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** **

 

** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-K**

 

| **x**                                                 | **ANNUAL REPORT UNDER SECTION 13 OR  15(d) OF THE**        |
|-------------------------------------------------------|----------------------------------------------------------------------|
|                                                  | **SECURITIES EXCHANGE ACT OF 1934**                                  |
|                                                  |                                                                 |
| **For the fiscal year ended  December 31, 2008** |
|                                                  |                                                                 |
| **or**                                                |
|                                                  |                                                                 |
| **o**                                                 | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15 (d) OF** |
|                                                  | **THE SECURITIES EXCHANGE ACT OF 1934**                              |

 

**Commissionfile No. 000-50875**

# ** **

**XELR8 HOLDINGS, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**480 South Holly Street**

**Denver, CO 80246**

(Address of principalexecutive offices)

 

**(303)-316-8577**

(Issuer’s telephone number)

 

**Securities registered pursuant to Section 12(b) ofthe Act:**

 

| **Title  of Each Class**             | ** ** | **Name  of Each Exchange on Which Registered** |
|--------------------------------------|------------|------------------------------------------------|
| Common Stock  ($1.00 par value) |       | American Stock  Exchange                       |

 

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

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes o  No x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (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 x  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer o |   | Smaller reporting company x |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

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

 

The aggregate market value of common stock held bynon-affiliates of the registrant as of March 25, 2009 was approximately $1,990,000based on a closing market price of $0.22 per share.

 

Therewere 15,697,170 shares of the registrant’s common stock outstanding as of March 30,2009.

 

 

 

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**Index toXELR8 Holdings, Inc. 2008 Form 10-K**

 
| ** **    | ** **                                                                                       | **Page** |
|---------------|--------------------------------------------------------------------------------------------------|----------|
| PART I   |                                                                                             |     |
| Item 1.       | Business                                                                                         | 2        |
| Item 1A.      | Risk Factors                                                                                     | 17       |
| Item 1B.      | Unresolved Staff  Comments                                                                       | 29       |
| Item 2.       | Properties                                                                                       | 29       |
| Item 3.       | Legal Proceedings                                                                                | 30       |
| Item 4.       | Submission of  Matters to a Vote of Security Holders                                             | 30       |
|          |                                                                                             |     |
| PART II  |                                                                                             |     |
| Item 5.       | Market for Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities | 31       |
| Item 6.       | Selected Financial Data                                                                          | 31       |
| Item 7.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations      | 32       |
| Item 7A.      | Quantitative and Qualitative Disclosures  About Market Risk                                      | 37       |
| Item 8.       | Financial Statements  and Supplementary Data                                                     | 37       |
| Item 9.       | Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure            | 37       |
| Item 9A.      | Controls and  Procedures                                                                         | 37       |
| Item 9B.      | Other Information                                                                                | 38       |
|          |                                                                                             |     |
| PART III |                                                                                             |     |
| Item 10.      | Directors, Executive Officers and  Corporate Governance                                          | 39       |
| Item 11.      | Executive  Compensation                                                                          | 41       |
| Item 12.      | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters  | 45       |
| Item 13.      | Certain Relationships and Related  Transactions, and Director Independence                       | 46       |
| Item 14.      | Principal Accountant Fees and Services                                                           | 47       |
|          |                                                                                             |     |
| PART IV  |                                                                                             |     |
| Item 15.      | Exhibits, Financial Statement Schedules                                                          | 48       |
|          |                                                                                             |     |
| Signatures    |                                                                                             | 50       |

 

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Form 10-Kfor XELR8 Holdings, Inc. (“the Company”) contains “forward-lookingstatements” and are made pursuant to the Safe Harbor Provisions of the PrivateSecurities Litigation Reform Act of 1995 and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”).All statements other than statements of historical fact are “forward-lookingstatements” for purposes of federal and state securities laws, including anyprojections of earnings, revenue or other financial items; any statements ofthe plans, strategies and objectives of management for future operations; anystatements concerning proposed new products or developments; any statementsregarding future economic conditions or performance; any statements of belief;and any statements of assumptions underlying any of the foregoing.Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,”“continue,” “believe,” “expect” or “anticipate” and other similar words.

 

Althoughwe believe that the expectations reflected in any of our forward-lookingstatements are reasonable, actual results could differ materially from thoseprojected or assumed in any of our forward-looking statements. Our futurefinancial condition and results of operations, as well as any forward-lookingstatements, are subject to change and to inherent risks and uncertainties.Actual future results may differ significantly from the results discussed inthe forward-looking statements. Some of the risks that may affect our performance arediscussed below under “Risk Factors Associated with Our Business.”

 

**PART I**

 

**ITEM1. DESCRIPTION OF BUSINESS**

** **

### **Overview**

### ** **

We develop,sell, market and distribute nutritional supplement products primarily through adirect sales or network marketing system in which independent distributors sellour products, as well as purchase them for their own personal use. We also sellour products directly to professional and Olympic athletes and to professionalsports teams.

 

Weformulated our original “legacy” products in 2000 and 2001 for sale toprofessional and Olympic athletes. We launched our sales and marketing programsto the general public in early 2002 through our internal sales force targetingspecialty retail stores, health clubs and personal trainers. During 2003, werefocused our marketing and sales strategy on direct selling throughindependent distributors. We believe, based upon our sales experience in 2001and 2002, our products can be more effectively sold through the face-to-facesales method afforded by direct selling. During 2005, we formulated a new lineof products that would have a wider appeal to the general public, as they weremore functional foods than nutritional supplements, and began marketing themthrough our existing independent distributors in the latter part of 2005.  In conjunction with this, we rebranded the networkmarketing company and all the products with the name of XELR8 — WHAT MOVES YOU.During 2006 we formulated a new product, BaziTM, a liquid dietary supplement. InJanuary 2007 we introduced this product to our network of independentdistributors and athlete endorsers. In late 2007 we decided to change the salesfocus of our independent distributors from multiple products to a singleproduct, BaziTM, and announced this to our sales force in February 2008.

 

Wedistribute and sell our products through a network marketing system, a form ofdirect selling, using independent distributors (“Distributors”). We also sellsales and marketing tools designed to assist our Independent Distributors ingrowing their business and selling our products. Distributors not only purchaseour products for their own consumption, but are encouraged to build and managetheir own sales group by recruiting, managing and training others to sell ourproducts. Distributors are compensated on sales generated by their group ordownline organization.  We also sell ourproducts directly to “Preferred” or “Direct” customers, who purchase ourproducts for personal consumption, and are not permitted to resell ordistribute the products.

 

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Akey part of our marketing strategy, in conjunction with our direct salesprogram, is the endorsement of our products by sports celebrities. Some of ourcelebrity endorsers include:

 

·                  Curt Schilling (baseball): Pitcher—Cy YoungAward Winner and 2001 World Series Co-MVP;

 

·                  Randy Johnson (baseball): Pitcher—five-timeCy Young Award Winner and 2001 World Series Co-MVP;

 

·                  Brian Griese (football): All Pro Quarterback;

 

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

 

·                  Briana Scurry (soccer player): Two timeOlympic gold medal winner and U.S. Woman’s World Cup Champion;

 

·                  Becky Quinn (cycling) — 2-Time Silvermedalist World Track Cycling Championship;

 

·                  Gary Gait (lacrosse): Former forward,six-time National Lacrosse League MVP and member of NLL Hall of Fame.

 

Wewere formed in 2001, under the name “Instanet, Inc.” to provide Internetfund transfers. Instanet, which had no operating revenues, was a developmentstage company. Instanet’s business model was not successful and it wassearching for an operating business. Vita Cube Systems, Inc. (“V3S”), aColorado corporation formed in October 2000, contacted Instanet in May 2003.The parties completed a stock-for-stock exchange on June 20, 2003, inwhich Instanet acquired V3S. The acquisition was conducted on an “arms-length”basis. In the exchange, the then existing stockholders of V3S exchanged theirstock in V3S for 2,714,403 shares of common stock of Instanet, then representinga 90% ownership interest in Instanet. V3S then became a wholly-owned subsidiaryof Instanet and V3S’s management became management of Instanet. Instanetchanged its 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 2005,we changed the name of the network marketing subsidiary from Vitacube Network, Inc.to XELR8, Inc. In March 2007, the shareholders approved the change ofthe name of the parent company from Vitacube Systems Holdings, Inc. toXELR8 Holdings, Inc. In August 2007, XELR8, Inc. formed a whollyowned subsidiary, XELR8 International, Inc., (“XELR8 International”) aColorado corporation, through which we plan to conduct our internationalexpansion. In September 2007, XELR8 International Inc., formed a wholly ownedsubsidiary, XELR8 Canada Corp, Incorporated, (“XELR8 Canada”) a Nova ScotiaUnlimited Company. To date, there has been no business conducted by XELR8International or XELR8 Canada.

 

Thedescription of our business describes the business being conducted by V3S andnow XELR8, Inc. Instanet discontinued its business prior to thestock-for-stock exchange.

 

### **Industry Overview**

### ** **

Asa direct seller of nutritional products we compete in two industries, TheNutrition Industry and Direct Selling Industry:

 

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

### ** **

The Nutrition BusinessJournal identifies the industry in the following segments:

 

·                  Dietary Supplements (vitamins, minerals,herbs & botanicals, sports nutrition, meal replacements, specialtysupplements)

 

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·                  Natural & Organic Foods (productssuch as cereals, milk, non-dairy beverages and frozen meals),

 

·                  Functional Foods (products with added ingredientsor fortification specifically for health or performance purposes),

 

·                  Natural & Organic Personal Care andHousehold Products

 

Accordingto the latest industry overview, Nutrition Business Journal (NBJ) (June/July 2008),the $94-billion U.S. nutrition industry grew 10.7% in 2007, its highest annualgrowth since 1998 and almost a full percentage point more than in 2006. Themore mature supplement segment topped $23.7 billion and 6% growth. Functionalfoods posted $34.3 billion in sales and its highest growth since 2002 on astrong performance in beverages and niche categories. Natural &organic foods continued a consistent progression into the mainstream foodmarket with 13% growth and continuing to increase its share of total foodsales  from 2% in 1997 to 10% this year.Natural & organic personal care and household goods grew the most lastyear, with sales rising 23% to $9.2 billion.

 

We believe that thefollowing factors drive growth in the nutrition industry:

 

·                  The general public’s awareness and understandingof the connection between diet and health,

 

·                  The aging population in our markets whotend to use more nutritional supplements as they continue to age,

 

·                  Increasing healthcare costs and theconsequential trend toward preventative medicine and non-traditional medicines,

 

·                  Product introductions in response to newscientific studies, and

 

·                  The willingness of the population toembrace ingredients that have been used in non-western cultures many years.

 

We believe that we arewell positioned to capitalize on the growth trends in the nutrition industry.

 

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

### ** **

Results of the 2007Direct Selling Association’s Annual Growth and Outlook Survey indicate a 1.3%decrease in direct sales over 2006 from a record high of $32.2 billion to $30.8billion in 2007, with an estimated 15.0 million people involved in the industryin the U.S., down 1.3% from 2006. The survey, which measures the size andactivity of the U.S. direct selling industry, is conducted annually andincludes responses from a cross-section of direct selling companies. Othermajor results of the survey indicate wellness products, such as weight lossproducts and nutritional supplements, account for approximately 21.4% of directsales, an increase from 20.3% in 2006.

 

Webelieve the prospects for continued growth in direct sales are good and shouldbenefit us, and we perceive several reasons why such growth has occurred:

 

·                  The growth of direct sales has given itpublic visibility. We believe that governmental regulation of the directselling industry has facilitated the public’s market acceptance of legitimatedirect selling companies.

 

·                  The current economic climate of sub-primelending foreclosures, business closures, lay-offs, downsizing, outsourcing, andmerging has resulted in motivated, educated workers seeking direct sales. Theseworkers generally have professional and social networks, which offerpersonalized credibility to the direct selling industry.

 

·                  With improved technology and the expandinguse of the Internet, direct selling firms can become more efficient. Forexample, none of our Independent Distributors are required to carry inventoryor personally conduct public presentations, and our computer systems keep trackof and communicate with independent distributors and their organizations. Webelieve these efficiencies make direct selling easier to administer than in thepast.

 

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### **Our Products**

### ** **

Wecurrently focus our sales and marketing efforts on a liquid nutritionalsupplement drink BaziTM, but also offer 12 different nutritional products. Noneof our products contain substances that have been the subject of publicizedhealth concerns by the medical community such as ephedra, creatine, androstene,androstenedione, aspartame, steroids or human growth hormones. During 2008 wediscontinued the XELR8 Snack. Our products include:

 

***BaziTM***

 

Ourlatest product offering, Bazi, is a liquid nutritional drink packed with eightdifferent super fruits and berries, including the Chinese jujube, plus 12vitamins and 68 minerals. The proprietary XELR8 Phyto8 Blend contains thefollowing fruits and berries: Jujube Fruit, Blueberry, Pomegranate, Goji Berry,Mangosteen, Raspberry, Acai and Seabuckthorn. Additionally, the productcontains 12 vitamins including A, C, E and B-complex and the XELR8 MineralBlend. During 2008 this product accounted for 92% of our total revenue.

 

Inlate 2007 we decided to change the sales focus of our Independent Distributorsfrom multiple products to a single product, BaziTM, and announced this to oursales force in February 2008. We will continue to sell the other productsto our existing customers and athletes, but will not have them available to newIndependent Distributors or customers.

 

***XELR8 EAT***

 

The EAT product is a functional food drink that wasformulated as a meal replacement. It combines all the health benefits of a protein-basedmeal replacement drink with the high-impact nutrition value of pure whole foodsupplements. The foods and nutrients in the EAT product are based on theHarvard Healthy Food Pyramid developed at the Harvard Medical School, andincludes ingredients from the eight essential food groups that their studieshave shown people should eat from everyday: Whole Grains; Vegetables; Fruits;Poultry, Eggs and Fish; Plant Oils; Nuts; Legumes; and Multi-Vitamin andCalcium Supplements. Added to the product are essential enzymes, pro-bioticsand SerotainTM.

 

***XELR8******DRINK***

 

The DRINK product is an energy drink that has beenformulated with the health benefits of antioxidants. The DRINK is sugar free,low in carbohydrates, high in flavonoid antioxidants (vitamins A, C and D) andhas an ORAC value (measurement of antioxidant strength) of 6,000, which isequilivant to three servings of blueberries.

 

***XELR8 HYDRATE***

 

XELR8 HYDRATE is a sportsdrink that has been formulated to support sustained energy without the levelsof sugar and caffeine of most colas, and with one-tenth the amount ofcarbohydrates and two additional hydrating electrolytes not found in Gatorade®,a competing sports drink. XELR8 HYDRATE has been formulated toprovide support for sustained energy before activity by incorporating theingredients D-Ribose, 5 ginsengs and a complete B-Vitamin Complex (B1, B2, B6and B12). XELR8 HYDRATE also containsantioxidants such as Vitamins A, C and E and pomegranate extract in itsformulation designed to benefit the body after activity.

 

***XELR8 BUILD***

 

XELR8 BUILD is a balancedshake that has a blend of proteins, carbohydrates and sugars and is availablein chocolate or vanilla flavors. Its blend of proteins is designed to supportmetabolism and provide energy.

 

XELR8 BUILD is formulatedwith 27 vitamins, minerals and antioxidants to help provide nourishment. XELR8 BUILD combines various proteinsources, vitamins, and minerals with ingredients such as Aminogen®—aningredient that contributes amino acids to the body and Fibersol-2®, a fiberthat aids in digestion.

 

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***Vitamins and Minerals, includingXELR8 SUPPORT***

 

Ourvitamins, minerals, and specialty formulations are sold in various VitaCubes®and in the XELR8 SUPPORT PACK, and consist of tablets, capsules and soft gelformulations. The VitaCube® is a compartmentalized container in which eachsupplement is separated into its own compartment, with a label above todesignate the location of supplement. The XELR8 SUPPORT PACK is a flip top boxof vitamins that are pillow packed into individual servings, with four tabletsin each serving. The XELR8 SUPPORT PACK replaced the Basic VitaCube®, and isdesigned for individuals who are new to nutritional supplement programs or whoare recreational athletes. This label also provides the supplement name, aphotograph, its benefits, the main ingredients and dosages, and the time totake it. VitaCubes® are divided into two primary and gender-specific packages:

 

·                  VitaCube® Essential, designed for theindividuals who have taken supplements previously and who seek a continued,serious exercise routine; and

 

·                  VitaCube® Elite, designed for the individualwho wants to maximize his or her exercise regimen and sports performance.

 

*Supplements found in our**XELR8SUPPORT PACK  and**VitaCube®and their product description:*

 

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

 

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| JSH®  (Joint Support Health) |   | Glucosamine  and Chondroitin—support joint flexibility and mobility                                                |
|-----------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|
|                              |   |                                                                                                                    |
| XELR8  Joint Support              |   | Glucosamine  and Chondroitin—support joint flexibility and mobility including MSM,  Boswellia, Tumeric and Cayenne |
|                              |   |                                                                                                                    |
| Q-Zyme®                      |   | CoEnzyme  Q10—support energy metabolism in the heart                                                               |

 

 

***Quality in Our Products***

 

Inseeking quality in our products, we require that before a product is brought tomarket, all:

 

·                  supplements are supported with publiclyavailable scientific research and references;

 

·                  our manufacturers carry applicablemanufacturing licenses;

 

·                  ingredients are combined so that theireffectiveness is not impaired;

 

·                  ingredients are in dosage levels that fallwithin tolerable upper intake levels established for healthy people by theInstitute of Medicine of the National Academies;

 

·                  products are free of adulterated ingredientssuch as ephedra, creatine, androstenedione, aspartame, steroids or human growthhormones;

 

·                  formulations have a minimum one year shelflife;

 

·                  products are 100% free of lead and thetypical allergens of wheat, corn and yeast; and

 

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

 

### **New Product Identification.**

### ** **

Fromtime to time we expand our product line through the development of newproducts. New product ideas are derived from a number of sources, includingtrade publications, scientific and health journals, consultants, distributors,and other third parties. Prior to introducing new products, we investigateproduct formulations as they relate to regulatory compliance and other issues.We expect to formulate approximately two new products within the next 24 to 48months, but will only introduce these products if they would be complimentaryto the BaziTM product and integrated into the product marketing focus.

 

### **Celebrity Endorsements**

### ** **

Aspart of our marketing efforts, we compensate several sports celebrities forendorsing our products. We believe these endorsements lead health and fitnessconscious consumers to use our products.

 

Ourendorsers have agreed to provide written testimonials to advertise our productsincluding the use of their name, likeness, and pictures for print, radio,electronic media, and video announcements. Additionally some endorsers haveagreed to make personal appearances, participate in website chats, and wearapparel containing our logo.

 

Theterms of our endorsement contracts vary. These contracts are generally for aperiod of one to three years and the endorsers are provided with our productsfor personal use on a reduced or no cost basis. In addition to receiving ourproducts, these endorsers may receive cash compensation, stock options, stockgrants, a percentage of net revenues, or other consideration. Some of ourendorsement contracts also provide that the endorser will not endorse anycompeting products.

 

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### **OurIndependent Distributors and Customers**

###  

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

 

Independent distributors are encouraged to recruit andsign up new independent distributors and customers, the result of which is thecreation of new “levels” within their sales organizations. These new enrolleesare referred to as the “downline” of their enrolling distributor. Downlineindependent distributors are also encouraged to recruit new independentdistributors, thereby creating additional levels in their organizations, butstill connected to the original enrolling distributor. Enrollments occur basedon personal introduction regardless of geographic location. We have no salesterritories. Our independent distributors are compensated with commissions andbonuses on the sale of product generated through their downline.

 

We believe direct selling is an effective way todistribute our products because:

 

·                  distributors can educateconsumers about our products in person;

 

·                  direct sales allows foractual product sampling by potential consumers;

 

·                  compared to otherdistribution methods our distributors can provide customers high levels ofservice and attention;

 

·                  direct selling has benefitedfrom advancements in technology, including low-cost telephone services and theInternet; and

 

·                  products can be introducedto the market through person-to-person selling, resulting in lower up frontcapital outlays for us than conventional methods.

 

Our marketing team utilizes multimedia website, 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.During 2007 we entered into a marketing partnership with Stevenson Lexus ofFredrick, Colorado, whereby qualified independent distributors would beeligible for a monthly reimbursement on a BaziTM branded LexusTM vehicle as longas they remained qualified. To date we have “awarded” six vehicles to ourdistributors.

 

***Structure of OurDirect Selling Program.***  To become one of our independentdistributors, a person must be enrolled through an existing independentdistributor and must purchase a starter kit, except in states where a purchaseof a starter kit is optional due to state regulations, in which case thedistributor is given a starter kit at no charge. The starter kit consists offorms, policy and procedures, selling aids, and access to a personal website ata cost of $35. Additionally, at the time of enrollment we permit distributorsto purchase product at a discount for personal consumption or for business buildingpurposes. Once enrolled, our distributors purchase product on a monthly basisfrom us for personal consumption and recruiting purposes.

 

***CompensationPlan.***  Independentdistributors can earn compensation in a number of different ways:

 

·                  selling products directly tocustomers (earning a “retail rebate” for the spread between their price andtheir customer’s price as established by us);

 

·                  generating commissions basedon their personal sales volume and the sales volume of their downlineorganization. We do not pay compensation for an existing distributor enrollinga new distributor;

 

·                  qualifying for bonuses basedon sales performance by distributors and their downline organization;

 

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·                  reimbursement of the cost ofpurchasing a BaziTM Lexus vehicle from Stevenson Lexus of Fredrick, based onmeeting certain monthly sales goals; and

 

·                  distributor options, under aplan approved by our shareholders, for the purchase of our common stock whichis quoted traded on the OTC Bulletin Boards, earned by achieving a certainsales level each month.

 

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

 

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 February 2008, weheld a distributor recognition and training conference in Las Vegas, Nevada andin September 2008, we held a “Diamond” recognition weekend in Cabo SanLucas, Mexico for our best performing independent distributors. We also holdlocal and regional sales, recognition and training events each year, typicallyduring spring or fall. We have established an annual recognition calendar andwill continue to add to this as our independent distributors achieve highersales goals each month.

 

***AdditionalMethods of Distribution.******* We also sell directly to professional and Olympicathletes using our in-house staff. Many of these athletes purchase our productsat a discounted price, although some endorse our products in return forreceiving them at no charge. We believe the endorsements of these high-profileathletes provides credibility to our products.

 

We are not dependent on one customer or a group ofcustomers.

 

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

### ** **

The ability to efficiently manage distribution,compensation, inventory control, and communication functions through the use ofsophisticated and dependable information processing systems is critical to oursuccess.

 

We continue to upgrade systems and introduce newtechnologies to facilitate our continued growth and support of 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 Texas supportingour customized order processing, fulfillment and independent distributormanagement software; (4) a standardized Avaya telecommunication switch andsystem; (5) a hosted independent distributor website system designedspecifically for network marketing and direct sales companies; and (6) proceduresto perform daily and weekly backups with both onsite and offsite storage ofbackups.

 

Importantly, our technology systems provide keyfinancial 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.

 

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### **Product Returns**

 

We revised our return policy in 2004 to provide aninitial purchase guarantee to all first-time customers and first-timeindependent distributors who are not satisfied with our products for anyreason, which was consistent with the Code of Ethics of the Direct SellingAssociation, whom we are a member of. These customers and distributors mayreturn to us any products purchased within 60 days of their initial order for afull refund. After 60 days and on all subsequent orders, customers andindependent distributors may return unused, unopened and undamaged product thatis currently being sold by us for a refund of 100% of the sales price less a10% restocking fee, provided it is returned to us within 12 months of thepurchase date. Product damaged during shipment is replaced. Historically,product returns as a percentage of our net sales have ranged from 0.7% to 7.7%of our monthly net sales.

 

### **OurCompetition**

### ** **

We compete with many companies engaged in sellingnutritional supplements. We also compete with direct selling companies who sellproducts 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 supplements ischaracterized by a few dominant national companies, including General NutritionCenters, Vitamin World, Vitamin Shoppe, and Great Earth Vitamin Stores. Othershave a presence within local markets, such as Vitamin Cottage in Denver,Colorado. Three companies dominate the Internet— Puritan.com, GNC.com andVitaminShoppe.com, the latter two having retail sales locations as well.

 

We compete with a number of large direct sellers inthe liquid superfruit / functional food category, such as Xango, Inc, whoproduce a mangosteen drink; Monavie, Inc., who sell an Açai Berry product;and Freelife Inc, who market a Goji berry drink, as well as may other smallerdrink companies with different superfruits as their principle ingredient.

