** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-KSB**

 

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

**SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31,2007**

 

**or**

 

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

**THE SECURITIES EXCHANGE ACT OF1934**

 

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

# ** **

**XELR8 HOLDINGS, INC.**

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

 

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

 

**480 SouthHolly Street**

**Denver, CO80246**

(Address ofprincipal executive offices)

 

**(303)-316-8577**

(Issuer’s telephone number)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

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

 

Securitiesregistered under Section 12(g) of the Exchange Act: **None**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes o   No x

 

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

 

Check whether the issuer (1) filed all reports to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.          YESx        NO o

 

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

 

Indicateby check mark if the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o     Acceleratedfiler o     Non-acceleratedfiler x

 

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

YES o       NO x

 

Issuer’s revenues for the year ended December 31,2007 were $4,853,046.

 

Aggregate market value of voting stock held bynon-affiliates: **$9,704,406.**

 

As of March 19, 2008, the Company had15,697,170 shares of its $.001 par value common stock issued and outstanding.

 

 

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** **

**Index to XELR8 Holdings, Inc. 2007 Form10-KSB**

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

 

1

 

**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This Form 10-KSBfor XELR8 Holdings, Inc. (“the Company”) contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act and Section 21Eof the Securities Exchange Act of 1934, as amended. All statements other thanstatements of historical fact are “forward-looking statements” for purposes offederal and state securities laws, including any projections of earnings,revenue or other financial items; any statements of the plans, strategies andobjectives of management for future operations; any statements concerningproposed new products or developments; any statements regarding future economicconditions or performance; any statements of belief; and any statements ofassumptions underlying any of the foregoing. Forward-looking statements mayinclude the words “may”,” “will”,” “estimate”,” “intend”,” “continue”, “believe,”“expect” or “anticipate” and other similar words.

 

Although we believe that the expectationsreflected in any of our forward-looking statements are reasonable, actualresults could differ materially from those projected or assumed in any of ourforward-looking statements. Our future financial condition and results ofoperations, as well as any forward-looking statements, are subject to changeand to inherent risks and uncertainties. Actual future resultsmay differ significantly from the results discussed in the forward-lookingstatements. Some of the risksthat may affect our performance are discussed below under “Risk FactorsAssociated 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.

 

We formulated our original “legacy” products in 2000 and 2001 for saleto professional and Olympic athletes. We launched our sales and marketingprograms to the general public in early 2002 through our internal sales forcetargeting specialty retail stores, health clubs and personal trainers. During2003, we refocused 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 thenetwork marketing company and all the products with the name of XELR8. During2006 we formulated a new product, BaziTM, a liquid dietary supplement. In January 2007we introduced this product to our network of independent distributors andathlete endorsers. In late 2007 we decided to change the sales focus of ourindependent distributors from multiple products to a single product, BaziTM, andannounced this to our sales force in February 2008.

 

We distribute and sell our products through a network marketing system,a form of direct selling, using independent distributors (“Distributors”). Wealso sell sales and marketing tools designed to assist our 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.

 

A key part of our marketing strategy, in conjunction with our directsales program, is the endorsement of our products by sports celebrities. Someof our celebrity endorsers include:

 

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·                  Mike Shanahan(football): Head Coach — on three Super Bowl teams;

 

·                  Carnell Williams(football): All Pro Running Back, 2005 Rookie of the Year;

 

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

 

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

 

·                  Brian Griese(football): All Pro Quarterback;

 

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

 

·                  Briana Scurry(soccer player): Two time Olympic gold medal winner and U.S. Woman’s World CupChampion;

 

·                  Becky Quinn(cycling) – 2-Time Silver medalist World Track Cycling Championship; and

 

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

 

We were formed in 2001, under the name “Instanet, Inc.” to provideInternet fund transfers. Instanet, which had no operating revenues, was adevelopment stage company. Instanet’s business model was not successful and itwas searching for an operating business. Vita Cube Systems, Inc. (“V3S”),a Colorado 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, thenrepresenting a 90% ownership interest in Instanet. V3S then became awholly-owned subsidiary of Instanet and V3S’s management became management ofInstanet. Instanet changed its name to VitaCube Systems Holdings, Inc. V3Sat the time of the acquisition had $810,743 of current and long-term assets and$3,000,080 of current and long-term liabilities. V3S’s assets included cash andcash equivalents, inventory, product formulations, an office informationtechnology system and office equipment and furniture. The acquisition of V3S byInstanet is considered a reverse acquisition and accounted for under thepurchase method of accounting. Under reverse acquisition accounting, V3S isconsidered the acquirer 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 conduct our international expansion. In September 2007,XELR8 International Inc., formed a wholly owned subsidiary, XELR8 Canada Corp,Incorporated, (“XELR8 Canada”) a Nova Scotia Unlimited Company. To date, therehas been no business conducted by neither XELR8 International nor XELR8 Canada.

 

The description of our business describes the business being conductedby V3S and now XELR8, Inc. Instanet discontinued its business prior to thestock-for-stock exchange.

 

### **Industry Overview**

### ** **

As a direct seller of nutritional products we compete in twoindustries, The Nutrition Industry and Direct Selling Industry:

 

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

### ** **

The Nutrition BusinessJournal identifies the industry in the following segments:

 

·                  DietarySupplements (vitamins, minerals, herbs & botanicals, sports nutrition,meal replacements, specialty supplements)

 

·                  Natural &Organic Foods (products such as cereals, milk, non-dairy beverages and frozenmeals),

 

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·                  Functional Foods(products with added ingredients or fortification specifically for health orperformance purposes),

 

·                  Natural &Organic Personal Care and Household Products

 

According to the latest industry overview, Nutrition Business Journal(NBJ) (July/August 2007), the $85-billion U.S. nutrition industry grew 10%in 2006, its highest annual growth since 1998. The more mature supplementsegment topped $22.4 billion and 5% growth, and the other three majorcategories were in double digits. Functional foods posted $31.4 billion insales and its highest growth since 2002 on a strong performance in beveragesand niche categories. Natural & organic foods continued a consistentprogression into the mainstream food market with 14% growth and moving from 2%of total food sales in 1997 to 4.7% a decade later. Natural & organicpersonal care and household goods posted a second consecutive year of recordgrowth in 2006.

 

Webelieve that the following factors drive growth in the nutrition industry:

 

·                 Thegeneral public’s awareness and understanding of the connection between diet andhealth,

·                 Theaging population in our markets who tend to use more nutritional supplements asthey continue to age,

·                 Increasinghealthcare costs and the consequential trend toward preventative medicine andnon-traditional medicines,

·                 Productintroductions in response to new scientific studies, and

·                 Thewillingness of the population to embrace ingredients that have been used innon-western cultures many years.

 

Webelieve that we are well positioned to capitalize on the growth trends in thenutrition industry.

 

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

### ** **

Resultsof the 2006 Direct Selling Association’s Annual Growth and Outlook Surveyindicate a 5.6% increase in direct sales over 2005 to a record high of $31.18billion, with an estimated 15.2 million people involved in the industry in theU.S., up 7.8% from 2005. The survey, which measures the size and activity ofthe U.S. direct selling industry, is conducted annually and includes responsesfrom a cross-section of direct selling companies. Other major results of thesurvey indicate wellness products, such as weight loss products and nutritionalsupplements, account for approximately 20.3% of direct sales, an increase from19.1% in 2005.

 

We believe the prospects for continued growth in direct sales are goodand should benefit us, and we perceive several reasons why such growth hasoccurred:

 

·                  The growth ofdirect sales has given it public visibility. We believe that governmentalregulation of the direct selling industry has facilitated the public’s marketacceptance of legitimate direct selling companies.

 

·                  The currenteconomic climate of sub-prime lending foreclosures, business closures,lay-offs, downsizing, outsourcing, and merging has resulted in motivated,educated workers seeking direct sales. These workers generally haveprofessional and social networks, which offer personalized credibility to thedirect selling industry.

 

·                  With improvedtechnology and the expanding use of the Internet, direct selling firms canbecome more efficient. For example, none of our independent distributors arerequired to carry inventory or personally conduct public presentations, and ourcomputer systems keep track of and communicate with independent distributorsand their organizations. We believe these efficiencies make direct sellingeasier to administer than in the past.

 

### **Our Products**

### ** **

We currently focus our sales and marketing efforts on a liquidnutritional supplement drink BaziTM, but also offer 12 different nutritionalproducts. None of our products contain substances that have been the subject ofpublicized health concerns by the medical community such as ephedra, creatine,androstene, androstenedione, aspartame, steroids or human growth hormones. Ourproducts include:

 

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***BaziTM***

 

Our latest product offering, Bazi, is a liquid nutritional drink packedwith eight different super fruits and berries, including the Chinese jujube,plus 12 vitamins and 68 minerals. The proprietary XELR8 Phyto8 Blend containsthe following fruits and berries: Jujube Fruit, Blueberry, Pomegranate, GojiBerry, Mangosteen, Raspberry, Acai and Seabuckthorn. Additionally, the productcontains 12 vitamins including A, C, E and B-complex and the XELR8 MineralBlend. During 2007 this product accounted for 83% of our total revenue.

 

In late 2007 we decided to change the sales focus of our independentdistributors from multiple products to a single product, BaziTM, and announcedthis to our sales force in February 2008. We will continue to sell theother products to our existing customers and athletes, but will not have themavailable to new distributors or customers.

 

***XELR8 EDS System***

 

The EDS System is the packaged concept for three of our products, EAT,DRINK and SNACK which allows the distributor or customer to purchase thecomplete system of products bundled together. The products can also be purchasedindividually.

 

***XELR8 EAT***

 

The EAT product is afunctional food drink that was formulated as a meal replacement. It combines all the health benefits of aprotein-based meal replacement drink with the high-impact nutrition value ofpure whole food supplements. The foods and nutrients in the EAT product arebased on the Harvard Healthy Food Pyramid developed at the Harvard MedicalSchool, and includes ingredients from the eight essential food groups thattheir studies have shown people should eat from everyday: Whole Grains;Vegetables; Fruits; Poultry, Eggs and Fish; Plant Oils; Nuts; Legumes; andMulti-Vitamin and Calcium Supplements. Added to the product are essentialenzymes, pro-biotics and SerotainTM.

