a replacement product for our Basic VitaCube® with a combination ofexisting vitamins as well as new formulations. This product will not requireFDA or other regulatory approval. We anticipate marketing efforts for the vitaminpack to will begin in March 2006, and that estimated aggregate amounts tocomplete development and testing of these products to be approximately $10,000.

 

**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,” and “M32+”. We have also obtained trademarks forour energy drink “eForce” and our protein shake product “VitaPro,” as well asfor six products we have discontinued. We have abandoned or not pursued effortsto register marks identifying other items in our product line for variousreasons including the inability of some names to qualify for registration. Wealso received federal trademark registration for six names or expressions thatwe use or intend to use to distinguish ourselves from others: “Cube Up,” “GetCubed,” “Simple, Innovative, Complete Nutrition,” “The Power of Nutrition,” “VitaCube”and “V3S.” All trademark registrations are protected for a period of 10 yearsand then are renewable thereafter if still in use. We are currently pursuing atrademark for “XELR8” and “What Moves You” to be used in association with ourdirect sales marketing program.

 

**Employees**

 

We had 16 full-time employees as of March 4,2006. We consider our employee relations to be good.

 

**ITEM 1A RISK FACTORS**

 

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 wellas in 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, 2005 and 2004of $5,015,877 and $2,513,999, respectively. At December 31, 2005, we hadan accumulated deficit of $12,580,832. We may never achieve or maintainprofitability. Our ability to achieve and maintain a profit is dependent uponour attracting and maintaining a large base of independent distributors whogenerate 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, 2005 and 2004that we have incurred substantial losses since inception, which raisessubstantial doubt about our ability to continue as a going concern. In theevent we are not able to continue operations you will likely suffer a completeloss of your investment in our securities. See the auditors’ reports on ourconsolidated financial statements elsewhere in this Form 10-KSB.

 

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**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. In2005 we rebranded the network marketing company and launched new products.There is no assurance that we will achieve significant sales as a result ofthis new strategy.

 

We also may not be successful inaddressing our operating challenges such as establishing a viable network ofindependent distributors, developing brand awareness and expanding our marketpresence. Our prospects for profitability must be considered in light of ourevolving business model. These factors make it difficult to assess ourprospects.

 

**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. The distributorsalso typically work on a part-time basis and may engage in other businessactivities, which may reduce their efforts for us.

 

In recruiting and keeping independentdistributors, we will be subject to significant competition from other direct salesorganizations, both inside and outside our industry. Our ability to attract andretain independent distributors will be dependent on the attractiveness of ourcompensation plan, our product mix, and the support we offer to our independentdistributors. Adverse publicity concerning direct sales marketing and publicperception of direct selling businesses generally could negatively affect ourability to attract, motivate and retain independent distributors.

 

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.**

 

One of our significant expenses is thepayment of compensation to our independent distributors. This compensationincludes commissions, bonuses, awards and prizes. From the date we changed oursales method to direct sales through independent distributors, August 1,2003, through December 31, 2005, compensation paid to our independentdistributors represented 64% 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 retainqualified and motivated independent distributors. We do not have any currentplans to change our 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

 

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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 independent distributorsare not supported by competent and reliable scientific evidence. If any ofthese representations made by our independent distributors were deemedfraudulent, the FTC could refer the matter to the Department of Justice forcriminal fraud prosecution. Also, the Food and Drug Administration (“FDA”)could seek to hold us civilly and criminally liable for misbranding, foradulteration, or for sale of an unapproved new drug if an independentdistributor were to make false or misleading claims, sell a product past itsshelf life, or represent that any of our products were intended for use in thecure, treatment, or prevention of a disease or health-related condition. Whilewe train our independent distributors and attempt to monitor our independentdistributors’ marketing claims and sales materials, we cannot ensure that allof these materials comply with applicable law.

 

**Our 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 woulddecrease 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 and thatadvancement 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 ornewly adopted laws or regulations could result in costs and fines to us and makeour independent distributors reluctant to continue their sales efforts, whichwould reduce 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.These challenges have caused direct selling companies to focus greaterattention on generating product sales to non-participants or non-distributors.Direct selling 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 distributorsresulting in 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 relatedtaxes, plus any related assessments and penalties, which could significantlyincrease our 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 our

 

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independent distributors will be in compliance with all of theseregulations. A failure by us or our distributors to comply with these laws andregulations could lead to governmental investigations, civil and criminalprosecutions, administrative hearings and court proceedings, civil and criminalpenalties, injunctions against product sales or advertising, civil and criminalliability for the Company and/or its principals, bad publicity, and tort claimsarising out of governmental or judicial findings of fact or conclusions of lawadverse to the Company or its principals. In addition, the adoption of newregulations and policies or changes in the interpretations of existingregulations and policies may result in significant new compliance costs ordiscontinuation of product sales and may adversely affect the marketing ofour products, resulting in decreases in revenues.

 

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 nutritional supplements.The proposed rules would establish minimum standards that must be met byall companies that manufacture, package, and hold nutritional supplements inthe United States. Violation of those standards would render the products inquestion presumptively adulterated and unlawful to sell. The proposed cGMPswould require manufacturers to follow procedures that would track nutrientsfrom source to finished product, test nutrients for identity, purity, quality,strength, and composition at each stage of production, and record fullcompliance with specific regulations governing production, manufacture, andholding of nutritional supplements. The cGMPs are expected to be adopted in2006 and may become fully effective by 2007. We expect that the cGMPs willincrease our product costs by requiring our various contract manufacturers toexpend additional capital and resources on quality control testing, newpersonnel, plant redesign, new equipment, facilities placement, recordkeepingand ingredient and product testing.

 

The FDA and 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 of whether complaints of this kind are substantiated or proven,public release of complaints of this type may have an adverse effect uponpublic perception of us, the quality of our products or the prudence of takingour products. Changes in consumer attitudes based on adverse event reportscould adversely affect the potential market for and sales of our products andmake it more difficult to recruit and retain independent distributors andobtain endorsers.

 

**We are dependent on a limited number ofindependent suppliers and manufacturers of our products, which may affectour ability 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 five primary manufacturers are New Sun Nutrition, LLC,FoodPharma, LLC, Valentine Industries, Inc., Natural AlternativesInternational Inc. and GMP Laboratories of America, Inc. These thirdparties may be unable to satisfy our supply requirements, manufacture ourproducts on a timely basis, fill and ship our orders promptly, provide servicesat competitive costs or offer reliable products and services. The failure tomeet of 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

 

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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 our productswould result in decreased product sales and our revenues would likely decline.We believe that we can meet our current supply and manufacturing requirementswith our current suppliers and manufacturers or with available substitutesuppliers and manufacturers. Historically, we have not experienced any delaysor disruptions to our business caused by difficulties in obtaining supplies.

 

**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 competing products in the U.S.market to be Myoplex® for protein drinks, Gatorade®, Powerade®, Acclerade®, andAll Sport® for energy drinks, and that Nature’s Bounty, Inc. and GeneralNutrition Centers, Inc. are the significant producers of vitamins. Most ofour competitors 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 may requireus to compete by lowering prices because we do not have the resources to engagein marketing campaigns against these competitors, and the economic viability ofour operations likely would be diminished.

 

**Customers and distributors may not beable to distinguish our products by name from competitor’s products.**

 

Due to the similarity of our products name tothose of many of our competitor’s products may result in the loss ofcustomers and distributors as well as impair the recruiting efforts of ourindependent distributors. This could result in the loss of repeat business aswell as the inability to generate increased revenue and attract futureindependent distributors.

 

**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

 

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our products. Claims that any products are ineffective, inappropriatelylabeled or have inaccurate instructions as to their use, could have a materialadverse effect on the market demand for our products, including reducing oursales and revenues.

 

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 product sales. The federal government, researchinstitutes, universities and others regularly conduct research into the use,effectiveness and potential for adverse results from the use of nutritionaldietary supplements. Even if adverse studies are subject to substantialcriticism or not supported by accepted scientific methodology, publicitysurrounding the reports of these studies may result in flat or decreasedsales of our products. In the past few years, the effectiveness of, andpotential for harm from, some of the leading herbal supplements, which containingredients not in our products, have come into question as a result ofresearch studies. These negative study results and other negative publicitycould adversely affect the potential market and sales of our products, as wellas increase our product returns, resulting in increased expenses to us.

 

While we have not received any directnegative publicity, the publicized studies associating increased mortalityrates with high dosages of Vitamin E has increased awareness of our consumersrelating 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, nutrition scienceis subject to change based on new research. New scientific evidence may disprovethe 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 may have higher prices thanthe products of most of our competitors, which may make it difficult forus to achieve significant revenues.**

 

We may have difficulty in achievingmarket acceptance of our products because our products are among the highestpriced in their categories due to the ingredients that we require in ourproducts. While we believe that our products are superior to competing, lowerpriced products, consumers must be educated about our products. If we areunable to achieve market acceptance, we will have difficulty in achievingrevenue growth, which would 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. Whileour third party manufacturers perform tests in connection with theformulations of our products, these tests are not designed to evaluate theinherent safety of our products.

 

Although we maintain product liabilityinsurance, it may not be sufficient to cover product liability claims andsuch claims could have a material adverse effect on our business. Thesuccessful assertion or settlement of an uninsured claim, a significant numberof insured claims or a claim exceeding the limits of our insurance coveragewould harm us by adding further costs to our business and by diverting theattention of our senior management from the operation of our business. Even ifwe successfully defend a liability claim, the uninsured litigation costs andadverse publicity may be harmful to our business.

 

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Any product liability claim may increaseour costs, and adversely affect our revenues and operating income. Moreover,liability claims arising from a serious adverse event may increase ourcosts through higher insurance premiums and deductibles, and may make itmore difficult to secure adequate insurance coverage in the future. Inaddition, our product liability insurance may fail to cover future productliability claims, which if adversely determined could subject us to substantialmonetary damages.

 

**A slower growth rate in the nutritional supplementindustry could lessen our sales and make it more difficult for us to achievegrowth and become profitable.**

 

According to the Nutrition Business Journal (May/June 2005),after a promising recovery in 2003, U.S. Supplement growth flattened overall from5.6% in 2003 to 2.6% in 2004 for total dollar sales of $20.3 billion. Somesales channels performed better than others: Internet and practitioner channels grew 13% and 10%, respectively,although they represent only 9% of the entire supplement segment combined. Multilevelmarketers, boosted by a revival, also fared quite well at 6.3% growth in theU.S. and significantly higher internationally. However, while sales ofsupplements in the natural retail channel managed a 4.2% rise in 2004 it wasdown from 12% growth in 2003. Negative impacts of coral calcium and low-carbproducts affected minerals and liquid meal replacements. Loss of ephedra-basedweight loss supplements after the ephedra ban in April 2004 didn’t helpeither, although the greater loss due to ephedra was in 2003. Consumers werealso deterred by negative meta-analysis of vitamin E released in the fall of2004, which tended to undermine the entire supplement category, an impact thatshowed up in the mass market most of all.

 

**New products may render our productsobsolete and our sales may suffer.**

 

The nutritional supplement markethistorically has been influenced by “fad” products that became popular due tochanging consumer tastes and media attention. Our products may be renderedobsolete by changes in popular tastes as well as media attention on newproducts or adverse media attention on nutritional supplements, which couldreduce our sales. It may be difficult for us to change our product line toadapt to changing tastes. In addition, other “fad” food regimens, such as lowcarbohydrate diets, may decrease the overall popularity and use of ourproducts, as well as result in higher returns of our products, therebyincreasing our expenses.

 

**We may from time to time write offobsolete inventories resulting in higher expenses and consequently greater netlosses.**

 

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 write downs of ourinventories. For example, in 2005 and 2004 we discontinued certain products andsales tools that we deemed obsolete, and we incurred a write-down againstinventory in 2005 of $70,335 and a charge against obsolete inventory of $33,837in 2004. Write downs and charges of this type have historically increased ournet losses, and if experienced in the future, will make it more difficult forus 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. As we gain more operating experiencewe may need to revise our reserves for product returns.

 

**If we are not able to adequately protect ourintellectual property, then we may not be able to compete effectively andwe may 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 some our products. Weconsider these product formulations our critical proprietary property, whichmust be protected from competitors. We do not have any patents because we donot believe they are necessary to protect our proprietary rights. Althoughtrade secret, trademark, copyright and patent laws generally provide suchprotection and we may attempt to protect ourselves through contracts withmanufacturers of our

 

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products, we may not be successful in enforcing our rights. Inaddition, enforcement of our proprietary rights may require lengthy andexpensive litigation. We have attempted to protect some of the trade names andtrademarks used for our products by registering them with the U.S. Patent andTrademark Office, but we must rely on common law trademark rights to protectour unregistered trademarks. Common law trademark rights do not provide thesame remedies as are granted to federally registered trademarks and the rightsof a common law trademark are limited to the geographic area in which thetrademark is actually used. Our inability to protect our intellectual propertycould have a material adverse impact on our ability to compete and could makeit difficult for us to achieve a profit.