 

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

 

Competitors for our sports and energy drinks includeGatorade®, 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®.

 

We compete with a number of large direct sellingfirms selling nutritional, diet, health, personal care and environmentalproducts, and numerous small competitors. The principal direct sellingcompetitors 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 a limited number of third parties to supplyand manufacture our products. Our flagship product, BaziTM, is manufactured byArizona Packaging and Production under the terms of a five year exclusivemanufacturing agreement, which stipulates certain prices, quantities anddelivery timelines. For our other legacy products, manufacturers produce theseproducts on a purchase order basis only and can terminate their relationshipswith us at will. Our two other primary manufacturers are Valentine Industries, Inc.and GMP Laboratories of America, Inc.

 

**Product Delivery**

 

All of our products are shipped by our manufacturersdirectly to our third party warehouse and fulfillment contractor, HoldenMSS forstorage at our main facilities in Denver, Colorado. The majority of theproducts sold to our independent distributors and their customers are shippeddirectly by HoldenMSS to the distributors 

 

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orcustomers. We maintain a secondary warehouse in Detroit, Michigan, with a thirdparty provider, Landmark, where we maintain a limited inventory for futureshipments into Canada. This facility is maintained and operated by a thirdparty contractor, who also acts as a customs agent.  We collect sales tax on products based uponthe address of the consumer to whom products are sent regardless of how theorder is placed. Sales to our professional and Olympic athletes, our sportsteams and from our non-distributor customers are shipped directly to them fromour facilities.

 

**Scalable Business Model.**

 

Ourbusiness model enables us to grow our business with moderate investment in ourinfrastructure and other fixed costs. We require no company-employed salesforce to market and sell our products, we incur no direct incremental cost toadd a new distributor in our existing markets, and our distributor compensationvaries directly with sales. In addition, our independent distributors bear thepart of the cost of our consumer marketing expenses, and our distributorleaders coordinate the recruiting and training initiatives of their downlinedistributor organizations. Furthermore, we can readily increase production anddistribution of our products as a result of our multiple third partymanufacturing relationships and distribution centers.

 

**Regulatory Matters**

 

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

 

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

 

·                  product claims andadvertising, including direct claims and advertising by us, as well as claimsand advertising by independent distributors, for which we may be heldresponsible;

 

·                  our direct selling program;and

 

·                  taxation of independentdistributors (which in some instances could impose an obligation on us tocollect the taxes and maintain appropriate records).

 

The formulation, manufacturing, packaging, labeling,holding, storage, distribution, advertising, and sale of our products aresubject to regulation by one or more federal agencies, including the FDA, theFTC, the Consumer Product Safety Commission (“CPSC”), the Occupational Safetyand Health Administration (“OSHA”), the Department of Agriculture (“USDA”) andthe 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 jurisdiction. When consumerscomplain to the CPSC about alleged harm stemming from ingestion of anutritional supplement, CPSC may contact the entity concerned, inform it of thenature of the complaint, and invite a response. CPSC has conducted severalrecalls of iron-containing dietary supplements that do not comply with thechild-resistant packaging requirement. The OSHA is charged with protectingworkplace safety. Nutritional supplement companies must maintain a safeworkplace and may from time to time be subject to queries from OSHA ifmanufacturing methods or procedures raise a question of worker safety. The USDAhas jurisdiction over animal food and animal feed, including regulatory controlover the harvesting of animal-based source materials, including animal-derivedproteins, and animal-derived gelatin capsules, used in the making of dietarysupplements. The EPA regulates dietary supplement compliance with standardsestablished under the Clean Air Act, the Clean Water Act, the OccupationalSafety and Health Act, and the Pollution Prevention Act as they affect the use,maintenance, and disposal of substances used in and facilities used for themanufacture of nutritional supplements.

 

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The FDCA has been amended several times with respectto nutritional supplements, in particular by the Dietary Supplement Health andEducation Act of 1994 (“DSHEA”), which established a new framework governingthe composition, safety, labeling and marketing of nutritional supplements.Nutritional supplements are defined as vitamins, minerals, herbs, otherbotanicals, amino acids and other dietary substances for human use tosupplement the diet, as well as concentrates, metabolites, constituents,extracts or combinations of such dietary ingredients. Generally, under DSHEA,dietary ingredients that were on the market prior to October 15, 1994, maybe used in nutritional supplements without notifying the FDA. New dietaryingredients, consisting of dietary ingredients that were not marketed in theUnited States before October 15, 1994, are subject to a FDA pre-market newdietary ingredient notification requirement unless the ingredient has beenpresent in the food supply as an article used for food without being chemicallyaltered. A new dietary ingredient notification must provide the FDA withevidence of a history of use or other evidence of safety establishing that useof the dietary ingredient will reasonably be expected to be safe. A new dietaryingredient notification must be submitted to the FDA at least 75 days beforethe initial marketing of the new dietary ingredient. There is no certainty thatthe FDA will accept any particular evidence of safety for any new dietaryingredient. The FDA’s refusal to accept such evidence could prevent themarketing of such dietary ingredients.

 

The FDA issued a consumer warning in 1996, followedby proposed regulations in 1997, covering nutritional supplements that containephedra or its active substance, ephedrine alkaloids. We have never produced orsold products containing ephedra. In February 2004, the FDA issued a finalregulation declaring nutritional supplements containing ephedra under the FDCAbecause they present an unreasonable risk of illness or injury under theconditions of use recommended or suggested in labeling, or if no conditions ofuse are suggested or recommended in labeling, under ordinary conditions of use.The rule took effect on April 12, 2004, and bans the sale ofnutritional supplement products containing ephedra. Similarly, the FDA issued aconsumer advisory in 2002 with respect to nutritional supplements that containthe ingredient Kava, and the FDA is currently investigating adverse effectsassociated with ingestion of this ingredient. We have never produced or soldany products containing Kava.

 

DSHEA permits statements of nutritional support tobe included in labeling for nutritional supplements without FDA premarketapproval. These statements must be submitted to the FDA within 30 days ofmarketing and must bear a label disclosure that “This statement has not beenevaluated by the Food and Drug Administration. This product is not intended todiagnose, treat, cure, or prevent any disease.” These statements may describe abenefit 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 implicitly representthat a nutritional supplement will diagnose, cure, mitigate, treat or prevent adisease. An entity that uses a statement of nutritional support in labelingmust possess scientific evidence substantiating that the statement is truthfuland not misleading. If the FDA determines that a particular statement ofnutritional support is an unacceptable drug claim or an unauthorized version ofa disease claim for a food product, or if the FDA determines that a particularclaim is not adequately supported by existing scientific data or is false ormisleading, 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 particular manufacturer orbrand of nutritional supplement; the literature must present a balanced view ofthe available scientific information on the nutritional supplement; ifdisplayed in an establishment, the literature must be physically separate fromthe nutritional supplement; and the literature may not have appended to it anyinformation by sticker or any other method. If the literature fails to satisfyeach of these requirements, we may be prevented from disseminating it with ourproducts, and any dissemination could subject our products to regulatory actionas an illegal drug. Moreover, any written or verbal representation by us thatwould associate a nutrient in a product that we sell with an effect on adisease will be deemed evidence of an intent to sell the product as anunapproved new drug, a violation of the FDCA.

 

On August 25, 2007 the FDA adopted the finalregulations for large manufactures of a standard originally proposed in March 2003of the current Good Manufacturing Practices guidelines (“cGMPs”) for the manufacturing,packing, holding and distributing dietary ingredients and nutritionalsupplements. The new 

 

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regulationswill require nutritional supplements to be prepared, packaged, and held incompliance with strict rules, and will require quality control provisions thatmay mandate redundant testing of product ingredients at each separate stage ofmanufacture and are intended to ensure that products are accurately labeled anddon’t contain adulterants and contaminants. While the rule allowed formedium and small manufacturers to have until 2009 and 2010, respectively, tocomply with the cGMPs, most of our contract manufacturers did not qualify assmall or medium. As a result, many of our contract manufacturers beganfollowing the proposed cGMPs or even pharmaceutical cGMPs well before the finalrule was published. We expect to see an increase in our manufacturingcosts as a result of the necessary increase in testing of raw ingredients andfinished products and compliance with higher quality standards, although we arenot certain of the amount of these costs.

 

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

 

In 2004, legislation was introduced in both housesof Congress that imposed substantial new regulatory requirements for dietarysupplements.  These bills did not passand are no longer pending, but we believe the 2004 proposed legislationevidences a continuing effort to further regulate dietary supplements.

 

On April 12, 2004, the FDA adopted a new testfor determining when a nutritional supplement is adulterated. Under this test,the FDA may declare a nutritional supplement adulterated (i.e., to present anunreasonable risk of illness or injury) if it finds any benefit provided by thesupplement outweighed by a risk of illness of injury. The new risk/benefit testis ill-defined and can be interpreted to permit FDA to hold a wide range ofnutritional supplements adulterated. It is possible that FDA might hold morenutritional supplements adulterated in the future, reducing the nutritionalingredients available for use in our products.

 

The FTC exercises jurisdiction over the advertisingof nutritional supplements. In recent years, the FTC has instituted numerousenforcement actions against nutritional supplement companies for deceptiveadvertising based on those companies’ alleged failure to possess competent andreliable scientific evidence in support of claims made in advertising.

 

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

 

On December 9,2006, President Bush signed the Dietary Supplement & NonprescriptionDrug Consumer Protection Act into law. The legislation requires manufacturersof dietary supplement and over-the-counter products to notify the FDA when theyreceive reports of serious adverse events. We already have an internal adverse event reportingsystem that has been in place for several years. Based on our understanding ofthe new law’s requirements, we believe we will have to make some changes to ourexisting reporting system, but are still in the process of fully evaluating theeffect that this will have on the Company. In December 2008 the FDAsubmitted Guidance for implementing the regulations for comment, this guidance,when finalized, will represent the current thinking of the Food and DrugAdministration on this topic, which we would intend to fully comply with.

 

***Direct SellingProgram.***  Our directselling program is subject to a number of federal and state regulationsadministered by the FTC and various state agencies. These regulations includeanti-pyramid laws, securities laws, and laws and regulations governing businessopportunities, franchises, lotteries and deceptive trade practices.

 

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Theanti-pyramid laws generally are directed at ensuring that product salesultimately are made to the retail consumers, that advancement within anorganization is based on sales of the organization’s products rather than therecruitment of new distributors, and that distributors are not saddled withlarge quantities of non-returnable inventory. We remain subject to the riskthat, in one or more markets, our marketing system could be found not to be incompliance with applicable anti-pyramid laws. Failure by us to comply withthese regulations could have a material adverse effect on our business in aparticular market or in general.

 

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

 

Wemonitor and respond to regulatory and legal developments, including those thatmay affect our direct selling program. However, the regulatory requirementsconcerning direct selling programs do not include bright line rules andare inherently fact-based. An adverse judicial determination with respect toour direct selling program could have a material adverse effect on ourbusiness. An adverse determination could: (1) require us to makemodifications to our direct selling program, (2) result in negativepublicity, (3)have a negative impact on independent distributor morale, (4) resultin reduced revenues, (5) result in fewer celebrity endorsers of ourproducts, and (6) potentially lead to the failure of the Company. Inaddition, adverse rulings by courts in any proceedings challenging the legalityof multi-level marketing systems, even in those not involving us directly,could have a material adverse effect on our operations.

 

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

 

Federaland state securities laws may also apply to network marketing programs. If anetwork marketing company’s compensation plan is not properly designed orimplemented, the plan itself can fall within the definition of an “investmentcontract,” which is a form of a security. Promoting such a program withoutregistration is a violation of the securities laws and regulations. A violationcould be prosecuted by the Securities and Exchange Commission, state securitiescommissions, or a civil cause of action could be instituted by private parties,and may result in significant damage to, or the closure of, a direct sellingcompany.

 

TheFTC and many states have “Business Opportunity” laws and regulations. Businessopportunities that have a required investment threshold that exceeds aspecified amount are subject to registration and disclosure obligations. Somestates also require the promoter of the program to secure a surety bond beforeoffering the business opportunity in the state and impose a “cooling off”period before the promoter can sell the business opportunity to a prospect. Ifa state or the FTC determines that our program is subject to regulation underthe business opportunity laws or regulations, we will be required to registerand adhere to the applicable obligations imposed by the respective states towhich the determination applies. This could impede the enrollment of newdistributors and slow the sales of our products.

 

OnApril 12, 2006, the Federal Trade Commission (“FTC”) proposed a newBusiness Opportunity Rule.  Under thecurrent Business Opportunity Rule (16 C.F.R. § 437), the Company does notmeet the definition of a “Business Opportunity” and therefore is not subject tothe rule.  If the proposed BusinessOpportunity Rule is made final by the FTC as proposed, the Company (aswell as all other network marketing

 

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companies)will fall within the definition of a Business Opportunity and will be requiredto comply with the requirements of the rule.

 

Followingpublication of the proposed rule, the FTC accepted comments from those whowished to make a submission. The comment and rebuttal periods have sinceclosed.  In addition to receivingthousands of comments in opposition to the proposed rule from directselling companies and individuals engaged in direct selling, several members ofCongress advised the FTC of their opposition to the proposed rule.  It isunknown when the FTC will issue a final version of the proposed rule.  The rule, when made final, by the FTC maydiffer significantly from the proposed rule. If made final as it is currentlyproposed, the proposed rule would require, among other things, that thatall network marketing companies, including the Company, to provide allprospective distributors with extensive disclosures at least seven days priorto enrolling as a distributor.

 

TheCompany or the sponsor of the prospective distributor will be required todisclose:

 

(a) IdentifyingInformation: This includes the name, address and telephone number of theCompany, the name of the sponsor of the prospective distributor, and the dateon which the Disclosure Document is provided to the prospect;

 

(b) EarningsClaim Information: If the Company or the sponsor of the prospective distributormakes earnings claims to the prospective distributor in association with theopportunity, an Earnings Claim Statement must be provided. The Earnings ClaimStatement must disclose (i) the beginning and ending dates when therepresented earnings were achieved, (ii) the number and percentage of alldistributors who achieved that level of earnings within such time period, (iii) anyspecific characteristics applicable to the person making the earnings claimthat differ from the characteristics of the prospect (e.g., a differentgeographic location), and (iv) a statement that written substantiation forthe earnings claim will be made available to the prospective distributor uponrequest;

 

(c) LegalClaims: If the Company, or any affiliate or prior business of the Company, orany of its’s officers, directors, managers or similar individuals have been thesubject of any civil or criminal action involving misrepresentation, fraud,securities law violations, or unfair or deceptive practices in the ten yearspreceding the date of the Disclosure Document, the full caption of each suchaction must be disclosed;

 

(d) RefundPolicy: The Company will be required to disclose the terms of its refundpolicy;

 

(e) Cancellationand Refund Requests: The Company will be required to disclose the total numberof purchasers who have cancelled their business within the preceding two years;

 

(f) ReferenceList: The Company will be required to list the name, city, state, and telephonenumbers of ten people who have enrolled as distributors within the three yearperiod preceding the date of the Disclosure Document who are located nearest tothe prospective distributor. Alternatively, the Company may disclose suchinformation for all distributors. The Disclosure Document must also adviseprospective distributors that if they become distributors, their personalcontact information may be disclosed to future prospective distributors.

 

Theimpact of the proposed rule could be: (1) the advance seven daydisclosure will cause a reduction in enrollments; (2) providing 10references closest to an applicant will require a significant investment inadvanced software systems; (3) the reference requirement creates aconfidentiality problem, as it completely ignores a distributor’s right to havetheir personal information maintained confidential; (4) the identity ofour distributors is currently protected as trade secret information and suchstatus will be compromised; and (5) the disclosure of legal claims withinthe specified categories applies to even those claims that were settled withoutadmission of liability, and even applies to disclosure of claims in which thecompany prevailed on the claims. All of these could cause a significantdecrease in the recruiting of independent distributors to the Company andconsequently affect our ability to sell our products.

 

TheFTC promulgated in 1975 and modified in 1980 the Guides Concerning the Use ofEndorsements and Testimonials in Advertising in 1972. The FTC’s statedpurpose for the Guides is to assist businesses and others in conforming theirendorsement and testimonial advertising practices to the requirements of Section 5of the FTC Act which prohibits unfair and deceptive advertisements. The termsendorsement and testimonial are used interchangeably by the FTC.  Althoughthe Guides are advisory in nature, proceedings to enforce the requirements oflaw as explained in the Guides can be brought under the FTC Act. In any suchaction, the FTC still has the burden of proving that a particular use of anendorsement or testimonial is deceptive. In November 2008 the FTCissued proposed revisions to the Guides. Included in these changes areadditional examples 

 

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dealingwith celebrity endorsements on talk shows and endorsements in theblogosphere.  Other changes are more explicit statements about the company’sliability for false or unsubstantiated statements made through endorsements orfailing to disclose material connections between themselves and their endorsersand that the endorsers may also be subject to liability for their statements.Under the proposed revisions, (Section 255.2) if a company does not havesubstantiation that the endorser’s experience is representative of whatconsumers will generally achieve the company must clearly and conspicuouslydisclose the generally expected performance in the depicted circumstances, andthe company must possess and rely on adequate substantiation for that representation.

 

TheFTC did not expressly state that reliance on a “disclaimers of typicality” is aper se violation of Section 5 of the FTC Act.  However, based on thetwo reports, the FTC believes that disclaimers such as “results not typical”and similar will not usually be effective.  To be safe, a company thatrelies on a “disclaimers of typicality” would need to possess reliableempirical testing demonstrating that the overall impression of the ad isnon-deceptive. Therefore, advertisements that contain consumer endorsementswould have to either present experiences that are representative of whatconsumers can generally expect to achieve using the product or must includeinformation about what consumers would typically experience when using theproduct. This proposal was open for comments until January 30, 2009, andto date no further updates have been issued by the FTC.

 

Theapplication of the Federal Franchise Rule and state franchise laws havesimilar application as the business opportunity laws. If found to be afranchise, 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.

 

TheUnited States Postal Services (“USPS”) has determined that some networkmarketing programs constitute illegal postal lotteries. If a participant in theprogram must give consideration to participate, and the selling entityremunerates the participants based on the element of chance, the programconstitutes a postal lottery. A determination that we are operating a postallottery would have a material adverse consequence on us as the USPS woulddiscontinue all mail service and could pursue criminal prosecution.

 

**Research and Development**

 

Weincurred $12,962 on research and development for the year ended December 31,2008 compared with $17,828 for the same period in 2007. During 2006 wedeveloped a new liquid nutrition drink, BaziTM, which was launched in January 2007.This product will not require FDA or other regulatory approval. During 2008 wecontinued to research new ingredients and productions methods that we couldintegrate into existing products or new products. We will continue to evaluateour product line and either update existing products or find new complimentaryproducts to sell through our independent distributors. We estimate aggregateamounts to continue development and testing of these products to beapproximately $50,000.

 

**Patents, Trademarks and Proprietary Rights**

 

Wehave obtained registration on trademarks for nine of our supplements: “AlphaNac,” “AO Elite,” “Complex SPP,” “CP Complex,” “GC Elite,” “JSH,” and “M32+”.We have also obtained trademarks for our rehydration drink “eForce” and ourprotein shake product “VitaPro,” as well as for other products, all of which wehave discontinued the use of the name. 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 four names or expressions thatwe use or intend to use to distinguish ourselves from others: “Get Cubed,” “ThePower of Nutrition,” “VitaCube” and “V3S.” All trademark registrations areprotected for a period of 10 years and then are renewable thereafter if stillin use. We are currently pursuing a trademark for “XELR8”,”Feel the Power”, “WhatMoves You,” and “Bazi” to be used in association with our direct salesmarketing program.

 

**Employees**

 

Wehad 11 full-time employees as of March 19, 2009. We consider our employeerelations to be good.

 

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**ITEM 1A RISK FACTORS**

 

Weare subject to various risks that could have a negative effect on the Companyand its financial condition. These risks could cause actual operating resultsto differ from those expressed in certain “forward looking statements’contained in this Form 10-K as well as in other communications.

 

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

 

We have not beenprofitable since inception in 2001. We had net losses for the year ending December 31,2008 and year ended December 31, 2007 of $2,110,034 and $3,241,730,respectively. At December 31, 2008, we had an accumulated deficit of$22,602,045. We may never achieve or maintain profitability. Our abilityto achieve and maintain a profit is dependent upon our attracting and retaininga large base of independent distributors who generate our sales.

 

**We mayneed to raise additional funds to fund operations which cannot be assured andwould result in dilution to the existing shareholders.**

 

To date, our operatingfunds have been provided primarily from sales of our common stock $15,352,624,through December 31, 2008, and to a lesser degree, cash flow provided bysales of our products. We used $1,103,846 of cash for operations in the yearended December 31, 2008, and $1,178,996 of cash for operations in the yearended December 31, 2007. If our business operations do not result inincreased product sales, our business viability, financial position, results ofoperations and cash flows will likely be adversely affected. Further, if we arenot successful in achieving profitability, additional capital will be requiredto conduct ongoing operations. We cannot predict the terms upon which we couldraise such capital or if any capital would be available at all, and whatdilution will be caused to the existing shareholders.

 

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

 

We have a limitedoperating history on which to evaluate our business and prospects. Our currentflagship product, BaziTM was formulated in 2006 and introduced to the public forsale in January 2007. Our other, legacy products were formulated from 2000through 2005, and we began selling these products to the general public inearly 2002 through 2005, with limited market success. In late 2003, we began torefocus our sales and marketing efforts on direct sales of products through ournetwork of independent distributors. In 2005, we rebranded the networkmarketing company and launched new products. In February 2008, we decidedto change our sales focus from multiple products, to a single product focus on BaziTM,our liquid dietary supplement drink. There is no assurance that we will achievesignificant sales as a result of us focusing our sales efforts on this singleproduct.

 

We also may not besuccessful in addressing our operating challenges such as establishing a viablenetwork of independent distributors, developing brand awareness and expandingour market presence. Our prospects for profitability must be considered inlight of our evolving business model. These factors make it difficult to assessour prospects.

 

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

 

To increase revenue, wemust increase the sales and recruiting productivity of our independent distributors.We cannot assure you that we will be successful in recruiting and retainingproductive independent distributors, particularly since direct salesorganizations usually experience high turnover rates of independentdistributors. Our independent distributors can terminate their relationshipswith us at any time. The distributors also typically work on a part-time basisand may engage in other business activities, which may reduce theirefforts for us.

 

In recruiting and keepingindependent distributors, we will be subject to significant competition fromother direct sales organizations, both inside and outside our industry. Ourability to attract and retain independent distributors will be dependent on theattractiveness of our compensation plan, our product mix, and the support weoffer to our independent distributors. Adverse publicity concerning directsales marketing and public 

 

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perception of directselling businesses generally could negatively affect our ability to attract,motivate and retain independent distributors.

 

Based on our knowledge ofthe direct selling industry, we anticipate that our independent distributororganization will be headed by a relatively small number of key independentdistributors who together with their downline network will be responsible for adisproportionate amount of revenues. We believe this structure is typical inthe direct selling industry, as sales leaders emerge in these organizations,and it is the current situation with us. The loss of a key independentdistributor will adversely affect our revenues and could adversely affect ourability to attract other independent distributors, especially if an independentdistributor takes other independent distributors of ours to a competitor or toany other organization.

 

**We aredependent on the level of effort that our independent distributors make inselling our products and we do not have control over their methods of marketingour products.**

 

We are dependent on ournon-employee, independent distributors to market and sell our products. Ourindependent distributors purchase products from us for their own personal useand to use in marketing their business. Additionally, we have a large numberindependent distributors in relation to the small number of corporate employeeswho are responsible for providing motivational support and recognition to theseindependent distributors. We also, typically have a high turnover in the numberof independent distributors who join our business each year, who requiretraining and motivation from both their enrollers, key independent distributorleaders and corporate staff. We rely on this training and the policies andprocedures included in the independent distributor agreement to ensure thateach independent distributor is aware of laws concerning the making of certainclaims regarding the products or income potential from the distribution on ourproducts. We take what we believe to be reasonable efforts to monitordistributor activities to prevent misrepresentations, illegal acts or unethicalbehavior while they conduct their business activities. There can be noassurance, however, that our efforts to train, motivate, educate and governtheir activities will be successful, and may result in lower recruiting andnegative publicity and legal actions against us.