 

***XELR8 DRINK***

 

The DRINK product is anenergy drink that has been formulated with the health benefits of antioxidants.The DRINK is sugar free, low in carbohydrates, high in flavonoid antioxidants(vitamins A, C and D) and has an ORAC value (measurement of antioxidantstrength) of 6,000, which is equilivant to three servings of blueberries.

 

***XELR8 SNACK***

 

TheSNACK is a raspberry-chocolate chew that contains SeroTONETM, a proprietarycomplex that works with your body’s natural levels of serotonin helping tosatisfy cravings between meals. SNACK is also formulated to be low in fat andcalories at approximately 60 calories and 2.5g of fat per serving.

 

***XELR8 HYDRATE***

 

XELR8HYDRATE is a sports drink that has been formulated to support sustained energywithout the levels of sugar and caffeine of most colas, and with one-tenth theamount of carbohydrates and two additional hydrating electrolytes not found inGatorade®, a competing sports drink. XELR8 HYDRATE has been formulated to provide support forsustained energy before activity by incorporating the ingredients D-Ribose, 5ginsengs and a complete B-Vitamin Complex (B1, B2, B6 and 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***

 

XELR8BUILD is a balanced shake that has a blend of proteins, carbohydratesand sugars and is available in chocolate or vanilla flavors. Its blend ofproteins is designed to support metabolism and provide energy.

 

XELR8BUILD is formulated with 27 vitamins, minerals and antioxidants to helpprovide nourishment. XELR8 BUILDcombines various protein sources, vitamins, and minerals with ingredients suchas Aminogen®—an ingredient that contributes amino acids to the body andFibersol-2®, a fiber that aids in digestion.

 

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

 

Our vitamins, minerals, and specialty formulations are sold in variousVitaCubes® and in the XELR8 SUPPORT PACK, and consist of tablets, capsules andsoft gel formulations. The VitaCube® is a compartmentalized container in whicheach supplement 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 the individuals who have taken supplements previouslyand who seek a continued, serious exercise routine; and

 

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

 

*Supplements found in our**XELR8 SUPPORT PACK  and VitaCube® and their product description:*

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

 

***Quality in OurProducts***

 

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

 

·                  supplements aresupported with publicly available scientific research and references;

 

·                  ourmanufacturers carry applicable manufacturing licenses;

 

·                  ingredients arecombined so that their effectiveness is not impaired;

 

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·                  ingredients arein dosage levels that fall within tolerable upper intake levels established forhealthy people by the Institute of Medicine of the National Academies;

 

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

 

·                  formulationshave a minimum one year shelf life;

 

·                  products are100% free of lead and the typical allergens of wheat, corn and yeast; and

 

### **Product Development**

### ** **

In May of 2005, we entered into a technology contract for theservices of UTEK, Inc., a knowledge transfer enterprise, under a strategicalliance services contract. UTEK is the primary organization responsible forthe acquisition of new technologies, primarily from universities, medicalcenters and federal research laboratories for the formulation of all of our newproducts. During 2006 our expense related to the UTEK contracts were $40,005.In October 2006, we terminated our relationship with UTEK.

 

### **New Product Identification.**

### ** **

From time to time we expand our product line through the development ofnew products. 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 12 to 48 months,but will only introduce these products if they would be complimentary to theBaziTM product and integrated into the product marketing focus.

 

### **Celebrity Endorsements**

### ** **

As part of our marketing efforts, we compensate several sportscelebrities for endorsing our products. We believe these endorsements leadhealth and fitness conscious consumers to use our products.

 

Our endorsers have agreed to provide written testimonials to advertiseour products including the use of their name, likeness, and pictures for print,radio, electronic media, and video announcements. Additionally some endorsershave agreed to make personal appearances, participate in website chats, andwear apparel containing our logo.

 

The terms of our endorsement contracts vary. These contracts aregenerally for a period of one to three years and the endorsers are providedwith our products for personal use on a reduced or no cost basis. In additionto receiving our products, these endorsers may receive cash compensation, stockoptions, stock grants, a percentage of net revenues, or other consideration. Someof our endorsement contracts also provide that the endorser will not endorseany competing products.

 

### **Our Independent 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 and sign up newindependent distributors and customers, the result of which is the creation ofnew “levels” within their sales organizations. These new enrollees are referredto as the “downline” of their enrolling distributor. Downline independentdistributors are also encouraged to recruit new independent distributors,thereby creating additional levels in their organizations, but still connectedto the original enrolling distributor. Enrollments occur based on personalintroduction regardless of geographic location. We have 

 

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no sales territories. Our independent distributors are compensated withcommissions and bonuses on the sale of product generated through theirdownline.

 

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

 

·                  distributors caneducate consumers about our products in person;

 

·                  direct salesallows for actual product sampling by potential consumers;

 

·                  compared toother distribution methods our distributors can provide customers high levelsof service and attention;

 

·                  direct sellinghas benefited from advancements in technology, including low-cost telephoneservices and the Internet; and

 

·                  products can beintroduced to the market through person-to-person selling, resulting in lowerup front capital outlays for us than conventional methods.

 

Our marketing team utilizes multimedia website, CDs and e-mail toenhance the selling and recruiting capabilities of our independentdistributors. These materials are sold to the independent distributors so thatthe ongoing advertising costs borne by us are not substantial. In addition, weutilize print, telecommunications and the Internet to recruit and trainindependent distributors. We have created a compensation plan that we believemotivates independent distributors to sell our products, build their salesorganizations, and participate in Company-sponsored contests. During 2007 weentered into a marketing partnership with Stevenson Lexus of Fredrick (in Fredrick,Colorado), whereby qualified independent distributors would be eligible for amonthly reimbursement on a BaziTM branded LexusTM vehicle as long as theyremained qualified.

 

***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 costs of $35. Additionally, at the time of enrollment we permit distributorsto purchase product at a discount for personal consumption or for businessbuilding purposes. Once enrolled, our distributors purchase product on a monthlybasis from us for personal consumption and recruiting purposes and retailsales.

 

***Compensation Plan.***  Independent distributors can earncompensation in a number of different ways:

 

·                  selling productsdirectly to customers (earning a “retail rebate” for the spread between theirprice and their customer’s price as established by us);

 

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

 

·                  qualifying forbonuses based on sales performance by distributors and their downlineorganization;

 

·                  reimbursement ofthe cost of purchasing a BaziTM Lexus vehicle from Stevenson Lexus of Fredrick,based on meeting certain monthly sales goals; and

 

·                  distributoroptions, under a plan approved by our shareholders, for the purchase of ourcommon stock which is traded on the American Stock Exchange, earned byachieving a certain sales 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 

 

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to send e-mails directly to their downline database along with toolsfor placing and reviewing orders and managing his or her downline.

 

For motivation, we recognize our independent distributors withrecognition and awards based upon sales achievements. In addition, from time totime, we use memorabilia signed by our celebrity endorsers as a furtherincentive. We plan on utilizing trips and vacations as a primary component of ourmotivation strategy. During January 2007, we held a distributorrecognition and training conference in Las Vegas, Nevada and in September 2007,we held a “Diamond” recognition weekend in Cabo San Lucas, Mexico for our bestperforming independent distributors. We also hold regional sales, recognitionand training events each year, typically during spring or fall. We haveestablished a annual recognition calendar and will continue to add to this asour independent distributors achieve higher sales goals each month.

 

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

 

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

 

### **Management Information, Internet andTelecommunication Systems**

### ** **

The ability to efficiently manage distribution, compensation, inventorycontrol, and communication functions through the use of sophisticated anddependable information processing systems is critical to our success.

 

We continue to upgrade systems and introduce new technologies tofacilitate our continued growth and support of independent distributoractivities. These systems include: (1) an internal network server thatmanages user accounts, print and file sharing, firewall management, and widearea network connectivity; (2) a Microsoft SQL database server to managesensitive transactional data, and corporate accounting and sales information; (3) acentralized host computer located in Texas supporting our customized orderprocessing, fulfillment and independent distributor management software; (4) astandardized Avaya telecommunication switch and system; (5) a hostedindependent distributor website system designed specifically for networkmarketing and direct sales companies; and (6) procedures to perform dailyand weekly backups with both onsite and offsite storage of backups.

 

Importantly, our technology systems provide key financial and operatingdata for management, timely and accurate product ordering, commission paymentprocessing, inventory management and detailed independent distributor records.Additionally, these systems deliver real-time business management, reportingand communications tools to assist in retaining and developing our salesleaders and independent distributors. We intend to continue to invest in ourtechnology systems in order to strengthen our operating platform.

 

### **ProductReturns**

### ** **

We revised our return policy in 2004 to provide an initial purchaseguarantee to all first-time customers and first-time independent distributorswho are not satisfied with our products for any reason, which was consistentwith the Code of Ethics of the Direct Selling Association, whom we are a memberof. These customers and distributors may return to us any products purchasedwithin 60 days of their initial order for a full refund. After 60 days and onall subsequent orders, customers and independent distributors may returnunused, unopened and undamaged product that is currently being sold by us for arefund of 100% of the sales price less a 10% restocking fee, provided it isreturned to us within 12 months of the purchase date. Product damaged duringshipment is replaced. Historically, product returns as a percentage of our netsales have ranged from 0.7% to 7.7% of our monthly net sales.

 

### **Our Competition**

### ** **

We compete with many companies engaged in selling nutritionalsupplements. We also compete with direct selling companies who sell productssimilar to ours. Most of our competitors have significantly greater financialand human resources than we do, and have operating histories longer than ours.We seek to differentiate our products and marketing from our competitors basedon our product quality, the use of sports celebrity endorsers, our attractivecompensation plan for our independent distributors and through our simpleselling program.

 

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

 

We compete with a number of large directsellers in the liquid superfruit / functional food category, such as Xango,Inc, who produce a mangosteen drink; Monavie, Inc., who sell an Acai Berryproduct; and Freelife Inc, who market a Goji berry drink, as well as may othersmaller drink companies with different superfruits as their principleingredient.

 

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

 

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

 

### **OurManufacturers**

### ** **

We use a limited number of third parties tosupply and manufacture our products. Our flagship product, BaziTM, ismanufactured by Arizona Packaging and Production under the terms of a five yearexclusive manufacturing agreement, which stipulates certain prices, quantitiesand delivery timelines. For our other legacy products, manufacturers producethese products on a purchase order basis only and can terminate theirrelationships with us at will. Our two other primary manufacturers areValentine Industries, Inc. and GMP Laboratories of America, Inc.