 

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

 

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 31,2005, we had spent $240,262 on technology system upgrades. We have experiencedinterruptions and may in the future experience interruptions to or failureof our information processing system; however, none of the interruptions todate have materially disrupted our business. Interruptions to or failure of ourinformation processing systems may be costly to fix and may damageour relationships 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 also depends on hiring, retainingand integrating senior management and skilled employees, including Sanford D.Greenberg, our founder, Earnest Mathis, Jr., our Chief Executive Officer,Douglas Ridley, our President, John Pougnet, our Chief Financial Officer,Timothy Transtrum, our Vice-President of Operations, and David Litt, our VicePresident of Sales and Marketing, in order to expand our business. Certain ofour officers have employment agreements that have stipulated service terms. Aswith all personal service providers, our officers can terminate theirrelationship with us at will. Our inability to retain these individuals may resultin our reduced ability to operate our business. Except for a $5 million key maninsurance policy on the life of Mr. Greenberg, we do not have key man lifeinsurance on any of our executive officers.

 

**ITEM2. DESCRIPTION OF PROPERTY**

 

**Facilities**

 

We lease an office, located at 480 SouthHolly Street, Denver, Colorado, from the father of Sanford D. Greenberg, ourfounder, for $3,390 per month, with the lease expiring on March 31, 2006,with an automatic monthly extension right and a two month notice period for theCompany to terminate the lease. Our annual office rent for 2005 and 2004 was $38,830and $36,000, respectively. We currently do not have any plans for renovation,improvement or development of our corporate office.

 

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. In January 2006 we contracted with GAWright Marketing, Inc., to assume our warehouse functions from Stonepathas well as fulfillment functions that were previously performed at our corporatelocation. These services will be billed on a per transaction basis plus amonthly inventory storage fee.

 

**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 $1.2 million on our main facility, including inventory,and $577,000 on our products not located at our main facility.

 

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**ITEM3. LEGAL PROCEEDINGS**

 

We are involved in one legal claim relatingto the use of the Trademark name of “XELR8” that is currently used to marketour products. In December 2005 we were informed by SoftPac Industries, Inc.(SoftPac) that we were infringing on a registered trademark name that they own.It is our position that this claim is without foundation, but have entered intosettlement discussions with SoftPac in an attempt to avoid further legalactions because of defense costs and diversion of management resources,litigation has a negative impact on us. The dispute and settlement relates tothe future coexistence of the trademarks. At this point a settlement has notbeen reached, and SoftPac has not filed any legal actions in any courts to seekan injunctive order.

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Nomatters were submitted to a vote of shareholders during the quarter ended December 31,2005.

 

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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 was “VCUB.OB.” Sincethere is only a limited trading market for our stock, stockholders, may findit difficult to sell their shares. Until June 20, 2003, the common stocktrades reflected the business of Instanet prior to the share exchange with V3S.On April 5, 2005 the Company moved to the American Stock Exchange andstarted trading under the symbol “PRH” in conjunction with a secondary offeringof shares.

 

The following table sets forth high and lowbid prices for our common stock for the calendar quarters indicated as reportedby the OTC Bulletin Board until April 4, 2005 and on the American StockExchange from April 5, 2005. These prices have been stated after givingretroactive effect to a 1-for-5 reverse split of our common stock consummatedon December 8, 2004, and represent quotations between dealers withoutadjustment for retail markup, markdown, or commission and may notrepresent actual transactions.

 
| ** **      | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| 2004            |       |     |       |    |       |
| First  Quarter  |       | $        | 7.55       |    | $          | 4.00 |   |
| Second  Quarter |       | $        | 7.55       |    | $          | 3.50 |   |
| Third  Quarter  |       | $        | 4.25       |    | $          | 1.55 |   |
| Fourth  Quarter |       | $        | 3.75       |    | $          | 2.00 |   |
| 2005            |       |     |       |    |       |
| First  Quarter  |       | $        | 3.90       |    | $          | 3.30 |   |
| Second  Quarter |       | $        | 3.30       |    | $          | 1.17 |   |
| Third  Quarter  |       | $        | 1.97       |    | $          | 1.25 |   |
| Fourth  Quarter |       | $        | 1.86       |    | $          | 1.25 |   |

 

### **Holders**

###  

As of March 6, 2006, we hadapproximately 161 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.

 

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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 materiallyfrom those anticipated in these forward-looking statements as a result of avariety of certain factors, including those set forth under “Risk FactorsAssociated with Our Business” and elsewhere in this report.*

 

**Overview**

 

We are in the business of developing,selling, marketing and distributing nutritional supplement products andfunctional foods. We market our products primarily through direct selling ornetwork marketing, in which independent distributors sell our products. Inaddition, we sell our products directly to professional and Olympic athletesand professional sports teams.

 

Our product lines consist of four powdered beverages,12 individual supplements packaged in our VitaCube®, , and a nutritional chew.Our VitaCube® is an easy to use, compartmentalized box with instructions forwhich supplements to take and the proper times to take them. Our EAT, DRINK andSNACK System is a packaged product that consists of functional foods and energydrinks that can be purchased as a whole system or individually.

 

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 February 28, 2006 we had 2,038 independent distributors and558 customers (excluding professional athletes and sports teams) who hadpurchased our products within the prior twelve 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 Our inventory net of our allowancefor obsolescence was $542,749 at December 31, 2005 an increase from $478,300at December 31, 2004.

 

The increase of inventory was a result of thelaunch of the three new products in the EDS System that required sufficientinventory levels for the projected demand and lead time in product ordering. Eventhough our inventory level currently is relatively high based on our sales forthe year ended December 31, 2005, we believe our inventory isappropriately classified as a current asset based on the ongoing implementationof our new marketing plan which is designed to increase our distributor baseand sales.

 

During the year ended December 31, 2005,we renamed the network marketing company and the brand under which the productsare sold and therefore were forced to discontinue some sales and marketingtools, taking a charge against operations for obsolete inventory of $70,335.Our allowance for obsolete inventory was decreased from $43,300 to $16,879 forthe years ended December 31, 2004 and 2005, respectively. We believe ourreserve for obsolescence is reasonable because (i) substantially all ofour inventory has been recently purchased, (ii) the shelf life of ourproducts averages three years, and (iii) we have no current plans toeliminate any of our products, instead choosing to repackage them in the newproduct branding strategy.

 

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 productsand certain sales materials. Included in the sales and marketing expenses areindependent distributor

 

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commissions, bonus and incentives along with other general selling expenses.We expect our independent distributor expenses, as a percentage of netrevenues, to decrease as independent distributors less additional incentivesand rely on the incentives in our direct sales program. General andadministrative expenses include salaries and benefits, rent and buildingexpenses, legal, accounting, telephone and professional 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 that the number of our distributors is an importantindicator to monitor. In addition, we will monitor the sales generated perindependent distributor as well as the success of our independent distributorsin recruiting new independent distributors.

 

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 lowernumber of our independent distributors and reduced sales and recruiting effortsby existing distributors, as well as a loss or no increase in the number ofsports celebrity endorsers of our products. We do not know what industry growthwas for 2005 or will be for 2006 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 and which has subsequently beenslow, will adversely affect us.

 

Our operating plan for 2006 is focused onincreasing the number of independent distributors, growing revenues, andgenerating gross profits. Due to the relatively recent commencement of ourdirect selling program through independent distributors, we cannot predict ourrevenue, gross profit, net income or loss or use of cash and cash equivalents;however, we expect 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, 2005 and 2004 andfor the years then ended, that there is substantial doubt regarding our abilityto continue as a going concern. To date this contingency has not affected ourability to secure funding for our operations; however, going forward, in theevent this uncertainty is not resolved, we may experience more difficultyin raising funds to operate our Company if we are required to raise suchcapital.

 

**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 a stock and stock options issued forservices 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 form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions. We believe thefollowing critical accounting policies affect our more significant judgmentsand estimates used in the preparation of our financial statements.

 

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

 

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***Allowancesfor Product Returns****.*Allowances for product returns are recorded at the timeproduct is shipped. These accruals are based upon the historical return ratesince the inception of our network marketing program in the third quarter of2003, and the specific historical return patterns by product. Our return ratesince the third quarter of 2003 has varied from 1.7% to 4.9% of our 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, 2005, ordersshipped that are subject to our 60-day money back guarantee were approximately$11,617. All other product may be returned to us by any customer orindependent distributor if it is unopened and undamaged for a 100% sales pricerefund, less a 10% restocking fee, provided the product is returned within 12months of purchase and is being sold by us at the time of return. We are notable to estimate the amount of revenue we have recognized that is held by thesebuyers of product and which is returnable, because it is not possible todetermine the amount of product that is unopened and undamaged. 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. Our reserve for product returns at the year ended December 31,2005 and 2004 was $20,314 and $4,110, respectively. To date, product expirationdates have not played any role in product returns, and we do not expect theywill in the future because it is unlikely that we will ship product with anexpiration date earlier than the latest allowable product return date.

 

***InventoryValuation****.*Inventoriesare stated at the lower of cost or market on a first-in first-out basis. Areserve for inventory obsolescence is maintained and is based upon assumptionsabout current and future product demand, inventory whose shelf life has expiredand market conditions. A change in any of these variables may requireadditional reserves to be taken. We reserved $16,879 for obsolete inventory asof December 31, 2005 and $43,300 as of December 31, 2004.

 

***StockBased Compensation.***We account for our stock-basedcompensation using Accounting Principles Board’s Opinion No. 25 (“APB No. 25”).Under APB No. 25, compensation expense is recognized for stock optionswith an exercise price that is less than the market price on the grant date ofthe option. For stock options with exercise prices at or above the market valueof the stock on grant, we have adopted the disclosure-only provisions ofStatement of Financial Accounting Standards No. 123 “Accounting forStock-Based Compensation” (“SFAS 123”). We have adopted the disclosure-onlyprovisions of SFAS 123 for the stock options granted to the employees anddirectors of ours. Accordingly, no compensation cost has been recognized forthese options. Many equity instrument transactions are valued based on pricingmodels such as Black-Scholes-Merton, which require judgments by us. Values forsuch transactions can very widely and are often material to the financialstatements.

 

***BeneficialConversion Feature of Debentures.***In accordancewith Emerging Issues Task Force No. 98-5, Accounting for Convertible Securitieswith Beneficial Conversion Features or Contingently Adjustable ConversionRatios, and No. 00-27, Application of Issue No. 98-5 to CertainConvertible Instruments, we recognize the value of conversion rights attachedto convertible debt. These rights give the debt holder the ability to converthis debt into common stock at a price per share that is less than the tradingprice to the public on the day the loan is made to us. The beneficial value iscalculated as the market price of the stock at the commitment date in excess ofthe conversion rate of the of the debentures and related accruing interest isrecorded as a discount to the related debt and addition to additional paid incapital. The discount is amortized over the remaining outstanding period ofrelated debt.

 

### **Results ofOperations**

###  

**For year ended December 31, 2005,compared the year ended December 31, 2004.**

 

*The discussion belowfirst presents the results of 2005 year followed by the results of 2004 year.*

 

***NetSales****.*Netsales were $1,227,803 compared to $803,640, an increase of 53%. The increase insales was the result of executing oursales and marketing plan of increasing our distributor and customer base alongwith creating greater brand recognition, along with the release of the threenew products in September 2005. Independent distributors purchaseour products for resale to customers and for their own personal consumption.

 

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

 
| ** **                              | ** ** | **Year Ended**      | ** ** |
|-----------------------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **December 31,**    | ** ** |
| ** **                              | ** ** | **2005**                 | ** ** | **2004** | ** ** |
| **Product Category**               | ** ** | **% of Sales** | ** ** | **% of Sales** | ** ** |
| eForce®  sports drink              |       | 25                       | %          | 10 | % |
| VitaPro®  nutrition shake          |       | 10                       | %          | 17 | % |
| EAT                                     |       | 7                        | %          | — | % |
| DRINK                                   |       | 6                        | %          | — | % |
| SNACK                                   |       | 11                       | %          | — | % |
| Vitamins and  minerals                  |       | 29                       | %          | 71 | % |
| Other -  educational materials, apparel |       | 12                       | %          | 2 | % |

 

***GrossProfit****.*Grossprofit increased to $686,887 from $522,299, an increase of 32%. Gross profit asa percentage of revenue (gross margin) decreased to 56% compared to 65%, aresult of sales price promotions during the summer and charges that we tookagainst inventory of $70,334. The overall increase in gross profit alsoreflects the increase in net revenue.

 

***Salesand Marketing Expenses****.*Sales and marketing expenses increased to $2,856,351 from $1,098,550an increase of 160%. Sales and marketing activities increased due to our focusedefforts to attract multilevel marketing industry leaders to become independentdistributors of ours and the rebranding strategy. We incurred $952,026 in coststo attract experienced sales leaders for our distributor network and $519,770in evaluating and identifying our brand positioning and holding a September eventto launch the new XELR8 brand and the Eat-Drink-Snack System. We expect tocontinue to incur higher sales and marketing expenses for the next 12 months aswe implement our marketing plan.