 

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

 

One of our significantexpenses is the payment of compensation to our independent distributors. Thiscompensation includes commissions, bonuses, awards and prizes. From the date wechanged our sales method to direct sales through independent distributors, August 1,2003, through December 31, 2008, compensation paid to our independentdistributors represented 46% 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. Further, as we expand intoforeign markets in the future, the laws of those countries may force us toalter our compensation plan, which may cause a negative trend amongst ourdistributors and consequently sales.

 

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

 

Our independentdistributors are independent contractors and, accordingly, we are not in aposition to provide the same level of control and oversight as we would ifindependent distributors were our employees. While we have implementedindependent distributor policies and procedures designed to govern independentdistributor conduct and to protect our goodwill, there can be no assurance thatour independent distributors will comply with our policies and procedures.Violations by our independent distributors of applicable law or of our policiesand procedures dealing with customers could reflect negatively on our productsand operations and harm our business reputation. To date, we have notexperienced any significant problems affecting our products, operations orbusiness reputation caused by distributor violations of our policies andprocedures. Additionally, as we expand from our present to future markets, ourmarketing system could be found not to comply with these laws and regulationsor may be prohibited. Failure to comply with current or future markets lawscould have a material adverse effect on our business, financial condition, andresults of operations.

 

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In addition, extensivefederal, state and local laws regulate our direct selling program. The FederalTrade Commission (“FTC”) or a court could hold us liable for the actions of ourindependent distributors. The FTC could also find us liable civilly fordeceptive advertising if health benefit representations made by our independentdistributors are not supported by competent and reliable scientific evidence.If any of these representations made by our independent distributors weredeemed fraudulent, the FTC could refer the matter to the Department of Justicefor criminal 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.

 

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

 

Our direct marketingprogram could be found to violate laws or regulations applicable to directselling marketing organizations. These laws and regulations generally aredirected at preventing fraudulent or deceptive schemes, often referred to as “pyramid”or “chain sales” schemes, by ensuring that product sales ultimately are made toconsumers and that advancement within an organization is based on sales of theorganization’s products rather than investments in the organization or othernon-retail sales-related criteria. The regulations concerning these types ofmarketing programs do not include “bright line” rules and are inherentlyfact-based. Thus, even in jurisdictions where we believe that our directselling program is in full compliance with applicable laws or regulationsgoverning direct selling programs, we are subject to the risk that these lawsor regulations or the enforcement or interpretation of them by governmental agenciesor courts can change. The failure of our direct selling program to comply withcurrent or newly adopted laws or regulations could result in costs and fines tous and make our independent distributors reluctant to continue their salesefforts, which would reduce our revenues significantly.

 

We are also subject tothe risk of private party challenges to the legality of our direct sellingprogram. Direct selling programs of some other companies have been successfullychallenged in the past. The challenges centered on whether the marketingprograms of direct selling companies are investment contracts in violation ofapplicable securities laws and pyramid schemes in violation of applicable FTC rules andregulations. These challenges have caused direct selling companies to focusgreater attention on generating product sales to non-participants ornon-distributors. Direct selling companies have addressed these issues bypromoting retail sales incentives, tying sales commissions more directly toretail sales and reclassifying those persons who enroll as distributors but donot make sales to other persons as retail customers. An adverse judicialdetermination with respect to our direct selling program, or in proceedings notinvolving us directly but which challenge the legality of direct sellingsystems, could have a material adverse effect on our sales efforts, leading tolower revenues. To date, we have not been subject to any adverse judicialdetermination with respect to our direct selling program.

 

On April 12, 2006,the Federal Trade Commission (“FTC”) proposed a new Business Opportunity Rule.Under the current Business Opportunity Rule (16 C.F.R. § 437), the Companydoes not meet the definition of a “Business Opportunity” and therefore is notsubject to the rule. If the proposed Business Opportunity Rule is madefinal by the FTC as proposed, the Company (as well as all other networkmarketing companies) will fall within the definition of a Business Opportunityand will be required to comply with the requirements of the rule.

 

Following publication ofthe proposed rule, the FTC accepted comments from those who wished to make asubmission. The comment and rebuttal periods have since closed. In addition toreceiving thousands of comments in opposition to the proposed rule fromdirect selling companies and individuals engaged in direct selling, severalmembers of Congress advised the FTC of their opposition to the proposedrule.  It is unknown when the FTC will issue a final version of theproposed rule. The rule, when made final, by the FTC may differ significantlyfrom the proposed rule. If made final as it is currently proposed, the proposedrule would 

 

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require, among otherthings, that that all network marketing companies, including the Company, toprovide all prospective distributors with extensive disclosures at least sevendays prior to enrolling as a distributor.

 

The Company or thesponsor of the prospective distributor will be required to disclose:

 

(a) IdentifyingInformation: This includes the name, address and telephone number of theCompany, the name of the sponsor of the prospective distributor, and the dateon which the Disclosure Document is provided to the prospect;

 

(b) Earnings ClaimInformation: If the Company or the sponsor of the prospective distributor makesearnings claims to the prospective distributor in association with theopportunity, an Earnings Claim Statement must be provided. The Earnings ClaimStatement must disclose (i) the beginning and ending dates when therepresented earnings were achieved, (ii) the number and percentage of alldistributors who achieved that level of earnings within such time period, (iii) anyspecific characteristics applicable to the person making the earnings claimthat differ from the characteristics of the prospect (e.g., a differentgeographic location), and (iv) a statement that written substantiation forthe earnings claim will be made available to the prospective distributor uponrequest;

 

(c) Legal Claims: Ifthe Company, or any affiliate or prior business of the Company, or any of its’sofficers, directors, managers or similar individuals have been the subject ofany civil or criminal action involving misrepresentation, fraud, securities lawviolations, or unfair or deceptive practices in the ten years preceding thedate of the Disclosure Document, the full caption of each such action must bedisclosed;

 

(d) Refund Policy:The Company will be required to disclose the terms of its refund policy;

 

(e) Cancellation andRefund Requests: The Company will be required to disclose the total number ofpurchasers who have cancelled their business within the preceding two years;

 

(f) Reference List:The Company will be required to list the name, city, state, and telephonenumbers of ten people who have enrolled as distributors within the three yearperiod preceding the date of the Disclosure Document who are located nearest tothe prospective distributor. Alternatively, the Company may disclose suchinformation for all distributors. The Disclosure Document must also adviseprospective distributors that if they become distributors, their personalcontact information may be disclosed to future prospective distributors.

 

The impact of theproposed rule could be: (1) the advance seven day disclosure willcause a reduction in enrollments; (2) providing 10 references closest toan applicant will require a significant investment in advanced softwaresystems; (3) the reference requirement creates a confidentiality problem,as it completely ignores distributors right to have their personal informationmaintained confidential; (4) the identity of our distributors is currentlyprotected as trade secret information and such status will be compromised; and (5) thedisclosure of legal claims within the specified categories applies to eventhose claims that were settled without admission of liability, and even appliesto disclosure of claims in which the company prevailed on the claims. All ofthese could cause a significant decrease in the recruiting of independentdistributors to the Company and consequently affect our ability to sell ourproducts.

 

On March 18, 2008,the Federal Trade Commission (FTC) issued a revised Notice of ProposedRulemaking on March 18, 2008, recommending significant revisions to theproposed Business Opportunity Rule that the FTC announced previously. Therevised proposed Rule indicates that the FTC intends to *exempt*direct sellers from coverage of theRevised Proposed Business Opportunity Rule.  The FTC concluded majorrevisions to the initial Rule were necessary to “avoid broadly sweeping insellers of multilevel marketing opportunities” and “that the proposed Rule istoo blunt an instrument to cure fraud in the MLM industry.”  Rather, theFTC determined that it will continue to use the flexibility it has in existinglaw to enforce and address individual cases of fraud on a case-by-case basis.

 

In its comments andanalysis announcing the revisions to the proposed rule, the FTC made extensiveobservations that may have as much significance as the revisions themselves.Specifically, the FTC comments and analysis address:

 

·    Theinapplicability of the Proposed Rule, as amended, to direct sellers;

 

·    Thedifference between legitimate multilevel companies and pyramid schemes;

 

·    Thelack of a need for a specific anti-pyramid rule;

 

·    Thelack of evidence of  prevalent deceptive practices in the “MLM [directselling] industry”;

 

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·    Thepreference for a fact specific inquiry into the legitimacy of any one entity ona case-by-case basis rather than a broad rule; and

 

·    Thedifficulties and undesirability of imposing a uniform earnings disclosurerequirement across the direct selling industry.

 

In the proposed revisionthe FTC has set forth specific language redefining a “business opportunity”,and relies upon three aspects of the definition to effectively remove directsellers from coverage.

 

·    First, the FTC limits coverage to those businessrelationships in which the prospective purchasers makes a required payment, butexcludes from the definition those relationships in which the only requiredpayment is for inventory at bona fide wholesale prices.

 

·    Second,the application of the Rule would no longer be triggered by virtue of anearnings claim being made, i.e. the mere representation by a company that anindividual might make money will not trigger the rule.

 

·    Third,in order to be considered a “business opportunity” the company would have tooffer “business assistance” to a prospect.  “Business Assistance” isdefined as providing locations, outlets, accounts, or customers, or promisingto buy back goods or services that an individual makes.

 

These provisionssignificantly narrow the scope of the initially proposed rule and reflectthe FTC’s intent to remove direct sellers from coverage. While the FTC BusinessOpportunity rulemaking is not complete, it appears to be the intention of theFTC to remove direct sellers from the coverage of the revised Rule, it is stilltoo early to evaluate the effect that the rule would have on the us andour distributors to attract and retain other distributors and customers .

 

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

 

We treat our independentdistributors as independent contractors and do not pay employment taxes, likesocial security, or similar taxes in other countries with respect tocompensation paid to them. In the event that an local regulatory authority inwhich our distributors operate deem the distributor to be an employee, wemay be held responsible for a variety of obligations imposed on employersrelating to their employees, including, but limited to, employment taxes(social security) and related taxes, plus any related assessments and penalties,which could significantly increase our operating costs.

 

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

 

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

 

The U.S. Food and DrugAdministration, the FDA, and other similar government agencies in othercountries, regulate our products and our product labeling. Among other matters,the FDA and other foreign agencies regulate nutrient content and ingredientinformation, claims of the effect of a dietary supplement or dietary ingredienton a body structure or function, and claims of the effect of a dietarysupplement or dietary ingredient on disease or risk of disease. The FDA andother foreign agencies can initiate civil and criminal

 

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proceedings againstpersons who make false or misleading claims on labels or in labeling, whoengage in misbranding, who evidence an intent to sell their products for atherapeutic use not approved by the agency, who sell misbranded products, orwho sell adulterated products. The FDA and other foreign agencies can alsorequire the recall of all products that are misbranded or adulterated.

 

The U.S. Federal TradeCommission, the FTC and their counterpart agencies in other countries that wemay operate in, have jurisdiction over our product advertising. These agenciescan initiate civil proceedings for deceptive advertising and deceptiveadvertising practices. It can seek for companies to make payments to consumersor disgorgement of profits from the sale of any product held to have beendeceptively advertised. These agencies or a court of law can require a companyfound 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 and localauthorities may likewise bring enforcement actions for misbranding,adulteration, and deceptive advertising. Those actions may be pursuedsimultaneously with federal actions.

 

On August 25, 2007the FDA adopted the final regulations for manufacturers of a standardoriginally proposed in March 2003 of the current Good ManufacturingPractices guidelines (“cGMPs”) for the manufacturing, packing, holding anddistributing dietary ingredients and nutritional supplements. The newregulations will require nutritional supplements to be prepared, packaged, andheld in compliance with strict rules, and will require quality controlprovisions that may mandate redundant testing of product ingredients at eachseparate stage of manufacture and are intended to ensure that products areaccurately labeled and don’t contain adulterants and contaminants. While the rule allowedfor medium and small manufacturers to have until 2009 and 2010, respectively,to comply with the cGMPs, most of our contract manufacturers did not qualify assmall or medium. As a result, many of our contract manufacturers beganfollowing the proposed cGMPs or even pharmaceutical cGMPs well before the finalrule was published. We expect to see an increase in our manufacturingcosts as a result of the necessary increase in testing of raw ingredients andfinished products and compliance with higher quality standards, although we arenot certain of the amount of these costs. 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, other state andlocal regulatory authorities, and the Direct Selling Association, 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.

 

**Ourability to grow sales is dependent on growing in our existing markets as wellas expanding into new markets in other countries. As we expand into foreignmarkets, we will become subject to different political, cultural, exchangerate, economic, legal and operational risks. We may invest significant amountsin these expansions with little success.**

 

We currently are focusingour marketing efforts on the United States and Canadian markets to grow thenumber of independent distributors and consequently our sales. We believe thatour future growth will come from both the markets that we are currentlyoperating in and other international markets. We do not have any history ofinternational expansion, and there for have no assurance that any efforts willresult in increased revenue. Additionally, we may need to overcome significantregulatory and legal barriers in order to sell our products and whether ourdistribution method will be accepted. These markets may require that wereformulate our product to comply with local customs and laws, however, thereis no guarantee that the reformulated product will be approved for sale bythese regulatory agencies or attract local distributors. These countries maynot accept our current compensation plan for distributors which may result inan inability to attract and retain local distributors. International taxinglaws may also prevent us from operating or repatriating profits from operationsin these countries, and the complexity of transfer pricing laws could diminishthe effective returns from investments in foreign countries. Many of ourcompetitors already have significant international operations which could be anadditional barrier for entry into a foreign market as the 

 

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local population may beestablished in other compensation opportunities and similar products. Webelieve that success in foreign markets will be dependent on the integration ofthese markets in a seamless way into our current compensation plan and also theability of our existing distributors to assist in building downline salesorganizations.

 

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

 

We rely entirely on alimited number of third parties to supply and manufacture our products. Ourflagship product, BaziTM, is manufactured by Arizona Packaging and Productionunder the terms of a five year exclusive manufacturing agreement, whichstipulates certain prices, quantities and delivery timelines. For our otherlegacy products, manufacturers produce these products on a purchase order basisonly and can terminate their relationships with us at will. Our two otherprimary manufacturers are Valentine Industries, Inc. and GMP Laboratoriesof America, Inc.

 

These third party manufacturingparties 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 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. Additionally, all our third party manufacturessource the raw materials for our products, and if we were to use alternativemanufacturers we may not be able to duplicate the exact taste and consistencyprofile of the product from the original manufacturer. An extended interruptionin the supply of our products would result in decreased product sales and ourrevenues would likely decline. We believe that we can meet our current supplyand manufacturing requirements with our current suppliers and manufacturers orwith available substitute suppliers and manufacturers. Historically, we havenot experienced any delays or disruptions to our business caused bydifficulties in obtaining supplies.

 

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

 

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

 

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

 

We face intensecompetition from numerous resellers, manufacturers and wholesalers of liquidnutritional supplements, energy drinks, protein shakes and nutritionalsupplements similar to ours, including other network marketing channels,retail, online and mail order providers. We consider the significant competingproducts in the U.S. market for our flagship product BaziTM to be FreeLifeInternational®, Xango® and Monavie® for a liquid nutrition drinks, and for ourlegacy products to be Myoplex® for protein drinks, Gatorade®, Powerade®,Acclerade®, and All Sport® for energy drinks, and that Nature’s Bounty, Inc.and General Nutrition Centers, Inc. are the significant producers ofvitamins. Most of our competitors have longer operating histories, establishedbrands in the marketplace, revenues significantly greater than ours, morecapital and better access to capital than us. We expect that these competitorsmay use their resources to engage 

 

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in various businessactivities that could result in reduced sales of our products. Companies withgreater capital and research capabilities could re-formulate existing productsor formulate new products that could gain wide marketplace acceptance, whichcould have a depressive effect on our future sales. In addition, aggressiveadvertising and promotion by our competitors may require us to compete bylowering prices because we do not have the resources to engage in marketingcampaigns against these competitors, and the economic viability of our operationslikely would be diminished.

 

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

 

Due to the similarity ofour company name to those of many of our competitor’s products may resultin the loss of customers and distributors as well as impair the recruitingefforts of our independent distributors. This could result in the loss ofrepeat business as well as the inability to generate increased revenue andattract future independent distributors.

 

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

 

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

 

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

 

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

 

While we have notreceived any direct negative publicity, the publicized studies associatingincreased mortality rates with high dosages of Vitamin E has increasedawareness of our consumers relating to the safety of the ingredients in oursupplements. Additionally, in 2007 there was a study published regardingincreased mortality rates in higher doses of antioxidants other than those fromnatural fruit, berry and vegetable sources which again increased awarenessamong our consumers relating to the safety of the ingredients in our products.During 2007 there were a number of negative articles about multivitamins, andin March, a Harvard Medical School report published in the *Harvard Men’sHealth Watch* newsletter cited studies showing that B6, B12 and folicacid found in multivitamins don’t prevent disease and that folic acid mayactually cause colorectal cancer. An article in April 2008 published in *The Natural Foods Merchandiser*, stated that the Council forResponsible Nutrition voiced concerns over the Harvard report. Both our primaryproduct Bazi and our boxes of vitamin have these vitamins present, and today wehave not had any direct negative publicity surrounding these products.

 

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

 

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

 

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

 

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

 

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

 

We face an inherent riskof exposure to product liability claims if the use of our products results in,or is believed to have resulted in, illness or injury. Most of our productscontain combinations of ingredients, and there is little long-term experiencewith the effect of these combinations. In addition, interactions of theseproducts with other products, prescription medicines and over-the-counter drugshave not been fully explored or understood and may have unintendedconsequences. While our third party manufacturers perform tests inconnection with the formulations of our products, these tests are not designedto evaluate the inherent safety of our products.

 

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

 

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

 

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

 

The$94-billion U.S. nutrition industry grew 10.7% in 2007, its highest annualgrowth since 1998 and almost a full percentage point more than in 2006. Themore mature supplement segment topped $23.7 billion and 6% growth. Functionalfoods posted $34.3 billion in sales and its highest growth since 2002 on astrong performance in beverages and niche categories. Natural &organic foods continued a consistent progression into the mainstream foodmarket with 13% growth and continuing to increase its share of total food salesfrom 2% in 1997 to 10% this year. Natural & organic personal care andhousehold goods grew the most last year, with sales rising 23% to $9.2 billion.There have continuedto be negative impacts of Echinacea and Ephedra 

 

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on the supplement marketand low-carb products affected minerals and liquid meal replacements. Thenegative tide of media is no longer putting problematic categories like ephedraor prohormones at stake, but foundation categories like E, C and evenmultivitamins and in 2007 antioxidants were subject to the same scrutiny. Allthese factors could have a negative impact on our sale growth.

 

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

 

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

 

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

 

Because we maintain highlevels of inventories to meet the product needs of our independent distributorsand customers, a change by us of our product mix could result in write downs ofour inventories. During 2007 we decided to modify the sales efforts frommultiple products to a single product focus on our flagship product BaziTM. As aconsequence of this decision, we deemed the inventory of certain of the legacyproducts to be obsolete due to the low likelihood that we would sell theseproducts before their expiration. As a result we incurred a write-down againstinventory for the year ended December 31, 2008 of $22,609 and a chargeagainst obsolete inventory of $189,403 in 2007. Write downs and charges of thistype have historically increased our net losses, and if experienced in thefuture, will make it more difficult for us to achieve profitability.

 

**Productreturns in excess of our estimates could require us to incur significantadditional expenses, which would make it difficult for us to achieveprofitability.**

 

We have established areserve in our financial statements for product returns which is based upon ourhistorical experience. Additionally, we only have limited sales experience withBaziTM as the product was only introduced to the market in January 2007. Ifthis reserve were to be inadequate, we may incur significant expenses forproduct returns. As we gain more operating experience, we may need torevise our reserves for product returns.

 

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

 

Our existing proprietaryrights may not afford remedies and protections necessary to preventinfringement, reformulation, theft, misappropriation and other improper use ofour products by competitors. We own the formulations contained in some ourproducts. We consider these product formulations our critical proprietaryproperty, which must be protected from competitors. We do not have any patentsbecause we do not believe they are necessary to protect our proprietary rights.Although trade secret, trademark, copyright and patent laws generally providesuch protection and we attempt to protect ourselves through contracts withmanufacturers of our products, we may not be successful in enforcing our rights.In addition, 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.

 

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**If wewere to lose one of our significant independent distributor leaders, therecould be an adverse result on our sales.**

 

Our current distributionmodel relies on the efforts of our independent distributors in buying ourproducts and recruiting and retaining new independent distributors in theirdownline organization. Our successful independent distributor leaders havesignificant downline organizations that they personally train and communicatewith, and consequently develop business relationships. The loss of one of theseleaders could result in lower recruitment and the inability of us to retain thedownline organization, which could result in a significant decrease in revenueand an increased cost for us to attract and retain new distributors for replacethe distributors that left our company. The loss of a leader may be a result ofour actions, like changes to the compensation plan or changing the productsthat we sell or as a result of factors that we have no control over, likebusiness and economic conditions, public perception of network marketing,public perception of nutritional products, other competing network marketingcompanies or the results of ruling by regulatory bodies against us.

 

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

 

We are dependent on ourinformation processing systems to timely process customer orders, oversee andmanage our distributor network and control our inventory, and for ourdistributors to communicate with their customers and distributors in theirnetwork. Since the initial purchase of our technology system in 2001 through December 31,2008, we had spent $352,809 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 ofkey personnel could impair our ability to operate.**

 

Our success also dependson hiring, retaining and integrating senior management and skilled employees,including John Pougnet, our Chief Executive Officer and Chief FinancialOfficer, Douglas Ridley, our President, Timothy Transtrum, our Vice Presidentof Operations, John Hutchinson, Vice President of IT and Web, Sanjeev Javia,our Vice President of Product Development and Endorser Relations and Sanford D.Greenberg, our Chairman of the Board of Directors, in order to expand ourbusiness. Certain of our officers have employment agreements that havestipulated service terms. As with all personal service providers, our officerscan terminate their relationship with us at will. Our inability to retain theseindividuals may result in our reduced ability to operate our business. Wedo not have key man life insurance on any of our executive officers.

 

**Provisionsin our articles of incorporation and bylaws may prevent a change in control ofus which could limit the price that investors may be willing to pay for oursecurities.**

 

Provisions contained inour articles of incorporation and bylaws could make it more difficult for athird party to acquire us or for our shareholders to change our management.These provisions:

 

·                                          give our board of directors the right toset the number of directors between one and nine directors;

 

·                                          permit the board of directors to fillvacancies resulting from an increase in the number of directors or the death orresignation of a board member;

 

·                                          prohibit cumulative voting in theelection of directors; and

 

·                                          authorize our board of directors to issueshares of preferred stock in the future without shareholder approval and todetermine the rights, preferences, privileges and restrictions of such preferredstock.

 

These provisions maylimit the price that investors are willing to pay in the future for oursecurities.

 

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**Theprice of our securities could be subject to wide fluctuations and yourinvestment could decline in value.**

 

The market price of thesecurities of a company such as ours with little name recognition in thefinancial community and without significant revenues can be subject to wideprice swings. For example, the bid price of our common stock has ranged from ahigh $16.25 to a low of $0.19 during the twenty-four quarters ended December 31,2008. The market price of our securities may be subject to wide changes inresponse to quarterly variations in operating results, announcements of newproducts by us or our competitors, reports by securities analysts, volumetrading, or other events or factors. In addition, the financial markets haveexperienced significant price and volume fluctuations for a number of reasons,including the failure of certain companies to meet market expectations. Thesebroad market price swings, or any industry-specific market fluctuations, mayadversely affect the market price of our securities.

 

Speculative traders mayanticipate a decline in the market price of our securities and engage in shortsales of our securities. Such short sales could further negatively affect themarket price of our securities.

 

Companies that have experiencedvolatility in the market price of their stock have been the subject ofsecurities class action litigation. If we were to become the subject ofsecurities class action litigation, it could result in substantial costs and asignificant diversion of our management’s attention and resources.

 

**Becauseour common stock may be classified as “penny stock,” trading may be limited,and the share price could decline.**

 

Because our common stockmay fall under the definition of “penny stock,” trading in the common stock, ifany, may be limited because broker-dealers would be required to provide theircustomers with disclosure documents prior to allowing them to participate intransactions involving the common stock. These disclosure requirements are burdensome to broker-dealers and maydiscourage them from allowing their customers to participate in transactionsinvolving the common stock.

 

“Penny stocks” are equitysecurities with a market price below $5.00 per share other than a security thatis registered on a national exchange, included for quotation on the NASDAQsystem or whose issuer has net tangible assets of more than $2,000,000 and hasbeen in continuous operation for greater than three years.  Issuers who have been in operation for lessthan three years must have net tangible assets of at least $5,000,000.