 

**Product Delivery**

 

All of our products are shipped by ourmanufacturers directly to our third party warehouse and fulfillment contractor,HoldenMSS for storage at our main facilities in Denver, Colorado. The majorityof the products sold to our independent distributors and their customers areshipped directly by HoldenMSS, to the distributors or customers. We maintain asecondary warehouse in Detroit, Michigan, where we maintain a limited inventoryfor future shipments into Canada. This facility is maintained and operated by athird party contractor, who also acts as a customs agent. We collect sales taxon products based upon the address of the consumer to whom products are sentregardless of how the order is placed. Sales to our professional and Olympicathletes, our sports teams and from our non-distributor customers are shippeddirectly to them from our facilities.

 

**Scalable Business Model.**

 

Our business model enables us to grow our businesswith moderate investment in our infrastructure and other fixed costs. Werequire no company-employed sales force to market and sell our products, weincur no direct incremental cost to add a new distributor in our existingmarkets, and our distributor compensation varies directly with sales. Inaddition, our independent distributors bear the part of the cost of ourconsumer marketing expenses, and our distributor leaders coordinate therecruiting and training initiatives of their downline distributororganizations. Furthermore, we can readily increase production and distributionof our products as a result of our multiple third party manufacturingrelationships and distribution centers.

 

 

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**Regulatory Matters**

 

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

 

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

 

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

 

·                  our directselling program; and

 

·                  taxation ofindependent distributors (which in some instances could impose an obligation onus to collect the taxes and maintain appropriate records).

 

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

 

The FDCA has been amended several times withrespect to nutritional supplements, in particular by the Dietary SupplementHealth and Education Act of 1994 (“DSHEA”), which established a new frameworkgoverning the composition, safety, labeling and marketing of nutritionalsupplements. Nutritional supplements are defined as vitamins, minerals, herbs,other botanicals, amino acids and other dietary substances for human use tosupplement the diet, as well as concentrates, metabolites, constituents, extractsor combinations of such dietary ingredients. Generally, under DSHEA, dietaryingredients that were on the market prior to October 15, 1994, may be usedin nutritional supplements without notifying the FDA. New dietary ingredients,consisting of dietary ingredients that were not marketed in the United Statesbefore October 15, 1994, are subject to a FDA pre-market new dietaryingredient notification requirement unless the ingredient has been present inthe food supply as an article used for food without being chemically altered. Anew dietary ingredient notification must provide the FDA with evidence of ahistory of use or other evidence of safety establishing that use of the dietaryingredient will reasonably be expected to be safe. A new dietary ingredientnotification must be submitted to the FDA at least 75 days before the initialmarketing of the new dietary ingredient. There is no certainty that the FDAwill accept any particular evidence of safety for any new dietary ingredient.The FDA’s refusal to accept such evidence could prevent the marketing of suchdietary ingredients.

 

DSHEA permits statements of nutritionalsupport to be included in labeling for nutritional supplements without FDApremarket approval. These statements must be submitted to the FDA within 30days of marketing and must bear a label disclosure that “This statement has notbeen evaluated by the Food and Drug Administration. This product is notintended to diagnose, treat, cure, or prevent any disease.” These statementsmay describe a benefit 

 

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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 manufactureror brand of nutritional supplement; the literature must present a balanced viewof the available scientific information on the nutritional supplement; ifdisplayed in an establishment, the literature must be physically separate fromthe nutritional supplement; and the literature may not have appended to it anyinformation by sticker or any other method. If the literature fails to satisfyeach of these requirements, we may be prevented from disseminating it with 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 thefinal regulations for manufacturers of a standard originally proposed in March 2003of the current Good Manufacturing Practices guidelines (“cGMPs”) for themanufacturing, packing, holding and distributing dietary ingredients andnutritional supplements. The new regulations will require nutritionalsupplements to be prepared, packaged, and held in compliance with strict rules,and will require quality control provisions that may mandate redundant testingof product ingredients at each separate stage of manufacture and are intendedto ensure that products are accurately labeled and don’t contain adulterantsand contaminants. While the rule allowed for medium and smallmanufacturers to have until 2009 and 2010, respectively, to comply with thecGMPs, most of our contract manufacturers did not qualify as small or medium.As a result, many of our contract manufacturers began following the proposedcGMPs or even pharmaceutical cGMPs well before the final rule was published.We expect to see an increase in our manufacturing costs as a result of thenecessary increase in testing of raw ingredients and finished products andcompliance with higher quality standards, although we are not certain of theamount 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 restrictive inthe future.

 

In 2004, legislation was introduced in bothhouses of Congress that imposed substantial new regulatory requirements fordietary supplements. These bills did not pass and are no longer pending, but webelieve the 2004 proposed legislation evidences a continuing effort to furtherregulate dietary supplements.

 

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

 

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

 

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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 is 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 theDietary Supplement & Nonprescription Drug Consumer Protection Act intolaw. The legislation requires manufacturers of dietary supplement andover-the-counter products to notify the FDA when they receive reports of seriousadverse events. We already have an internal adverse event reporting system thathas been in place for several years. Based on our understanding of the new law’srequirements, we believe we will have to make some changes to our existingreporting system, but are still in the process of fully evaluating the effectthat this will have on the Company. We will know more when the FDA issuesimplementing regulations in 2008, which we would intend to fully comply with.

 

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

 

The anti-pyramid laws generally are directedat ensuring that product sales ultimately are made to the retail consumers,that advancement within an organization is based on sales of the organization’sproducts rather than the recruitment of new distributors, and that distributorsare not saddled with large quantities of non-returnable inventory. We remainsubject to the risk that, in one or more markets, our marketing system could befound not to be in compliance with applicable anti-pyramid laws. Failure by usto comply with these regulations could have a material adverse effect on ourbusiness in a particular market or in general.

 

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

 

We monitor and respond to regulatory andlegal developments, including those that may affect our direct selling program.However, the regulatory requirements concerning direct selling programs do notinclude bright line rules and are inherently fact-based. An adversejudicial determination with respect to our direct selling program could have amaterial adverse effect on our business. An adverse determination could: (1) requireus to make modifications to our direct selling program, (2) result innegative publicity, (3)have a negative impact on independent distributormorale, (4) result in reduced revenues, (5) result in fewer celebrityendorsers of our products, and (6) potentially lead to the failure of theCompany. In addition, adverse rulings by courts in any proceedings challengingthe legality of multi-level marketing systems, even in those not involving usdirectly, could have a material adverse effect on our operations.

 

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

 

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

 

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

 

On April 12, 2006, the Federal TradeCommission (“FTC”) proposed a new Business Opportunity Rule. Under the currentBusiness Opportunity Rule (16 C.F.R. § 437), the Company does not meet thedefinition of a “Business Opportunity” and therefore is not subject to the rule.If the proposed Business Opportunity Rule is made final by the FTC asproposed, the Company (as well as all other network marketing companies) willfall within the definition of a Business Opportunity and will be required tocomply with the requirements of the rule.

 

Following publication of the proposed rule,the FTC accepted comments from those who wished to make a submission. Thecomment and rebuttal periods have since closed. 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 may differ significantly from the proposed rule. Ifmade final as it is currently proposed, the proposed rule would require,among other things, that that all network marketing companies, including theCompany, to provide all prospective distributors with extensive disclosures atleast seven days prior to enrolling as a distributor.

 

The Company or the sponsor of the prospectivedistributor will be required to disclose:

 

(a) Identifying Information: This includes the name, address andtelephone number of the Company, the name of the sponsor of the prospectivedistributor, and the date on which the Disclosure Document is provided to theprospect;

(b) Earnings Claim Information: If the Company or the sponsor ofthe prospective distributor makes earnings claims to the prospectivedistributor in association with the opportunity, an Earnings Claim Statementmust be provided. The Earnings Claim Statement must disclose (i) the beginningand ending dates when the represented earnings were achieved, (ii) thenumber and percentage of all distributors who achieved that level of earningswithin such time period, (iii) any specific characteristics applicable tothe person making the earnings claim that differ from the characteristics ofthe prospect (e.g., a different geographic location), and (iv) a statementthat written substantiation for the earnings claim will be made available tothe prospective distributor upon request;

(c) Legal Claims: If the Company, or any affiliate or priorbusiness of the Company, or any of its’s officers, directors, managers orsimilar individuals have been the subject of any civil or criminal actioninvolving misrepresentation, fraud, securities law violations, or unfair ordeceptive practices in the ten years preceding the date of the DisclosureDocument, the full caption of each such action must be disclosed;

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

(e) Cancellation and Refund Requests: The Company will be requiredto disclose the total number of purchasers who have cancelled their businesswithin the preceding two years;

(f) Reference List: The Company will be required to list the name,city, state, and telephone numbers of ten people who have enrolled asdistributors within the three year period preceding the date of the DisclosureDocument who are located nearest to the prospective distributor. Alternatively,the Company may disclose such information for all distributors. The DisclosureDocument must also advise prospective distributors that if they becomedistributors, their personal contact information may be disclosed to futureprospective distributors.

 

The impact of the proposed rule couldbe: (1) the advance seven day disclosure will cause a reduction inenrollments; (2) providing 10 references closest to an applicant willrequire a significant investment in advanced software systems; (3) thereference requirement creates a confidentiality problem, as it completelyignores a distributor’s right to have their personal information maintainedconfidential; (4) the identity of our distributors is

 

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currently protected as trade secret information and such status will becompromised; and (5) the disclosure of legal claims within the specifiedcategories applies to even those claims that were settled without admission ofliability, and even applies to disclosure of claims in which the companyprevailed on the claims. All of these could cause a significant decrease in therecruiting of independent distributors to the Company and consequently affectour ability to sell our products.

 

On March 18, 2008, the Federal Trade Commission (FTC) issued arevised Notice of Proposed Rulemaking on March 18, 2008, recommendingsignificant revisions to the proposed Business Opportunity Rule that theFTC announced nearly two years ago. The revised proposed Rule indicatesthat the FTC intends to *exempt*directsellers from coverage of the Revised Proposed Business Opportunity Rule. The FTC concluded major revisions to the initial Rule were necessary to“avoid broadly sweeping in sellers of multilevel marketing opportunities” and“that the proposed Rule is too blunt an instrument to cure fraud in theMLM industry.”  Rather, the FTC determined that it will continue to usethe flexibility it has in existing law to enforce and address individual casesof fraud on a case-by-case basis.