 

***General andAdministrative Expenses****.*General and administrative expenses were $2,844,633compared to $1,569,730 or an increase of 81%. The increase in 2005 is a resultof expenses associated with business consultants used in the web development;public company expenses for the annual meeting; stock and stock optioncompensation that was paid to consultants and higher executive compensation. Executivecompensation increased as a result of employment agreements with Earnest Mathis, Jr.,our Chief Executive Officer effective March 2, 2005, Douglas Ridley, ourPresident on June 2, 2005 and John D. Pougnet, our Chief Financial Officereffective September 12, 2005. The Company also issued stock basedcompensation to consultants for services rendered for past or currentperformance with investor relations, accounting services, web development,endorsements and to independent distributors.

 

***Researchand Development Expenses***. Research and developmentexpenses increased to $70,073 from $6,498. We are continuing to research anddevelop ingredients and manufacturing technologies for our product line. Wehave engaged in a strategic alliance agreement with UTEK Corporation, atechnology transfer company to assist us with introductions to universityresearch ingredients and processes.

 

***InterestExpense***. Interest expense was $2,841 compared with$300,872 a decrease of 99% due to the retirement of all outstanding debt fromthe proceeds of the April 2005 share offering.

 

***NetLoss****.*Ournet loss was $5,015,877 or $(0.57) per share compared to $2,513,999 or $(0.44) pershare, an increase of 100%. The increase in net loss is a result of increased salesand marketing expenses and general and administrative costs.

 

### **Liquidity andCapital Resources**

###  

To date, our operating funds have beenprovided primarily from sales of our common stock ($11,280,587), and by loansfrom our founder, our Chief Executive Officer and by various stockholders($3,989,209), through December 31, 2005, 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

 

27

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offering, both our founder and one of our former directors convertedoutstanding loans plus accrued interest into 1,391,087 shares of our commonstock at March 31, 2004, further reducing our debt. In April 2004, werepaid all of our then existing debt of $220,000. As of December 31, 2004,we had no outstanding interest bearing short-term or long-term debt.

 

During March 2005, we obtained a $170,000short-term loan from our Chief Executive Officer, a $25,000 short-term loanfrom a significant shareholder and a $170,000 short-term loan from an unrelatedparty for a total of $365,000. All of these loans provide for interest at 10%per annum. These loans were paid in full with accrued interest of $2,841 on April 12,2005 leaving us with no short-term or long-term debt at that time.

 

On April 8, 2005 we closed a public offeringof 1,500,000 units that was comprised of two shares of common stock and one Class Acommon stock warrant to purchase common stock at $4.50 and one Class Bwarrant to purchase common stock at $6.00 for net proceeds of $7,742,682.

 

We used $4,936,422 of cash for operations inthe year ended December 31, 2005, and we used $2,061,928 of cash in theyear ended December 31, 2004. 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, 2005, we had $2,805,021 in cash and cashequivalents available to fund future operations as well as $110,000 incertificates of deposit that are used to secure letters of credit issued to twoof our major suppliers. Net working capital increased from $94,369 at December 31,2004, to $3,310,034 at December 31, 2005. This increase in working capitalwas the result of the cash raised during the April offering as describedin “Notes to Consolidated Financial Statements—Note 2 Shareholders’ Equity.”From the initial purchase of our technology system in 2001 through December 31,2005, we had spent $240,262 on technology system upgrades.

 

Our independent auditors have noted in theirreports on our financial statements as of December 31, 2005 and 2004 andfor the years then ended, that there is substantial doubt regarding our abilityto continue as a going concern. To date this contingency has not affected ourability to secure funding for our operations; however, going forward, we may experiencemore difficulty in raising additional funds to operate our Company.

 

In the event that we are successful incompleting our business plan of increasing the number of distributors, saleslevels and consequently increased profitability, we believe that our cashresources will be sufficient to fund our operations for the next 12 months. Ifour business operations do not result in increased product sales, our business viability,financial position, results of operations and cash flows will likely beadversely affected. Further, if we are not successful in achievingprofitability, additional capital will be required to conduct ongoingoperations. We cannot predict the terms upon which we could raise such capitalor if any capital would be available at all.

 

***CustomerConcentrations****.*We had no single customer that accounted for any substantial portionof our revenues.

 

***Off-BalanceSheet Items****.*Wehad no off-balance sheet items as of December 31, 2005.

 

**ITEM7. FINANCIAL STATEMENTS**

 

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

 

### **Index to Financial Statements**

 
| Reports of Independent Registered Public  Accounting Firms                                                                      |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets as of December 31,  2005 and 2004                                                              |   |
| Consolidated Statements of Operations for  the years ended December 31, 2005 and 2004                                      |   |
| Consolidated Statements of Changes in  Shareholders’ Equity (Deficit) for the years ended December 31, 2005  and 2004 |   |
| Consolidated Statements of Cash Flows for  the Years Ending December 31, 2005 and 2004                                     |   |
| Notes to Consolidated Financial Statements                                                                                      |   |

 

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

 

None.

 

**ITEM 8A. CONTROLS AND PROCEDURES**

 

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

###  

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms, and that such information is accumulated and communicated to management,including the chief executive officer and chief financial officer, asappropriate, to allow timely decisions regarding required disclosure.Management necessarily applied its judgment in assessing the costs and benefitsof such controls and procedures, which, by their nature, can provide onlyreasonable assurance regarding management’s control objectives.

 

With the participation of management, our ChiefExecutive Officer and Chief Financial Officer evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures at theconclusion of the period ended December 31, 2005. Based upon thisevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective in ensuring thatmaterial information required to be disclosed is included in the reports thatwe file with the Securities and Exchange Commission.

 

### **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**

 

**Entry into a Material Definitive Agreement – EastgateAssociates Ltd**

 

On March 29, 2006, VitaCube Systems Holdings, Inc.(the “Company”) engaged Eastgate Associates Ltd, (“Eastgate”) a investorrelations and strategic resource firm to manage the Company’s investorcommunications. The term of the agreement is for six months and requires a 15day notice of non renewal. Eastgate will receive a fee of $7,500 monthly alongwith warrants to purchase up to 12,500 common shares of the Company’s stockmonthly. The warrants vest immediately and are exercisable at $2.00 per share.

 

**Entry into a Material Definitive Agreement – CarnellWilliams**

 

On March 29, 2006, VitaCube Systems Holdings, Inc.(the “Company”) engaged Carnell “Cadillac” Williams, a professional footballplayer to endorse the Company’s products. The term of the agreement is forthree years with rights to terminate by the Company after the first and secondyear in the event that the Company’s stock price fails to meet certain targets.Mr. Williams will receive an initial fee of 44,444 shares of common stockshares valued at $60,000 and 20,000 options to purchase shares of common stockissued at the closing stock price on March 28, 2006. Further, Mr. Williamswill receive an additional 20,000 common stock options at fair market value atthe beginning of the second and third years of the agreement. Further, if thetotal fair value of the compensation received by Mr. Williams at the endof the first and second year is not, $110,000 and $160,000, the Company has theoption to issue additional common stock or common stock options for thedifference between the market value and the above listed targets; or to voidthe contract and release Mr. Williams of any further contractualobligations. All of the common stock options to be issued to Mr. Williamswill vest immediately and are exercisable for five years from the date ofissue.

 

On March 30, 2006 the Registrant issued a pressrelease relating to the engagement of Mr. Williams, a copy of which hasbeen filed herewith.

 

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**PART III**

 

**ITEM 9. 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. |       | 46      |       | Chairman and Chief Executive Officer |       | -                  |
| Douglas Ridley           |       | 49      |       | President and Director               |       | -                  |
| Sanford D. Greenberg     |       | 47      |       | Founder                              |       | -                  |
| John D. Pougnet          |       | 35      |       | Chief Financial Officer              |       |               |
| Timothy Transtrum        |       | 42      |       | Vice President Operations            |       | -                  |
| David Litt               |       | 40      |       | Vice President Sales and Marketing   |       | -                  |
| Sanjeevkumar Javia       |       | 31      |       | Vice President Product Development   |       |               |
| John B. McCandless       |       | 57      |       | Director                             |       | Audit/Compensation |
| Anthony DiGiandomenico   |       | 39      |       | 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 and Mr. Ridley, are “independentdirectors” under the American Stock Exchange listing standards. Our officersserve at the discretion of our board of directors.

 

The following is a summary of our directorsand executive officers’ business experience:

 

**Earnest Mathis, Jr.,Chairman and Chief Executive Officer.**Mr. Mathiswas appointed as the Chairman and Chief Executive Officer on March 2, 2005.Prior to the merger with VitaCube Systems, Inc. Mr. Mathis served asInstanet’s Chief Executive Officer and a director from February 2001 to June 2003.Mr. Mathis served as Instanet’s Chief Executive Officer and a Directorfrom February 2001 to June 2003. Mr. Mathis is the currentPresident and a Director of Inverness Investments, Inc., a privatefinancial consulting company and he has served in these positions since January 1987.Mr. Mathis is currently serving as Manager of Amerigolf, LLC a privategolf course development company and he has served in this position since February 1998.Mr. Mathis is the Founder a manager of Waveland Ventures, LLC, a privatecapital management company managing governmental economic redevelopmentprograms and he has served in this position 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 and he hasserved in this position since March 2002. Mr. Mathis is currentlyChief Executive Officer, Chief Financial Officer and a Director forPetramerica, a public development stage company and he has served in thisposition since April 2002. Mr. Mathis was managing Director ofIntegrated Medical Services, Inc., a private medical waste transportcompany from January 1997 to December 2004. From February 2001through December 2002, Mr. Mathis served as President, ChiefFinancial Officer and a Director of Care Concepts I, Inc., a publicdevelopment stage company that acquired Ibid America, Inc in December 2002.

 

**Douglas Ridley,President and Director.**Mr. Ridley was appointedas a Director on January 1, 2004, and in June 2005 Mr. Ridleyjoined the Company as President. Mr. Ridley was an independent consultantto us from April 2003 until December 31, 2003. Mr. Ridley iscurrently President of Simply Because, a gift products network marketingcompany and since 1997, has been President of Chad Management Co., LLC, anutritional products network marketing company.

 

**Sanford D. Greenberg,Founder.**Mr. Greenberg is our Founder and sinceour inception in October 2000 until March 2005 served as our Chairmanand Chief Executive Officer. In March 2005, Mr. Greenberg resignedhis position as Chairman and Chief Executive Officer to devote full-timeefforts in advancing our sales and marketing program through our independentdistributors Prior to that, he was the Executive Vice President for GSGSecurities, Inc., a NASD member firm, from 1998 to October 2000. From1989 to 1998, he was the Chairman and Chief Executive Officer of Chatfield Dean &Co., Inc., a former NASD member firm.

 

**John D. Pougnet, Chief Financial Officer.** Mr. Pougnetwas appointed as CFO in September 2005. Immediately prior to joining theCompany, Mr. Pougnet was Assurance Senior Manager at KPMG, LLP, aglobal network of professional services firms

 

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providing Audit, Tax and Advisory services to both public and privatecompanies from January 2003 to September 2005. Prior to this Mr. Pougnetoperated an independent consulting business from August 2002 to June 2003.He also served as Vice President of Finance and Corporate Secretary at FutureBeef Operations, LLC, from May 2001 to August 2002, where he wasresponsible for the strategic planning, development and leadership of theCorporate Finance department for this multi-state meat packing company. Priorto this, Mr. Pougnet was senior auditor with Deloitte & Touchefrom September 1996 to May 2001.

 

**Timothy Transtrum,Vice President of Operations.**Mr. Transtrumjoined us on February 2, 2004, as Operating Officer. Prior to that, he wasPresident and Chief Operating Office for NutriHealth USA, a division of theglobal nutrition company Natural Health Holdings LTD, from May 2002 to February 2004.From February 1999 to May 2000, he served as Vice President ofOperations and International Development for Oasis Wellness Network, a networkmarketing company. From February 1998 to February 2004, Mr. Transtrumalso was President of TF Transtrum Associates, an operations and retentionconsulting firm. From 1991 to 1998, he worked for Melaleuca Inc., a networkmarketing company, during which time he became Director of InternationalOperations.

 

**David Litt, VicePresident of Sales and Marketing.**Mr. Litt joinedus as our Vice President of Sales and Marketing on October 1, 2004. Mr. Littwas an independent consultant for us from February 2004 until October 1,2004, through his consulting business. Mr. Litt operated an independentconsulting business from January 2003 until October 2004. From October 1998to January 2003, Mr. Litt was the Chief Sales and Marketing Officerfor Oasis Wellness Network, a network marketing company and from June 1996to October 1998 he was the Vice President of Marketing for MercantileStores, Inc., a retail department store.

 

**Sanjeevkumar Javia, Vice President of ProductDevelopment.** Mr. Javia joined the Company in July 2001and manages and oversees product development and training and is a liaison tothe Company’s external scientific and medical research resources. Prior tojoining the Company, Mr. Javia was the Director of Affiliate Publishersfor Worldpages.com, an independent publisher from September 1998 to July 2001.

 

**John B. McCandless,Director.**Mr. McCandless was appointed as adirector on February 19, 2004, and serves on our Audit and CompensationCommittees. Mr. McCandless has been the Vice President of TechnicalServices at Weider Nutrition International, Inc. since October 2003. Mr. McCandlessprovided operations and product consulting services to nutrition and directselling companies as a consultant from November 2002 to present, and from October 1995to November 2002, he served as Senior Vice President and Chief OperatingOfficer for USANA Health Sciences, a direct sales health products company.