 

Rules promulgated bythe Securities and Exchange Commission under Section 15(g) of theExchange Act require broker-dealers engaging in transactions in penny stocks,to first provide to their customers a series of disclosures and documentsincluding:

 

·                  A standardized risk disclosure documentidentifying the risks inherent in investment in penny stocks;

 

·                  All compensation received by thebroker-dealer in connection with the transaction;

 

·                  Current quotation prices and otherrelevant market data; and

 

·                  Monthly account statements reflecting thefair market value of the securities.

 

These rules alsorequire that a broker-dealer obtain financial and other information from acustomer, determine that transactions in penny stocks are suitable for suchcustomer and deliver a written statement to such customer setting forth thebasis for this determination.

 

**We mayissue preferred stock with rights senior to the common stock.**

 

Our articles ofincorporation authorize the issuance of up to 5,000,000 shares of preferredstock without shareholder approval and on terms established by our directors.We have no existing plans to issue shares of preferred stock. However, therights and preferences of any such class or series of preferred stock would beestablished by our board of directors in its sole discretion and may havedividend, voting, liquidation and other rights and preferences that are seniorto the rights of the common stock.

 

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**Youshould not rely on an investment in our common stock for the payment of cashdividends.**

 

Because of oursignificant operating losses and because we intend to retain future profits, ifany, to expand our business, we have never paid cash dividends on our stock anddo not anticipate paying any cash dividends in the foreseeable future. Youshould not make an investment in our securities if you require dividend income.Any return on investment in our common stock would only come from an increasein the market price of our stock, which is uncertain and unpredictable.

 

**Compliance with changing corporate governance regulations andpublic disclosures may result in additional risks and exposures.**

 

Changinglaws, regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002 and new regulations fromthe SEC, have created uncertainty for public companies such as ours.  These laws, regulations, and standards aresubject to varying interpretations in many cases and as a result, theirapplication in practice may evolve over time as new guidance is provided by regulatoryand governing bodies.  This could resultin continuing uncertainty regarding compliance matters and higher costsnecessitated by ongoing revisions to disclosure and governance practices.  As a result, our efforts to comply withevolving laws, regulations, and standards have resulted in, and are likely tocontinue to result in, increased expenses and significant management time andattention.

 

**The current crisis in global credit and financial marketscould materially and adversely affect our business and results of operations.**

 

Ashas been widely reported, global credit and financial markets have beenexperiencing extreme disruptions in recent months, including severelydiminished liquidity and credit availability, declines in consumer confidence,declines in economic growth, increases in unemployment rates, and uncertaintyabout economic stability.  There can beno assurance that there will not be further deterioration in credit andfinancial markets and confidence in economic conditions.  These economic uncertainties affectbusinesses such as ours in a number of ways, making it difficult to accuratelyforecast and plan our future business activities.  The current tightening of credit in financialmarkets and the general economic downturn has lead consumers and businesses topostpone spending, which has caused uncertainty in our possible mergercandidates.  We are unable to predict thelikely duration and severity of the current disruptions in the credit andfinancial markets and adverse global economic conditions and if the currentuncertain economic conditions continue or further deteriorate our business andresults of operations could be materially and adversely affected.

 

**ITEM 1B  UNRESOLVED STAFF COMMENTS**

** **

None.

 

**ITEM 2.DESCRIPTION OF PROPERTY**

** **

**Facilities**

 

Welease an office, located at 480 South Holly Street, Denver, Colorado, from thefather of Sanford D. Greenberg, our founder and Chairman, for $3,900 per month.The lease expired on March 31, 2006, with an automatic monthly extensionright and a two month notice period for the Company to terminate the lease. Ourannual office rent for 2008 and 2007 was $46,800 and $42,780, respectively. Wecurrently do not have any plans for renovation, improvement or development ofour corporate office.

 

InJuly 2006 we contracted with Holden MSS, Inc. (“Holden”), located inDenver, Colorado, to assume our warehouse functions from our prior warehouseprovider. Holden bills us on a per transaction basis plus a monthly inventorystorage fee. During August 2007 we contracted with Landmark GlobalDistribution, Inc., a warehouse and fulfillment facility in Detroit,Michigan, to perform fulfillment for orders to be shipped into Canada. Thisagreement is a month by month arrangement and we pay for the space that ourinventory uses and on a transactional basis. To date, our Canadian operationshave not commenced and we maintain a minimal amount of inventory at thislocation.

 

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**Insurance**

 

Wemaintain commercial general liability, including product liability coverage,and property insurance. Our policy provides for a general liability limit of$2.0 million per occurrence, and $2.0 million annual aggregate umbrellacoverage. We also have a casualty insurance policy with a limit of $1.0 millionon our main facility, including inventory, and $690,000 on our products locatedat both the Holden and Landmark facilities.

 

**ITEM 3. LEGALPROCEEDINGS**

** **

Weare not currently involved in any legal proceedings.

 

**ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

** **

No matters were submittedto security holders for a vote during the quarter ended December 31, 2008.

 

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**PART II**

 

**ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERMATTERS**

** **

### **Market Information**

### ** **

Thereis only a limited trading market for our stock. As a result stockholders mayfind it difficult to sell their shares. Since April 5, 2005, the Company’scommon stock was listed on the New York Stock Exchange’s AlterNext US Exchange(formerly the American Stock Exchange), and started trading under the symbol “PRH”in conjunction with a secondary offering of shares. On March 19, 2007, theCompany changed its name to XELR8 Holdings, Inc. and on March 19,2007, started trading under the symbol “BZI”. On March 9, 2009 the Companywas delisted from the AlterNext Exchange. The Company is currently listed onthe OTC Bulletin Board and is quoted for trading under the symbol “XELR”.

 

Thefollowing table sets forth high and low bid prices for our common stock for thecalendar quarters indicated as reported by the American Stock Exchange. Theseprices represent quotations between dealers without adjustment for retailmarkup, markdown, or commission and may not represent actual transactions.

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2007           |       |     |       |    |       |
| First Quarter  |       | $        | 1.80       |    | $          | 0.58 |   |
| Second Quarter |       | $        | 3.04       |    | $          | 1.56 |   |
| Third Quarter  |       | $        | 1.94       |    | $          | 0.85 |   |
| Fourth Quarter |       | $        | 1.25       |    | $          | 0.70 |   |
|           |       |     |       |    |       |   |   |
| 2008           |       |     |       |    |       |
| First Quarter  |       | $        | 1.18       |    | $          | 0.85 |   |
| Second Quarter |       | $        | 1.65       |    | $          | 0.75 |   |
| Third Quarter  |       | $        | 1.02       |    | $          | 0.38 |   |
| Fourth Quarter |       | $        | 0.62       |    | $          | 0.25 |   |

 

### **Holders**

### ** **

Asof March 19, 2009, we had approximately 791 holders of record of ourcommon stock. A significant number of our shares were held in street name and,as such, we believe that the actual number of beneficial owners issignificantly higher.

 

### **Dividends**

### ** **

Wehave never declared or paid any cash dividends on our common stock. For theforeseeable future, we intend to retain any earnings to finance the developmentand expansion of our business, and we do not anticipate paying any cashdividends on our common stock. Any future determination to pay dividends willbe at the discretion of our board of directors and will be dependent upon thenexisting conditions, including our financial condition and results ofoperations, capital requirements, contractual restrictions, business prospects,and other factors that our board of directors considers relevant.

 

**ITEM 6. SELECTED FINANCIAL DATA**

** **

Asa “smaller reporting company” as defined by Item 10 of Regulation S-K, we arenot required to provide this information.

 

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**ITEM 7. MANGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

*You should read the following discussion andanalysis in conjunction with our financial statements, including the notesthereto contained in this report. This discussion contains forward-lookingstatements that involve risks, uncertainties and assumptions. Our actualresults may differ materially from those anticipated in these forward-lookingstatements as a result of a variety of certain factors, including those setforth under “Risk Factors Associated with Our Business” and elsewhere in thisreport.*

* *

**Overview**

 

Weare in the business of developing, selling, marketing and distributingnutritional supplement products and functional foods. We market our productsprimarily through direct selling or network marketing, in which independentdistributors sell our products. In addition, we sell our products directly toprofessional and Olympic athletes and professional sports teams.

 

Ourproduct lines consist of a liquid nutritional supplement, four powderedbeverages, and 12 individual supplements packaged in our VitaCube® or a box.Our VitaCube® is an easy to use, compartmentalized box with instructions forwhich supplements to take and the proper times to take them. We added a box ofsupplements with the four daily vitamins conveniently packaged in pillow-packsfor each serving. In January 2007 we launched our latest product offeringBaziTM, a liquid nutrition drink. In late 2007 we decided to focus our salesefforts on this product and publicly announced it to our independentdistributors in February 2008.

 

Duringthe third quarter of 2003, we initiated a transition of our sales and marketingefforts from sales to retail outlets and in-house telemarketing to directselling through independent distributors and we launched our direct salesprogram in the second quarter of 2004. As of February 29, 2009 we had6,483 independent distributors and 4,530 customers (excluding professionalathletes and sports teams) who had purchased our products within the priortwelve months.

 

Wemaintain an inventory of our products to insure that we can timely fill ourcustomer orders. During 2007 we entered into a five year manufacturingagreement with Arizona Packaging and Production, who manufacture our flagshipproduct, BaziTM. The terms of the agreement provided that they would be theexclusive manufacturer of this product and also stipulated certain prices,quantities and delivery timelines. As a result the increased sales of Bazi andthe manufacturing agreement, the lead time on this product has been reduced to4 weeks. Our inventory, net of our allowance for obsolescence, was $176,236 at December 31,2008, a decrease from $370,843 at December 31, 2007.

 

Thedecrease of inventory was a result of the decision to focus our marketingefforts around the single product, BaziTM, therefore we provided for obsolesceon a number of the legacy products that we do not believe that we will sellbefore they expire. We believe that the current inventory level is adequate tomeet our short-term projected demand, and based on our sales for the year endedDecember 31, 2008, it is appropriately classified as a current asset basedon the ongoing implementation of our new single product marketing plan which isdesigned to increase our distributor base and sales.

 

Duringthe year ended December 31, 2008, we continued to see the demand for allof our legacy products (all products other than BaziTM) decrease as customersfavored the convenience and simplicity of BaziTM. In August 2008 wediscontinued the sales of the XELR8 Snack product. Both of these factorsresulted in taking a charge against operations for obsolete inventory of$22,609. Our allowance for obsolete inventory decreased to $116,095 from$189,403 for the years ended December 31, 2008 and 2007,respectively.  We believe our reserve forobsolescence is reasonable because (i) substantially all of our BaziTMinventory has been recently purchased, and (ii) the shelf life of ourlegacy products averages three years and BaziTM is a year.

 

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

 

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generatedthrough their downline organization. Independent distributors advance indistributor levels as they develop their sales organization and increase theirsales volume, which increases their compensation.

 

Werecognize revenue when products are shipped to our customers. Revenue isreduced by product returns at the time we take the product either back intoinventory or dispose of it. In addition, we estimate a reserve total for futurereturns. Cost of our sales consists of expenses directly related to theproduction and distribution of the products and certain sales materials.Included in the sales and marketing expenses are independent distributorcommissions, bonus and incentives along with other general selling expenses. Weexpect our independent distributor expenses, as a percentage of net revenues,to decrease as independent distributors receive less additional incentives andrely on the incentives in our direct sales program. General and administrativeexpenses include salaries and benefits, rent and building expenses, legal,accounting, telephone and professional fees.

 

Ourrevenue will depend on the number and productivity of our independentdistributors, who purchase products and sales materials from us for resale totheir customers or for personal use. Because we will distribute substantiallyall of our products through our independent distributors, our failure to retainour existing distributors and recruit additional distributors could have anadverse effect on our revenue. We believe that the number of our distributorsand customers are an important indicator to monitor. In addition, we willmonitor the sales generated per independent distributor as well as the successof our independent distributors in recruiting new independent distributors andcustomers.

 

Withrespect to industry and market factors that may affect us directly, we believethat industry credibility in both direct selling and nutritional supplementswill be critical elements in whether we can increase revenues and becomeprofitable. Any adverse developments in either of these two areas, to us or inour industry, could lead to a lower number of our independent distributors andreduced sales and recruiting efforts by existing distributors, as well as aloss or no increase in the number of sports celebrity endorsers of ourproducts. We do not know what industry growth was for 2008, or will be for2009, nor do we have enough experience in the direct sales channel to determinewhether a slower industry growth rate, which occurred for several years leadingup to 2003 and which has subsequently been slow, will adversely affect us.Additionally, we believe that the deteriorating economic conditions in the UnitedStates that started in the third quarter of 2008 and continue through into 2009could have a negative effect on our business and the ability of our independentdistributors to recruit other distributors.

 

Ouroperating plan for 2009 is focused on the continued growth and marketpenetration of BaziTM, and increasing the number of independent distributors andcustomers, growing revenues, and generating gross profits. With respect to industry and marketfactors that may affect us directly, we believe that industry credibilityin both direct selling and nutritional supplements will be critical elements inwhether we can increase revenues and become profitable. Any adversedevelopments in either of these two areas, to us or in our industry, could leadto a lower number of our independent distributors and reduced sales andrecruiting efforts by existing distributors, as well as a loss or no increasein the number of sports celebrity endorsers of our products. Due to therelatively recent commencement of our direct selling program throughindependent distributors and the change in marketing strategy from multipleproducts to a single product, we cannot predict our revenue, gross profit, netincome or loss or use of cash and cash equivalents; however, we expect netlosses will continue for at least the next 9 months.

 

In March 2008, wecompleted a private sale of common stock of the Company for gross proceeds of$500,000.

 

**Critical Accounting Polices and Estimates**

 

Discussionand analysis of our financial condition and results of operations are basedupon financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenue and expenses, andrelated disclosure of contingent assets and liabilities. On an on-going basis,we evaluate our estimates; including those related to collection ofreceivables, inventory obsolescence, sales returns and non-monetarytransactions such as stock and stock options issued for services. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making 

 

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judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions. We believe the following criticalaccounting policies affect our more significant judgments and estimates used inthe preparation of our financial statements.

 

***Revenue Recognition****.*  In accordance with Staff Accounting Bulletin104 “Revenue Recognition in Financial Statements”, revenue is recognized at thepoint of shipment, at which time title is passed. Net sales include sales ofproducts, sales of marketing tools to independent distributors and freight andhandling charges. With the exception of approved professional sports teams, wereceive the net sales price from all of our orders in the form of cash orcredit card payment prior to shipment. Professional sports teams with approvedcredit have been extended payment terms of net 30 days.

 

***Allowances for Product Returns****.*  Allowances for product returns are recordedat the time product is shipped. These accruals are based upon the historicalreturn rate since the inception of our network marketing program in the thirdquarter of 2003, and the specific historical return patterns by product. Ourreturn rate since the third quarter of 2003 has varied from 0.7% to 7.7% of ournet monthly sales.

 

Weoffer a 60-day, 100% money back unconditional guarantee to all customers andindependent distributors who have never before purchased products from us. Asof December 31, 2008, orders shipped that are subject to our 60-day moneyback guarantee were approximately $130,517. All other product may be returnedto us by any customer or independent distributor if it is unopened andundamaged for a 100% sales price refund, less a 10% restocking fee, providedthe product is returned within 12 months of purchase and is being sold by us atthe time of return. We are not able to estimate the amount of revenue we haverecognized that is held by these buyers of product and which is returnable,because it is not possible to determine the amount of product that is unopenedand undamaged. Product damaged during shipment is replaced wholly at our cost,which historically has been negligible.

 

We monitor our return estimate on an ongoingbasis and may revise allowances to reflect our experience.  Our reserve for product returns at the yearended December 31, 2008 and 2007 was $134,836 and $76,193, respectively.To date, product expiration dates have not played any role in product returns,and we anticipate that they may in the future because of the marketing focus onBaziTM, a product that has only a one year shelf life and therefore it ispossible for us to have expired product returned to us. To date we have nothave any significant returns of expired product.

 

***Inventory Valuation****.*  Inventories are stated at the lower of costor market on a first-in first-out basis. A reserve for inventory obsolescenceis maintained and is based upon assumptions about current and future productdemand, inventory whose shelf life has expired and market conditions. A changein any of these variables may require additional reserves to be taken. Wereserved $116,095 for obsolete inventory as of December 31, 2008 and$189,403 as of December 31, 2007.

 

***Stock Based Compensation. ***Many equity instrument transactions are valued basedon pricing models such as Black-Scholes-Merton, which require judgments by us.Values for such transactions can vary widely and are often material to thefinancial statements.

 

Effective January 1,2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(revised 2004), Share-Based Payment (SFAS 123R), which requirescompensation costs related to share-based transactions, including employeestock options, to be recognized in the financial statements based on fairvalue. SFAS 123R revises SFAS No. 123, Accounting for Stock-BasedCompensation, (SFAS 123) and supersedes Accounting Principles BoardOpinion (APB) No. 25, Accounting for Stock Issued to Employees. In March 2005,the Securities and Exchange Commission (the SEC) issued Staff AccountingBulletin No. 107 (SAB 107) regarding the SEC’s interpretation ofSFAS 123R and the valuation of share-based payments for public companies.We have applied the provisions of SAB 107 in its adoption ofSFAS 123R. We adopted the provisions of SFAS 123R using the modifiedprospective transition method. In accordance with this transition method, thecompany’s consolidated financial statements for prior periods have not beenrestated to reflect the impact of SFAS 123R. Under the modified prospective transitionmethod, share-based compensation expense for the first quarter of 2006 includescompensation expense for all share-based compensation awards granted prior to,but for which the requisite service has not yet been performed as of January 1,2006, based on the 

 

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grant date fair valueestimated in accordance with the original provisions of SFAS 123. Share-basedcompensation expense for all share-based compensation awards granted after January 1,2006 is based on the grant date fair value estimated in accordance with theprovisions of SFAS 123R.

 

### **Results of Operations**

### ** **

*The discussion below first presents the results of 2008 yearfollowed by the results of 2007 year.*

 

**For year ended December 31, 2008, compared to the yearended December 31, 2007.**

 

***Net Sales****. *Net sales were $7,416,372compared to $4,853,046, an increase of 53%. The increase in sales was the result of the continued success ofthe liquid nutritional supplement, BaziTM. This product, along with aintroduction of new sales and marketing tools assisted our independentdistributors in executing our business plan. Independent distributorspurchase our products for resale to customers and for their own personalconsumption.

 

Thepercentage that each product category represented of our net sales is asfollows:

 

 

| ** **                                  | ** ** | **Year Ended**        | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **December 31,** | ** ** |
| ** **                                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Product Category**                        | ** ** | **% of Sales**        | ** ** | **% of Sales** | ** ** |
| BAZITM                                  |       | 92                    | %          | 83 | % |
| HYDRATE                                     |       | 1                     | %          | 2 | % |
| BUILD                                       |       | 1                     | %          | 2 | % |
| EAT                                         |       | 0                     | %          | 1 | % |
| DRINK                                       |       | 1                     | %          | 3 | % |
| SNACK*                                      |       | 0                     | %          | 1 | % |
| Vitamins and minerals (including SUPPORT)   |       | 1                     | %          | 2 | % |
| Other — educational materials, apparel |       | 4                     | %          | 6 | % |

----

*product was discontinued in August 2008

 

***Gross Profit****. *Gross profit increased to$5,739,337 from $3,472,383, an increase of 65%. Gross profit as a percentage ofrevenue (gross margin) increased to 77% compared to 72%, a result of highermargin of the BaziTM product compared to our legacy products. The overallincrease in gross profit also reflects the increase in net revenue.

 

***Sales and Marketing Expenses****. *Sales and marketing expensesincreased to $4,950,718 from $3,180,392, an increase of 56%. Sales andmarketing expenses include the commissions that we pay our independentdistributors as well as costs associated with producing marketing materials,promotional activities and events for our distributors. The increases in theexpense are primarily due to the increased revenue compared to the prior year,and therefore the commission that we pay these distributors who sell theproduct. We incurred$3,369,603 during the year ended December 31, 2008, compared to $2,006,167during the year ended December 31, 2007, in costs to attract experiencedsales leaders to our distributor network, commissions paid to our IndependentDistributors, and promotions and awards for our distributors. Our costs of hostingDistributor events like the National Distributor Event and the Diamond ClubWeekend increased by 24% from the prior year, with the expense for the yearended December 31, 2008, of $284,435 compared to the 2007 expense of$229,749.  The salary expense of oursales and marketing group, which includes our customer service center,increased to $334,913 for the year ended December 31, 2008 compared to$282,924 for the year ended December 31, 2007. We expect all of theseexpense categories to continue to increase as our sales increase for the next12 months as we implement our marketing plan.

 

***General and Administrative Expenses****. *General and administrativeexpenses were $2,878,156 compared to $3,107,469, or a decrease of 7%. The decrease is a result of $661,132 instock based compensation that we paid to the referral agent in connection withthe short term loan financing in the prior period and a charge of $350,000 in2007 in stock based compensation that the Company recorded for the grant ofstock by a principal shareholder to the employees of the Company. Under theguidance issued by the Securities and Exchange Commission in Staff AccountingBulletin 107 (SAB 107), share-based payments issued to an employee of a 

 

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reporting entity by arelated party or other holder of economic interest in the entity ascompensation for services provided to the entity are to be recorded as acompensation expense by the entity. These decreases were partially offset byhigher compensation as a result of the variable employment agreements with ourexecutives and additional employees, and additional expenses incurred fortechnology related support services and infrastructure.

 

***Interest Expense***.  Interest expense was $0 compared with$439,537, a decrease of 100%. In November 2006 and January 2007, theCompany entered into two short term debt financing agreements. Both providedfor a 10% interest rate and an origination fee of 400,000 shares of commonstock of the Company which was valued using the share price of the Company onthe dates the loans were funded and amortized over the term of the loan. Bothloans were repaid on March 27, 2007.

 

***Net Loss****.*Our net loss was $2,110,034, compared $3,241,730, a decrease of 35%;while on a per share basis our loss was $0.14 per share for the year ended December 31,2008, compared to $0.23 per share for the year ended December 31, 2007, adecrease of 39%. The decrease in net loss is a result of increased sales andgross margin, decreased stock based compensation expense and the interestexpense from the bridge note loans, and offset by the increased Distributorcommission and event expenses. The per share decrease was also a result of ahigher number of outstanding shares as a result of the private placementtransactions that took place in the year ended December 31, 2008.

 

### **Liquidity and Capital Resources**

### ** **

To date, our operatingfunds have been provided primarily from sales of our common stock $15,352,624,through December 31, 2008, and to a lesser degree, cash flow provided bysales of our products.

 

On March 5, 2007, weannounced that the Company had raised $2,000,000 in gross proceeds in a privateplacement transaction, which would close subject to shareholder and AmericanStock Exchange approval. On March 7, 2007, the shareholders approved theprivate placement transaction, and on March 27, we closed the transaction.At the time of closing, we paid in full the short-term loans of $500,000 plusaccrued interest of $13,425 leaving us with no short-term or long-term debt atthat time, other than trade accounts payable and other accrued liabilities.

 

On May 8, 2007, theCompany announced that it had completed the sale of one million units in aprivate placement transaction resulting in gross proceeds of $2,000,000, whichwould close subject to American Stock Exchange approval. On May 24, 2007,we closed the transaction.

 

OnFebruary 19, 2008, the Company announced that it had completed the sale ofone-half million units in a private placement transaction for gross proceeds of$500,000. On March 6, 2008 the American Stock Exchange approved the issueof the shares.

 

We used $1,103,846 ofcash for operations in the year ended December 31, 2008, compared to$1,178,996 of cash for operations in the year ended December 31, 2007. Theuse of cash in our operations results from incurring and accruing expenses tosuppliers necessary to generate business and service our customers at a timewhen revenues did not keep pace with expenses. As of December 31, 2008, wehad $1,576,510 in cash and cash equivalents available to fund futureoperations. Net working capital decreased to $1,314,831 at December 31, 2008, compared to $2,120,479 at December 31,2007.

 

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

 

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

 

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***Off-Balance Sheet Items****.*  We had no off-balance sheet items as of December 31,2008.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

As a “smallerreporting company” as defined by Item 10 of Regulation S-K, we are not requiredto provide this information.

 

**ITEM 8. FINANCIAL STATEMENTS**

** **

Thefinancial statements are included in this annual report on Form 10-K at page F-1.