 

In its comments and analysis announcing the revisions to the proposedrule, the FTC made extensive observations that may have as much significance asthe revisions themselves. Specifically, the FTC comments and analysis address:

 

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

·      The difference between legitimatemultilevel companies and pyramid schemes;

·      The lack of a need for a specificanti-pyramid rule;

·      The lack of evidence of  prevalent deceptive practices in the “MLM[direct selling] industry”;

·      The preference for a fact specific inquiryinto the legitimacy of any one entity on a case-by-case basis rather than abroad rule; and

·      The difficulties and undesirability ofimposing a uniform earnings disclosure requirement across the direct sellingindustry.

 

In the proposed revision the FTC has set forth specific languageredefining a “business opportunity”, and relies upon three aspects of thedefinition to effectively remove direct sellers from coverage.

 

·      First, the FTC limits coverage to thosebusiness relationships in which the prospective purchasers makes a requiredpayment, but excludes from the definition those relationships in which the onlyrequired payment is for inventory at bona fide wholesale prices.

·      Second, the application of the Rule wouldno longer be triggered by virtue of an earnings claim being made, i.e. the mererepresentation by a company that an individual might make money will nottrigger the rule.

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

 

Taken in their totality, these provisions significantly narrow thescope of the initially proposed rule and reflect the FTC’s intent toremove direct sellers from coverage. While the FTC Business Opportunityrulemaking is not complete, it is clear is that it is the intention of the FTCto remove direct sellers from the coverage of the revised Rule.

 

The application of the Federal Franchise Rule andstate franchise laws have similar application as the business opportunity laws.If found to be a franchise, we would be required to prepare and submit aUniform Franchise Offering Circular or similar disclosure document toindependent distributors before they could enroll in the program. Additionalcompliance obligations would also be imposed. This could have a materialadverse impact on the enrollment of new distributors and the sales of ourproducts.

 

The United States Postal Services (“USPS”)has determined that some network marketing programs constitute illegal postallotteries. If a participant in the program must give consideration toparticipate, and the selling entity remunerates the participants based on theelement of chance, the program constitutes a postal lottery. A determinationthat we are operating a postal lottery would have a material adverse consequenceon us as the USPS would discontinue all mail service and could pursue criminalprosecution.

 

**Research and Development**

 

We incurred $17,828 on research anddevelopment for the year ended December 31, 2007 compared with $73,921 forthe same period in 2006. During 2006 we developed a new liquid nutrition drink,BaziTM, which was launched in January 2007. This product will not requireFDA or other regulatory approval. During 2007 we continued to research newingredients and productions methods that we could integrate into existingproducts or new products. We will continue to evaluate our product line andeither update existing products or find new complimentary products to sellthrough our independent distributors. We estimate aggregate amounts to continuedevelopment and testing of these products to be approximately $50,000.

 

**Patents, Trademarks and Proprietary Rights**

 

We have obtained registration on trademarksfor nine of our supplements: “Alpha Nac,” “AO Elite,” “Complex SPP,” “CPComplex,” “GC Elite,” “JSH,” and “M32+”. We have also obtained trademarks forour rehydration drink “eForce” and our protein shake product “VitaPro,” as wellas for other products, all of which we have discontinued the use of the name.We have abandoned or not pursued efforts to register marks identifying otheritems in our product line for various reasons including the inability of somenames to qualify for registration. We also received federal trademarkregistration for six names or expressions that we use or intend to use todistinguish ourselves from others: “Cube Up,” “Get Cubed,” “Simple, Innovative,Complete Nutrition,” “The Power of Nutrition,” “VitaCube” and “V3S.” Alltrademark registrations are protected for a period of 10 years and then arerenewable thereafter if still in use. We are currently pursuing a trademark for“XELR8,” “What Moves You,” “Bazi” and the “Shendong Jujube” to be used inassociation with our direct sales marketing program.

 

**Employees**

 

We had 12 full-time employees as of March 19,2008. We consider our employee relations to be good.

 

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**ITEM 1ARISK FACTORS**

 

We are subject to various risks that could have a negative effect onthe Company and its financial condition. These risks could cause actual operatingresults to differ from those expressed in certain “forward looking statements’contained in this Form 10-KSB as well as in other communications.

 

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

 

We have not been profitable since inception in 2001.We had net losses for the year ending December 31, 2007 and year ended December 31,2006 of $3,241,730 and $4,669,449, respectively. At December 31, 2007, wehad an accumulated deficit of $20,492,011. We may never achieve ormaintain profitability. Our ability to achieve and maintain a profit isdependent upon our attracting and retaining a large base of independentdistributors who generate our sales.

 

**We may need to raise additional funds to fundoperations which cannot be assured and would result in dilution to the existingshareholders.**

 

To date, our operating funds have been providedprimarily from sales of our common stock ($14,913,421), and by loans from ourfounder and by various stockholders ($3,989,209), through December 31,2007, and to a lesser degree, cash flow provided by sales of our products. Weused $1,178,996 of cash for operations in the year ended December 31,2007, and $2,992,028 of cash for operations in the year ended December 31,2006. If our business operations do not result in increased product sales, ourbusiness viability, financial position, results of operations and cash flowswill 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, and what dilution will be causedto the existing shareholders.

 

**Our limited operating history and recent change inmarketing strategy make it difficult to evaluate our prospects.**

 

We have a limited operating history on which toevaluate our business and prospects. Our current flagship product, BaziTM wasformulated in 2006 and introduced to the public for sale in January 2007.Our other, legacy products were formulated from 2000 through 2005, and we beganselling these products to the general public in early 2002 through 2005, withlimited market success. In late 2003, we began to refocus our sales andmarketing efforts on direct sales of products through our network ofindependent distributors. In 2005, we rebranded the network marketing companyand launched new products. In February 2008, we decided to change oursales focus from multiple products, to a single product focus on BaziTM, ourliquid 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 be successful in addressing ouroperating challenges such as establishing a viable network of independentdistributors, developing brand awareness and expanding our market presence. Ourprospects for profitability must be considered in light of our evolving businessmodel. These factors make it difficult to assess our prospects.

 

**Our failure to recruit, maintain and motivate a largebase of productive independent distributors could limit our ability to generaterevenues.**

 

To increase revenue, we must increase the sales andrecruiting productivity of our independent distributors. We cannot assure youthat we will be successful in recruiting and retaining productive independentdistributors, particularly since direct sales organizations usually experiencehigh turnover rates of independent distributors. Our independent distributorscan terminate their relationships with us at any time. The distributors alsotypically work on a part-time basis and may engage in other businessactivities, which may reduce their efforts for us.

 

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

 

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Based on our knowledge of the direct sellingindustry, we anticipate that our independent distributor organization will beheaded by a relatively small number of key independent distributors whotogether with their downline network will be responsible for a disproportionateamount of revenues. We believe this structure is typical in the direct sellingindustry, as sales leaders emerge in these organizations, and it is the currentsituation with us. The loss of a key independent distributor will adverselyaffect our revenues and could adversely affect our ability to attract otherindependent distributors, especially if an independent distributor takes otherindependent distributors of ours to a competitor or to any other organization.

 

**We are dependent on the level of effort that our independentdistributors make in selling our products and we do not have control over theirmethods of marketing our products.**

 

We are dependent on our non-employee, independentdistributors to market and sell our products. Our independent distributorspurchase products from us for their own personal use and to use in marketingtheir business. Additionally, we have a large number independent distributorsin relation to the small number of corporate employees who are responsible forproviding motivational support and recognition to these independentdistributors. We also, typically have a high turnover in the number ofindependent distributors who join our business each year, who require trainingand motivation from both their enrollers, key independent distributor leadersand corporate staff. We rely on this training and the policies and proceduresincluded in the independent distributor agreement to ensure that eachindependent 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 govern theiractivities will be successful, and may result in lower recruiting and negativepublicity and legal actions against us.

 

**A change in the amount of compensation paid to ourindependent distributors could reduce our ability to recruit and retain them.**

 

One of our significant expenses is the payment ofcompensation to our independent distributors. This compensation includescommissions, bonuses, awards and prizes. From the date we changed our salesmethod to direct sales through independent distributors, August 1, 2003,through December 31, 2007, compensation paid to our independentdistributors represented 50% 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 are not in a position to exert the same level ofinfluence or control over our independent distributors as we could if they wereour employees, and we may be subject to significant costs and reputationharm in the event our independent distributors violate any laws or regulationsapplicable to our operations.**

 

Our independent distributors are independentcontractors and, accordingly, we are not in a position to provide the samelevel of control and oversight as we would if independent distributors were ouremployees. While we have implemented independent distributor policies andprocedures designed to govern independent distributor conduct and to protectour goodwill, there can be no assurance that our independent distributors willcomply with our policies and procedures. Violations by our independentdistributors of applicable law or of our policies and procedures dealing withcustomers could reflect negatively on our products and operations and harm ourbusiness reputation. To date, we have not experienced any significant problemsaffecting our products, operations or business reputation caused by distributorviolations of our policies and procedures. Additionally, as we expand from ourpresent to future markets, our marketing system could be found not to complywith these laws and regulations or may be prohibited. Failure to comply withcurrent or future markets laws could have a material adverse effect on ourbusiness, financial condition, and results of operations.

 

In addition, extensive federal, state and local lawsregulate our direct selling program. The Federal Trade Commission (“FTC”) or acourt could hold us liable for the actions of our independent distributors. TheFTC could also find us liable civilly for deceptive advertising if healthbenefit representations made by our independent 

 

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

 

**Our direct selling program through independentdistributors could be found not to be in compliance with current or newlyadopted laws or regulations, which could subject us to increased costs and reduceddistributor participation in sales efforts, and our revenues would decreasesignificantly.**

 

Our direct marketing program could be found toviolate laws or regulations applicable to direct selling marketingorganizations. These laws and regulations generally are directed at preventingfraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales”schemes, by ensuring that product sales ultimately are made to consumers andthat advancement within an organization is based on sales of the organization’sproducts rather than investments in the organization or other non-retailsales-related criteria. The regulations concerning these types of marketingprograms do not include “bright line” rules and are inherently fact-based.Thus, even in jurisdictions where we believe that our direct selling program isin full compliance with applicable laws or regulations governing direct sellingprograms, we are subject to the risk that these laws or regulations or theenforcement or interpretation of them by governmental agencies or courts canchange. The failure of our direct selling program to comply with current ornewly adopted laws or regulations could result in costs and fines to us andmake our independent distributors reluctant to continue their sales efforts,which would reduce our revenues significantly.