 

**AnthonyDiGiandomenico, Director.**Mr. DiGiandomenico wasappointed as a director on May 25, 2004, and he serves on our Audit andCompensation Committees. Mr. DiGiandomenico co-founded MDB Capital GroupLLC, a NASD member broker-dealer, in 1997 and serves as a managing director ofthe firm. From 1990 to 1995, he served as President and Chief Executive Officerof the Digian Company, a real estate development company. He currently serveson the board of Orion Acquisition Corp. II, a corporation which files reportspursuant to the Securities Exchange Act of 1934, which was formed in 1995 toacquire an operating business by purchase, merger or otherwise.

 

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

 

Mr. McCandless works for a competitor ofours in the nutritional supplement market, Weider Nutrition International, Inc.We believe that his services as a board member are valuable to us. In the eventa conflict arises between Mr. McCandless and us in connection with hisboard duties, he will recuse himself from board deliberations and decisionsrelating to the conflict.

 

**Director Compensation**

 

Our directors who are also employees do notreceive any additional compensation for their services as directors. During theyears ended December 31, 2005 and 2004, non-employee directors did notreceive fees for service as directors but were reimbursed for reasonable travelexpenses in attending meetings. We may pay director fees to ournon-employee directors during 2006; however, directors will be reimbursed forreasonable travel expenses in attending meetings.

 

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In connection with their appointment to theboard of directors, Douglas Ridley, John B. McCandless and AnthonyDiGiandomenico were each granted stock options to purchase 10,000 shares of ourcommon stock at an exercise price of $5.00 per share. Each option wasexercisable for 2,500 shares on the date the option was granted. The optionsheld by Mr. Ridley and Mr. McCandless vested with respect to anadditional 2,500 shares on December 1, 2004 and will vest with respect to theremaining 5,000 shares on December 1, 2005. The options held by Mr. DiGiandomenicovest with respect to an additional 2,500 shares on May 20, 2005 and withrespect to the remaining 5,000 shares on May 20, 2006. During the year,additional options were issued to the outside directors, including DouglasRidley, who was an outside director at the time of the grant. Mr. Ridleywas granted 20,000 options to purchase common shares at $3.20 and will be fullyvested by May 13, 2006. Mr. McCandless and Mr. DiGiandomenicoeach received 40,000 options to purchase common stock at $3.20 per share andwill be fully vested by May 13, 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. DiGiandomenicoserve on the Audit Committee. Our Audit Committee’s main function is to overseeour accounting and financial reporting processes, internal systems of control,independent auditor relationships and the audits of our financial statements.The Audit Committee’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 of directors has determined that it does not havean audit committee financial expert serving on its Audit Committee. The boardof directors does not believe any of its current members qualify as auditcommittee financial expert.

 

**Compensation Committee**

 

Messrs. 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 our 2003Stock Incentive Plan. The Compensation Committee’s responsibilities include thefollowing:

 

•                  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;

 

•                  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.

 

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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) BeneficialOwnership Reporting Compliance**

###  

Section 16(a) of the SecuritiesExchange Act of 1934, as amended requires our executive officers and directorsand persons who own more than 10% of a registered class of our equitysecurities to file reports of ownership and changes in ownership with theSecurities and Exchange Commission. Executive officers, directors and greaterthan 10% stockholders are required by Commission regulation to furnish us withcopies of all Section 16(a) forms they file. Except for John D.Pougnet, who was late filing his initial report of Form 3, Douglas Ridleywho was late filing his Form 4 and Sanford D. Greenberg who was late infiling his Form 4, we believe all of our executive officers and directorscomplied with all applicable filing requirements during the fiscal year ended December 31,2005.

 

### **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.XELR8.com. We willdisclose on our website any waivers of, or amendments to, our Code of Ethics.

 

**ITEM 10. EXECUTIVE COMPENSATION**

 

The following table sets forth informationwith respect to compensation earned by the executive officers of the Companyfor 2005 and 2004. No other executive officer, other than Mr. Greenberg,received cash compensation from us of $100,000 or more in 2004. Mr. Pougnet,Chief Financial Officer did not receive cash compensation from the Company of$100,000 or more in 2005.

 

**Summary Compensation Table**

 
| ** **                                 | ** ** | ** **                   | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                          | ** ** | **Long Term  Compensation** | ** ** | ** **                            | ** ** |
|--------------------------------------------|------------|------------------------------|------------|----------------------------|------------|----------------|------------|-------------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **Annual Compensation** | ** ** | **Securities  Underlying** | ** ** | ** **     | ** ** |
| **Name and Principal  Position** | ** ** | **Years**                    | ** ** | **Salary  ($)**            | ** ** | **Bonus  ($)** | ** ** | **Other Annual  Compensation  ($)** | ** ** | **Securities  Options  (#)**     | ** ** | **All Other  Compensation  ($)** | ** ** |
| Earnest  Mathis, Jr, CEO (2)               |       | 2005                         |       | 122,845                    |       | -0-            |       | 9,831                               | (1)        | 275,000                          |       | -0-                                   |       |
|                                       |       |                         |       |                       |       |           |       |                                |       |                             |       |                                  |       |
| Sanford D.  Greenberg,                     |       | 2005                         |       | 150,000                    |       | -0-            |       | 18,000                              | (1)        | -0-                              |       | -0-                                   |       |
| Founder                                    |       | 2004                         |       | 114,905                    |       | -0-            |       | 17,631                              | (1)        | 800,000                          |       | -0-                                   |       |
|                                       |       |                         |       |                       |       |           |       |                                |       |                             |       |                                  |       |
| Douglas  Ridley, President (3)             |       | 2005                         |       | 100,962                    |       | 25,000         |       | -0-                                 |       | 220,000                          | (4)        | -0-                                   |       |
|                                       |       |                         |       |                       |       |           |       |                                |       |                             |       |                                  |       |
| David Litt,  Vice President Sales          |       | 2005                         |       | 173,077                    |       | 25,000         |       | 462                                 | (1)        | 50,000                           |       | -0-                                   |       |
| and  Marketing (5)                         |       | 2004                         |       | 34,615                     |       | -0-            |       | -0-                                 |       | 50,000                           |       | -0-                                   |       |
|                                       |       |                         |       |                       |       |           |       |                                |       |                             |       |                                  |       |
| Timothy  Transtrum, Vice President         |       | 2005                         |       | 130,000                    |       | -0-            |       | -0-                                 |       | 50,000                           |       | -0-                                   |       |
| Of  Operations (6)                         |       | 2004                         |       | 99,423                     |       | -0-            |       | -0-                                 |       | 50,000                           |       | -0-                                   |       |
|                                       |       |                         |       |                       |       |           |       |                                |       |                             |       |                                  |       |
| Sanjeevkumar  Javia, Vice President        |       | 2005                         |       | 102,714                    |       | -0-            |       | -0-                                 |       | 160,000                          |       | -0-                                   |       |
| Of Product  Development                    |       | 2004                         |       | 77,885                     |       | -0-            |       | -0-                                 |       | -0-                              |       | -0-                                   |       |

 

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(1)                                  Includesauto allowance.

(2)                                  Mr. Mathisjoined the Company in March 2005.

(3)                                  Mr. Ridleyjoined the Company in June 2005.

(4)                                  Includesthe 20,000 common stock options that Mr. Ridley earned as a Director priorto joining the Company.

(5)                                  Mr. Littjoined the Company in October 2004

(6)                                  Mr. Transtrumjoined the Company in February 2004

 

### **EmploymentContracts**

###  

During the current year the Company enteredinto employment contracts with Mr. Mathis, Mr. Ridley and Mr. Pougnetand restructured Mr. Greenberg’s contract.

 

On March 2, 2005, in connection with Mr. Greenberg’sresignation as Chairman, Chief Executive Officer, and President, Mr. Greenberg’semployment agreement was amended and restated to provide that his primaryduties involve training, motivating, and recruiting independent distributors. Mr. Greenbergwill receive a salary of $150,000 per year and may receive bonuses in suchamounts as determined by our board of directors. Mr. Greenberg will alsobe eligible to participate in bonuses on the same basis as our executives underany executive bonus plan adopted by us. Either party may terminate theagreement upon 30 days prior written notice. Additionally, Mr. Greenberg may beterminated for “just cause” as defined in the employment agreement upon onebusiness day’s prior written notice. Mr. Greenberg may terminate hisemployment for “good reason” as defined in employment agreement. If weterminate Mr. Greenberg without just cause or he terminates his employmentfor good reason, he is entitled 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. On March 2, 2005,in connection with Mr. Mathis’ employment as Chief Executive Office, Mr. Greenbergforfeited options to purchase 275,000 shares. In addition, Mr. Greenberghas agreed to forfeit options to purchase 50,000 shares if the planned publicoffering is completed.

 

Earnest Mathis entered into an employment agreementwith us, effective March 2, 2005, providing for his employment as ourChief Executive Officer and President. The employment agreement is for atwo-year term and provides that he will devote approximately 80% of his timeand energies to the business of the Company. Mr. Mathis will receive asalary of $150,000 per year and may receive bonuses in such amounts asdetermined by our Compensation Committee. Mr. Mathis will also be eligibleto participate in bonuses on the same basis as other executives under anyexecutive bonus plan adopted by us. Either party may terminate theagreement upon 30 days prior written notice. Additionally, Mr. Mathis may beterminated immediately for “just cause” as defined in the employment agreement.Mr. Mathis may also terminate his employment for “good reason” asdefined in the employment agreement. If we terminate Mr. Mathis withoutjust cause or he terminates his employment for good reason, he is entitled toone year’s salary payable over 12 months. Mr. Mathis’ employment agreementalso includes a non-competition provision for a period of one year after histermination of employment.

 

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

 

On June 2, 2005, Doug Ridley joined us as ourPresident along with his current position on the board of directors. Mr. Ridley’semployment agreement is for a two-year term and he will receive a base salaryof $175,000, and may receive bonuses in such amounts as determined by ourCompensation Committee. Mr. Ridley will also be eligible to participate inbonuses on the same basis as other executives under any executive bonus planadopted by

 

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us.Mr. Ridley will receive a signing bonus of $25,000 payable immediately. Hewill have an option to purchase 200,000 shares of VitaCube Systems Holdings, Inc.common stock, with an exercise price of $1.58. The options will vest in equalamounts over a four-year period on December 31 starting on December 31,2005. If Mr. Ridley’s employment were terminated other than for cause,disability or without good reason by Mr. Ridley, he would be providedseverance pay equal to the remaining months left on his employment agreement,payable in equal monthly installments.

 

On September 12, 2005, John D. Pougnet joinedus as our Chief Financial Officer. Mr. Pougnet’s employment agreement isfor a two-year term and he will receive a base salary of $140,000, and may receivebonuses in such amounts as determined by our Compensation Committee. Mr. Pougnetwill also be eligible to participate in bonuses on the same basis as otherexecutives under any executive bonus plan adopted by us. He will have an optionto purchase 50,000 shares of VitaCube Systems Holdings, Inc. common stock,with an exercise price of $1.80. The options will vest in equal amounts over afour-year period on December 31 starting on December 31, 2005. If Mr. Pougnet’semployment were terminated other than for cause, disability or without goodreason by Mr. Pougnet, he would be provided severance pay equal to twelvemonths, payable in equal monthly installments.

 

**Stock Options Grants**

 

In 2005, we issued the options listed below.There were no stock options exercised in 2005 by either Mr. Mathis or Mr. Greenberg.The following table sets forth the options granted in 2005:

 

**OptionGrants in 2005**

 
| **Name**                  | ** ** | **Number of securities  underlying options  granted (#)** | ** ** | **Percent of total options  granted to employees in  fiscal year** | ** ** | **Exercise or base  price ($/Sh)** | ** ** | **Expiration date** | ** ** |
|---------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------|------------|
| Earnest  Mathis, Jr. |       | 275,000                                                                       |       | 33                                                                                                    | %          | $                                                 | 2.50       |                     | 2010       |   |
| Sanford D.  Greenberg     |       | -0-                                                                           |       | -0-                                                                                                   |       | —                                            |       | —                   |       |
| Douglas  Ridley           |       | 20,000                                                                        |       | 2                                                                                                     | %          | $                                                 | 3.20       |                     | 2010       |   |
|                      |       | 200,000                                                                       |       | 24                                                                                                    | %          | $                                                 | 1.58       |                     | 2010       |   |
| David Litt                |       | 50,000                                                                        |       | 6                                                                                                     | %          | $                                                 | 1.50       |                     | 2010       |   |
| Timothy  Transtrum        |       | 50,000                                                                        |       | 6                                                                                                     | %          | $                                                 | 1.50       |                     | 2010       |   |
| Sanjeevkumar  Javia       |       | 160,000                                                                       |       | 19                                                                                                    | %          | $                                                 | 1.50       |                     | 2010       |   |

 

**Stock Option Exercises ad Option Value**

 

There were no options exercised by the namedexecutive officers during the year ended December 31, 2005 and there wereno options held by these officers that were in the money at December 31,2005.