 

### **Index to Financial Statements**

** **
| Reports of Independent Registered Public Accounting  Firms                                                                     | F-1    |
|--------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                           |   |
| Consolidated  Balance Sheets as of December 31, 2008 and 2007                                                             | F-3    |
|                                                                                                                           |   |
| Consolidated  Statements of Operations for the years ended December 31, 2008 and 2007.                                    | F-4    |
|                                                                                                                           |   |
| Consolidated Statements of Changes in Shareholders’  Equity (Deficit) for the years ended December 31, 2008 and 2007 | F-5    |
|                                                                                                                           |   |
| Consolidated Statements of Cash Flows for the Years  Ending December 31, 2008 and 2007                                    | F-6    |
|                                                                                                                           |   |
| Notes to Consolidated Financial Statements                                                                                     | F-7    |

** **

**ITEM9. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

On November 1, 2008,Gordon, Hughes & Banks, LLP (“GH&B”) resigned as the Company’sindependent registered public accounting firm. GH&B recently entered intoan agreement with Eide Bailly LLP (“Eide Bailly”), pursuant to which EideBailly acquired the operations of GH&B and certain of the professionalstaff and shareholders of GH&B joined Eide Bailly either as employees or partnersof Eide Bailly and will continue to practice as members of Eide Bailly.Concurrent with the resignation of GH&B, the Company, through and with theapproval of its Audit Committee, engaged Eide Bailly as its independentregistered public accounting firm.

 

The report of GH&B onthe Company’s financial statements for the fiscal year ended December 31,2007 did not contain an adverse opinion or a disclaimer of opinion, and was notqualified or modified as to uncertainty, audit scope, or accounting principles.

 

In connection with theaudit for the past two fiscal years and through November 1, 2008, therewere no disagreements with GH&B on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedure, whichdisagreements, if not resolved to the satisfaction of GH&B, would havecaused GH&B to make reference to the subject matter of the disagreements inconnection with its audit reports on the Company’s financial statements.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

** **

*(a) Evaluationof Disclosure Controls and Procedures.*  Our management, with the participation ofour Chief Executive Officer (CEO), evaluated the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport. Based on that evaluation, our CEO concluded that our disclosurecontrols and procedures as of the end of the period covered by this report wereeffective such that the information required to be disclosed by us in reportsfiled under the Securities Exchange Act of 1934 is (i) recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and (ii) accumulated and communicated to ourmanagement, including our CEO, as appropriate to allow timely decisionsregarding disclosure. A controls system cannot provide absolute assurance,however, that the 

 

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objectives of the controlssystem are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within a company havebeen detected.

 

*Management’sAnnual Report on Internal Control over Financial Reporting.*  Our management is responsiblefor establishing and maintaining adequate internal control over financialreporting (as defined in Rule 13a-15(f) under the Exchange Act). Ourinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements in accordance with of accounting principlesgenerally accepted in the United States.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Therefore, even those systems determined to be effectivecan provide only reasonable assurance of achieving their control objectives.

 

Our management, with theparticipation of the CEO, evaluated the effectiveness of the Company’s internalcontrol over financial reporting as of December 31, 2008.  In makingthis assessment, our management used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control —Integrated Framework.  Based on this evaluation, our management, with theparticipation of the CEO, concluded that, as of December 31, 2008, ourinternal control over financial reporting was effective.

 

The annual report doesnot include an attestation report of the company’s registered public accountingfirm regarding internal control over financial reporting.  Management’sreport was not subject to attestation by the company’s registered publicaccounting firm pursuant to temporary rules of the Securities and ExchangeCommission that permit the company to provide only management’s report in thisannual report.

 

(b) *Changes in Internal Control over Financial Reporting.*  Therewere no changes in the Company’s internal controls over financial reporting,known to the CEO or the chief financial officer, that occurred during theperiod covered by this report that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

**ITEM 9B. OTHER INFORMATION**

 

OnMarch 9, 2009 the Company was delisted from the AlterNext Exchange. TheCompany is currently listed on the OTC Bulletin Board and is quoted for trading under the symbol “XELR”. On the sameday, the Board of Directors appointed Sanford Greenberg to the Board andelected him its Chairman.

 

 

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**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS**

** **

### **Directors and Executive Officers**

### ** **

Thefollowing sets forth certain information regarding each of our directors andexecutive officers:

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                                                   | ** ** | **Committee**                 |
|------------------------|------------|---------|------------|----------------------------------------------------------------|------------|-------------------------------|
| Sanford D. Greenberg   |       | 50      |       | Chairman                                                       |       | —                        |
| John D. Pougnet        |       | 37      |       | Chief Executive  Officer, Chief Financial Officer and Director |       | —                        |
| Douglas Ridley         |       | 52      |       | President and Director                                         |       | —                        |
| John B. McCandless     |       | 60      |       | Lead Director                                                  |       | —                        |
| Daniel Rumsey          |       | 47      |       | Director                                                       |       | Audit/Compensation/Nominating |
| Anthony Petrelli       |       | 56      |       | Director                                                       |       | Compensation/Nominating       |
| AJ Robbins             |       | 62      |       | Director                                                       |       | Audit/Compensation            |
| Anthony DiGiandomenico |       | 42      |       | Director                                                       |       | Audit/Nominating              |

 

Directors hold officeuntil the next annual meeting of stockholders following their election unlessthey resign or are removed as provided in the bylaws. Our officers serve at thediscretion of our Board of Directors.

 

The following is asummary of our directors’ and executive officers’ business experience.

 

**SanfordD. Greenberg, Chairman.  **Mr. Greenberg is our Founder and since ourinception in October 2000 until March 2005 served as our Chairman andChief Executive Officer. On March 9, 2009, Mr. Greenberg wasreappointed as the Chairman of the Board. In March 2005, Mr. Greenbergresigned his position as Chairman and Chief Executive Officer to devotefull-time efforts in advancing our sales and marketing program through ourindependent distributors. Prior to that, he was the Executive Vice Presidentfor GSG Securities, Inc., a NASD member firm, from 1998 to October 2000.From 1989 to 1998, he was the Chairman and Chief Executive Officer of ChatfieldDean & Co., Inc., a former NASD member firm.

 

**John D.Pougnet, Chief Executive Officer and Chief Financial Officer.  **Mr. Pougnet was appointed a Directoron July 11, 2007 and Chief Executive Officer on October 11, 2006.Prior to that Mr. Pougnet was appointed as Chief Financial Officer in September 2005.Immediately prior to joining the Company, Mr. Pougnet was Assurance SeniorManager at KPMG, LLP, a global network of professional services firms providingAudit, Tax and Advisory services to both public and private companies from January 2003to September 2005. Prior to this Mr. Pougnet operated an independentconsulting business from August 2002 to June 2003. He also served asVice President of Finance and Corporate Secretary at Future Beef Operations,LLC, from May 2001 to August 2002, where he was responsible for thestrategic planning, development and leadership of the Corporate Financedepartment for this multi-state meat packing company. Prior to this, Mr. Pougnetwas senior auditor with Deloitte & Touché from September 1996 to May 2001.

 

**DouglasRidley, President and Director.  **Mr. Ridley was appointed as a Director on January 1,2004, and in June 2005 Mr. Ridley joined the Company as President. Mr. Ridleywas an independent consultant to us from April 2003 until December 31,2003. Prior to joining the Company Mr. Ridley was President of SimplyBecause, a gift products network marketing company, from 2003 until 2005 andfrom 1997 until May 2005, was President of Chad Management Co., LLC, anutritional products network marketing company.

 

**John B.McCandless, Lead Director.  **Mr. McCandless was appointed as a director on February 19,2004, Chairman from October 2006 to March 2009 and as Lead Directorfrom March 2009 to date. He is currently providing consulting services tothe Company as well as other nutrition and direct selling companies. From October 2003until December 2006 Mr. McCandless served as the Vice President ofTechnical Services at Weider/Schiff Nutrition International. Mr. McCandlessprovided operations and product consulting services to nutrition and directselling companies as a consultant from November 2002 to October 2003,and from 

 

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October 1995 to November 2002,he served as Senior Vice President and Chief Operating Officer for USANA HealthSciences, a health science company.

 

**AJRobbins, Director.  **Mr. Robbins was appointed as a director on July 10,2006, and serves on our Audit and Compensation Committees. Mr. Robbins iscurrently the Managing Partner of AJ Robbins PC, which he founded in 1986. Mr. Robbin’spractice focuses on accounting and auditing for corporate and securities workfor both private and public companies. Mr. Robbins is a Certified PublicAccountant registered in Colorado, New York and California as well as a memberof the American Institute of Certified Public Accountants and registered withPublic Company Accounting Oversight Board.

 

**DanielRumsey, Director.  **Mr. Rumsey was appointed as a director on August 17,2007, and serves on our Audit, Compensation, and Corporate Governance &Nominating Committees. Mr. Rumsey is active in advising boards, privateequity and hedge funds and banks in connection with public and privatefinancings, restructurings, turnarounds, mergers and acquisitions and crisismanagement. Mr. Rumsey is a highly accomplished business professional withextensive experience in senior management positions, including Chief ExecutiveOfficer, Chief Restructuring Officer, Chief Financial Officer and Chief LegalOfficer. Currently, he serves as Chief Executive Officer and Chairman of theBoard of Azzurra Holding Corporation (formerly P-Com, Inc.); President andfounder of SEC Connect, LLC; as well as Managing Partner of the Disclosure LawGroup. He also serves on the Board of World Racing Group. After beginning hiscareer as an attorney with a private law firm, he served as a staff attorney atthe U.S. Securities & Exchange Commission, working in the Division ofCorporation Finance - Office of Chief Counsel. Prior executive postings haveincluded Assistant General Counsel at Terra Industries; Associate GeneralCounsel and Assistant Secretary of EchoStar Communications Corp.; Acting CFOand General Counsel of JustCare Development, LLC; CEO and President of AspenLearning Systems; EVP, General Counsel and Secretary of Knowledge Kids Network, Inc.;and CEO, CFO, General Counsel and Secretary of P-Com, Inc. Mr. Rumseyis a graduate of the University of Denver and the University of Denver Collegeof Law.

 

**AnthonyPetrelli, Director.  **Mr. Petrelli was appointed as a director on August 17,2007, and serves on our Compensation Committee. Mr. Petrelli has beenengaged in the areas of corporate finance, investment banking underwriting,sales management and securities trading for more than 30 years. Mr. Petrellijoined Neidiger, Tucker, Bruner, Inc. in May of 1987 and currentlyserves as Senior Vice President and a member of the Board of Directors. He isalso its Managing Director of Corporate Finance/Investment Banking and overseespublic and private offerings for micro-, small- and mid-cap market companies.In addition, he has served on the National Association of Securities Dealers, Inc.(NASD) Statutory Disqualification Committee; been a member and Vice Chairman ofthe NASD National Adjudicatory Council; member and Chairman of the NASDDistrict Business Surveillance Committee; a member of the Task Force on Futureof Shared State and Federal Securities Regulation for the North AmericanSecurities Administrators Association, Inc.; and has served as a memberand past Chairman of the National Investment Banking Association.

 

**AnthonyDiGiandomenico, Director.  **Mr. DiGiandomenico was appointed as a director onMay 25, 2004, and serves on our Audit and Corporate Governance &Nominating 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 Directors of Orion Acquisition Corp. II, a corporation whichfiles reports pursuant to the Securities Exchange Act of 1934, which was formedin 1995 to acquire an operating business by purchase, merger or otherwise.

 

Thereare no family relationships between or among our executive officers anddirectors.

 

**BOARD OF DIRECTORS**

 

**BoardCommittees**

 

The standing committeesof the Board of Directors are comprised of the Audit Committee, CompensationCommittee and the Corporate Governance & Nominating Committee.

 

The Audit Committee iscomprised of Messrs. Rumsey, DiGiandomenico and Robbins and oversees ourfinancial reporting processes, including (i) reviewing with management andthe outside auditors the audited 

 

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financial statementsincluded in our Annual Report, (ii) reviewing with the outside auditorsthe interim financial results included in our quarterly reports filed with theSEC, (iii) discussing with management and the outside auditors the qualityand adequacy of internal controls, and (iv) reviewing the independence ofthe outside auditors. During 2008 the Audit Committee met four timestelephonically.

 

The CompensationCommittee is comprised of Messrs. Petrelli, Robbins and Rumsey. At thedirection of the full Board, the Compensation Committee reviews and makesrecommendations with respect to compensation of our directors, executiveofficers and senior management. The Compensation Committee administers ourStock Incentive Plan. The Compensation Committee met twice during 2008 andapproved various other matters by unanimous written consent.

 

The Corporate Governance &Nominating Committee is comprised of Messrs. Rumsey, Robbins andMcCandless. At the direction of the full Board, the Committee review,investigate qualified nominees for election to the Board when vacancies occurand makes recommendations with respect to the nomination of directors. TheCommittee met once in 2008.

 

The Corporate Governance &Nominating Committee strives to identify and attract director nominees with avariety of experience who have the business background and personal integrityto represent the interests of all shareholders. Although the Board has notestablished any specific minimum qualifications that must be met by a directornominee, factors considered in evaluating potential candidates includeeducational achievement, managerial experience, business acumen, financialsophistication, direct selling industry expertise and strategic planning andpolicy-making skills. Depending upon the current needs of the Board, somefactors may be weighed more or less heavily than others in the Board’sdeliberations. The Board evaluates the suitability of a potential directornominee on the basis of written information concerning the candidate,discussions with persons familiar with the background and character of thecandidate and personal interviews with the candidate. The Corporate Governance &Nominating Committee also assists the Board in developing and monitoring the Company’scorporate governance guidelines.

 

**Attendanceat Meetings**

 

The Board held fourmeetings during 2008. Various matters were also approved by the unanimouswritten consent of the directors during the last fiscal year. Each directorattended at least 75% of the aggregate of (i) the total number of meetingsof the Board and (ii) the total number of meetings held by all committeesof the Board on which such director served. We have no formal policy withrespect to the attendance of Board members at the annual meeting ofshareholders but encourage all incumbent directors and director nominees toattend each annual meeting of shareholders.

 

**BoardCharters**

 

TheBoard has adopted a charter with respect to its governance which includesconsideration of director nominees. Additionally, the Compensation, Audit andCorporate Governance & Nominating Committees have adopted Charterswith respect to their governance and operation.

 

### **Code of Ethics**

### ** **

Wehave adopted a Code of Ethics that applies to all of our directors, officersand employees. We publicize the Code of Ethics through posting the policy on our website,http://www.XELR8.com. We will disclose on our website any waivers of, oramendments to, our Code of Ethics.

 

**ITEM 11. EXECUTIVE COMPENSATION**

** **

**CompensationDiscussion and Analysis**

 

The objective of theCompany’s compensation program is to attract, retain and reward management whodemonstrate the required skill to develop the Company into a leader in thenutrition and network marketing field. Through the development of the Company’sbusiness plan, the compensation program is designed to incentivize managementin the creation of shareholder value. The compensation program has beendesigned to 

 

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reward executives forestablishing the Company in the network marketing field, developing productsthat can be successfully sold in that channel and creating shareholder wealth.

 

Currently the Company hasused two elements of compensation for management, current compensation, in theform of cash, and long-term equity compensation in the form of grants of stockoption awards. The Company has also used the award of options to replace cashcompensation for employees and the issuance of stock as a method of fulfillingits obligations under employment contracts. As the Company has not beenprofitable since its inception, the Company has not had a cash bonus program,but rather relied on the potential of the long-term awards as incentives tocompensate its executives. The Company has identified and disclosed to itsexecutives what levels of profitability would be required in order to create acash bonus plan. Typically the current compensation is set at a base level,with variances based on the achievement of certain benchmarks with regards tomonthly net sales targets.

 

The cash compensationenables the Company to attract management with the required skills andexperience while the awards of stock options are used as a method of retainingexecutives for long term growth. Additionally, the Company has used the awardsof stock and options as a method of reducing cash outflow

 

The Company hasdetermined the amount of short and long term compensation based on a number offactors: level of experience of the employee in his or her respective field,prevailing market rates for individuals performing similar functions atcompeting companies in a similar industry and stage of development of the Company.The Company has attempted to evenly balance the compensation between currentand long-term for its executives, with the long-term award requiring some formof vesting, typically over a two or four year period. During the current year,the executives that were granted what is typically a long-term compensationaward, stock options, in lieu of short term cash compensation, and were vestedinto their options over a shorter period of time. The Company has also usedoptions on a performance basis for certain individuals, with the achievement ofcertain goals resulting in the vesting in the options. Going forward theCompany intends to base awards to management based on the achievement ofcertain predetermined sales goals. When evaluating the compensation of executiveson an annual basis, the Company has reviewed past compensation received by theexecutive in both current and long-term awards when determining any additionalawards, as well as the achievement of certain sales and profitability targetsfor selected executives.

 

Each element of thecompensation program is designed to further the Company’s goals of attractingand retaining high caliber individuals with the experience to grow the Companyand ultimately create and increase shareholder wealth. The incentive basedawards were directly tied to the achievement of an objective, whereas the otherawards that were based on the vesting period were used as a mechanism to retainskilled executives. In the performance based awards, where either long-termawards are vested or there is an increase in current cash compensation, it isthe practice of the Company to link the overall objectives of the Company withthe respective objectives for that executive and his or her ability to exerciseinfluence over the outcome.

 

Thefollowing table sets forthinformation with respect to compensation earned by the executive officers ofthe Company for 2008 and 2007.

 

**Summary Compensation Table**

 
| ** **                  | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | **Change in** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|---------------------|------------|------------|------------|------------|------------|------------|------------|------------------|------------|--------------------|------------|------------------|------------|------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | **Pension**        | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** | **Value and** | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-Equity**   | ** ** | **Nonqualified**   | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive**    | ** ** | **Deferred**       | ** ** | **All**          | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | **Stock**  | ** ** | **Option** | ** ** | **Plan**         | ** ** | **Compensation**   | ** ** | **Other**        | ** ** | ** ** | ** ** |
| **Name and**                | ** ** | ** ** | ** ** | ** **          | ** ** | **Bonus**  | ** ** | **Awards** | ** ** | **Awards** | ** ** | **Compensation** | ** ** | **Earnings**       | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
| **Principal  Position**     | ** ** | **Year**   | ** ** | **Salary ($)** | ** ** | **($)**    | ** ** | **($)(1)** | ** ** | **($)(2)** | ** ** | **($)**          | ** ** | **($)**            | ** ** | **($)**          | ** ** | **($)**    | ** ** |
| John D. Pougnet,            |       | 2008       |       | 204,361             |       | —     |       | —     |       | 78,580     |       | —           |       | —             |       | —           |       | 282,941    |       |
| Chief Executive Officer and |       | 2007       |       | 151,002             |       | —     |       | 38,500     |       | 103,378    |       | —           |       | —             |       | —           |       | 292,880    |       |
| Chief Financial Officer     |       |       |       |                |       |       |       |       |       |       |       |             |       |               |       |             |       | —     |       |
| Douglas Ridley,             |       | 2008       |       | 183,508             |       | —     |       | —     |       | 62,864     |       | —           |       | —             |       | —           |       | 246,372    |       |
| President                   |       | 2007       |       | 138,117             |       | —     |       | 35,000     |       | 78,656     |       | —           |       | —             |       | —           |       | 251,773    |       |

 

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(1)                                  On March 27,2007 a principal shareholder, Mr. Sanford Greenberg, granted shares of hisown stock to certain employees of the Company. Under the guidance issued by theSecurities and Exchange Commission in Staff Accounting Bulletin 107 (SAB 107),share-based payments 

 

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issued to an employee of areporting entity by a related party or other holder of economic interest in theentity as compensation for services provided to the entity are to be recordedas a compensation expense by the entity.

 

 (2)                               The Company uses aBlack-Scholes option-pricing model (Black-Scholes model) to estimate the fairvalue of the stock option grant. The use of a valuation model requires thecompany to make certain assumptions with respect to selected model inputs.Expected volatility was calculated based on the historical volatility of thecompany’s stock price. In the future the average expected life will be based on thecontractual term of the option and expected employee exercise and post-vestingemployment termination behavior. Currently it is based on the simplifiedapproach provided by SAB 107. The risk-free interest rate is based on U.S.Treasury zero-coupon issues with a remaining term equal to the expected lifeassumed at the date of the grant. The following were the factors used in theBlack Sholes model to calculate the compensation expense:

 

| ** **               | ** ** | **For the year ended  December 31, 2008** | ** ** |
|--------------------------|------------|--------------------------------------------------------------------|------------|
| Stock price volatility   |       | 94.2  to 101.5                                                     | %          |
| Risk-free rate of return |       | 0.37  to 3.09                                                      | %          |
| Annual dividend yield    |       | 0                                                                  | %          |
| Expected life            |       | 1.5  to 4.5 Years                                                  |       |

 

**Grantsof Plan-Based Awards**

 

In 2008, we issuedthe options listed below. There were no stock options exercised in 2008. Thefollowing table sets forth the options granted in 2008:

 
| ** **                                                         | ** ** | ** **  | ** ** | **Number of  Non-Equity  Incentive Plan  Units** | ** ** | **Estimated Future Payouts Under  Non-Equity Incentive Plan Awards** | ** ** | **Estimated Future Payouts Under  Equity Incentive Plan Awards** | ** ** | **All Other  Stock Awards:  Number of  Shares of  Stock or** | ** ** | **All Other  Option Awards:  Number of  Securities  Underlying** | ** ** | **Exercise or  Base Price  of Option** | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Grant**   | ** ** | **Granted**                                                | ** ** | **Threshold**                                                                                      | ** ** | **Target**                                                                                     | ** ** | **Maximum**                                                                           | ** ** | **Threshold**                                                                   | ** ** | **Target**                                            | ** ** | **Maximum** | ** ** | **Units** | ** ** | **Options** | ** ** | **Awards** | ** ** |
| **Name**                                                           | ** ** | **Date(1)** | ** ** | **(#)**                                                    | ** ** | **($)**                                                                                            | ** ** | **($)**                                                                                        | ** ** | **($)**                                                                               | ** ** | **(#)**                                                                         | ** ** | **(#)**                                               | ** ** | **(#)** | ** ** | **(#)** | ** ** | **(#)(2)** | ** ** | **($/ Sh)(1)** | ** ** |
|                                                               |       |        |       |                                                       |       |                                                                                               |       |                                                                                           |       |                                                                                  |       |                                                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| John Pougnet, Chief  Executive Officer and Chief Financial Officer |       | 1/8/2008    |       | 0                                                          |       | 0                                                                                                  |       | 0                                                                                              |       | 0                                                                                     |       | 0                                                                               |       | 0                                                     |       | 0 |   | 0 |   | 125,000 |   | $1.00 |   |
| Douglas Ridley, President                                          |       | 1/8/2008    |       | 0                                                          |       | 0                                                                                                  |       | 0                                                                                              |       | 0                                                                                     |       | 0                                                                               |       | 0                                                     |       | 0 |   | 0 |   | 100,000 |   | $1.00 |   |

----

(1)                                  The Company usesthe same date for the Grant Date and the Approval Date. The Company’s Boarddetermined the exercise price of the options, using the higher of $1.00 or theclosing market price for the Grant Date of $0.90.

 

(2)                                  The award wasgranted under the Company’s 2003 Stock Incentive Plan. The employee has five yearsfrom the date of issue to exercise the option, and theaward will vest ratably over a four year period. The terms of the award aredetermined by the 2003 Stock Incentive Plan.

 

**EmploymentContracts**

 

During 2008 theCompany entered amended employment contracts with Mr. Pougnet and Mr. Ridley.

 

On May 2,2008 the Company entered into an employment agreement with its Chief ExecutiveOfficer and Chief Financial Officer, Mr. John Pougnet. Mr. Pougnethas served as the Company’s Chief Executive Officer since October 1, 2006,and as Chief Financial Officer since September 12, 2005. The contract isfor a period of two years commencing on February 1, 2008, with anautomatic renewal provision for subsequent one year periods, with the Companyproviding Mr. Pougnet 90 days notice of non-renewal.  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 sixmonths, payable in equal monthly installments. Mr. Pougnet’s base salaryis $205,000 per annum, and is subject to adjustment on the earlier of the firstanniversary of the date of this Agreement or when the Company reports aprofitable quarter.