 

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

 

On April 12, 2006, the Federal Trade Commission(“FTC”) proposed a new Business Opportunity Rule. Under the current BusinessOpportunity Rule (16 C.F.R. § 437), the Company does not meet thedefinition of a “Business Opportunity” and therefore is not subject to the rule.If the proposed Business Opportunity Rule is made final by the FTC asproposed, the Company (as well as all other network marketing companies) willfall within the definition of a Business Opportunity and will be required tocomply with the requirements of the rule.

 

Following publication of the proposed rule, the FTCaccepted comments from those who wished to make a submission. The comment andrebuttal periods have since closed. In addition to receiving thousands ofcomments in opposition to the proposed rule from direct selling companiesand individuals engaged in direct selling, several members of Congress advisedthe FTC of their opposition to the proposed rule.  It is unknown when theFTC will issue a final version of the proposed rule. The rule, when made final,by the FTC may differ significantly from the proposed rule. If made final as itis currently proposed, the proposed rule would 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 the sponsor of the prospectivedistributor 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) 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 the representedearnings were achieved, (ii) the number and percentage of all distributorswho achieved that level of earnings within such time 

 

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period,(iii) any specific characteristics applicable to the person making theearnings claim that differ from the characteristics of the prospect (e.g., adifferent geographic location), and (iv) a statement that writtensubstantiation for the earnings claim will be made available to the prospectivedistributor upon request;

(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 such informationfor all distributors. The Disclosure Document must also advise prospectivedistributors that if they become distributors, their personal contactinformation may be disclosed to future prospective distributors.

 

The impact of the proposed rule could be: (1) theadvance seven day disclosure will cause a reduction in enrollments; (2) providing10 references closest to an applicant will require a significant investment inadvanced software systems; (3) the reference requirement creates aconfidentiality problem, as it completely ignores distributors 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.

 

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

 

We treat our independent distributors as independentcontractors and do not pay employment taxes, like social security, or similartaxes in other countries with respect to compensation paid to them. In theevent that an local regulatory authority in which our distributors operate deemthe distributor to be an employee, we may be held responsible for avariety of obligations imposed on employers relating to their employees,including, but limited to, employment taxes (social security) and relatedtaxes, plus any related assessments and penalties, which could significantlyincrease our operating costs.

 

**We are affected by extensive laws, governmentalregulations, administrative determinations, court decisions and similarconstraints which can make compliance costly and subject us to enforcementactions by governmental agencies.**

 

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

 

The U.S. Food and Drug Administration, the FDA, andother similar government agencies in other countries, regulate our products andour product labeling. Among other matters, the FDA and other foreign agenciesregulate nutrient content and ingredient information, claims of the effect of adietary supplement or dietary ingredient on a body structure or function, andclaims of the effect of a dietary supplement or dietary ingredient on diseaseor risk of disease. The FDA and other foreign agencies can initiate civil andcriminal proceedings against persons who make false or misleading claims onlabels or in labeling, who engage in misbranding, who evidence an intent tosell their 

 

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productsfor a therapeutic use not approved by the agency, who sell misbranded products,or who 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 Trade Commission, the FTC and theircounterpart agencies in other countries that we may operate in, havejurisdiction over our product advertising. These agencies can initiate civilproceedings for deceptive advertising and deceptive advertising practices. Itcan seek for companies to make payments to consumers or disgorgement of profitsfrom the sale of any product held to have been deceptively advertised. These agenciesor a court of law can require a company found liable to give notice of theavailability of refunds in part or whole for the product purchase pricefor all products sold through use of advertising deemed deceptive.

 

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

 

On August 25, 2007 the FDA adopted the finalregulations for manufacturers of a standard originally proposed in March 2003of the current Good Manufacturing Practices guidelines (“cGMPs”) for themanufacturing, packing, holding and distributing dietary ingredients andnutritional supplements. The new regulations will require nutritionalsupplements to be prepared, packaged, and held in compliance with strict rules,and will require quality control provisions that may mandate redundant testingof product ingredients at each separate stage of manufacture and are intendedto ensure that products are accurately labeled and don’t contain adulterantsand contaminants. While the rule allowed for medium and smallmanufacturers to have until 2009 and 2010, respectively, to comply with thecGMPs, most of our contract manufacturers did not qualify as small or medium.As a result, many of our contract manufacturers began following the proposedcGMPs or even pharmaceutical cGMPs well before the final rule waspublished. We expect to see an increase in our manufacturing costs as a resultof the necessary increase in testing of raw ingredients and finished productsand compliance with higher quality standards, although we are not certain ofthe amount of these costs. We expect that the cGMPs will increase our productcosts by requiring our various contract manufacturers to expend additionalcapital and resources on quality control testing, new personnel, plantredesign, new equipment, facilities placement, recordkeeping and ingredient andproduct testing.

 

The FDA, other state and local regulatoryauthorities, and the Direct Selling Association, invite the public to complainif they experience any adverse effects from the consumption of nutritionalsupplements. These complaints may be made public. Regardless of whethercomplaints of this kind are substantiated or proven, public release of complaintsof this type may have an adverse effect upon public perception of us, thequality of our products or the prudence of taking our products. Changes inconsumer attitudes based on adverse event reports could adversely affect thepotential market for and sales of our products and make it more difficult torecruit and retain independent distributors and obtain endorsers.

 

**Our ability to grow sales is dependent on growing inour existing markets as well as expanding into new markets in other countries.As we expand into foreign markets, we will become subject to differentpolitical, cultural, exchange rate, economic, legal and operational risks. Wemay invest significant amounts in these expansions with little success.**

 

We currently are focusing our marketing efforts onthe United States and Canadian markets to grow the number of independentdistributors and consequently our sales. We believe that our future growth willcome from both the markets that we are currently operating in and otherinternational markets. We do not have any history of international expansion,and there for have no assurance that any efforts will result in increasedrevenue. Additionally, we may need to overcome significant regulatory and legalbarriers in order to sell our products and whether our distribution method willbe accepted. These markets may require that we reformulate our product tocomply with local customs and laws, however, there is no guarantee that thereformulated product will be approved for sale by these regulatory agencies orattract local distributors. These countries may not accept our currentcompensation plan for distributors which may result in an inability to attractand retain local distributors. International taxing laws may also prevent usfrom operating or repatriating profits from operations in these countries, andthe complexity of transfer pricing laws could diminish the effective returnsfrom investments in foreign countries. Many of our competitors already havesignificant international operations which could be an additional barrier forentry into a foreign market as the local population may be established in othercompensation opportunities and similar products. We believe that success inforeign markets will be dependent on the integration of these markets in aseamless way into our current compensation plan and also the ability of ourexisting distributors to assist in building downline sales organizations.

 

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

 

We rely entirely on a limited number of thirdparties to supply and manufacture our products. Our flagship product, BaziTM, ismanufactured by Arizona Packaging and Production under the terms of a five yearexclusive manufacturing agreement, which stipulates certain prices, quantitiesand delivery timelines. For our other legacy products, manufacturers producethese products on a purchase order basis only and can terminate theirrelationships with us at will. Our two other primary manufacturers are ValentineIndustries, Inc. and GMP Laboratories of America, Inc.

 

These third party manufacturing parties may beunable to satisfy our supply requirements, manufacture our products on a timelybasis, fill and ship our orders promptly, provide services at competitive costsor offer reliable products and services. The failure to meet of any of thesecritical needs would delay or reduce product shipment and adversely affect ourrevenues, as well as jeopardize our relationships with our independentdistributors and customers. In the event any of our third party manufacturerswere to become unable or unwilling to continue to provide us with products inrequired volumes and at suitable quality levels, we would be required toidentify and obtain acceptable replacement manufacturing sources. There is noassurance that we would be able to obtain alternative manufacturing sources ona timely basis. Additionally, all our third party manufactures source the rawmaterials for our products, and if we were to use alternative manufacturers wemay not be able to duplicate the exact taste and consistency profile of theproduct from the original manufacturer. An extended interruption in the supplyof our products would result in decreased product sales and our revenues wouldlikely decline. We believe that we can meet our current supply andmanufacturing requirements with our current suppliers and manufacturers or withavailable substitute suppliers and manufacturers. Historically, we have notexperienced any delays or disruptions to our business caused by difficulties inobtaining supplies.

 

**We are dependent on our third party manufacturers tosupply our products in the compositions we require, and we do not independentlyanalyze our products. Any errors in our product manufacturing could result inproduct recalls, significant legal exposure, and reduced revenues and the lossof distributors.**

 

While we require that our manufacturers verify theaccuracy of the contents of our products, we do not have the expertise orpersonnel to monitor the production of products by these third parties. We relyexclusively, without independent verification, on certificates of analysisregarding product content provided by our third party suppliers and limitedsafety testing by them. We cannot be assured that these outside manufacturerswill continue to supply products to us reliably in the compositions we require.Errors in the manufacture of our products could result in product recalls,significant legal exposure, adverse publicity, decreased revenues, and loss ofdistributors and endorsers.

 

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

 

We face intense competition from numerous resellers,manufacturers and wholesalers of liquid nutritional supplements, energy drinks,protein shakes and nutritional supplements similar to ours, including othernetwork marketing channels, retail, online and mail order providers. Weconsider the significant competing products in the U.S. market for our flagshipproduct BaziTM to be FreeLife International®, Xango® and Monavie® for a liquidnutrition drinks, and for our legacy products to be Myoplex® for proteindrinks, Gatorade®, Powerade®, Acclerade®, and All Sport® for energy drinks, andthat Nature’s Bounty, Inc. and General Nutrition Centers, Inc. arethe significant producers of vitamins. Most of our competitors have longeroperating histories, established brands in the marketplace, revenues significantlygreater than ours, more capital and better access to capital than us. We expectthat these competitors may use their resources to engage in variousbusiness activities that could result in reduced sales of our products.Companies with greater capital and research capabilities could re-formulateexisting products or formulate new products that could gain wide marketplaceacceptance, which could have a depressive effect on our future sales. Inaddition, aggressive advertising and promotion by our competitorsmay require us to compete by lowering prices because we do not have theresources to engage in marketing campaigns against these competitors, and theeconomic viability of our operations likely would be diminished.