 

**ITEM 11. SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS**

 

**Securities Authorized for Issuance UnderEquity Compensation Plans**

 

The following table sets forth informationconcerning ownership of our common stock as of December 31, 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.

 

35

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| **Name and Address**                                                        | ** ** | **Number of  Shares (1)** | ** ** | **Percent of  Class (2)** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| Earnest Mathis, Jr.(12)  Chief Executive Officer and Chairman                    |       | 436,957                             | (3)        | 4.4                                 | %          |
|                                                                                  |       |                                |       |                                |       |
| Doug Ridley (12)  President and Director                                              |       | 72,500                              | (4)        |                                | *          |
|                                                                                  |       |                                |       |                                |       |
| John D. Pougnet (12)  Chief Financial Officer                                         |       | 12,500                              | (5)        |                                | *          |
|                                                                                  |       |                                |       |                                |       |
| David Litt (12)  Vice President of Sales and Marketing                                |       | 35,000                              | (6)        |                                | *          |
|                                                                                  |       |                                |       |                                |       |
| Timothy Transtrum (12)  Vice President of Operations                                  |       | 37,500                              | (7)        |                                | *          |
|                                                                                  |       |                                |       |                                |       |
| Sanjeevkumar Javia (12)  Vice President of Product Development                        |       | 146,667                             | (8)        | 1.5                                 | %          |
|                                                                                  |       |                                |       |                                |       |
| John B McCandless (12)  Director                                                      |       | 35,000                              | (10)       |                                | *          |
|                                                                                  |       |                                |       |                                |       |
| Anthony DiGiandomenico  Director  401 Wilshire Blvd Ste. 1020  Santa Monica, CA 90401 |       | 219,703                             | (9)        | 2.2                                 | %          |
|                                                                                  |       |                                |       |                                |       |
| All officers  and directors as a group (8 persons)                                    |       | 995,827                             |       | 9.6                                 | %          |
|                                                                                  |       |                                |       |                                |       |
| Sanford D. Greenberg (12)  Founder                                                    |       | 2,805,406                           | (13)       | 28.0                                | %          |
|                                                                                  |       |                                |       |                                |       |
| Warren Cohen  595 South Broadway, Suite 200  Denver, CO 80209                    |       | 1,338,800                           | (11)       | 13.9                                | %          |

 

----

| *      |   | 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 the date hereof and which will not become vested  or exercisable within 60 days of December 31, 2005.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    |   | Percentages are rounded to nearest  one-tenth of one percent. Percentages are based on 9,618,900 shares of common  stock outstanding. Options that are presently exercisable or exercisable  within 60 days are deemed 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 Includes 274,625  shares issuable pursuant to options which are presently exercisable or which  become exercisable within 60 days of the filing of December 31, 2005,  and 162,332 shares held of record.                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (4)    |   | Comprised of 72,500 shares issuable  pursuant to options which are presently exercisable or which become  exercisable within 60 days of December 31, 2005.                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (5)    |   | Comprised of 12,500 shares issuable  pursuant to options which are presently exercisable or which become  exercisable within 60 days of December 31, 2005.                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (6)    |   | Comprised of 35,000 shares issuable  pursuant to options which are presently exercisable or which become  exercisable within 60 days of December 31, 2005, 10,000 shares held of  record.                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (7)    |   | Comprised of 37,500 shares issuable  pursuant to options which are presently exercisable or which become  exercisable within 60 days of December 31, 2005.                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (8)    |   | Comprised of 146,667 shares issuable  pursuant to options which are presently exercisable or which become exercisable  within 60 days of December 31, 2005.                                                                                                                                                                                                                                                                                               |

 

36

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| (9)    |   | Comprised of 99,095 shares issuable  pursuant to public warrants and 33,750 shares pursuant to options which are  presently exercisable or which become exercisable within 60 days of December 31,  2005, and 66,800 shares held of record and 10,029 Class A warrants and  10,029 Class B warrants. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                |
| (10)   |   | Comprised of 35,000 shares issuable  pursuant to options which are presently exercisable or which become  exercisable within 60 days of December 31, 2005                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                |
| (11)   |   | Comprised of 1,338,800 shares held of  record.                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                |
| (12)   |   | Address: 480 South Holly Street, Denver,  Colorado 80246                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                |
| (13)   |   | Includes shares either held directly or as  custodian for a minor child and includes 416,000 shares issuable pursuant to  options which are presently exercisable or which become exercisable within 60  days of December 31, 2005, and 2,389,406 shares held of record.                                       |

 

The following table provides information about our equity compensationplans as of December 31, 2005.

 

**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     |       | 1,571,350                                                                                                                                            |       | $                                                                                                           | 3.40       |                                                                                                                                       | 228,650    |   |
| Equity  compensation plans not approved by stockholders |       | -0-                                                                                                                                                  |       | N/A                                                                                                         |       | -0-                                                                                                                                        |       |
| Total                                                   |       | 1,571,350                                                                                                                                            |       | $                                                                                                           | 3.40       |                                                                                                                                       | 228,650    |   |

 

**ITEM 12. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

We lease our current corporate office spacefrom Arnold Greenberg, the father of our Founder, Sanford D. Greenberg. We paid$36,000 and $38,830 in rent for the years ended December 31, 2004 and2005, respectively. Our current lease at $3,390 per month expires at the end ofMarch 2006, with an automatic monthly extension and a two month noticeperiod to cancel.

 

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 above debt owed to Mr. Cohenwas a condition 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.

 

Mr. Greenberg converted $133,127 and $166,873that he advanced us plus accrued interest into long-term subordinated loans on June 30,2002 and September 30, 2002, respectively. These notes provided forinterest at 8% per year with principal and interest payable from 5% of ouradjusted quarterly net income. Accrued interest on the notes as of 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. Greenbergconverted $200,000 that he advanced us into a bridge loan with interest at 10%per year, principal and interest due December 31, 2003. As part ofthe terms of the bridge loan, Mr. Greenberg was granted an option topurchase 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

 

37

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demand accruing interest at 10% per year. As of December 31, 2003,accrued interest 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 ofcommon stock were being sold in a private offering of our securities. Thisprice was determined pursuant to arms-length negotiations between third partyinvestors and us, and the conversion of the above debt owed to Mr. Greenbergwas a condition 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.

 

In December 2003, Mr. Mathisadvanced us $50,000, evidenced by a promissory note. As part of theconsideration for the loan, Mr. Mathis received an option to purchase2,000 shares of our common stock at $5.00 per share. The option is fully vestedand exercisable for 5 years. This option was not part of our 2003 StockIncentive Plan. The promissory note provided for interest at 18% per annum andwas due 30 days after the loan was funded. The note further provided that, inthe event the note was not paid when due, Mr. Mathis was entitled to (i) anadditional option to purchase 20,000 shares of our common stock at $5.00 pershare (with this 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 priceof $2.50 per share. This note was not paid when due, and in January 2004, Mr. Mathiswas granted the second option to purchase 20,000 shares of our common stock at$5.00 per share. In connection with this transaction, we recorded interest of$50,000 in January 2004 related to the beneficial conversion featureembedded in this note. During January 2004, we borrowed an additional$50,000 from Mr. Mathis. The terms of the note were the same as the loanmade in December 2003. An option to purchase 2,000 shares of our commonstock at $2.50 per share was granted as partial consideration for this loan.This note was not paid when due, and in February 2004, Mr. Mathis wasgranted a second option to purchase 10,000 shares of our common stock at $2.50per share. Also in February 2004, we recorded interest of $50,000 relatedto the beneficial conversion features embedded in the note. In February 2004,Mr. Mathis converted the principal of the notes payable totaling $100,000into 30,000 shares of our common stock at $2.50 per share, forgiving a total of$2,441in accrued interest.

 

Mr. DiGiandomenico, a Director, is amanaging member of MDB Capital LLC, (“MDB”) the placement agent in a privateoffering of our 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 conversion price of the warrants wasbased on the offering price of our common stock in the then just completedprivate offering. At the time the trading price for our common stock was $2.55per share; however, our common stock was thinly traded. At the time of the April 2005offering Mr. DiGiandomenico received 10,029 Class A warrants and10,029 Class B warrants as compensation for the year lockup of hisexisting share owned.

 

Mr. Litt, our Vice President of Salesand Marketing, served as a consultant to us in 2004, regarding sales andmarketing activities 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.

 

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

 

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

 

38

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**ITEM 13.EXHIBITS**

 

(a)          Exhibits

 
| **Exhibit No** | ** ** | **Description**                                                                                                                                                                                                                                                 |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Articles of Incorporation incorporated by  reference to Exhibit 3.01 filed with Form SB-2 filed February 27,  2001                                                                                                                               |
| 3.1.1               |       | Certification of Amendment to the Articles  of Incorporation incorporated by reference to Exhibit 3.1.1 filed with Form 10-QSB  filed November 14, 2003                                                                                          |
| 3.2                 |       | Amended and Restated By-laws filed with Form 10-KSB on March 3, 2005 as Exhibit 3.2, and incorporated herein by reference                                                                                                                                       |
| 4.1                 |       | Warrant – MDB Capital Group filed with Form SB-2  on June 29, 2004, and incorporated herein by reference                                                                                                                                         |
| 4.2                 |       | Sample Stock Purchase Agreement with  Registration Rights filed with Form SB-2 on June 29, 2004, and  incorporated herein by reference                                                                                                                |
| 4.3                 |       | Warrant – Anthony DiGiandomenico filed with  Form SB-2 on June 29, 2004, and incorporated herein by reference                                                                                                                                    |
| 4.4                 |       | Warrant – Christopher A. Marlett filed with  Form SB-2 on June 29, 2004, and incorporated herein by reference                                                                                                                                    |
| 10.1                |       | VitaCube Systems Holdings, Inc. 2003  Stock Incentive Plan incorporated by reference to Exhibit 10.1 filed  with Form 10-QSB filed November 14, 2003                                                                                        |
| 10.1.1              |       | Form of Incentive Stock Option Agreement under the 2003 Stock Incentive Plan filed with Form 10-KSB on March 3, 2005, as Exhibit 10.1.1, and incorporated herein by reference.                                                              |
| 10.1.2              |       | Form of Nonqualified Stock Option Agreement under the 2003 Stock Incentive Plan filed with Form 10-KSB on March 3, 2005, as Exhibit 10.1.2, and incorporated herein by reference.                                                           |
| 10.2                |       | Agreement Concerning the Exchange of Securities by and between the Company and VitaCube Systems, Inc. and the Security Holders of VitaCube Systems, Inc. incorporated by reference to Exhibit 2 filed with Form 8-K filed July 1, 2003 |
| 10.3                |       | Employment Agreement – Sanford D. Greenberg filed with Form 8-K on April 2, 2004, as Exhibit 10.1, and incorporated herein by reference                                                                                                     |
| 10.4                |       | Option Agreement – Sanford D. Greenberg filed with Form 8-K on April 2, 2004, as Exhibit 10.2, and incorporated herein by reference                                                                                                         |
| 10.5                |       | Lockup Agreements – Sanford D. Greenberg and Warren Cohen filed with Form SB-2 on June 29, 2004, and incorporated herein by reference                                                                                                            |
| 10.6                |       | Employment Agreement – Timothy Transtrum filed with Form SB-2 on June 29, 2004, and incorporated herein by reference                                                                                                                             |
| 10.7                |       | MDB Capital Group, LLC – Engagement Letter filed with Form SB-2 on June 29, 2004, and incorporated herein by reference                                                                                                                           |
| 10.8                |       | Employment Agreement – David Litt filed with Form 8-K on November 5, 2004, and incorporated herein by reference                                                                                                                                  |
| 10.9                |       | Incentive Stock Option Agreement – David Litt . filed with Form 10-KSB on March 3, 2005, as Exhibit 10.10, and incorporated herein by reference.                                                                                            |
| 10.10               |       | Office Lease and Addendums – A.L. Greenberg filed with Form SB-2 on January 18, 2005, and incorporated herein by reference                                                                                                                       |
| 10.11               |       | Consulting Agreement – Dr. William Wheeler filed with Form SB-2 on January 18, 2005, and incorporated herein by reference                                                                                                                   |
| 10.12               |       | Restated Employment Agreement – Sanford D. Greenberg filed with Form 10-KSB on , March 4, 2005 as Exhibit 10.3, and incorporated herein by reference.                                                                                       |
| 10.13               |       | Employment Agreement – Earnest Mathis, Jr. filed with Form 10-KSB on March 3, 2005, as Exhibit 10.10, and incorporated herein by reference.                                                                                            |
| 10.14               |       | Stock Option Agreement – Earnest Mathis, Jr. filed with Form 10-KSB on March 3, 2005, as Exhibit 10.11, and incorporated herein by reference.                                                                                          |
| 10.15               |       | Strategic alliance agreement with UTEK Corporation filed on Form 8-K on May 23, 2005, as Exhibit 10.1 and 10.2, and incorporated herein by reference.                                                                                            |
| 10.16               |       | Employment Agreement – Douglas Ridley filed with Form 8-K on June 2, 2005, as Exhibit 10.1, and incorporated herein by reference.                                                                                                           |
| 10.17               |       | Service Agreement with Elite Financial Communications Group, LLC file on Form 8-K on September 6, 2005, , as Exhibit 10.11, and incorporated herein by reference.                                                                                |
| 10.18               |       | Employment Agreement – John D. Pougnet filed with Form 8-K on September 14, 2005, as Exhibit 10.1, and incorporated herein by reference.                                                                                                    |
| 10.19               |       | Consulting Agreement with Eastgate Associates Ltd filed herein.                                                                                                                                                                                                 |
| 10.20.1             |       | Consulting agreement with Carnell Williams filed herein                                                                                                                                                                                                         |
| 10.20.2             |       | Press Release for Carnell Williams filed herein                                                                                                                                                                                                                 |
| 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                                                     |

 

39

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| 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 |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

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 and Audit Related**

 

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

 

We paid Gordon, Hughes & Banks, LLPa total of $24,277 for professional services rendered in review of the September 30,2004 Form 10-QSB and audit of our financials for the year ended December 31,2004.