 

On May 2,2008 the Company entered into an employment agreement with its President, Mr. DouglasRidley. Mr. Ridley has served as the Company’s President since June 2,2005. The employment contract is for an initial period of two years commencingon May 5, 2008, with an automatic renewal provision for subsequent oneyear periods, with the Company providing Mr. Ridley 90 days notice ofnon-renewal.  If Mr. Ridley’s employment were terminated other thanfor cause, disability or without good reason by Mr. Ridley, he would beprovided severance pay equal to three months, payable in equal monthlyinstallments. Mr. Ridley’s base salary is $193,000 per annum, and issubject to adjustment to $220,000 when the Company’s monthly revenue exceeds$1,000,000, net of taxes, provision for returns and excluding shipping revenue.Mr. Ridley is also granted an award of 50,000 options to purchase commonstock under the Company’s 2003 XELR8 Option Plan at a price of $1.18 per sharefor a period of five years from May 2, 2008, the vesting of which iscontingent upon the Company reporting quarterly revenue of $6,000,000.

 

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**OutstandingEquity Awards as of December 31, 2008**

 
| ** **                   | ** ** | **Option  Awards**                                                                  | ** ** | **Stock  Awards**                                                                     | ** ** |
|------------------------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **Name**                     | ** ** | **Number of  Securities  Underlying  Unexercised  Options   (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options   (#)  Unexercisable** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options   (#)** | ** ** | **Option  Exercise  Price   ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of  Stock That  Have Not  Vested   (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  Have Not  Vested   ($)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Unearned  Shares,  Units  or Other  Rights That  Have Not  Vested   (#)** | ** ** | **Equity  Incentive  Plan  Awards:  Market or  Payout  Value of  Unearned  Shares,  Units  or Other  Rights That  Have Not  Vested   ($)** | ** ** |
| John Pougnet,                |       | 50,000                                                                              |       | 0                                                                                     |       |   |   | $ | 1.80 |   | 9/11/2015 |   |   |   |   |   |   |   |   |   |
| Chief Executive  Officer     |       | 70,833                                                                              |       | 29,167                                                                                |       |   |   | $ | 1.39 |   | 3/9/2011 |   |   |   |   |   |   |   |   |   |
| and Chief  Financial Officer |       | 100,000                                                                             |       | 0                                                                                     |       |   |   | $ | 0.65 |   | 5/27/2011 |   |   |   |   |   |   |   |   |   |
|                         |       | 100,000                                                                             |       | 0                                                                                     |       |   |   | $ | 1.55 |   | 3/25/2012 |   |   |   |   |   |   |   |   |   |
|                         |       | 31,250                                                                              |       | 93,750                                                                                |       |   |   | $ | 1.00 |   | 1/7/2013 |   |   |   |   |   |   |   |   |   |
| Douglas Ridley,              |       | 10,000                                                                              |       | 0                                                                                     |       |   |   | $ | 5.00 |   | 12/2/2010 |   |   |   |   |   |   |   |   |   |
| President                    |       | 20,000                                                                              |       | 0                                                                                     |       |   |   | $ | 3.20 |   | 5/12/2010 |   |   |   |   |   |   |   |   |   |
|                         |       | 200,000                                                                             |       | 0                                                                                     |       |   |   | $ | 1.58 |   | 5/30/2009 |   |   |   |   |   |   |   |   |   |
|                         |       | 70,000                                                                              |       | 0                                                                                     |       |   |   | $ | 1.00 |   | 3/26/2012 |   |   |   |   |   |   |   |   |   |
|                         |       | 25,000                                                                              |       | 75,000                                                                                |       |   |   | $ | 1.00 |   | 1/7/2013 |   |   |   |   |   |   |   |   |   |

 

**StockOption Exercises and Stock Vested**

 

Therewere no options exercised by the named executive officers during the year endedDecember 31, 2008.

 
| ** **                                                         | ** ** | **Option Awards**             | ** ** | **Stock Awards**   | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **Number of Shares**     | ** ** | **Value Realized** | ** ** | **Number of Shares** | ** ** | **Value Realized** | ** ** |
| ** **                                                         | ** ** | **Acquired on Exercise** | ** ** | **on Exercise**    | ** ** | **Acquired on Vesting** | ** ** | **on Vesting** | ** ** |
| **Name**                                                           | ** ** | **(#)**                            | ** ** | **($)**                 | ** ** | **(#)** | ** ** | **($)** | ** ** |
| John Pougnet,  Chief Executive Officer and Chief Financial Officer |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |
| Douglas Ridley,  President                                         |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |

 

**Post-EmploymentCompensation, Pension Benefits, Nonqualified Deferred Compensation**

 

Therewere no post-employment compensation, pension or nonqualified deferredcompensation benefits earned by the executive officers during the year ended December 31,2008.

 

**DirectorCompensation**

 
| **Name**               | ** ** | **Fees Earned or  Paid in Cash  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)(1)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|
| Sanford Greenberg      |       | 0                                                         |       |                   |       | 0                          |       | 0                                                      |       | 0                                                                                                |       | 58,868                                | (2)        | 58,868         |       |
| AJ Robbins             |       | 32,000                                                    |       | 0                      |       | 8,248                      |       | 0                                                      |       | 0                                                                                                |       | 0                                     |       | 40,248         |       |
| Anthony Petrelli       |       | 17,000                                                    |       | 0                      |       | 8,248                      |       | 0                                                      |       | 0                                                                                                |       | 0                                     |       | 25,248         |       |
| Daniel Rumsey          |       | 19,000                                                    |       | 0                      |       | 8,248                      |       | 0                                                      |       | 0                                                                                                |       | 0                                     |       | 27,248         |       |
| John McCandless        |       | 0                                                         |       | 0                      |       | 8,248                      |       | 0                                                      |       | 0                                                                                                |       | 65,000                                | (3)        | 73,248         |       |
| Anthony DiGiandomenico |       | 10,750                                                    |       | 0                      |       | 8,248                      |       | 0                                                      |       | 0                                                                                                |       | 0                                     |       | 18,998         |       |

----

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

 

| ** **               | ** ** | **For the year ended  December 31, 2008** | ** ** |
|--------------------------|------------|--------------------------------------------------------------------|------------|
| Stock price volatility   |       | 94.2  to 101.5                                                     | %          |
| Risk-free rate of return |       | 0.37  to 3.09                                                      | %          |
| Annual dividend yield    |       | 0                                                                  | %          |
| Expected life            |       | 1.5  to 4.5 Years                                                  |       |

 

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(2)          Mr. Greenbergreceived compensation per the terms of the employment agreement dated October 1,2006, which provides for Mr. Greenberg to receive 1% of net adjustedsales.

 

(3)          Mr. McCandlesswas engaged on a monthly basis to consult the Company’s management on variousissues related to network marketing operations and product development.

 

During2008 the Company compensated all external Board members for their participationat Board meetings, and Audit and Compensation Committee meetings. Additionally,Messrs. McCandless, Robbins, Petrelli, Rumsey and DiGiandomenico weregranted 25,000 options to purchase common stock for their services.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS**

** **

**SecurityOwnership of Certain Beneficial Owners and Management**

 

Thefollowing table sets forth certain information with respect to the ownership ofour Common Stock as of the record date, by (i) each person who is known byus to own of record or beneficially more than 10% of our Common Stock, (ii) eachof our directors and officers. Unless otherwise indicated, the stockholderslisted in the table have sole voting and investment powers with respect to theshares of Common Stock. Shareholdings include shares held by family members.The addresses of the individuals listed below are in the Company’s care at 480South Holly Street, Denver, Colorado 80246 unless otherwise noted.

 
| **Name and Address**                                | ** ** | **Number of  Shares(1)** | ** ** | **Percent of  Class(2)** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Sanford D Greenberg                                           |       | 3,439,406                     | (3)        | 21.4                          | %          |
| Chairman                                                      |       |                          |       |                          |       |
| John D. Pougnet                                               |       | 395,646                       | (4)        | 2.5                           | %          |
| Chief Executive Officer, Chief Financial Officer and Director |       |                          |       |                          |       |
| Douglas Ridley                                                |       | 351,250                       | (5)        | 2.2                           | %          |
| President                                                     |       |                          |       |                          |       |
| John B. McCandless                                            |       | 205,625                       | (6)        | 1.3                           | %          |
| Lead Director                                                 |       |                          |       |                          |       |
| Dan Rumsey                                                    |       | 125,000                       | (7)        |                          | *          |
| Director                                                      |       |                          |       |                          |       |
| Anthony B. Petrelli                                           |       | 135,875                       | (8)        |                          | *          |
| Director                                                      |       |                          |       |                          |       |
| Anthony DiGiandomenico                                        |       | 595,551                       | (9)        | 3.7                           | %          |
| Director                                                      |       |                          |       |                          |       |
| AJ Robbins                                                    |       | 145,000                       | (10)       |                          | *          |
| Director                                                      |       |                          |       |                          |       |
| Total officer and director                                    |       | 5,393,353                     |       | 30.1                          | %          |
|                                                          |       |                          |       |                          |       |
| Total beneficial ownership                                    |       | 5,393,353                     |       | 30.1                          | %          |

----

*Less than 1%

 

(1)             All entries exclude beneficial ownershipof shares issuable pursuant to options that have not vested or that are nototherwise exercisable as of the date hereof and which will not become vested orexercisable within 60 days of March 30, 2009.

 

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(2)             Percentages are rounded to nearest one-tenthof one percent. Percentages are based on 15,697,170 shares of common stockoutstanding. Options that are presently exercisable or exercisable within 60days are deemed to be beneficially owned by the person holding the options forthe purpose of computing the percentage ownership of that person, but are nottreated as outstanding for the purpose of computing the percentage of any otherperson.

 

(3)             Comprised of 3,064,406 shares held ofrecord either held directly or as custodian for a minor child and 375,000shares issuable pursuant to options which are presently exercisable or whichbecome exercisable.

 

(4)             Comprised of 29,500 shares held of recordand 366,146 shares issuable pursuant to options which are presently exercisableor which become exercisable.

 

(5)             Comprised of 20,000 shares held of recordand 331,250 shares issuable pursuant to options which are presently exercisableor which become exercisable.

 

(6)             Comprised of 205,625 shares issuablepursuant to options which are presently exercisable or which becomeexercisable.

 

(7)             Comprised of 20,000 shares held of recordand 105,000 shares issuable pursuant to options which are presently exercisableor which become exercisable.

 

(8)             Comprised of 115,625 shares pursuant tooptions which are presently exercisable or which become exercisable and 10,125 Class Awarrants and 10,125 Class B warrants.

 

(9)             Comprised of 323,493 shares issuablepursuant to public warrants and 185,200 shares pursuant to options which arepresently exercisable or which become exercisable and 66,800 shares held ofrecord and 10,029 Class A warrants and 10,029 Class B warrants.

 

(10)       Comprised of 145,000 shares issuablepursuant to options which are presently exercisable or which becomeexercisable.

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

** **

We lease our current corporate office space from Arnold Greenberg, thefather of our Founder and Chairman, Sanford D. Greenberg. We paid $46,800 and$42,780 in rent for the years ended December 31, 2008 and 2007,respectively. Our current lease at $3,900 per month expired at the end of March 2006,and has been replaced with a month to month lease at $4,050 per month.

 

During the year ended December 31, 2008, we contacted withServiceQuest, whose principal is the brother of our Vice President ofOperations, to provide consulting services related to our call center. For theyear ended December 31, 2008 we paid ServiceQuest $41,929 in consultingfees.

 

46

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**ITEM 14. PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

** **

Setforth below are fees paid to the Company’s independent accountants for the pasttwo years for the professional services performed for the Company.

 

**Audit Fees and Audit Related**

 

Wepaid Gordon, Hughes & Banks, LLP a total of $10,837 for professionalservices rendered in review of the March 31, June 30 and September 30,2008 Form 10-Q and $33,191 for the audit of our financials for the yearended December 31, 2007.

 

 We paid Gordon, Hughes & Banks, LLP atotal of $1,648 for professional services rendered in review of our filings oftwo Registration Statements filed on Form S-8 in the year ended December 31,2008.

 

Wepaid Gordon, Hughes & Banks, LLP a total of $9,292 for professionalservices rendered in review of the March 31, June 30 and September 30,2007 Form 10-QSB and $25,457 for the audit of our financials for the yearended December 31, 2006.

 

**Tax Fees**

 

During2007 we paid Gordon, Hughes & Banks, LLP a total of $4,350professional services rendered in connection with the preparation of ourfederal and state income tax returns for the year ended December 31, 2006.

 

**All Other Fees**

 

None.

 

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**ITEM 15. 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.                                                                                                    |

 

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| 10.19   |   | Consulting Agreement with Eastgate Associates Ltd filed with Form 10-KSB on March 31, 2006 and incorporated herein by reference.                                                                   |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20.1 |   | Endorser Agreement with Carnell Williams filed with Form 10-KSB on March 31, 2006 and incorporated herein by reference                                                                             |
| 10.21   |   | Consent Agreement with PouchTec Industries, L.L.C., filed with Form 8-K on July 6, 2006, as Exhibit 99.1, and incorporate herein by reference.                                                |
| 10.22   |   | Amended Earnest Mathis, Jr. Employment Agreement, filed with Form 8-K on July 14, 2006, as Exhibit 10.1, and incorporate herein by reference.                                            |
| 10.23   |   | Amended Sanford Greenberg Employment Agreement, filed with Form 8-K on July 14, 2006, as Exhibit 10.2, and incorporate herein by reference.                                                   |
| 10.24   |   | Amended John Pougnet Employment Agreement, filed with Form 8-K on July 14, 2006, as Exhibit 10.3, and incorporate herein by reference.                                                        |
| 10.25   |   | Bridge Financing Agreement with Asset Protection Fund filed with Form 8-K on November 28, 2006, as Exhibit 10.1, and incorporate herein by reference.                                         |
| 10.26   |   | Bridge Financing Agreement with Global Project Finance AG filed with Form 8-K on December 19, 2006, as Exhibit 10.1, and incorporate herein by reference.                                     |
| 10.27   |   | Referral Agreement with Lighthouse Capital filed with Form 8-K on December 19, 2006, as Exhibit 10.2, and incorporate herein by reference.                                                    |
| 10.28   |   | Amended Sanford Greenberg Employment Agreement filed with Form 10-KSB on March 30, 2007 and incorporated herein by reference.                                                                      |
| 10.29   |   | Amended John Pougnet Employment Agreement filed with Form 10-KSB on March 30, 2007 and incorporated herein by reference.                                                                           |
| 10.30   |   | Exclusive Manufacturing Agreement with Arizona Production and Packaging, L.L.C. filed on August 2, 3007 and incorporated herein by reference.                                                           |
| 10.31   |   | Acceleration Sports Institute Agreement filed with Form 8-K on November 14, 2007 and incorporated herein by reference.                                                                             |
| 10.32   |   | Employment Contract for John D. Pougnet filed with Form 10-Q on May 6, 2008 and incorporated herein by reference.                                                                                  |
| 10.33   |   | Employment Contract for Douglas Ridley filed with Form 10-Q on May 6, 2008 and incorporated herein by reference.                                                                                   |
| 14.1    |   | Code of Ethics filed herewith                                                                                                                                                                                |
| 14.2    |   | Board  Charter filed herewith                                                                                                                                                                                |
| 14.3    |   | Audit  Committee Charter filed herewith                                                                                                                                                                      |
| 14.4    |   | Compensation  Committee Charter filed herewith                                                                                                                                                               |
| 14.5    |   | Nominating &  Corporate Governance Committee charter filed herewith                                                                                                                                 |
| 21.1    |   | Subsidiaries  of XELR8 Holdings, Inc. filed herewith                                                                                                                                                    |
| 31.1    |   | Certification  of CEO as Required by Rule 13a-14(a)/15d-14 filed herewith                                                                                                                               |
| 31.2    |   | Certification  of CFO as Required by Rule 13a-14(a)/15d-14 filed herewith                                                                                                                               |
| 32.1    |   | Certification  of CEO as Required by Rule 13a-14(a) and  Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of  Chapter 63 of Title 18 of the United States Code filed herewith |
| 32.2    |   | Certification of CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code filed herewith    |

 

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**SIGNATURES**

 

Inaccordance with Section 13 or 15(d) of Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, on March 30,2009.

 
| ** ** | **XELR8 HOLDINGS, INC.** |
|------------|--------------------------|
|       |                     |   |
|       | By                       | /s/ John D. Pougnet. |
|       |                     | John  D. Pougnet |
|       |                     | Chief  Executive Officer, |
|       |                     | Chief  Financial Officer, and |
|       |                     | Director |
|       |                     |   |
|       | By                       | /s/ Sanford Greenberg |
|       |                     | Sanford  D. Greenberg |
|       |                     | Chairman |
|       |                     |   |
|       | By                       | /s/ Douglas Ridley |
|       |                     | Douglas  Ridley |
|       |                     | President  and Director |
|       |                     |   |
|       | By                       | /s/ John B. McCandless |
|       |                     | John  B. McCandless. |
|       |                     | Lead  Director |
|       |                     |   |
|       | By                       | /s/ Anthony DiGiandomenico |
|       |                     | Anthony  DiGiandomenico |
|       |                     | Director |
|       |                     |   |
|       | By                       | /s/ Anthony B. Petrelli |
|       |                     | Anthony  B. Petrelli |
|       |                     | Director |
|       |                     |   |
|       | By                       | /s/ Daniel Rumsey |
|       |                     | Daniel  Rumsey |
|       |                     | Director |
|       |                     |   |
|       | By                       | /s/ AJ Robbins |
|       |                     | AJ  Robbins |
|       |                     | Director |

 

50

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## **Table of Contents**

 

## **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

## ** **

To the Board of Directors

XELR8 Holdings, Inc.

Denver, Colorado

 

We have audited theaccompanying consolidated balance sheet of XELR8 Holdings, Inc. as of December 31,2008 and the related consolidated statements of operations, changes inshareholders’ equity (deficit) and cash flows for the year then ended.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

 

We conducted our auditin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged to perform,an audit of its internal control over financial reporting. Our audit 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 also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of XELR8 Holdings, Inc. as of December 31,2008, and the results of its operations and its cash flows for the year thenended, in conformity with accounting principles generally accepted in theUnited States of America.

 
| *** ***                 | ***EideBailly, LLP*** |
|------------------------------|-----------------------|
|                         |                  |
| Greenwood Village,  Colorado |                  |
| March 24, 2009          |                  |

** **

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** **

## **REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

## ** **

To theBoard of Directors

XELR8 Holdings, Inc.

Denver, Colorado

 

We have audited theaccompanying consolidated balance sheet of XELR8 Holdings, Inc. as of December 31,2007 and the related consolidated statements of operations, changes inshareholders’ equity (deficit) and cash flows for the year then ended.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit 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 audit included considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of XELR8 Holdings, Inc. as of December 31,2007, and the results of its operations and its cash flows for the year thenended, in conformity with accounting principles generally accepted in theUnited States of America.

 
| *** ***                 | ***Gordon,  Hughes & Banks, LLP*** |
|------------------------------|---------------------------------------------|
|                         |                                        |
| Greenwood Village,  Colorado |                                        |
| March 10, 2008          |                                        |

 

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**XELR8 HOLDINGS, INC.**

# **CONSOLIDATED BALANCE SHEETS**

# **As of December 31, 2008and 2007**

** **

** **

** **
| ** **                                                                                                                         | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                         |       |        |       |        |       |
| ** **                                                                                                                         | ** ** | ** **  | ** ** | ** **  | ** ** |
| Current assets:                                                                                                                    |       |        |       |        |       |
| Cash and cash equivalents                                                                                                          |       | $           | 1,576,510  |        | $          | 2,245,858 |   |
| Accounts receivable, net of allowance for doubtful accounts of $3,071  and $12,231, respectively                                   |       | 6,825       |       | 7,460       |       |
| Inventory, net of allowance for obsolescence of $116,095 and  $189,403, respectively                                               |       | 176,236     |       | 370,843     |       |
| Prepaid expenses and other current assets                                                                                          |       | 509,377     |       | 329,015     |       |
| Total current assets                                                                                                               |       | 2,268,948   |       | 2,953,176   |       |
|                                                                                                                               |       |        |       |        |       |
| Intangible assets, net                                                                                                             |       | 21,411      |       | 17,959      |       |
| Property and equipment, net                                                                                                        |       | 35,832      |       | 81,405      |       |
|                                                                                                                               |       |        |       |        |       |
| Total assets                                                                                                                       |       | $           | 2,326,191  |        | $          | 3,052,540 |   |
|                                                                                                                               |       |        |       |        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                      | ** ** | ** **  | ** ** | ** **  | ** ** |
| Current liabilities:                                                                                                               |       |        |       |        |       |
| Accounts payable                                                                                                                   |       | $           | 643,426    |        | $          | 574,413 |   |
| Return reserve                                                                                                                     |       | 134,836     |       | 76,193      |       |
| Accrued payroll and benefits                                                                                                       |       | 71,193      |       | 61,475      |       |
| Other accrued expenses                                                                                                             |       | 104,662     |       | 120,616     |       |
|                                                                                                                               |       |        |       |        |       |
| Total Liabilities                                                                                                                  |       | 954,117     |       | 832,697     |       |
|                                                                                                                               |       |        |       |        |       |
| **Commitments and Contingencies (Note 7)**                                                                                         | ** ** | ** **  | ** ** | ** **  | ** ** |
|                                                                                                                               |       |        |       |        |       |
| **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,  15,697,170 and 15,197,170 shares issued and outstanding respectively |       | 15,697      |       | 15,197      |       |
| Additional paid in capital                                                                                                         |       | 23,958,422  |       | 22,696,657  |       |
| Accumulated (deficit)                                                                                                              |       | (22,602,045 | )          | (20,492,011 | )          |
|                                                                                                                               |       |        |       |        |       |
| Total shareholders’ equity                                                                                                    |       | 1,372,074   |       | 2,219,843   |       |
|                                                                                                                               |       |        |       |        |       |
| Total liabilities and shareholders’ equity                                                                                    |       | $           | 2,326,191  |        | $          | 3,052,540 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**XELR8 HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**For the Years Ended December 31, 2008 and 2007**

 
| ** **                                                    | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|
| Net revenue                                                   |       | $          | 7,416,372  |       | $          | 4,853,046 |   |
| Cost of goods sold                                            |       | 1,677,035  |       | 1,380,663  |       |
| Gross profit                                                  |       | 5,739,337  |       | 3,472,383  |       |
|                                                          |       |       |       |       |       |
| Operating expenses:                                           |       |       |       |       |       |
| Selling and marketing expenses                                |       | 4,950,718  |       | 3,180,392  |       |
| General and administrative expenses                           |       | 2,878,156  |       | 3,107,469  |       |
| Research and development expenses                             |       | 12,962     |       | 17,828     |       |
| Depreciation and amortization                                 |       | 45,696     |       | 58,033     |       |
| Total operating expenses                                      |       | 7,887,532  |       | 6,363,722  |       |
|                                                          |       |       |       |       |       |
| Net (loss) from operations                                    |       | (2,148,195 | )          | (2,891,339 | )          |
| Other income (expense)                                        |       |       |       |       |       |
| Interest income                                               |       | 53,061     |       | 87,646     |       |
| Other expenses                                                |       | (13,770    | )          | —     |       |
| Gain (Loss) on disposial of asset                             |       | (1,130     | )          | 1,500      |       |
| Interest (expense)                                            |       | —     |       | (439,537   | )          |
|                                                          |       |       |       |       |       |
| Total other income (expense)                                  |       | 38,161     |       | (350,391   | )          |
|                                                          |       |       |       |       |       |
| Net (loss)                                                    |       | $          | (2,110,034 | )          | $          | (3,241,730 | ) |
|                                                          |       |       |       |       |       |
| Net (loss) per common share                                   |       |       |       |       |       |
| Basic and diluted net (loss) per share                        |       | $          | (0.14      | )          | $          | (0.23 | ) |
|                                                          |       |       |       |       |       |
| Weighted average common shares outstanding, basic and diluted |       | 15,607,006 |       | 13,951,691 |       |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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** **