 

 

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**Customers and distributors may not be able todistinguish our products by name from competitor’s products.**

 

Due to the similarity of our company name to thoseof many of our competitor’s products may result in the loss of customersand distributors as well as impair the recruiting efforts of our independentdistributors. This could result in the loss of repeat business as well as theinability to generate increased revenue and attract future independentdistributors.

 

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

 

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

 

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

 

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

 

While we have not received any direct negativepublicity, the publicized studies associating increased mortality rates withhigh dosages of Vitamin E has increased awareness of our consumers relating tothe safety of the ingredients in our supplements. Additionally, in 2007 therewas a study published regarding increased mortality rates in higher doses ofantioxidants other than those from natural fruit, berry and vegetable sourceswhich again increased awareness among our consumers relating to the safety ofthe ingredients in our products.

 

**Nutritional supplement products may be supportedby only limited conclusive clinical studies resulting in less market acceptanceof these products and lower revenues or lower growth rates in revenues.**

 

Our nutritional supplement products are made fromvitamins, minerals, amino acids, herbs, botanicals, fruits, berries and othersubstances for which there is a long history of human consumption. However,there is little long-term experience with human consumption of certain productingredients or combinations of ingredients in concentrated form. Although webelieve all of our products fall within the generally known safe limits fordaily doses of each ingredient contained within them, nutrition science isimperfect. Moreover, some people have peculiar sensitivities or reactions tonutrients commonly found in foods and may have similar sensitivities orreactions to nutrients contained in our products. Furthermore, nutritionscience is subject to change based on new research. New scientific evidencemay disprove the efficacy of our products or prove our products to haveeffects not previously known. We could be adversely affected in the event thatour products should prove to be or if they are asserted to be ineffective orharmful to consumers, or if adverse effects are associated with a competitor’ssimilar products.

 

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

 

We may have difficulty in achieving marketacceptance of our products because our products are among the highest priced intheir categories due to the ingredients that we require in our products. Whilewe believe that our products are superior to competing, lower priced products,consumers must be educated about our products. If we 

 

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areunable to achieve market acceptance, we will have difficulty in achievingrevenue growth, which would likely result in continuing operating losses.

 

**The sale of our products involves product liabilityand related risks that could expose us to significant insurance and lossexpenses.**

 

We face an inherent risk of exposure to productliability claims if the use of our products results in, or is believed to haveresulted in, illness or injury. Most of our products contain combinations ofingredients, and there is little long-term experience with the effect of thesecombinations. In addition, interactions of these products with other products,prescription medicines and over-the-counter drugs have not been fully exploredor understood and may have unintended consequences. While our third partymanufacturers perform tests in connection with the formulations of ourproducts, these tests are not designed to evaluate the inherent safety of ourproducts.

 

Although we maintain product liability insurance, itmay not be sufficient to cover product liability claims and such claimscould have a material adverse effect on our business. The successful assertionor settlement of an uninsured claim, a significant number of insured claims ora claim exceeding the limits of our insurance coverage would harm us by addingfurther costs to our business and by diverting the attention of our seniormanagement from the operation of our business. Even if we successfully defend aliability claim, the uninsured litigation costs and adverse publicitymay be harmful to our business.

 

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

 

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

 

According to the Nutrition Business Journal (NBJ)(July/August 2007), the $85-billion U.S. nutrition industry grew 10% in2006, its highest annual growth since 1998. The more mature supplement segmenttopped $22.4 billion and 5% growth, and the other three major categories werein double digits. Functional foods posted $31.4 billion in sales and itshighest growth since 2002 on a strong performance in beverages and nichecategories. There have continued to be negative impacts of Echinacea, Ephedraon the supplement market and low-carb products affected minerals and liquidmeal replacements. The negative tide of media is no longer putting problematiccategories like ephedra or prohormones at stake, but foundation categories likeE, C and even multivitamins and in 2007 antioxidants were subject to the samescrutiny. All these factors could have a negative impact on our sale growth.

 

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

 

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

 

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

 

Because we maintain high levels of inventories tomeet the product needs of our independent distributors and customers, a changeby us of our product mix could result in write downs of our inventories. During2007 we decided to modify the sales efforts from multiple products to a singleproduct focus on our flagship product BaziTM. As a consequence of this decision,we deemed the inventory of certain of the legacy products to be obsolete due tothe low likelihood that we would sell these products before their expiration.Likewise, in 2006 we discontinued certain other legacy products and salestools, and therefore we deemed the remaining inventory to be obsolete. As aresult we incurred a write-down against inventory for the year ended December 31,2007 of $189,403 and a charge against obsolete inventory of $123,511 in 2006.Write downs and charges of this type have historically increased our netlosses, and if experienced in the future, will make it more difficult for us toachieve profitability.

 

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

 

We have established a reserve in our financial statementsfor product returns which is based upon our historical experience.Additionally, we only have limited sales experience with BaziTM as the productwas only introduced to the market in January 2007. If this reserve were tobe inadequate, we may incur significant expenses for product returns. Aswe gain more operating experience, we may need to revise our reserves forproduct returns.

 

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

 

Our existing proprietary rights may not affordremedies and protections necessary to prevent infringement, reformulation,theft, misappropriation and other improper use of our products by competitors.We own the formulations contained in some our products. We consider theseproduct formulations our critical proprietary property, which must be protectedfrom competitors. We do not have any patents because we do not believe they arenecessary to protect our proprietary rights. Although trade secret, trademark,copyright and patent laws generally provide such protection and we attempt toprotect ourselves through contracts with manufacturers of our products, wemay not be successful in enforcing our rights. In addition, enforcement ofour proprietary rights may require lengthy and expensive litigation. Wehave attempted to protect some of the trade names and trademarks used for ourproducts by registering them with the U.S. Patent and Trademark Office, but wemust rely on common law trademark rights to protect our unregisteredtrademarks. Common law trademark rights do not provide the same remedies as aregranted to federally registered trademarks and the rights of a common lawtrademark are limited to the geographic area in which the trademark is actuallyused. Our inability to protect our intellectual property could have a materialadverse impact on our ability to compete and could make it difficult for us toachieve a profit.

 

**If we were to lose one of our significant independentdistributor leaders, there could be an adverse result on our sales.**

 

Our current distribution model relies on the effortsof our independent distributors in buying our products and recruiting andretaining new independent distributors in their downline organization. Oursuccessful independent distributor leaders have significant downlineorganizations that they personally train and communicate with, and consequentlydevelop business relationships. The loss of one of these leaders could resultin lower recruitment and the inability of us to retain the downlineorganization, which could result in a significant decrease in revenue and anincreased cost for us to attract and retain new distributors for replace thedistributors that left our company. The loss of a leader may be a result of ouractions, like changes to the compensation plan or changing the products that wesell or as a result of factors that we have no control over, like business andeconomic conditions, public perception of network marketing, public perceptionof nutritional products, other competing network marketing companies or theresults of ruling by regulatory bodies against us.

 

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

 

We are dependent on our information processingsystems to timely process customer orders, oversee and manage our distributornetwork and control our inventory, and for our distributors to communicate withtheir customers and distributors in their network. Since the initial purchaseof our technology system in 2001 through December 31, 2007, we had spent$335,763 on technology system upgrades. We have experienced interruptions andmay in the future experience interruptions to or failure of ourinformation processing system; however, none of the interruptions to date havematerially disrupted our business. Interruptions to or failure of ourinformation processing systems may be costly to fix and may damageour relationships with our customers and distributors, and cause us to losecustomers and distributors. If we are unable to fix problems with ourinformation processing systems in a timely manner our sales may suffer.

 

**Loss of keypersonnel could impair our ability to operate.**

 

Our success also depends on hiring, retaining andintegrating senior management and skilled employees, including John Pougnet,our Chief Executive Officer and Chief Financial Officer, Douglas Ridley, ourPresident, Timothy Transtrum, our Vice President of Operations, JohnHutchinson, Vice President of IT and Web, Sanjeev Javia, our Vice President ofProduct Development and Endorser Relations and Sanford D. Greenberg, ourfounder, in order to expand our business. Certain of our officers haveemployment agreements that have stipulated service terms. As with all personalservice providers, our officers can terminate their relationship with us atwill. Our 

 

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inabilityto retain these individuals may result in our reduced ability to operateour business. We do not have key man life insurance on any of our executiveofficers.

 

**Provisions in our articles of incorporation and bylawsmay prevent a change in control of us which could limit the price thatinvestors may be willing to pay for our securities.**

 

Provisions contained in our articles ofincorporation and bylaws could make it more difficult for a third party toacquire us or for our shareholders to change our management. These provisions:

 

·                  give our board of directors the right to setthe 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 the election ofdirectors; 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 suchpreferred stock.

 

These provisions may limit the price that investorsare willing to pay in the future for our securities.

 

**The price of our securities could be subject to widefluctuations and your investment could decline in value.**

 

The market price of the securities of a company suchas ours with little name recognition in the financial community and withoutsignificant revenues can be subject to wide price swings. For example, the bidprice of our common stock has ranged from a high $16.25 to a low of $0.19during the twenty quarters ended December 31, 2007. The market price ofour securities may be subject to wide changes in response to quarterlyvariations in operating results, announcements of new products by us or ourcompetitors, reports by securities analysts, volume trading, or other events orfactors. In addition, the financial markets have experienced significant priceand volume fluctuations for a number of reasons, including the failure ofcertain companies to meet market expectations. These broad market price swings,or any industry-specific market fluctuations, may adversely affect the marketprice of our securities.

 

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

 

Companies that have experienced volatility in themarket price of their stock have been the subject of securities class actionlitigation. If we were to become the subject of securities class actionlitigation, it could result in substantial costs and a significant diversion ofour management’s attention and resources.