 

We paid Gordon, Hughes & Banks, LLPa total of $23,000 for professional services rendered in review of the March 31,June 30 and September 30, 2005 Form 10-QSB and audit of ourfinancials for the year ended December 31, 2005.

 

 Wepaid Gordon, Hughes & Banks, LLP a total of $25,510 for professionalservices rendered in review of our filing a Form SB-2.

 

**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.

 

We paid Gordon, Hughes & Banks, LLPa total of $3,750 professional services rendered in connection with thepreparation of our federal and state income tax returns for the year ended December 31,2004

 

**All Other Fees**

 

None.

 

40

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) ofExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, on March 30, 2006.

 
|   | **VITACUBE SYSTEMS HOLDINGS, INC.** |
|--------|------------------------------------------|
|   |                                     |   |   |
|   |                                     |   |   |
|   | By                                       |   | */s/ Earnest Mathis, Jr.* | * * |
|   |                                     |   | Earnest Mathis, Jr. |
|   |                                     |   | Chief Executive Officer and Chairman |
|   |                                     |   |   |
|   |                                     |   |   |
|   | By                                       |   | */s/ John D Pougnet* | * * |
|   |                                     |   | John D Pougnet |
|   |                                     |   | Chief Financial Officer |
|   |                                     |   |   |
|   |                                     |   |   |
|   | By                                       |   | */s/ Doug Ridley* | * * |
|   |                                     |   | Doug Ridley |
|   |                                     |   | President and Director |
|   |                                     |   |   |
|   |                                     |   |   |
|   | By                                       |   | */s/ Anthony DiGiandomenico* | * * |
|   |                                     |   | Anthony DiGiandomenico |
|   |                                     |   | Director |
|   |                                     |   |   |
|   |                                     |   |   |
|   | By                                       |   | */s/ John B. McCandless* | * * |
|   |                                     |   | John B. McCandless |
|   |                                     |   | Director |

 

41

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

** **

Tothe Board of Directors

VitaCubeSystems Holdings, Inc.

Denver,Colorado

 

Wehave audited the accompanying consolidated balance sheets of VitaCube SystemsHoldings, Inc. as of December 31,2005 and 2004 and the related consolidated statements of operations,changes in shareholders’ equity (deficit) and cash flows for each of the twoyears then ended. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement. TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the consolidated financial statements. An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

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 31,2005 and 2004, and the results of its operations and its cash flows foreach of the years then ended, in conformity with accounting principlesgenerally accepted in the United States of America.

 

The accompanying financial statements have been presented assuming thatthe Company will continue as a going concern, which contemplates therealization of assets and the satisfaction of liabilities in the normal courseof business. As discussed in Note 1 to the consolidated financial statements,the Company incurred a net loss of $5,015,877 for the year ended December 31,2005 and incurred significant net losses since inception. These factors raisesubstantial doubt about the Company’s ability to continue 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 thisuncertainty.

 

 
|                        | ***Gordon, Hughes & Banks, LLP*** |   |
|-----------------------------|--------------------------------------------|--------|
|                        |
| Greenwood Village, Colorado |
| February 3, 2006       |

 

F-1

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

# **CONSOLIDATEDBALANCE SHEETS**

# **For the Years Ended December 31, 2005 and 2004**

# ** **

| ** **                                                                                                                  | ** ** | **2005**    | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|
| **ASSETS**                                                                                                                  |       |        |       |       |       |
| Current  assets:                                                                                                            |       |        |       |       |       |
| Cash and  cash equivalents                                                                                                  |       | $           | 2,805,021  |       | $          | 114,794 |   |
| Short term  investments                                                                                                     |       | 110,000     |       |       |       |
| Accounts  receivable, net of allowance for doubtful accounts of $5,463 and $237,  respectively                              |       | 8,758       |       | 4,358      |       |
| Inventory,  net of allowance for obsolescence of $16,879 and 43,300, respectively                                           |       | 542,749     |       | 478,300    |       |
| Prepaid  expenses and other current assets                                                                                  |       | 279,502     |       | 108,315    |       |
| Total  current assets                                                                                                       |       | 3,746,030   |       | 705,767    |       |
|                                                                                                                        |       |        |       |       |       |
| Property and  equipment, net (Note 4)                                                                                       |       | 93,423      |       | 109,275    |       |
| Intangible  assets, net (Note 5)                                                                                            |       | 36,219      |       | 40,015     |       |
| Deferred  offering costs                                                                                                    |       | —      |       | 269,106    |       |
|                                                                                                                        |       |        |       |       |       |
| Total assets                                                                                                                |       | $           | 3,875,672  |       | $          | 1,124,163 |   |
|                                                                                                                        |       |        |       |       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                              |       |        |       |       |       |
| Current  liabilities:                                                                                                       |       |        |       |       |       |
| Accounts  payable and accrued expenses                                                                                      |       | $           | 455,996    |       | $          | 611,398 |   |
| Total  liabilities                                                                                                          |       | 455,996     |       | 611,398    |       |
|                                                                                                                        |       |        |       |       |       |
| Commitments  and Contingency                                                                                                |       | —      |       | —     |       |
|                                                                                                                        |       |        |       |       |       |
| **SHAREHOLDERS’  EQUITY (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, 9,618,900 and 6,534,043  issued and outstanding, respectively |       | 9,619       |       | 6,534      |       |
| Additional  paid in capital                                                                                                 |       | 15,990,889  |       | 8,071,186  |       |
| Accumulated  (deficit)                                                                                                      |       | (12,580,832 | )          | (7,564,955 | )          |
|                                                                                                                        |       |        |       |       |       |
| Total  shareholders’ equity                                                                                            |       | 3,419,676   |       | 512,765    |       |
|                                                                                                                        |       |        |       |       |       |
| Total  liabilities and shareholders’ equity                                                                            |       | $           | 3,875,672  |       | $          | 1,124,163 |   |

 

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

 

F-2

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**Forthe Years Ended December 31, 2005 and 2004**

 
| ** **                                         | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
|                                               |       |       |       |       |       |
| Net sales                                          |       | $          | 1,227,803  |       | $          | 803,640 |   |
| Cost of  goods sold                                |       | 540,916    |       | 281,341    |       |
| Gross profit                                       |       | 686,887    |       | 522,299    |       |
|                                               |       |       |       |       |       |
| Operating  expenses:                               |       |       |       |       |       |
| Selling and  marketing expenses                    |       | 2,856,351  |       | 1,098,550  |       |
| General and  administrative expenses               |       | 2,844,633  |       | 1,569,730  |       |
| Research and  development expenses                 |       | 70,037     |       | 6,498      |       |
| Depreciation  and amortization                     |       | 25,682     |       | 65,339     |       |
| Total  operating expenses                          |       | 5,796,703  |       | 2,740,117  |       |
|                                               |       |       |       |       |       |
| Loss from  operations                              |       | (5,109,816 | )          | (2,217,818 | )          |
| Other income  (expense)                            |       |       |       |       |       |
| Interest  income                                   |       | 96,780     |       | 4,691      |       |
| Interest  (expense)                                |       | (2,841     | )          | (300,872   | )          |
|                                               |       |       |       |       |       |
| Total other  income (expense)                      |       | 93,939     |       | (296,181   | )          |
|                                               |       |       |       |       |       |
| Net (loss)                                         |       | $          | (5,015,877 | )          | $          | (2,513,999 | ) |
|                                               |       |       |       |       |       |
| Net (loss)  per common share                       |       |       |       |       |       |
| Basic and  diluted net (loss) per share            |       | $          | (0.57      | )          | $          | (0.44 | ) |
|                                               |       |       |       |       |       |
| Weighted  average common shares, basic and diluted |       | 8,768,452  |       | 5,716,404  |       |

 

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

 

F-3

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OFCHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**

**Forthe Years Ended December 31, 2005 and 2004**

 
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **       | ** ** | ** **      | ** ** | ** **    | ** ** | **Total**              | ** **  |
|---------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------------|------------|---------------|------------|------------------------|-------------|
| ** **                                                                                              | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**  | ** ** | ** **    | ** ** | **shareholders’** | ** **  |
| ** **                                                                                              | ** ** | **Common Stock** | ** ** | **paid in** | ** ** | **Accumulated** | ** ** | **equity**    | ** ** |
| ** **                                                                                              | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**     | ** ** | **(deficit)** | ** ** | **(deficit)**          | ** **  |
| **Balances,  January 1, 2004**                                                                     |       | 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                |        |
|                                                                                                    |       |                  |       |             |       |            |       |          |       |                   |        |
| Public  offering of common stock and warrants, April 5, 2005, net of offering  costs of $1,839,425 |       | 3,000,000             |       | 3,000            |       | 7,095,937       |       | —        |       | 7,098,937              |        |
| Issuance of  common stock warrants                                                                      |       | —                |       | —           |       | 286,638         |       | —        |       | 286,638                |        |
| Issuance of  common stock for services                                                                  |       | 84,857                |       | 85               |       | 144,615         |       | —        |       | 144,700                |        |
| Stock-based  compensation                                                                               |       | —                |       | —           |       | 392,513         |       | —        |       | 392,513                |        |
| Net (loss)                                                                                              |       | —                |       | —           |       | —          |       | (5,015,877    | )          | (5,015,877             | )           |
|                                                                                                    |       |                  |       |             |       |            |       |          |       |                   |        |
| **Balances,  Decmeber 31, 2005**                                                                        |       | 9,618,900             |       | $                | 9,619      |            | $          | 15,990,889    |       | $                      | (12,580,832 | ) | $ | 3,419,676 |   |
|                                                                                                         |            |                       |            |                  |            |                 |            |               |            |                        |             |  |  |  |  |  |

 

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

 

F-4

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Forthe Years Ended December 31, 2005 and 2004**

 
| ** **                                                    | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash flows from operating activities:                         |       |       |       |       |       |
| Net loss                                                      |       | $          | (5,015,877 | )          | $          | (2,513,999 | ) |
| Adjustments  to reconcile                                     |       |       |       |       |       |
| Depreciation  and amortization                                |       | 25,682     |       | 65,339     |       |
| Beneficial  conversion feature interest                       |       | —     |       | 255,000    |       |
| Stock issued  in payment of accounts payable                  |       | —     |       | 100,000    |       |
| Stock and  stock options issued for services                  |       | 537,213    |       | 357,513    |       |
| Change in  allowance for doubtful accounts                    |       | 5,225      |       | 101        |       |
| Change in  allowance for inventory obsolesence                |       | (26,421    | )          | 11,518     |       |
| Change in  allowance for product returns                      |       | 16,204     |       | 2,450      |       |
| Changes in  assets and liabilities:                           |       |       |       |       |       |
| Accounts  receivable                                          |       | (9,625     | )          | 2,214      |       |
| Inventory                                                     |       | (38,028    | )          | (203,781   | )          |
| Other  current assets                                         |       | (243,585   | )          | (52,838    | )          |
| Accounts  payable and accrued expenses                        |       | (187,210   | )          | (85,445    | )          |
| Net cash  (used) by operating activities                      |       | (4,936,422 | )          | (2,061,928 | )          |
| Cash flows from investing activities:                         |       |       |       |       |       |
| Capital  expenditures                                         |       | (6,033     | )          | (4,007     | )          |
| Purchase of  short term investments                           |       | (110,000   | )          | —     |       |
| Net cash  (used) by investing activities                      |       | (116,033   | )          | (4,007     | )          |
| Cash flow from financing activities:                          |       |       |       |       |       |
| Proceeds  from bridge loan financing                          |       | 195,000    |       | —     |       |
| Repayments  of bridge financing                               |       | (195,000   | )          | (47,500    | )          |
| Proceeds  from loan from shareholder                          |       | 170,000    |       | 12,481     |       |
| Repayments  of loan from shareholder                          |       | (170,000   | )          | (132,173   | )          |
| Proceeds  from notes payable                                  |       | —     |       | 205,000    |       |
| Issuance of  common stock                                     |       | 7,742,682  |       | 2,034,958  |       |
| Net cash  from financing activities                           |       | 7,742,682  |       | 2,172,766  |       |
| NET INCREASE  IN CASH                                         |       | 2,690,227  |       | 106,831    |       |
| CASH,  BEGINNING OF PERIOD                                    |       | 114,794    |       | 7,963      |       |
| CASH, END OF  PERIOD                                          |       | $          | 2,805,021  |       | $          | 114,794 |   |
|                                                          |       |       |       |       |       |
| **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 |   |
| Interest and debt forgiveness                                 |       | $          | —     |       | $          | 8,964 |   |
| Notes payable converted to common stock                       |       | $          | —     |       | $          | 305,000 |   |
|                                                          |       |       |       |       |       |
| **SUPPLEMENTAL CASH FLOW**                                    |       |       |       |       |       |
| Cash paid for interest                                        |       | $          | 2,841      |       | $          | 45,872 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements. 