**XELR8 HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF**

**CHANGES INSHAREHOLDERS’ EQUITY (DEFICIT)**

**For the Years Ended December 31, 2008 and 2007**

 
| ** **                                                                        | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | ** **    | ** ** | **Total**              | ** **  |
|-----------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|---------------|------------|------------------------|-------------|
| ** **                                                                        | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **    | ** ** | **shareholders’** | ** **  |
| ** **                                                                        | ** ** | **Common Stock** | ** ** | **paid in** | ** ** | **Accumulated** | ** ** | **equity**    | ** ** |
| ** **                                                                        | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **(deficit)** | ** ** | **(deficit)**          | ** **  |
| **Balances, January 1, 2007**                                                |       | 10,097,170       |       | $           | 10,097     |            | $          | 16,849,900    |       | $                      | (17,250,281 | ) | $ | (390,284 | ) |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| Issuance of Common Stock for Services                                             |       | 2,100,000        |       | 2,100       |       | 1,017,900       |       | —        |       | 1,020,000              |        |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| Issuance of Common Stock in Private Offerings, net of offering costs  of $380,552 |       | 3,000,000        |       | 3,000       |       | 3,616,448       |       | —        |       | 3,619,448              |        |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| Stock Transferred by Shareholder for services                                     |       | —           |       | —      |       | 350,000         |       | —        |       | 350,000                |        |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| Stock-based compensation                                                          |       | —           |       | —      |       | 862,409         |       | —        |       | 862,409                |        |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| Net (loss)                                                                        |       | —           |       | —      |       | —          |       | (3,241,730    | )          | (3,241,730             | )           |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| **Balances, December 31, 2007**                                              |       | 15,197,170       |       | $           | 15,197     |            | $          | 22,696,657    |       | $                      | (20,492,011 | ) | $ | 2,219,843 |   |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| Issuance of Common Stock in Private Offering, net of offering costs  of $60,797   |       | 500,000          |       | 500         |       | 438,703         |       | —        |       | 439,203                |        |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| Anti-dilution of Series E & F Common Stock Warrants                 |       | —           |       | —      |       | 13,770          |       | —        |       | 13,770                 |        |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| Stock-based compensation                                                          |       | —           |       | —      |       | 809,292         |       | —        |       | 809,292                |        |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| Net (loss)                                                                        |       | —           |       | —      |       | —          |       | (2,110,034    | )          | (2,110,034             | )           |
|                                                                              |       |             |       |        |       |            |       |          |       |                   |        |
| **Balances, December 31, 2008**                                              |       | 15,697,170       |       | $           | 15,697     |            | $          | 23,958,422    |       | $                      | (22,602,045 | ) | $ | 1,372,074 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**XELR8 HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**For the Years Ended December 31, 2008 and 2007**

 
| ** **                                                              | ** **               | **2008**   | ** **               | **2007**   | ** ** |
|-------------------------------------------------------------------------|--------------------------|------------|--------------------------|------------|------------|
| Cash flows from operating activities:                                   |      |       |      |       |       |
| Net income (loss)                                                       |                     | $          | (2,110,034               | )          | $          | (3,241,730 | ) |
| Adjustments to reconcile                                                |                     |       |                     |       |       |
| Depreciation and amortization                                           |                     | 45,696     |                     | 58,033     |       |
| Loss (Gain) on sale of equipment                                        |                     | 1,130      |                     | (1,500     | )          |
| Stock and stock options issued for services                             |                     | 789,292    |                     | 1,372,408  |       |
| Expense related to anti-dilution of warrants                            |                     | 13,770     |                     | —     |       |
| Interest expense and amortization related to bridge loan financing      |                     | —     |                     | 428,889    |       |
| Change in allowance for doubtful accounts                               |                     | (9,160     | )                        | 1,525      |       |
| Change in allowance for inventory obsolesence                           |                     | (73,308    | )                        | 147,748    |       |
| Change in allowance for product returns                                 |                     | 58,643     |                     | 30,866     |       |
| Changes in assets and liabilities:                                      |                     |       |                     |       |       |
| Accounts receivable                                                     |                     | 9,795      |                     | (4,200     | )          |
| Inventory                                                               |                     | 267,915    |                     | (107,227   | )          |
| Other current assets                                                    |                     | (180,362   | )                        | (69,723    | )          |
| Accounts payable and accrued expenses                                   |                     | 82,777     |                     | 205,915    |       |
| Net cash (used) by operating activities                                 |                     | (1,103,846 | )                        | (1,178,996 | )          |
|                                                                    |                     |       |                     |       |       |
| Cash flows from investing activities:                                   |                     |       |                     |       |       |
| Proceeds from sale of equipment                                         |                     | —     |                     | 1,500      |       |
| Capital expenditures and patent expenses                                |                     | (4,705     | )                        | (22,242    | )          |
| Net cash (used) provided by investing activities                        |                     | (4,705     | )                        | (20,742    | )          |
|                                                                    |                     |       |                     |       |       |
| Cash flow from financing activities:                                    |                     |       |                     |       |       |
| Proceeds from bridge loan financing                                     |                     | —     |                     | 250,000    |       |
| Repayments of bridge financing                                          |                     | —     |                     | (500,000   | )          |
| Issuance of common stock, net of offering costs                         |                     | 439,203    |                     | 3,619,449  |       |
| Net cash provided by financing activities                               |                     | 439,203    |                     | 3,369,449  |       |
|                                                                    |                     |       |                     |       |       |
| NET INCREASE (DECREASE) IN CASH                                         |                     | (669,348   | )                        | 2,169,711  |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD                      |                     | 2,245,858  |                     | 76,147     |       |
| CASH AND CASH EQUIVALENTS, END OF THE PERIOD                            |                     | $          | 1,576,510                |       | $          | 2,245,858 |   |
|                                                                    |                     |       |                     |       |       |
| **SUPPLEMENTAL CASH FLOW DISCLOSURE**                                   | ** **               | ** ** | ** **               | ** ** | ** ** |
| Cash paid for interest                                                  |                     | $          | —                   |       | $          | 13,425 |   |
| Stock issued for satisfaction of accrued compensation expense           |                     | $          | —                   |       | $          | 540,000 |   |
| Deferred offering costs applied against proceeds from offering          |                     | $          | —                   |       | $          | 25,000 |   |
| Expiration of call feature liability on options reclassified to  equity |                     | $          | 20,000                   |       | $          | — |   |

# ** **

The accompanying notes are an integral partof these consolidated financial statements.

 

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** **

**XELR8 HOLDINGS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

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

 

***Organizationand Business***

** **

The consolidated financial statements include those of XELR8 Holdings, Inc.,(XELR) (formerly Vitacube Systems Holdings, Inc.) and its wholly ownedsubsidiaries, VitaCube Systems, Inc., XELR8, Inc. (formerly VitaCubeNetwork, Inc.), XELR8 International, Inc. and XELR8 Canada, Corp.Collectively, they are referred to herein as the “the Company.”

 

The Company is in the business of selling, marketing and distributingnutritional supplement products and functional foods.  Our product lines consist of a liquid dietarysupplement, sports hydration drink, a protein shake, a sports energy drink, ameal replacement drink, and a full product line of vitamins and minerals in theform of tablets, softgels or capsules, all of which are manufactured using ourproprietary product formulations.

 

The Company sells and markets the products through a direct sellingchannel, in which independent distributors sell our products through a networkof customers and other distributors. These activities are conducted through XELR8, Inc., a wholly ownedColorado corporation, formed on July 9, 2003.  In addition, we sell our products directly toprofessional and Olympic athletes and professional sports teams throughVitaCube Systems, Inc. To date there have been no activities in XELR8 International, Inc.and XELR8 Canada, Corp.

 

***Liquidity and Basis of Presentation***

 

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 Company incurred a net loss of $2,110,034for the year ended December 31, 2008 and has incurred significant netlosses since inception.

 

TheCompany has been developing awareness of its products through its marketingplan and product innovation.  Withintime, management believes that demand for its products will develop to allowthe Company to become profitable, through the development of its independentdistributor and customer base. Management believes that the cash resources willbe sufficient to fund its operations for the next twenty-four months. If thebusiness operations do not result in increased product sales, our businessviability, financial position, results of operations and cash flow will likely beadversely affected. Consequently, management may elect to raise money duringthe year ended December 31, 2009 to meet any shortfalls fromoperations.  However a realization of asignificant portion of the assets in the accompanying balance sheet is dependenton the continued operations of the Company, which in turn is dependent on theincrease in independent distributors and customer base or the additionalcapital raised through a placement of its securities.

 

***Principles of Consolidation***

 

The accompanying financial statements include the accounts of theCompany and its wholly-owned subsidiaries VitaCube Systems, Inc., XELR8, Inc.,XELR8 International, Inc. and XELR8 Canada, Corp.   All intercompany accounts and transactionshave been eliminated in the preparation of these consolidated statements.

 

***Use of Estimates***

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that 

 

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affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period.  Management believes that the estimatesutilized in the preparation of the financial statements are prudent andreasonable.  Actual results could differfrom these estimates.

 

***Revenue Recognition***

 

The Company ships itsproducts by common carrier and receives payment in the form of cash, creditcard or approved credit terms.  In May 2004, the Company revised itsproduct return policy to provide a 60-day money back guarantee on orders placedby first-time customers and distributors.  After 60 days and for allsubsequent orders placed by customers and distributors, the Company allowsresalable products to be returned within 12 months of the purchase date for a100% sales price refund, subject to a 10% restocking fee.  Since August 2003,the Company has experienced monthly returns ranging from 0.7% to 7.7% of netsales.  Sales revenue and estimated returns are recorded when themerchandise is shipped since performance by the Company is considered met whenproducts are in the hands of the common carrier. Amounts received for unshippedmerchandise are recorded as customer deposits and are included in accruedliabilities net of sales tax.

 

***Cash and Cash Equivalents***

 

For the purpose of reporting cash flows, the Company considers all cashand highly liquid investments with an original maturity of three months or lessto be cash equivalents. The Company considers deposits in banks and investmentspurchased with original maturities of more than three months and less than ayear to be short term investments.

 

***Concentrations***

 

The Company has no significant off-balance sheetconcentrations of credit risk such as foreign exchange contracts, optionscontracts or other foreign hedging arrangements.  The Company maintains the majority of itscash balances with two financial institutions in the form of demand depositsand money market funds.  Funds in excessof the federally insured amount of $250,000 through December 31, 2009, aresubject to credit risk, and the Company believes that the financialinstitutions are financially sound and the risk of loss is minimal.

 

During 2008, the Company relied significantly onone supplier for 71% of its purchases of raw materials for supplements, drinksand marketing materials held for sale. The Company entered into an Exclusive Manufacturing Agreement with thissupplier in 2007 to produce the BaziTM product. The Company owns the formula andmanagement believes that its purchasing requirements can be readily met fromalternative sources.

 

The Company generates a significant proportion ofits revenue from the sale of its product Bazi. For the years ended December 31,2008 and 2007, Bazi accounted for 92% and 83% of the Company’s total revenue,respectively.

 

***Fair Value of Financial Instruments***

 

Substantially all of the Company’s assets and liabilities are carriedat fair value or contracted amounts that approximate fair value.  Estimates of fair value are made at aspecific point in time, based on relative market information and informationabout each financial instrument, specifically, the value of the underlyingfinancial 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’sliabilities consist primarily of short term liabilities recorded at contractedamounts that approximate fair value.

 

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***Inventory***

 

Inventory is stated at the lower of cost or market on a FIFO (first-infirst-out) basis.  Provision is made toreduce excess or obsolete inventory to the estimated net realizable value.  The Company purchases for resale a liquiddietary supplement, sports energy drink, a sports hydration drink, a proteinshake, meal replacement drink, a functional food snack and other vitamins andnutritional supplements, which it packages in various forms and containers.

 

Inventory is comprised of the following:

 

| ** **                     | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|--------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Purchased materials            |       | $                          | 71,930     |                       | $          | 58,746 |   |
| Finished goods                 |       | 220,401                    |       | 501,500                    |       |
| Reserve for obsolete inventory |       | (116,095                   | )          | (189,403                   | )          |
|                           |       | $                          | 176,236    |                       | $          | 370,843 |   |

*** ***

***A summary of the reserve for obsolete and excessinventory is as follows as of December 31, 2008 and 2007:***

 

| ** **                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1    |       | $        | 189,403    |     | $          | 41,655 |   |
| Addition toprovision            |       | 22,610   |       | 216,760  |       |
| Write-off of obsolete inventory |       | (95,918  | )          | (69,012  | )          |
| Balance as of December 31  |       | $        | 116,095    |     | $          | 189,403 |   |

 

***Property and Equipment***

 

Property and equipmentare stated at cost. The Company provides for depreciation of property andequipment using the straight-line method based on estimated useful lives ofbetween three and ten years.

 

***Long-Lived Assets***

 

TheCompany reviews its long-lived assets for impairment whenever changes incircumstances indicate that the carrying amount of an asset may not be recoverable.  For purposes of evaluating the recoverabilityof long-lived assets, the recoverability test is performed using undiscountednet cash flows estimated to be generated by the asset. An impairment was notdeemed necessary in either 2008 or 2007.

 

***Intangible Assets***

 

Intangible assets, todate, have consisted of the direct costs incurred for application fees andlegal expenses associated with trademarks on the Company’s products. The Company’sintangible assets, consisting of trademarks and patent costs, are beingamortized over their estimated life of 15 years. The Company evaluates theuseful lives of its intangible assets annually and adjusts the lives accordingto the expected useful life. An impairment was not deemed necessary in either2008 or 2007.

 

***Advertising Costs***

 

Advertising and marketing costs were $607,931 and$494,883 for the years ended December 31, 2008 and 2007, respectively, andare expensed as incurred or the first time the advertising takes place.

 

***Income Taxes***

 

The Company accounts for income taxes in accordance with Statement ofFinancial Accounting Standards No. 109, “Accounting for Income Taxes”(SFAS 109).  Under the asset andliability method of SFAS 109, deferred tax assets and liabilities arerecognized for the estimated future tax consequences 

 

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attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax ratesin effect for the year in which those temporary differences are expected to berecovered or settled.

 

In June 2006, the Financial Accounting Standards Board (“FASB”)issued Interpretation No. 48, “Accounting for Uncertainties in IncomeTaxes, an interpretation of SFAS No. 109, Accounting for Income Taxes” (“FIN48”). FIN 48 prescribes a comprehensive model for how companies shouldrecognize, measure, present, and disclose in their financial statementsuncertain tax positions taken or expected to be taken on a tax return. UnderFIN 48, tax positions must initially be recognized in the financial statementswhen it is more likely than not the position will be sustained upon examinationby the tax authorities. Such tax positions must initially and subsequently bemeasured as the largest amount of tax benefit that has a greater than 50%likelihood of being realized upon ultimate settlement with the tax authorityassuming full knowledge of the position and relevant facts. FIN 48 is effectivefor fiscal years beginning after December 15, 2006.

 

FIN 48 became effective for the Company on January 1, 2007. Thecumulative effect of adopting FIN 48 on January 1, 2007 has been recordednet in deferred tax assets, which resulted in no FIN 48 liability on thebalance sheet. The total amount of unrecognized tax benefits as of the date ofadoption was zero. There are open statutes of limitations for taxingauthorities in federal and state jurisdictions to audit the Company’s taxreturns from 2006 through the current period. The Company’s policy is toaccount for income tax related interest and penalties in income tax expense inthe statement of operations. There have been no income tax related interest orpenalties assessed or recorded. Because the Company has provided a fullvaluation allowance on all of its deferred tax assets, the adoption of FIN 48had no impact on the Company’s effective tax rate.

 

***Stock-Based Compensation***

 

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

 

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

 

Total share-basedcompensation expense, for all of the Company’s share-based awards recognizedfor the year ended December 31, 2008, was $789,292 or $0.05 per sharebasic and diluted compared with the $1,372,408 or $0.10 per share for the yearended December 31, 2007.

 

The Company uses aBlack-Scholes option-pricing model (Black-Scholes model) to estimate the fairvalue of the stock option grant. The use of a valuation model requires theCompany to make certain 

 

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assumptions with respectto selected model inputs. Expected volatility was calculated based on thehistorical volatility of the Company’s stock price. In the future the averageexpected life will be based on the contractual term of the option and expectedemployee exercise and post-vesting employment termination behavior. Currentlyit is based on the simplified approach provided by SAB 107, as the Company doesnot have any historical exercise data. The risk-free interest rate is based onU.S. Treasury zero-coupon issues with a remaining term equal to the expectedlife assumed at the date of the grant. The following were the factors used inthe Black Sholes model in the quarters to calculate the compensation cost:

 
| ** **               | ** ** | **Year ended December 31, 2008** | ** ** | **Year ended December 31, 2007** | ** ** |
|--------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **               | ** ** | ** **                            | ** ** | ** **                            | ** ** |
| Stock price volatility   |       | 94.2  to 101.5                        | %          | 96.7  to 98.7                         | %          |
|                     |       |                                  |       |                                  |       |
| Risk-free rate of return |       | 0.37  to 3.09                         | %          | 3.34  to 4.95                         | %          |
|                     |       |                                  |       |                                  |       |
| Annual dividend yield    |       | 0                                     | %          | 0                                     | %          |
|                     |       |                                  |       |                                  |       |
| Expected life            |       | 1.5  to 4.5 Years                     |       | 1.5  to 4.5 Years                     |       |

 

***Net Loss Per Share***

 

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

 

***Recent Accounting Pronouncements***

 

In February 2007,the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS No. 159”). Under SFAS No. 159, entitiesmay choose to measure at fair value many financial instruments and certainother items that are not currently required to be measured at fair value. SFAS No. 159also establishes recognition, presentation, and disclosure requirementsdesigned to facilitate comparisons between entities that choose differentmeasurement attributes for similar types of assets and liabilities. SFAS No. 159does not affect any existing accounting literature that requires certain assetsand liabilities to be carried at fair value. SFAS No. 159 is effective forus beginning January 1, 2008. The adoption of this standard did not haveany impact on our financial position or results of operations.

 

In November 2007,the FASB issued SFAS 141 (revised 2007), “Business Combinations” (“SFAS 141R”)and SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements,an amendment of ARB No. 51” (“SFAS 160”). SFAS 141R will change howbusiness acquisitions are accounted for and will impact financial statementsboth on the acquisition date and in subsequent periods. SFAS 160 will changethe accounting and reporting for minority interests, which will berecharacterized as noncontrolling interests and classified as a component ofequity. SFAS 141R and SFAS 160 are effective for fiscal years beginning on orafter December 15, 2008. SFAS 141R will be applied prospectively. SFAS 160requires retroactive adoption of the presentation and disclosure requirementsfor existing minority interests. All other requirements of SFAS 160 will beapplied prospectively. Early adoption is prohibited for both standards. Theadoption of this standard is not expected have any impact on our financialposition or results of operations.

 

In February 2008,the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157.”FSP FAS 157-2 delays the effective date of SFAS No. 157 for allnon-financial assets and non-financial liabilities that are not re-measured atfair value on a recurring basis until fiscal years beginning after November 15,2008. Any amounts recognized upon adoption of this rule as a cumulativeeffect adjustment will be recorded to the opening balance of retained earningsin the year of adoption. The Company adopted SFAS No. 157 beginning January 1,2008, except as it applies to those nonfinancial assets and nonfinancialliabilities. This adoption did not have a material effect on the Company’sfinancial statements, as the 

 

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Company had noinvestments other than cash and cash equivalents at December 31, 2008. TheCompany is required to adopt FSP SFAS No. 157-2 beginning January 1,2009, and it does not expect this adoption will have an effect on its financialstatements.

 

In October 2008, theFASB issued FSP FAS 157-3, “Determining the Fair Value of a FinancialAsset When the Market for That Asset Is Not Active.” FSP FAS 157-3clarifies the application of SFAS No. 157 in a market that is not activeand provides an example to illustrate key considerations in determining thefair value of a financial asset when the market for that financial asset is notactive. FSP FAS 157-3 was effective upon issuance, including prior periodsfor which financial statements have not been issued. Revisions resulting from achange in the valuation technique or its application should be accounted for asa change in accounting estimate following the guidance in SFAS No. 154, “AccountingChanges and Error Corrections.” FSP FAS 157-3 is effective October 10,2008. The adoption of FSP SFAS No. 157-3 has not had an impact on theCompany’s financial statements.

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities—an amendment of SFAS No. 133.” This Standard requiresenhanced disclosures regarding derivatives and hedging activities, including: (a) themanner in which an entity uses derivative instruments; (b) the manner inwhich derivative instruments and related hedged items are accounted for underSFAS No. 133, Accounting for Derivative Instruments and HedgingActivities; and (c) the effect of derivative instruments and relatedhedged items on an entity’s financial position, financial performance, and cashflows. The Standard is effective for financial statements issued for fiscalyears and interim periods beginning after November 15, 2008. AsSFAS 161 relates specifically to disclosures, the Standard will have noimpact on the Company’s financial statements.

 

EffectiveJanuary 1, 2009, the Company will adopt FASB Staff Position No. APB14-1, “Accounting for Convertible Debt Instruments That May Be Settled inCash Upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) andFASB Staff Position No. EITF 03-6-1, “Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities” (“FSPEITF 03-6-1”), both of which require retrospective application to priorperiods. The Company is still in the process of evaluating the overall impactof FSP APB 14-1 and FSP EITF 03-6-1, however, the Company believes that it willhave no effect on the 2008 per share (diluted) and earnings per share (diluted)amounts as reported.

 

**NOTE 2 — SHAREHOLDERS’ EQUITY (DEFICIT)**

 

The authorized capitalstock of the Company consists of 50,000,000 shares of common stock at $.001 parvalue and 5,000,000 shares of preferred stock at $.001 par value.  The holders of the common stock are entitledto receive, when and as declared by the Board of Directors, dividends payableeither in cash, in property or in shares of the common stock of theCompany.  Dividends have no cumulativerights and dividends will not accumulate if the Board of Directors does notdeclare such dividends.  Through December 31,2008, no dividends have been declared or paid by the Company.

 

On November 21,2006, the Company entered into a Bridge Financing Agreement with AssetProtection Fund (“APF”), whereby APF loaned the Company $250,000. The term ofthe loan was the shorter of when the Company completed a Private PlacementOffering or six months from the loan origination date and it accrued interestat a rate of 10% per annum. Additionally, the Company issued APF 400,000 sharesof restricted common stock as a loan fee. The Company recorded a deferred loancost of $140,000 based on the Company’s closing common stock price on the daythat the loan was funded. The deferred loan cost was amortized over the term ofthe loan and recorded as additional interest expense. On March 27, 2007,the Company completed the private placement transaction and repaid the loan toAsset Protection Fund of $250,000 plus accrued interest of $8,630. For the yearended December 31, 2007, the Company recognized $108,000 of interest expenserelated to the amortization of the deferred loan costs.

 

On December 12,2006, the Company entered into a Bridge Financing Agreement with Global ProjectFinance AG (“GPF”), whereby GPF loaned the Company the amount of $250,000 whichwas funded on January 16, 2007. The term of the loan was the shorter ofwhen the Company completed a 

 

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Private Placement Offeringor six months from the loan origination date and it accrued interest at a rateof 10% per annum. Additionally, the Company issued GPF 400,000 shares ofrestricted common stock as a loan fee. The Company recorded, as interestexpense, an amount based on the Company’s closing common stock price on the daythat the loan was funded, and the Company recorded $320,000 representing thefair value of the stock provided. This deferred loan cost was to be amortizedover the term of the loan and recorded as an additional interest expense. On March 27,2007 the Company repaid the loan plus accrued interest of $4,795. For the yearended December 31, 2007, the Company recognized $320,000 of interestexpense in connection with this transaction.

 

On December 18,2006, the Company entered into an agreement with Lighthouse Capital for thereferral of APF and GPF, or other potential financing contacts to the Company.The term of this Agreement was for a period of sixty days from the date of theAgreement and the Company would pay a fee in the amount of 200,000 restrictedshares of the Company’s common stock to the referral representative uponfunding received from any one or more referrals in the total aggregate amountof $500,000. On January 16, 2007, GPF funded the Company $250,000, toaggregate $500,000 received by the Company from the referrals of LighthouseCapital. Per the terms of the Agreement, the Company issued Lighthouse Capital200,000 shares and recorded an expense of $160,000 based on the closing marketprice on the date of the funding.

 

On March 5, 2007,the Company announced that it had completed the sale of two million units in aprivate placement transaction for gross proceeds of $2,000,000. The placementwas sold to accredited individual and institutional investors. The units weresold under the exemption provided in Regulation D of Rule 506 and Section 415of the Securities Act. The terms of the private placement provided for a unitoffering at $1.00 per unit.  Each unit was comprised of one share and onehalf of a warrant to purchase a share of common stock at an exercise price of$1.50 per share for a period of five years. The shares of common stock andthe shares underlying the warrants have been registered under the SecuritiesAct of 1933, as amended, and may be offered or sold in the United States. On March 7,2007, the shareholders approved the placement transaction, and on March 27,the Company closed the transaction. The Company incurred $221,907 of offeringexpenses in connection with the offering, netting the Company $1,778,094 inproceeds. Additionally, the Company engaged a number of selling agents inconnection with the sale of the private placement and paid compensation of108,500 warrants for their efforts.