 

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

 

Our articles of incorporation authorize the issuanceof up to 5,000,000 shares of preferred stock without shareholder approval andon terms established by our directors. We have no existing plans to issueshares of preferred stock. However, the rights and preferences of any suchclass or series of preferred stock would be established by our board ofdirectors in its sole discretion and may have dividend, voting, liquidation andother rights and preferences that are senior to the rights of the common stock.

 

**You shouldnot rely on an investment in our common stock for the payment of cash dividends.**

 

Because of our significant operating losses andbecause we intend to retain future profits, if any, to expand our business, wehave never paid cash dividends on our stock and do not anticipate paying anycash dividends in the foreseeable future. You should not make an investment inour securities if you require dividend income. Any return on investment in ourcommon stock would only come from an increase in the market price of our stock,which is uncertain and unpredictable.

 

**ITEM 1B  UNRESOLVED STAFF COMMENTS**

 

None.

 

25

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**ITEM 2. DESCRIPTION OFPROPERTY**

** **

**Facilities**

 

We lease an office, located at 480 SouthHolly Street, Denver, Colorado, from the father of Sanford D. Greenberg, ourfounder, for $3,900 per month. The lease expired on March 31, 2006, withan automatic monthly extension right and a two month notice period for theCompany to terminate the lease. Our annual office rent for 2007 and 2006 was$42,780 and $40,680, respectively. We currently do not have any plans forrenovation, improvement or development of our corporate office.

 

In January 2006, we entered a twelvemonth contract with GA Wright Marketing, Inc. (“GAW”) to manage and storeour products as well as perform the fulfillment functions for us. GAW storesour products in a controlled-environment warehouse in Denver, Colorado, andaccepts bulk shipments on our behalf. We pay for these services on a pertransaction basis, and our costs have been approximately $9,600 per month. In July 2006we contracted with Holden MSS, Inc. (“Holden”), to assume our warehousefunctions from GAW. Holden acquired the warehousing and fulfillment operationfrom GAW and operates a facility in the vicinity of the GAW warehouse. Holdencontinues to bill 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.

 

**Insurance**

 

We maintain commercial general liability,including product liability coverage, and property insurance. Our policyprovides for a general liability limit of $2 million per occurrence, and $2million annual aggregate umbrella coverage. We also have a casualty insurancepolicy with a limit of $1.0 million on our main facility, including inventory,and $600,000 on our products located at both the Holden and Landmarkfacilities.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

We are not currently involved in any legalproceedings.

 

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

 

Thefollowing matters were submitted to a vote by the shareholders at the meetingheld on November 12, 2007:

 

1.               To elect seven directors of the Company.

 

2.               To increase the number of shares issuableunder our Stock Incentive Plan from 2,200,000 shares to 3,000,000 shares.

 

3.               To increase the number of shares issuableunder our Distributor Stock Option Plan from 500,000 shares to 1,500,000shares.

 

Detailsrelating to the above matters were set forth in the Proxy Statement dated September 4,2007. All of our shareholders of record as of the close of business on September 24,2007 were entitled to notice of and to vote at such meeting. At the meeting theshareholders approved all matters set forth in the Company’s proxy statement,which included the re-election of Board members, the increase of sharesissuable under its 2003 Stock Incentive Plan from 2,200,000 to 3,000,000shares, and the increase of shares issuable under its Distributor Stock OptionPlan from 500,000 shares to 1,500,000. The members re-elected to the Board ofDirectors, who will serve until the 2008 Annual Meeting of Stockholders,include Chairman, John B. McCandless; Chief Executive Officer and ChiefFinancial Officer, John Pougnet; Company President, Douglas Ridley; AnthonyDiGiandomenico; AJ Robbins; Daniel Rumsey and Anthony Petrelli.

 

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**PART II**

 

**ITEM 5. MARKET FOR COMMONEQUITY AND RELATED STOCKHOLDER MATTERS**

### ** **

### **MarketInformation**

### ** **

Our common stock commenced trading on the OTCBulletin Board on December 26, 2001. Our trading symbol was “VCUB.OB.”Since there is only a limited trading market for our stock, stockholders mayfind it difficult to sell their shares. Until June 20, 2003, the commonstock trades reflected the business of Instanet prior to the share exchangewith V3S. On April 5, 2005, the Company moved to the American StockExchange and started trading under the symbol “PRH” in conjunction with asecondary offering of shares. On March 19, 2007, the Company changed itsname to XELR8 Holdings, Inc. and on March 19, 2007, started tradingunder the symbol “BZI”.

 

The following table sets forth high and lowbid prices for our common stock for the calendar quarters indicated as reportedby the American Stock Exchange from April 5, 2005. These prices have beenstated after giving retroactive effect to a 1-for-5 reverse split of our commonstock consummated on December 8, 2004, and represent quotations betweendealers without adjustment for retail markup, markdown, or commission and maynot represent actual transactions.

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| 2006           |       |     |       |    |       |
| First Quarter  |       | $        | 1.52       |    | $          | 1.22 |   |
| Second Quarter |       | $        | 1.79       |    | $          | 0.62 |   |
| Third Quarter  |       | $        | 0.65       |    | $          | 0.39 |   |
| Fourth Quarter |       | $        | 0.62       |    | $          | 0.27 |   |
| 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 |   |

 

### **Holders**

### ** **

As of March 19, 2008, we hadapproximately 833 holders of record of our common stock. A significant numberof our shares were held in street name and, as such, we believe that the actualnumber of beneficial owners is significantly higher.

 

### **Dividends**

### ** **

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

 

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** **

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

* *

*You shouldread the following discussion and analysis in conjunction with our financialstatements, including the notes thereto contained in this report. Thisdiscussion contains forward-looking statements that involve risks,uncertainties and assumptions. Our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of a varietyof certain factors, including those set forth under “Risk Factors Associatedwith Our Business” and elsewhere in this report.*

* *

**Overview**

 

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

 

Our product lines consist of four powderedbeverages, 12 individual supplements packaged in our VitaCube® or a box , and anutritional chew. Our VitaCube® is an easy to use, compartmentalized box withinstructions for which supplements to take and the proper times to take them.We added a box of supplements with the four daily vitamins convenientlypackaged in pillow-packs for each serving. Our EAT, DRINK and SNACK System is apackaged product that consists of functional foods and energy drinks that canbe purchased as a whole system or individually. In January 2007 welaunched our latest product offering BaziTM, a liquid nutrition drink. In late2007 we decided to focus our sales efforts on this product and publiclyannounced it to our independent distributors in February 2008.

 

During the third quarter of 2003, weinitiated a transition of our sales and marketing efforts from sales to retailoutlets and in-house telemarketing to direct selling through independentdistributors and we launched our direct sales program in the second quarter of2004. As of February 29, 2008 we had 5,089 independent distributors and3,327 customers (excluding professional athletes and sports teams) who hadpurchased our products within the prior twelve months.

 

We maintain an inventory of our products toinsure that we can timely fill our customer orders. We can have large increasesin inventory levels if we have multiple product reorders in the same period. Inaddition, our manufacturers typically may take up to 12 weeks to deliverproducts after we place an order, and they have minimum order requirements,which also adds to higher inventory levels. During 2007 we entered into a fiveyear manufacturing agreement with Arizona Packaging and Production, whomanufacture our flagship product, BaziTM. The terms of the agreement providedthat they would be the exclusive manufacturer of this product and alsostipulated certain prices, quantities and delivery timelines. As a result thelead time on this product has been reduced to 10 weeks. Our inventory, net ofour allowance for obsolescence, was $370,843 at December 31, 2007, adecrease from $411,364 at December 31, 2006.

 

The decrease of inventory was a result of thedecision to focus our marketing efforts around the single product, BaziTM,therefore we provided for obsolescence on a number of the legacy products thatwe do not believe that we will sell before they expire. We believe that thecurrent inventory level is adequate to meet our short-term projected demand,and based on our sales for the year ended December 31, 2007, it isappropriately classified as a current asset based on the ongoing implementationof our new single product marketing plan which is designed to increase ourdistributor base and sales.

 

During the year ended December 31, 2007,we saw the demand for all of our legacy products (all products other thanBaziTM) decrease as customers favored the convenience and simplicity of BaziTM.In February 2008 we announced our decision to focus our sales andmarketing efforts around a single product focus. Both of these factors resultedin taking a charge against operations for obsolete inventory of $216,760. Ourallowance for obsolete inventory increased to $189,403 from $41,655 for theyears ended December 31, 2007 and 2006, respectively. We believe ourreserve for obsolescence is reasonable because (i) substantially all ofour BaziTM inventory has been recently purchased, and (ii) the shelf lifeof our legacy products averages three years and BaziTM is a year.

 

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Our network marketing program is designed to provide an incentive forindependent distributors to build, maintain and motivate a sales organizationof customers and other independent distributors to enhance earning potential.Our independent distributors are compensated with commissions and bonuses onsales generated through their downline organization. Independent distributorsadvance in distributor levels as they develop their sales organization andincrease their sales volume, which increases their compensation.

 

We recognize revenue when products are shipped to our customers.Revenue is reduced by product returns at the time we take the product eitherback into inventory or dispose of it. In addition, we estimate a reserve totalfor future returns. Cost of our sales consists of expenses directly related tothe production 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.

 

Our revenue will depend on the number and productivity of ourindependent distributors, who purchase products and sales materials from us forresale to their customers or for personal use. Because we will distributesubstantially all of our products through our independent distributors, ourfailure to retain our existing distributors and recruit additional distributorscould have an adverse effect on our revenue.

 

Due to the early stage of our direct sales program we believe that thenumber of our distributors and customers are an important indicator to monitor.In addition, we will monitor the sales generated per independent distributor aswell as the success of our independent distributors in recruiting newindependent distributors and customers.

 

With respect to industry and market factors that may affect usdirectly, we believe that industry credibility in both direct selling andnutritional supplements will be critical elements in whether we can increaserevenues and become profitable. Any adverse developments in either of these twoareas, to us or in our industry, could lead to a lower number of ourindependent distributors and reduced sales and recruiting efforts by existingdistributors, as well as a loss or no increase in the number of sportscelebrity endorsers of our products. We do not know what industry growth wasfor 2007 or will be for 2008 nor do we have enough experience in the directsales channel to determine whether a slower industry growth rate, whichoccurred for several years leading up to 2003 and which has subsequently beenslow, will adversely affect us.