 

F-5

----

 

**VITACUBESYSTEMS HOLDINGS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

***Organizationand Business***

 

The consolidated financial statements include those ofVitaCube Systems Holdings, Inc., (VSHI) and its wholly owned subsidiaries,VitaCube Systems, Inc. and XELR8, Inc. (formerly VitaCube Network, Inc.).Collectively, they are referred to herein as the “the Company.”

 

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

 

The Company sells and markets the products through adirect selling channel, in which independent distributors sell our productsthrough a network of customers and other distributors. These activities areconducted through XELR8, Inc., a wholly owned Colorado corporation, formedon July 9, 2003. In addition, we sell our products directly toprofessional and Olympic athletes and professional sports teams throughVitaCube Systems Inc.

 

***Going Concern Uncertainty***

 

Theaccompanying financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America, whichcontemplates continuation of the Company as a going concern.  The Companyincurred a net loss of $5,015,877 for the year ended December 31, 2005 andhas incurred significant net losses since inception.

 

The Company has been developing awareness of itsproducts through its newly implemented marketing plan.  Within time,management believes that demand for its products will develop to allow theCompany to become profitable, through the development of its independentdistributor and customer base. Management believes that the cash resources willbe sufficient to fund its operations for the next twelve months. If thebusiness operations do not result in increased product sales, our businessviability, financial position, results of operations and cash flow will likelybe adversely affected. Consequently, management may elect to raise money duringthe year ended December 31, 2006 to meet any shortfalls fromoperations.  However a realization of significant portion of the assets inthe accompanying balance sheet is dependent on the continued operations of theCompany, which in turn is dependent on the increase in independent distributorsand customer base or the additional capital raised through a placement of itssecurities.

 

***Principals ofConsolidation***

 

The accompanying financial statements includethe accounts of the Company and its wholly-owned subsidiaries VitaCube Systems, Inc.and XELR8, Inc. All intercompany accounts and transactions have beeneliminated in the preparation of 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 share and per share amountsin these financial statements have been restated to give effect to the reversesplit.

 

***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.

 

F-6

----

 

Management believes that the estimates utilized in the preparation ofthe financial statements are prudent and reasonable. Actual results coulddiffer from these estimates.

 

***Revenue Recognition***

 

The Company ships its products by common carrier andreceives payment in the form of cash, credit card or approved credit terms.In May 2004, the Company revised its product return policy to provide a60-day money back guarantee on orders placed by first-time customers anddistributors. After 60 days and for all subsequent orders placed by customersand distributors, the Company allows resalable products to be returned within12 months of the purchase date for a 100% sales price refund, subject to a 10%restocking fee. Since August 2003, the Company has experienced monthlyreturns ranging from 1.7% to 4.9% of net sales. Sales revenue and estimatedreturns are recorded when the merchandise is shipped since performance by theCompany is considered met when products are in the hands of the common carrier.Amounts received for unshipped merchandise are recorded as customer depositsand 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. The Company considers deposits inbanks and investments purchased with original maturities of more than threemonths and less than a year to be short term investments.

 

***Concentrations***

 

The Company has no significantoff-balance sheet concentrations of credit risk such as foreign exchangecontracts, options contracts or other foreign hedging arrangements. The Companymaintains the majority of its cash balances with two financial institutions inthe form of demand deposits and money market funds. Funds in excess of thefederally insured amount of $100,000 are subject to credit risk, and theCompany believes that the financial institutions are financially sound and therisk of loss is minimal.

 

During 2005, the Company reliedsignificantly on five suppliers for 61% of its purchases of raw materials forsupplements, drinks and marketing materials held for sale. The Company does notbelieve that it has reliance on any single supplier as the most significantaccounted for 14% of inventory purchases. Management believes that itspurchasing requirements can be readily met from alternative sources.

 

***Short termInvestments***

 

The Company records the certificates of deposit asheld-to-maturity securities and uses the amortized cost at balance sheet date.

 

***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 are made at a specific point in time, basedon relative market information and information about each financial instrument,specifically, the value of the underlying financial instrument. Assets that arerecorded at fair value consist largely of cash, short term investments andaccounts receivable, which are carried at contracted amounts that approximatefair value. Similarly, the Company’s liabilities consist primarily of shortterm liabilities recorded at contracted amounts 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 orobsolete inventory to the estimated net realizable value. The Company purchasesfor resale a sports energy drink, a sports hydration drink, a protein shake,meal replacement drink, a functional food snack and other vitamins andnutritional supplements, which it packages in various forms and containers.

 

Inventory is comprised of thefollowing:

 

F-7

----

 
| ** **                     | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Purchased materials            |       | $                           | 237,105    |                        | $          | 294,529 |   |
| Finished goods                 |       | 322,523                     |       | 227,071                     |       |
| Reserve for obsolete inventory |       | (16,879                     | )          | (43,300                     | )          |
|                           |       | $                           | 542,749    |                        | $          | 478,300 |   |

 

***Asummary of the reserve for obsolete and excess inventory was as follows as of December 31,2005 and 2004:***

 
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1    |       | $        | 43,300     |     | $          | 31,782 |   |
| Addition to provision           |       | 70,335   |       | 33,837   |       |
| Write-off of obsolete inventory |       | (96,756  | )          | (22,319  | )          |
| Balance as of December 31  |       | $        | 16,879     |     | $          | 43,300 |   |

 

***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. For purposes of evaluating therecoverability of long-lived assets, the recoverability test is performed usingundiscounted net cash flows estimated to be generated by the asset. Animpairment was not deemed necessary in either 2005 or 2004.

 

***Intangible Assets***

 

The Company’s intangible assets, consistingof trademarks and patent costs, are being amortized over their estimated lifeof 15 years.

 

***Advertising Costs***

 

Advertising andmarketing costs were $773,470 and $321,846 for the years ended December 31,2005 and 2004, respectively and are expensed as incurred or the first time theadvertising takes place.

 

***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 liabilitiesare measured using enacted tax rates in effect for the year in which thosetemporary differences are expected to be recovered 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 forStock Issued to Employees” (“APB No. 25”), and related interpretations inaccounting for stock options granted to employees.

 

F-8

----

 

If the Company measured compensation cost based on thefair value of the options at the grant date at December 31, 2005 and 2004consistent with the method prescribed by SFAS 123, the Company’s net loss andloss per common share would have been increased to the pro forma amountsindicated below:

 
| ** **                                                                                                                           | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Net loss, as  reported                                                                                                               |       | $          | (5,015,877 | )        | $          | (2,513,999 | ) |
|                                                                                                                                 |       |       |       |     |       |
| Add:  Stock-based compensation expense included in reported net income, net of  related tax effects                                  |       | 392,513    |       | 343,192  |       |
|                                                                                                                                 |       |       |       |     |       |
| Deduct:  Total stock-based compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (1,357,748 | )          | (661,129 | )          |
|                                                                                                                                 |       |       |       |     |       |
| Pro forma  net loss                                                                                                                  |       | $          | (5,981,111 | )        | $          | (2,831,936 | ) |
| Earnings per  share:                                                                                                                 |       |       |       |     |       |
| Basic and  diluted earnings (loss) per common share                                                                                  |       |       |       |     |       |
| As reported                                                                                                                          |       | $          | (0.57      | )        | $          | (0.44 | ) |
| Pro forma                                                                                                                            |       | $          | (0.68      | )        | $          | (0.50 | ) |

 

The fair value of each option grant was estimated atthe date of the grant using the Black-Scholes-Merton option pricing model withthe following assumptions for 2005 and 2004: risk-free interest rate between3.85% - 4.01% and 2.79%-3.93%, respectively; no dividend yield; expected lifeof 3.6 to 7 years and 5 years respectively; and volatility between 96.6% and116.01% (2005) and 86.97% (2004), respectively.

 

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.”

 

***Beneficial Conversion Feature ofDebt***

 

In accordance with Emerging Issues Task Force No. 98-5,Accounting for Convertible Securities with Beneficial Conversion Features orContingently Adjustable Conversion Ratios, and No. 00-27, Application ofIssue No. 98-5 to Certain Convertible Instruments, the Company recognizesthe value of conversion rights attached to convertible debt. These rights givethe debt holder the ability to convert his debt into common stock at a priceper share that is less than the trading price to the public on the day the loanis made to the Company. The beneficial value is calculated based on the marketprice of the stock at the commitment date in excess of the conversion rate ofthe debt and related accruing interest and is recorded as a discount to therelated debt and addition to additional paid in capital. The discount isamortized and recorded as interest expense over the remaining outstandingperiod of related debt.

 

***NetLoss Per Share***

 

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

 

***Recent AccountingPronouncements***

 

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4, which revised ARB No.43, relating to inventory costs. This revision is to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that these items be recognized

 

F-9

----

 

as a current period charge regardless of whether they meet the criterion specified in ARB 43. In addition, this Statement requires the allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after the date this Statement is issued. Management believes this Statement will have no impact on the financial statements of the Company once adopted.

 

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2005), Share-Based Payment, (“SFAS No. 123(R)”) which amends FASB Statement Nos. 123 and 95. SFAS No. 123(R) requires all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value and is effective for public companies that file as small business issuers for interim or annual periods beginning after December 15, 2005. The Company will adopt this standard effective January 1, 2006 and will elect the modified prospective application transition method. Under the modified prospective application transition method, awards that are granted, modified, repurchased, or cancelled after the date of adoption should be measured and accounted for in accordance with the provisions of SFAS No. 123(R). Awards granted prior to the effective date should continue to be accounted for in accordance with the provisions of SFAS No. 123 with the exception that compensation expense related to unvested options must be recognized in the income statement based on the fair value of the options on the date of grant. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company expects adoption of the standard to reduce fiscal 2006 net income by an amount consistent with amounts shown in pro forma disclosures above.

 

In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. This Statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date of this Statement is issued. Management believes this Statement will have no impact on the financial statements of the Company once adopted.

 

In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”), Accounting for Conditional Asset Retirement Obligations, which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. A conditional asset retirement obligation is defined as a legal obligation to perform asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Adoption of FIN 47 by the Company will not result in a change to current practice.

 

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3, which changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine the period-specific effects or the cumulative effect of change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in the income statement. The Company adopted the provisions of this effective January 1, 2006.

 

F-10

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**NOTE 2 – SHAREHOLDERS’ EQUITY**

 

The authorized capital stock of the Company consistsof 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 stockare entitled to receive, when and as declared by the Board of Directors,dividends payable either in cash, in property or in shares of the common stockof the Company. Dividends have no cumulative rights and dividends will notaccumulate if the Board of Directors does not declare such dividends. Through December 31,2005, no dividends have been declared or paid by the Company.

 

During February 2004, holders of thenotes payable 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, raisinga total of $2,497,925 through the sale of 1,665,290 shares of the Company’scommon stock at $1.50 per share. The Company incurred associated directexpenses of approximately $123,841 with the Offering. In addition, the Companyissued warrants to the placement agent for the purchase of 434,424 shares ofthe Company’s common stock 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 theCompany’s former directors, Warren Cohen, converted $1,335,861 of a long termsubordinated loan plus $187,094 of accrued interest into 1,015,304 shares ofthe Company’s common stock at $1.50 per share. In addition, the Company issued66,667 shares of the Company’s common stock valued at $1.50 per share to acreditor 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.

 

On April 5, 2005, the Company completed anoffering of its securities to the public raising $9,225,000 before expenses andlisted its common stock and units on the American Stock Exchange. The offeringwas for 1.5 million units at $6.15 per unit, each unit consisting of two sharesof our common stock, one redeemable Class A public warrant for commonstock at $4.50 and one redeemable Class B public warrant for common stockat $6.00. The net proceeds to the Company, after deducting the underwriter’sdiscount of 7% ($.43 per unit), direct offering costs and expenses wereapproximately $7.3 million.

 

On May 20, 2005 the units were separated and thecomponents began trading on the AMEX under the common stock symbol PRH, Class Apublic warrant symbol PRH.WS.A and Class B public warrant symbol PRH.WS.B.As of December 31, 2004, deferred offering costs totaling $269,106 wererecorded as long-term assets and were netted against the proceeds of the April offeringduring the year ended December 31, 2005.