 

On March 7, 2007, atthe annual shareholder meeting, the shareholders approved an increase in thenumber of shares issuable under the 2003 Stock Incentive Plan to 2,200,000shares of our Common Stock. For the year ended December 31, 2007 theCompany recorded an expense of $822,676 related to options issued to athletes,consultants, employees and executives of the Company. Additionally, at theshareholder meeting, the stockholders of the Company approved the creation ofthe 2006 Distributor Option Plan and reserved thereunder options to purchase 500,000shares of common stock. The Company recorded an expense of $39,732 for the yearended December 31, 2007, in connection with the issuance of options underthis plan.

 

On March 26, 2007,the Company entered into an amended employment contract (“Employment Agreement”)with Sanford Greenberg to provide for the assignment of the benefits andobligations of the Employee Agreement from XELR8 Holdings, Inc. to XELR8, Inc.The amendment provides that Mr. Greenberg will receive annual compensationof $1. Additionally, Mr. Greenberg waives any and all rights toparticipate in any incentive executive bonus plan of the Company, but willreceive a bonus equal to one percent (1%) of the net sales of XELR8, Inc.from November 1, 2006, for a period of 12 years.  Further, Mr. Greenbergshall receive 1,500,000 restricted shares of the Company, and he agreed towaive and forfeit options for 250,000 shares of the Company’s common stock thatwere granted on April 1, 2004. The 1,500,000 restricted shares were issuedon March 27, 2007, in satisfaction of the obligation of $540,000 which wasrecorded in the year ended December 31, 2006 financial statements. Thefair value was determined based on the closing market value of the Companyshare price on the date that the Company and Mr. Greenberg agreed to theamendment, subject to shareholder approval, of November 17, 2006.

 

On April 6, 2007, Mr. Greenberggranted 200,000 shares of common stock to the employees of the Company. Underthe guidance issued by the SEC in Staff Accounting Bulletin 107 (SAB 107),share-based

 

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paymentsissued to an employee of a reporting entity by a related party or other holderof economic interest in the entity as compensation for services provided to theentity are to be recorded as a compensation expense by the entity. As aprincipal shareholder, Mr. Greenberg, is a holder of an economic interestin the entity, and therefore the Company is required to record an expenseof  $350,000 in stock based compensation and an off-setting entry directlyto additional paid in capital  based on the share price on the date of thegrant.

 

On May 8, 2007, theCompany announced that it had completed the sale of one million units in aprivate placement transaction for gross proceeds of $2,000,000. The placementwas sold to an accredited individual and institutional investors. The unitswere sold under the exemption provided in Regulation D of Rule 506 and Section 415of the Securities Act. The terms of the private placement provided for a unitoffering at $2.00 per unit.  Each unit was comprised of one share ofcommon stock, half of a Class E warrant to purchase common stock and halfof a Class F warrant to purchase common stock.  The Class Ewarrants have an exercise price of $2.00 and are for a five year period with acall provision by the Company when the Company’s share price trades above $4.50for twenty consecutive days. The Class F warrants have an exercise priceof $2.00 and a five year term, with no call provision. The shares of commonstock and the shares underlying the warrants have been registered under theSecurities Act of 1933, as amended, and may be offered or sold in the UnitedStates. The Company incurred $158,645 of offering expenses in connection withthe offering, netting the Company $1,841,355 in proceeds. Additionally, theCompany engaged a number of selling agents in connection with the sale of theprivate placement and paid compensation of 55,000 warrants for their efforts.

 

On February 19,2008, the Company announced that it had completed the sale of one-half millionunits in a private placement transaction for gross proceeds of $500,000. Theplacement was sold to accredited individuals and institutional investors. Theunits were sold under the exemption provided in Regulation D of Rule 506and Section 415 of the Securities Act. The terms of the private placementprovided for a unit offering at $1.00 per unit.  Each unit consists of oneshare of common stock and six/tenths (6/10) of a Class G Warrant topurchase common stock. In connection with the private placement, the Companyagreed to reduce the exercise price of certain of its Series E Warrantsand Series F Warrants previously purchased by the same investors in the May 8,2007 private placement. The Class G Warrants have an exercise price of$1.50 and are exerciseable for a five year period with a call provision by theCompany if the Company’s share price closes above $2.50 for twenty consecutivedays. The Amended Series E Warrants have an exercise price of $1.50 andare exerciseable for a five year period, with a call provision by the Companyif the Company’s share price closes above $3.00 for twenty consecutive days.The Amended Series F Warrants have an exercise price of $1.50 and areexerciseable for a five year period, with a call provision by the Company ifthe Company’s share price closes above $4.50 for twenty consecutive days. Theshares of common stock have not been registered under the Securities Act of1933, as amended. The Company has one year from the closing date to file aregistration statement for the shares underlying the Class G Warrants. Ifthe Company does not have an effective registration statement for the commonstock underlying the Amended Series E and F Warrants within one year, theholder would receive cashless exercise rights.  The Company incurred$60,797 of offering expenses in connection with the offering, netting theCompany $439,203 in proceeds. Additionally, the Company engaged a number ofselling agents in connection with the sale of the private placement and paidcompensation of 25,000 warrants for their efforts. As a result of the offering,and the lowering of the exercise price of the Original Series E and Series Fwarrants, the Company recorded a dilution expense of $13,770 for the Investorswho participated in the May 8, 2007 offering, but not in the February 19,2008 placement. On March 6, 2008 the American Stock Exchange approved theissue of the shares.

 

On December 31,2008 the Company reclassed $20,000 from Other Liabilities to Additional Paid inCapital for the value of an expired call option that was given to a consultantfor options that were granted for services provided in a prior year.

 

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A summary of the Company’swarrant activity for the years ended December 31, 2008 and December 31,2007 are presented below:

 
| ** **                              | ** ** | **Warrants  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|---------------------------------------|------------|
| **Outstanding, January 1, 2007**   |       | 4,405,160                 |       | $                                     | 4.79       |   |
| Granted                                 |       | 2,203,500                 |       | 1.52                                  |       |
| Exercised                               |       | —                    |       | —                                |       |
| Expired                                 |       | —                    |       | —                                |       |
| **Outstanding, December 31, 2007** |       | 6,608,660                 |       | 3.70                                  |       |
| Granted                                 |       | 610,000                   |       | 1.50                                  |       |
| Exercised                               |       | —                    |       | —                                |       |
| Expired                                 |       | —                    |       | —                                |       |
| **Outstanding, December 31, 2008** |       | 7,218,660                 |       | 3.51                                  |       |
|                                         |            |                           |            |                                       |            |  |

 

As of December 31,2008, the Company had the following outstanding warrants to purchase its commonstock:

 
| ** **               | ** ** | **Weighted**                | ** ** | **Weighted**                      | ** ** |
|--------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| **Warrants Outstanding** | ** ** | **Average  Exercise Price** | ** ** | **Average  Remaining Life (Yrs)** | ** ** |
| 3,111,924                |       | $                           | 1.50       |                              | 3.26       |   |
| 81,000                   |       | $                           | 1.83       |                              | 3.39       |   |
| 180,000                  |       | $                           | 2.00       |                              | 2.47       |   |
| 1,922,868                |       | $                           | 4.50       |                              | 1.28       |   |
| 1,922,868                |       | $                           | 6.00       |                              | 1.28       |   |
| 7,218,660                |       | $                           | 3.51       |                              | 2.19       |   |

 

**NOTE 3 — STOCK OPTIONS**

 

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

 

On July 22, 2005,the shareholders approved an amendment to the Plan to increase the number ofshares available under the Plan to 1,800,000 shares of common stock, and againon March 7, 2007 and on November 12, 2007 the shareholders approvedan increase in the Plan bringing the total shares available under the Plan to3,000,000.

 

Asummary of the status of the Plan for the years ended December 31, 2008and 2007, together with changes during each of the years then ended, ispresented in the following table:

 

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** **

**2003Stock Incentive Plan**

** **
| ** **                           | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | ** **      | ** **     | **Weighted**          | ** ** |
|--------------------------------------|------------|---------------|------------|-------------------|------------|------------|------------|-----------------|----------------|-----------------------|------------|
| ** **                           | ** ** | **Qualified** | ** ** | **Non-qualified** | ** ** | ** ** | ** ** | **Exercise**    | ** **     | **Average  Exercise** | ** ** |
| ** **                           | ** ** | **Options**   | ** ** | **Options**       | ** ** | **Total**  | ** ** | **Price Range** | ** **     | **Price**             | ** ** |
| Balances, January 1, 2007       |       | 788,000       |       | 1,010,350         |       | 1,798,350  |       | $               | 0.45  to $5.00 |                  | $          | 2.94 |   |
| Granted                              |       | 370,000       |       | 400,000           |       | 770,000    |       | $               | 1.00  to $2.19 |                  | $          | 1.47 |   |
| Forfeited                            |       | (146,500      | )          | (38,050           | )          | (184,550   | )          | $               | 0.49  to $5.00 |                  | $          | 3.57 |   |
| Balances, December 31, 2007     |       | 1,011,500     |       | 1,372,300         |       | 2,383,800  |       | $               | 0.45  to $5.00 |                  | $          | 2.34 |   |
| Granted                              |       | 590,000       |       | 165,000           |       | 755,000    |       | $               | 1.00  to $1.01 |                  | $          | 1.00 |   |
| Forfeited                            |       | (6,500        | )          | (217,600          | )          | (224,100   | )          | $               | 5.00           |                  | $          | 5.00 |   |
| Balances, December 31, 2008     |       | 1,595,000     |       | 1,319,700         |       | 2,914,700  |       | $               | 0.45  to $5.00 |                  | $          | 1.43 |   |
| Number of options exercisable   |       |          |       |              |       |       |       |            |           |                  |       |   |   |
| At December 31, 2008            |       | 1,042,464     |       | 1,241,575         |       | 2,284,039  |       | $               | 0.45  to $5.00 |                  | $          | 1.98 |   |

 

The weightedaverage fair value per share of the grants of qualified options for the yearsended December 31, 2008 and 2007, were, $0.66 and $1.10, respectively. Theweighted average fair value per share of the grants of Non-qualified optionsfor the years ended December 31, 2008 and 2007, were $0.38 and $1.11,respectively.

 

The followingtable sets forth the exercise price range, number of shares, weighted averageexercise price and remaining contractual lives at December 31, 2008:

 
| ** **          | ** ** | **Outstanding** | ** ** | **Exercisable**    | ** ** |
|---------------------|------------|-----------------|------------|--------------------|------------|
| ** **          | ** ** | ** **      | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **      | ** ** | **Weighted**       | ** ** | **Average** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| ** **          | ** ** | **Number of**   | ** ** | **Average**        | ** ** | **Contractual** | ** ** | **Shares** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding** | ** ** | **Exercise Price** | ** ** | **Life (months)** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| 5.00                |       | 294,600         |       | $                  | 5.00       |   | 26.3 |   | 294,600 |   | $ | 5.00 |   |
| 3.20                |       | 145,000         |       | $                  | 3.20       |   | 19.7 |   | 145,000 |   | $ | 3.20 |   |
| 2.19 to 2.55        |       | 290,000         |       | $                  | 2.25       |   | 37.2 |   | 290,000 |   | $ | 2.25 |   |
| 1.28 to 1.80        |       | 900,100         |       | $                  | 1.54       |   | 25.8 |   | 795,064 |   | $ | 1.54 |   |
| 1.00 to 1.15        |       | 1,165,000       |       | $                  | 1.00       |   | 46.4 |   | 639,375 |   | $ | 1.01 |   |
| 0.45 to 0.65        |       | 120,000         |       | $                  | 0.52       |   | 30.8 |   | 120,000 |   | $ | 0.52 |   |
|                |       | 2,914,700       |       |               |       |   |   | 2,284,039 |   |   |   |

 

At December 31,2008, 85,300 options were available for future grants under the Plan.

 

Effective March 7, 2007, the shareholders of the Company adoptedthe 2006 Distributor Stock Incentive Plan (the “Plan”). Options granted underthe 2006 Distributor Stock Incentive Plan will be nonqualified options, asdefined under the Internal Revenue Code. The expiration date, maximum number ofshares purchasable, vesting provisions and any other provisions of optionsgranted under the 2006 Distributor Stock Incentive Plan will be established atthe time of grant. The 2006 Distributor Stock Incentive Plan will beadministrated by the Board of the Company. The term of the option will be threeyears unless that administrator designates a different term for a specificaward, but no options may be granted for terms of greater than ten years.Options will vest and become exercisable in whole or in one or moreinstallments at such time as may be determined by the plan administrator. Theexercise price may not be less than the fair market value of the Common Stockon the date of grant. The initial maximum number of shares of common stockavailable for grants under the Plan was 500,000 shares, and on November 12,2007, this was increased to 1,500,000.

 

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Asummary of the status of the Plan for the year ended December 31, 2008,together with changes during each of the years then ended, is presented in thefollowing table:

 

**2006Distributor Option Plan**

 
| ** **                           | ** ** | ** **        | ** ** | ** ** | ** ** | ** **      | ** **     | **Weighted**         | ** ** |
|--------------------------------------|------------|-------------------|------------|------------|------------|-----------------|----------------|----------------------|------------|
| ** **                           | ** ** | **Non-qualified** | ** ** | ** ** | ** ** | **Exercise**    | ** **     | **Average Exercise** | ** ** |
| ** **                           | ** ** | **Options**       | ** ** | **Total**  | ** ** | **Price Range** | ** **     | **Price**            | ** ** |
| Balances, January 1, 2007       |       | —            |       | —     |       |            |           |                 |       |
| Granted                              |       | 84,500            |       | 84,500     |       | $               | 0.49  to $1.90 |                 | $          | 1.21 |   |
| Forfeited                            |       | —            |       | —     |       | $               | 0.00           |                 | $          | 0.00 |   |
| Balances, December 31, 2007     |       | 84,500            |       | 84,500     |       | $               | 0.49  to $1.90 |                 | $          | 1.21 |   |
| Granted                              |       | 204,000           |       | 204,000    |       | $               | 0.38  to $1.18 |                 | $          | 1.01 |   |
| Forfeited                            |       | (6,000            | )          | (6,000     | )          | $               | 1.36  to $1.60 |                 | $          | 1.44 |   |
| Balances, December 31, 2008     |       | 282,500           |       | 282,500    |       | $               | 0.38  to $1.90 |                 | $          | 1.06 |   |
| Number of options exercisable   |       |              |       |       |       |            |           |                 |       |   |   |
| At December 31, 2008            |       | 282,500           |       | 282,500    |       | $               | 0.38  to $1.90 |                 | $          | 1.06 |   |

 

The weightedaverage fair value per share of the grants of distributor options for the yearsended December 31, 2008 and 2007, were, $0.68 and $0.63, respectively.

 

The following table setsforth the exercise price range, number of shares, weighted average exerciseprice and remaining contractual lives at December 31, 2008:

 
| ** **          | ** **    | **Outstanding** | ** ** | **Exercisable**    | ** ** |
|---------------------|---------------|-----------------|------------|--------------------|------------|
| ** **          | ** **    | ** **      | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **          | ** **    | ** **      | ** ** | **Weighted**       | ** ** | **Average** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| ** **          | ** **    | **Number of**   | ** ** | **Average**        | ** ** | **Contractual** | ** ** | **Shares** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** **    | **Outstanding** | ** ** | **Exercise Price** | ** ** | **Life (months)** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| $                   | 0.38 to $1.90 |            | 282,500    |               | $          | 1.06 |   | 34.5 |   | 282,500 |   | $ | 1.06 |   |
|                |          | 282,500         |       |               |       |   |   | 282,500 |   |   |   |
|                     |               |                 |            |                    |            |  |  |  |  |  |  |  |  |  |

 

At December 31,2008, 1,217,500 options were available for future grants under the Plan.

 

**NOTE 4 — PROPERTY AND EQUIPMENT**

 

Propertyand equipment consisted of the following:

 

| ** **                    | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Furniture & fixtures |       | $                           | 50,963     |                        | $          | 50,963 |   |
| Office equipment              |       | 12,023                      |       | 15,456                      |       |
| Software                      |       | 245,912                     |       | 245,912                     |       |
| Leasehold improvements        |       | 121,605                     |       | 121,605                     |       |
|                          |       | 430,503                     |       | 433,936                     |       |
| Accumulated depreciation      |       | (394,671                    | )          | (352,531                    | )          |
|                          |       |                        |       |                        |       |
|                          |       | $                           | 35,832     |                        | $          | 81,405 |   |

 

Depreciationexpense was $44,443 and $46,372 for the years ended December 31, 2008 and2007, respectively.

 

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**NOTE 5 — INTANGIBLE ASSETS**

 

The Company has incurred costs to trademark eight of its currentproducts and marketing nomenclatures. During the year, the Company accelerated the amortization on six of thetrademarks which related to products that the Company no longer marketed.Patents and trademarks are being amortized over a period of 15 years.

 

Intangible assets are:

 
| ** **                              | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Patents and trademarks                  |       | $                           | 73,164     |                        | $          | 68,460 |   |
| Accumulated amortization and Impairment |       | (51,754                     | )          | (50,501                     | )          |
|                                    |       |                        |       |                        |       |
| ** **                              |       | $                           | 21,411     |                        | $          | 17,959 |   |

 

Amortization expense for the year ended December 31, 2008, and2007, was $1,253, and $11,661, respectively.

 

**NOTE 6 — INCOME TAXES**

 

The Company accounts for income taxes in accordance with Statement ofFinancial Accounting Standard No. 109, Accounting for Income Taxes (SFAS109).  Under the provisions of SFAS 109,a deferred tax liability or asset (net of a valuation allowance) is provided inthe financial statements by applying the provisions of applicable laws tomeasure the deferred tax consequences of temporary differences that will resultin net taxable or deductible amounts in future years as a result of eventsrecognized in the financial statements in the current or preceding years.

 

 

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**Income tax provision consisted of thefollowing:**

 
| ** **               | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Current:                 |       | $        |       |     | $          |   |   |
| Federal                  |       | —   |       | —   |       |
| State                    |       | —   |       | —   |       |
|                     |       | —   |       | —   |       |
| Deferred:                |       |     |       |     |       |
| Federal                  |       | —   |       | —   |       |
| State                    |       | —   |       | —   |       |
|                     |       | —   |       | —   |       |
|                     |       |     |       |     |       |
| **Income Tax Provision** |       | $        | —     |     | $          | — |   |

 

**Reconciliation of effective tax rate:**

 
|                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Federal taxes at statutory rate        |       | 34.0000  | %          | 34.00    | %          |
| State taxes, net of federal benefit    |       | 2.6300   | %          | 3.04     | %          |
| Permanent items                        |       | (4.7300  | )%         | (0.18    | )          |
| Generation of general business credits |       | —   | %          | —   |       |
|                                   |       |     |       |     |       |
| Valuation allowance                    |       | (31.9000 | )%         | (36.86   | )%         |
| Effective income tax rate              |       | —   |       | —   |       |

 

Deferred income taxes reflect the net tax effects of temporarydifferences between carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes.  Significant components of the Company’sdeferred tax assets and liabilities are as follows:

 
| ** **                                         | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets:                               |       |       |       |       |       |
| Net operating losses                               |       | $          | 5,648,621  |       | $          | 5,160,023 |   |
| Stock based compensation and other                 |       | 886,248    |       | 701,672    |       |
| Gross deferred tax assets                          |       | 6,534,869  |       | 5,861,695  |       |
|                                               |       |       |       |       |       |
| Deferred tax liabilities:                          |       |       |       |       |       |
| Gross deferred tax liabilities                     |       | —     |       | —     |       |
| Net deferred tax assets before valuation allowance |       | 6,534,869  |       | 5,861,695  |       |
|                                               |       |       |       |       |       |
| Valuation Allowance                                |       | (6,534,869 | )          | (5,861,695 | )          |
| Deferred Tax Assets (Liabilities), Net             |       | $          | —     |       | $          | — |   |

 

At December 31, 2008 approximately $15,242,000 of net operatingloss carryforwards for federal income tax purposes were available to offsetfuture taxable income through the year 2028. In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion or all of thedeferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become realizable. Management considers the scheduled reversal of deferred tax liabilities,

 

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projected futuretaxable income, and tax planning strategies in making this assessment.  Based upon the limited history of the Companyand projections for future taxable income over the periods in which thedeferred tax assets are realizable, management believes it is not more likelythan not that the Company will realize the benefits of these deductibledifferences and therefore a full valuation allowance against the deferred taxassets has been established.

 

The Tax Reform Act of 1986 contains provisions that limit theutilization of net operating loss and tax credit carryforwards if there hasbeen a change of ownership as described in Section 382 of the InternalRevenue Code.  Such an analysis has notbeen performed by the Company to determined the impact of these provisions onthe Company’s net operating losses, though management believes the impact wouldbe minimal, if any.  A limitation underthese provisions would reduce the amount of losses available to offset futuretaxable income of the Company.

 

In June 2006, the Financial Accounting Standards Board (“FASB”)issued Interpretation No. 48, “Accounting for Uncertainties in IncomeTaxes, an interpretation of SFAS No. 109, Accounting for Income Taxes” (“FIN48”). FIN 48 prescribes a recognition threshold and measurement attribute forthe recognition and measurement of tax positions taken or expected to be takenon income tax returns.  FIN 48 also provides guidance on de-recognition ofincome tax assets and liabilities, classification of current and deferred incometax assets and liabilities, and accounting for interest and penaltiesassociated with tax positions.

 

Based on management’s assessment of FIN 48, it was concluded that theadoption of FIN 48, as of January 1, 2007, had no significant impact onthe Company’s results of operations or financial position, and required noadjustments to the opening balance sheet accounts.  The year-end analysissupports the same conclusion, and the Company does not have an accrual foruncertain tax positions as of December 31, 2008.  There have been noincome tax related interest or penalties assessed or recorded and if interestand penalties were to be assessed, the Company would charge interest andpenalties to income tax expense.  It is not anticipated that unrecognizedtax benefits would significantly increase or decrease within 12 months of thereporting date.  The Company files income tax returns in the U.S. andvarious state jurisdictions and there are open statutes of limitations fortaxing authorities to audit the Company’s tax returns from 2006 through thecurrent period.

 

**NOTE 7 — COMMITMENTS**

 

We lease our current corporate office space from Arnold Greenberg, thefather of our Founder, Sanford D. Greenberg. We paid $46,800 and $42,780 inrent for the years ended December 31, 2008 and 2007, respectively. Ourcurrent lease at $3,900 per month expired at the end of March 2006, andhas been replaced with a month to month lease at $4,050 per month.

 

In 2006 the Company entered into a Consent Agreement with PouchTecIndustries, L.L.C., whereby PouchTec Industries agrees that the Company is therightful owner of the XELR8 mark. In consideration of the consent the Companyagreed to pay PouchTec Industries for the years 2006 to 2010 an amount of 1% ofnet sales, subject to a minimum payment of $35,000 and a maximum of $80,000 peryear.

 

The Company has entered in a number of consulting agreements withvarious consultants that could require the Company to pay up to $177,000 inconsulting fees in 2009.

 

The Company has various operating leases for copiers, telephone andcomputer equipment that range from 1 to 5 years in length.  Rental expenses for these operating leaseswere $60,073 and $70,531 for the years ended December 31, 2008 and 2007,respectively. Minimum future rentals under these agreements at December 31,2008 are as follows:

 

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| **Year**   | ** ** | **$**  | ** ** |
|------------|------------|--------|------------|
| 2009       |       | 22,404 |       |
| 2010       |       | 22,404 |       |
| 2011       |       | 18,477 |       |
| 2012       |       | 11,245 |       |
| Thereafter |       | 0      |       |
|       |       | 74,530 |       |

 

The Company maintains employment agreements with certain keymanagement.  The agreements provide forminimum base salaries, eligibility for stock options and performance bonusesand severance payments.

 

**NOTE 8 — RELATED PARTY TRANSACTIONS**

 

As further described in Note 7, the Company leases office space from arelative of the Company’s founder.

 

During the year ended December 31, 2008, we contracted withServiceQuest, whose principal is the brother of our Vice President ofOperations, to provide consulting services related to our call center. For theyear ended December 31, 2008 we paid ServiceQuest $41,929 in consultingfees.

 

**NOTE 9 — SUBSEQUENT EVENTS**

 

On March 9, 2009 the Company was delisted from the AlterNextExchange. The Company is currently listed on the OTC Bulletin Board and isquoted for trading under the symbol “XELR”. On the same day, the Board of Directors appointed Sanford Greenberg tothe Board and elected him its Chairman.

 

 

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