 

On May 20, 2005, the Company entered into aone-year strategic alliance agreement with UTEK Corporation, a technologytransfer company. In accordance with the terms of the agreement, the Companyissued to UTEK 54,857 unregistered shares of common stock as compensation, with1/12th of the shares (4,571) vesting each month during the term ofthe agreement. The agreement is terminable by either party upon 30 days notice.In the event of termination before the completion of the agreement; allunvested shares of common stock shall be returned to the Company. The Companyrecorded a prepaid expense of $96,000 related to this issuance of the 54,857shares of unregistered common stock of the Company. The value of thistransaction was based upon the Company’s trading price of $1.75 per share onthe day the agreement was reached. During the year ended December 31,2005, the Company amortized $56,000 of this prepayment and applied this expenseto its operating expenses.

 

In August 2005, the Company issued atotal of 30,000 shares of its common stock, valued at $1.63 per share toendorsers of the Company’s products.

 

F-11

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**NOTE 3 – STOCK OPTIONS**

 

Effective July 1, 2003 the shareholdersof the Company adopted the 2003 Stock Incentive Plan (the “Plan”). The Planincludes incentive and non-qualified stock options and restricted stock grants.The initial maximum number of shares of common stock available for grants underthe Plan was 800,000 shares. The Plan provides that with respect to incentivestock options (“ISO”) the option price per share must be at least the fairmarket value (as determined by the Compensation Committee or, in lieu thereof,the Board of Directors) of the common stock on the date the stock option isgranted or based on daily quotes from an exchange or quotation systemdesignated by the Compensation Committee as the primary market for the shares. Underthe Plan, if an ISO is granted to an employee who owns more than 10% of thetotal combined voting power of all classes of stock of the Company or any ofits subsidiaries, then the option price must be at least 110% of the fairmarket value of the stock subject to the option, and the term of the optionmust not exceed 5 years from the date of grant. Under the Plan, if for anyreason, a change in control of the Company occurred, all shares subject to thePlan immediately become vested and exercisable. On October 15, 2004, theshareholders approved an amendment to the Plan to increase the number of sharesavailable under the Plan to 1,000,000 shares of common stock.

 

On July 22, 2005, the shareholders approved anamendment to the Plan to increase the number of shares available under the Planto 1,800,000 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

 
| ** **                                               | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | ** **      | ** **     | **Weighted** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|-------------------|------------|------------|------------|-----------------|----------------|--------------|------------|
| ** **                                               | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | ** **      | ** **     | **Average**  | ** ** |
| ** **                                               | ** ** | **Qualified** | ** ** | **Non-qualified** | ** ** | ** ** | ** ** | **Exercise**    | ** **     | **Exercise** | ** ** |
| ** **                                               | ** ** | **Options**   | ** ** | **Options**       | ** ** | **Total**  | ** ** | **Price Range** | ** **     | **Price**    | ** ** |
| 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 |   |
| Granted                                                  |       | 535,000       |       | 331,100           |       | 866,100    |       | $               | 1.28 to  $3.20 |         | $          | 1.82 |   |
| Forfeited                                                |       | (49,250       | )          | —            |       | (49,250    | )          | $               | 5.00           |         | $          | 5.00 |   |
| Balances, December 31, 2005                         |       | 688,000       |       | 809,350           |       | 1,477,350  |       | $               | 1.28 to  $5.00 |         | $          | 3.40 |   |
| Number of  options exercisable At December 31, 2005 |       | 295,167       |       | 644,350           |       | 939,517    |       | $               | 1.28 to  $5.00 |         | $          | 3.48 |   |

 

----

(1) – Excludes 30,000 qualified options that arecontingent on meeting certain performance criteria, which had not been meet at December 31,2005.

 

The following table sets forth the exercise pricerange, number of shares, weighted average exercise price and remainingcontractual lives at December 31, 2005:

 
| ** **   | ** ** | **Outstanding** | ** ** | **Exercisable**    | ** ** |
|--------------|------------|-----------------|------------|--------------------|------------|
| ** **   | ** ** | ** **      | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **   | ** ** | ** **      | ** ** | **Weighted**       | ** ** | **Average** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| **Exercise** | ** ** | **Number of**   | ** ** | **Average**        | ** ** | **Contractual** | ** ** | **Shares** | ** ** | **Average** | ** ** |
| **Prices**   | ** ** | **Outstanding** | ** ** | **Exercise Price** | ** ** | **Life (months)** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| 5.00         |       | 611,250         |       | $                  | 5.00       |   | 32.5 |   | 508,000 |   | $ | 5.00 |   |
| 3.20         |       | 105,000         |       | $                  | 3.20       |   | 52.5 |   | 5,000 |   | $ | 3.20 |   |
| 2.55         |       | 50,000          |       | $                  | 2.55       |   | 56.7 |   | 50,000 |   | $ | 2.55 |   |
| 1.28 to 1.80 |       | 711,100         |       | $                  | 1.56       |   | 59.0 |   | 376,517 |   | $ | 1.55 |   |
|         |       |            |       |               |       |   |   |   |   |   |   |
|         |       | 1,477,350       |       |               |       |   |   | 939,517 |   |   |   |

 

F-12

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At December 31, 2005, 322,650 options wereavailable for future grants under the Plan.

 

**NOTE 4 – PROPERTY AND EQUIPMENT**

 

Property and equipment consisted of thefollowing:

 
| ** **                    | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Furniture & fixtures |       | $                           | 50,963     |                        | $          | 50,963 |   |
| Office equipment              |       | 16,855                      |       | 10,822                      |       |
| Software                      |       | 175,649                     |       | 175,649                     |       |
| Leasehold improvements        |       | 121,605                     |       | 121,605                     |       |
|                          |       | 365,072                     |       | 359,039                     |       |
| Accumulated depreciation      |       | (271,649                    | )          | (249,764                    | )          |
|                          |       |                        |       |                        |       |
|                          |       | $                           | 93,423     |                        | $          | 109,275 |   |

 

Depreciationexpense was $21,885 and $62,002 for the years ended December 31, 2005 and2004, respectively.

 

**NOTE 5 – INTANGIBLE ASSETS**

 

The Company has incurred costs to trademark 14 of itscurrent and former products and 6 specific marketing nomenclatures. Patents andtrademarks are being amortized over a period of 15 years, at approximately$3,796 per year.

 

Intangible assets are:

 
| ** **               | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Patents and trademarks   |       | $                           | 50,052     |                        | $          | 50,052 |   |
| Accumulated amortization |       | (13,833                     | )          | (10,037                     | )          |
|                     |       |                        |       |                        |       |
|                     |       | $                           | 36,219     |                        | $          | 40,015 |   |

 

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

 

The Company’s Founder advanced the Company $122,521which was due upon demand with interest at the rate of 10% per annum. On March 31,2004 the Company re-paid the loan and accrued interest of $9,652.

 

On March 1, 2005, Christopher Marlett, asignificant shareholder, loaned the Company $25,000 evidenced by a promissorynote. The note provides that the principal together with interest at 10% perannum, is due and payable on the earlier of May 30, 2005 or the closing ofa public offering of stock. On April 12, 2005 the Company re-paid the noteplus accrued interest of $288.

 

On March 2, 2005, the Company’s Chief ExecutiveOfficer advanced the Company a total of $170,000 evidenced by a promissory note.The note bears interest at 10% per annum with principal and interest payable bythe earlier of May 30, 2005, or the closing a public offering of stock. OnApril 12, 2005 the Company re-paid the note plus accrued interest of$1,236.

 

F-13

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**NOTE 7 – INCOME TAXES**

 

As of December 31, 2005, the Company hadapproximately $8,273,000 in pretax federal and state net operating losscarryforwards, expiring beginning in 2023.

 

The Company provides for deferred taxes arising fromtemporary differences in the book and tax carrying amounts of assets andliabilities. Temporary differences arise primarily from differences inreporting stock based compensation and allowance accounts.

 

The deferred tax assets that result from suchoperating loss carryforwards and temporary differences of approximately$2,759,000 and $1,429,000 at December 31, 2005 and 2004 respectively, havebeen fully reserved for in the accompanying consolidated financial statementsas follows.

 
| ** **                     | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| Deferred tax liabilities       |       | $                          | —     |                       | $          | — |   |
|                           |       |                       |       |                       |       |
| Deferred tax assets:           |       |                       |       |                       |       |
| Net  operating loss deductions |       | $                          | 2,743,000  |                       | $          | 1,411,000 |   |
| Other  deferred assets         |       | 16,000                     |       | 18,000                     |       |
| Total deferred tax assets      |       | 2,759,000                  |       | 1,429,000                  |       |
| Valuation allowance            |       | (2,759,000                 | )          | (1,429,000                 | )          |
|                           |       | $                          | —     |                       | $          | — |   |

 

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

 
| ** **                                      | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| 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 party,a relative of the founder, with the current lease of $3,390 per month expiringat the end of March 2006, with an automatic monthly extension. Rentexpense for the years ended December 31, 2005 and 2004 was $38,830 and$36,000, respectively. Minimum future rentals at December 31, 2005, underthis agreement approximate:

 

| **December 31,** | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| 2006                  |       | $          | 10,170     |   |
| Total                 |       | $          | 10,170     |   |

 

The Company has various operating leases for vehicles,telephone and computer equipment that range from 2 to 3 years in length. Rentalexpenses for these operating leases were $208,362 and $74,692 for the yearsended December 31, 2005 and 2004, respectively. Minimum future rentalsunder these agreements at December 31, 2005 are as follows:

 

| **December 31,** | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| 2006                  |       | $          | 81,782     |   |
| 2007                  |       | 16,293     |       |
| Total                 |       | $          | 98,072     |   |

 

F-14

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The Company hascommitments for contract services with unrelated parties totaling approximately$542,263. The agreements provide for various payments to be made over a twoyear period.

 

The Company maintainsemployment agreements with certain key management. The agreements provide forminimum base salaries, eligibility for stock options and performance bonusesand severance payments.

 

**NOTE 9 – BRIDGE LOANS AND NOTE PAYABLES**

 

In December 2003, Mr. Mathis, ashareholder at the time and current Chief Executive Officer, advanced us$50,000, evidenced by a promissory note. As part of the consideration forthe loan, Mr. Mathis received an option to purchase 2,000 shares of ourcommon stock at $5.00 per share. The option is fully vested and exercisable for5 years. This option was not part of our 2003 Stock Incentive Plan. Thepromissory note provided for interest at 18% per annum and was due 30 daysafter the loan was funded. The note further provided that, in the event thenote was not paid when due, Mr. Mathis was entitled to (i) anadditional option to purchase 20,000 shares of our common stock at $5.00 pershare (with this 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 priceof $2.50 per share. This note was not paid when due, and in January 2004, Mr. Mathiswas granted the second option to purchase 20,000 shares of our common stock at$5.00 per share. In connection with this transaction, we recorded interest of$50,000 in January 2004 related to the beneficial conversion featureembedded in this note.

 

 DuringJanuary 2004, we borrowed an additional $50,000 from Mr. Mathis. Theterms of the note were the same as the loan made in December 2003. Anoption to purchase 2,000 shares of our common stock at $2.50 per share wasgranted as partial consideration for this loan. This note was not paid whendue, and in February 2004, Mr. Mathis was granted a second option topurchase 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 theprincipal of the notes payable totaling $100,000 into 30,000 shares of ourcommon stock at $2.50 per share, forgiving a total of $2,441 in accruedinterest.

 

During January 2004 the Company borrowed anadditional $155,000 from multiple unrelated parties. As part of theconsideration for these loans, the Company granted options to purchase 14,200shares of its common stock at $2.50 per share, which options were fully vestedand exercisable for 5 years. These options were not part of the Company’s2003 Stock Incentive Plan. The promissory notes provided for interest at 18%per annum and were due 30 days after the loans were funded. The notes furtherprovided that, in event the notes were not paid when due, the holders of thenotes were entitled to (i) an additional options to purchase 21,000 sharesof the Company’s common stock at $2.50 per share (with these options having thesame terms as the options for 14,200 shares) and (ii) conversion of thenotes into shares of the Company’s common stock at a price of $2.50 per share. Thenotes were not paid when due, and in February 2004 the holders weregranted the second options to purchase 21,000 shares of the Company’s commonstock at $2.50 per share. In February 2004 in connection with thistransaction, the Company recorded interest of $205,000 related to thebeneficial conversion features embedded in the notes.

 

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 accrued interest with respect to the notes,which was forgiven when the notes were converted into common stock.

 

**NOTE 10 – 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.

 

F-15

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As further described in Note 9, fourshareholders of the Company provided bridge loan financing and notes payable tothe Company. The three for the four shareholders were also the founder, chiefexecutive officer and a former director of the Company, respectively. Subsequentlyand during 2004, the related party bridge loan financing and shareholder notespayable were converted to common stock.

 

**NOTE 11 – Legal Matters**

 

The Company is involved in one legal claimrelating to the use of the Trademark name of “XELR8” that is currently used tomarket its products. In December 2005 the Company was informed by SoftPacIndustries, Inc. (SoftPac) that we were infringing on a registeredtrademark name that they own. It is the Company’s position that this claim iswithout foundation, but have entered into settlement discussions with SoftPacin an attempt to avoid further legal actions because of defense costs anddiversion of management resources, litigation has a negative impact on us. Thedispute and settlement relates to the future coexistence of the trademarks. Atthis point a settlement has not been reached, and SoftPac has not filed anylegal actions in any courts to seek an injunctive order.

 

F-16

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