 

Our operating plan for 2008 is focused on the continued growth andmarket penetration of BaziTM, and increasing the number of independentdistributors and customers, growing revenues, and generating gross profits. Withrespect to industry and market factors that may affect us directly, webelieve that industry credibility in both direct selling and nutritionalsupplements will be critical elements in whether we can increase revenues andbecome profitable. Any adverse developments in either of these two areas, to usor in our industry, could lead to a lower number of our independentdistributors and reduced sales and recruiting efforts by existing distributors,as well as a loss or no increase in the number of sports celebrity endorsers ofour products. Due to the relatively recent commencement of our directselling program through independent distributors and the change in marketingstrategy from multiple products to a single product, we cannot predict ourrevenue, gross profit, net income or loss or use of cash and cash equivalents;however, we expect net losses will continue for at least the next 9 months.

 

InMarch 2007, we completed a private sale of common stock of the Company forgross proceeds of $2,000,000 and in May 2007 completed a second privatesale of common stock of the Company for additional gross proceeds of$2,000,000.

 

**Critical AccountingPolices and Estimates**

 

Discussion and analysis of our financial condition and results ofoperations are based upon financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenue andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate our estimates; including those related tocollection of receivables, inventory obsolescence, sales returns andnon-monetary transactions such as stock and stock options issued for services.We base our estimates on historical experience and on various other assumptionsthat are believed to be 

 

 

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reasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. Actual results may differ fromthese estimates under different assumptions or conditions. We believe thefollowing critical accounting policies affect our more significant judgmentsand estimates used in the preparation of our financial statements.

 

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

 

***Allowances forProduct 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 sales.

 

We offer a 60-day, 100% money back unconditional guarantee to allcustomers and independent distributors who have never before purchased productsfrom us. As of December 31, 2007, orders shipped that are subject to our60-day money back guarantee were approximately $140,465. All other product maybe returned to us by any customer or independent distributor if it is unopenedand undamaged for a 100% sales price refund, less a 10% restocking fee,provided the product is returned within 12 months of purchase and is being soldby us at the time of return. We are not able to estimate the amount of revenuewe have recognized that is held by these buyers of product and which isreturnable, because it is not possible to determine the amount of product thatis unopened and undamaged. Product damaged during shipment is replaced whollyat 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, 2007 and 2006 was $76,193 and $45,327, respectively. Todate, product expiration dates have not played any role in product returns, andwe 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 cost or market on a first-infirst-out basis. A reserve for inventory obsolescence is maintained and isbased upon assumptions about current and future product demand, inventory whoseshelf life has expired and market conditions. A change in any of thesevariables may require additional reserves to be taken. We reserved $189,403 forobsolete inventory as of December 31, 2007 and $41,655 as of December 31,2006.

 

***Stock BasedCompensation. ***Many equity instrument transactions arevalued based on pricing models such as Black-Scholes-Merton, which requirejudgments by us. Values for such transactions can vary widely and are oftenmaterial to the financial statements.

 

EffectiveJanuary 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004), Share-Based Payment (SFAS 123R), whichrequires compensation costs related to share-based transactions, includingemployee stock options, to be recognized in the financial statements based onfair value. SFAS 123R revises SFAS No. 123, Accounting for Stock-BasedCompensation, (SFAS 123) and supersedes Accounting Principles BoardOpinion (APB) No. 25, Accounting for Stock Issued to Employees. In March 2005,the Securities and Exchange Commission (the SEC) issued Staff AccountingBulletin No. 107 (SAB 107) regarding the SEC’s interpretation ofSFAS 123R and the valuation of share-based payments for public companies.We have applied the provisions of SAB 107 in its adoption ofSFAS 123R. We adopted the provisions of SFAS 123R using the modifiedprospective transition method. In accordance with this transition method, thecompany’s consolidated financial statements for prior periods have not beenrestated to reflect the impact of SFAS 123R. Under the modified prospectivetransition method, share-based compensation expense for the first quarter of2006 includes compensation expense for all share-based compensation awardsgranted prior to, but for which the requisite service has not yet beenperformed as of January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS 123.Share-based compensation expense for all share-based compensation awards 

 

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grantedafter January 1, 2006 is based on the grant date fair value estimated inaccordance with the provisions of SFAS 123R.

 

### **Results of Operations**

### ** **

*The discussion below first presents theresults of 2007 year followed by the results of 2006 year.*

 

**For year ended December 31, 2007,compared to the year ended December 31, 2006.**

 

***Net Sales****. *Netsales were $4,853,046 compared to $2,148,420, an increase of 126%. The increasein sales was the result of the January 12,2007 launch of the liquid nutritional supplement, BaziTM. This product, alongwith a introduction 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.

 

The percentage that each product category represented of our net salesis as follows:

 
| ** **                                   | ** ** | **Year Ended**        | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **December 31,** | ** ** |
| ** **                                   | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **Product Category**                         | ** ** | **% of Sales**        | ** ** | **% of Sales** | ** ** |
| BAZITM                                   |       | 83                    | %          | — | % |
| HYDRATE                                      |       | 2                     | %          | 11 | % |
| BUILD                                        |       | 2                     | %          | 5 | % |
| EAT                                          |       | 1                     | %          | 18 | % |
| DRINK                                        |       | 3                     | %          | 28 | % |
| SNACK                                        |       | 1                     | %          | 10 | % |
| Vitamins and  minerals (including SUPPORT)   |       | 2                     | %          | 13 | % |
| Other –  educational materials, apparel |       | 6                     | %          | 15 | % |

 

***Gross Profit****. *Grossprofit increased to $3,472,383 from $1,372,658, an increase of 153%. Grossprofit as a percentage of revenue (gross margin) increased to 72% compared to64%, a result of higher margin of the BaziTM product compared to our legacyproducts. This higher gross margins was offset by charges that we took againstinventory of $216,760. The overall increase in gross profit also reflects theincrease in net revenue.

 

***Sales and MarketingExpenses****. *Sales and marketing expensesincreased to $3,180,392 from $2,626,613, an increase of 21%. 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 is 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 $2,006,167 duringthe year ended December 31, 2007, compared to $1,311,158 in the year endedDecember 31, 2006, in costs to attract experienced sales leaders to ourdistributor network, commissions paid to our Independent Distributors, andpromotions and awards for our distributors. Our costs of hostingDistributor events like the National Distributor Event and the Diamond ClubWeekend remained relatively constant from year to year, with the expense forthe year ended December 31, 2007, of $229,749 comparing favorability tothe 2006 expense of $222,126.  The salaryexpense of our sales and marketing group, which includes our customer servicecenter, increased to $282,924 for the year ended December 31, 2007compared to $270,945 for the year ended December 31, 2006. We expect allof these expense categories to continue to increase as our sales increase forthe next 12 months as we implement our marketing plan.

 

***General andAdministrative Expenses****. *General andadministrative expenses were $3,107,469 compared to $3,275,689, or a decreaseof 5%. The decrease in this expense is a result of the decrease in salary andseverance expense from $1,829,709 in 2006 compared to $942,200 in 2007. Thisdecrease was primarily the result of the expense the Company recorded in 2006of $540,000 for the amendment to Sanford Greenberg’s employment contract.Additionally, executive compensation decreased as a result of amendments to theemployment agreements with Earnest Mathis, Jr., our former Chief ExecutiveOfficer and John D. Pougnet, our Chief Financial Officer effective May 28,2006 and the subsequent departure of Mr. Mathis in October 2006 andthe assumption of his role of Chief Executive Officer by Mr. Pougnet. Inaddition to the assumption of Chief Executive duties by Mr. Pougnet, allthe other executives of the Company reduced their salaries, with areinstatement based on the Company 

 

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achieving certain monthly sales milestones. During 2007 one of themilestones was achieved, and these executives received a partial reinstatementof prior salaries. The reduction in the salary and severance expense was offsetby the increase in stock based compensation expense, increasing to $1,212,409for the year ended December 31, 2007 compared to $701,270 for the yearended December 31, 2006. The increase is a result of the fee wepaid in stock to the referral agent in connection with the short term loanfinancing and a one time grant of fully vested options to the executives thattook a pay reduction in 2006. The increase was also the result of $350,000 instock based compensation that the Company recorded in the second quarter forthe grant of stock by a principal shareholder, Mr. Sanford Greenberg, tothe employees of the company. Under the guidance issued by the Securities andExchange Commission in Staff Accounting Bulletin 107 (SAB 107), share-basedpayments issued to an employee of a reporting entity by a related party or otherholder of economic interest in the entity as compensation for services providedto the entity are to be recorded as a compensation expense by the entity.

 

***Research andDevelopment Expenses***.  Research and development expenses decreasedto $17,828 from $73,921, a decrease of 76%. We are continuing to research anddevelop ingredients and manufacturing technologies for our product line.  In October 2006 we terminated thestrategic alliance agreement with UTEK Corporation, a technology transfercompany to assist us with introductions to university research ingredients andprocesses. Additionally, during 2006 we engaged a number of authorities on theJujube fruit, the principal ingredient in the new product, Bazi, that theCompany launched in January 2007.

 

***Interest Expense***.  Interest expense was $439,537 compared with$33,888, an increase of 1,197% due to the two short term bridge notes that theCompany entered into in November 2006and January 2007. Both provided for a 10% interest rate and an originationfee of 400,000 shares of common stock of the Company which was valued using theshare price of the Company on the dates the loans were funded and amortizedover the term of the loan. Both loans were repaid on March 27, 2007, thedate the Company closed the first private placement transaction, extinguishingall debt financing that the Company had in place.

 

***Net Loss****.*Our net loss was $3,241,730, compared to$4,669,449, a decrease of 31%; while on a per share basis our loss was $(0.23)per share for the year ended December 31, 2007, compared to $(0.48) pershare for the year ended December 31, 2006, a decrease of 52%. Thedecrease in net loss is a result of increased sales and gross margin, andoffset by the increased Distributor commission expense, stock based compensationexpense and the interest expense from the bridge note loans. The per sharedecrease was also a result of a higher number of outstanding shares as a resultof the two private placement transactions that tok place in the year ended December 31,2007.

 

### **Liquidity and Capital Resources**

### ** **

Todate, our operating funds have been provided primarily from sales of our commonstock ($14,913,421), and by loans from our founder and by various stockholders($3,989,209), through December 31, 2007, and to a lesser degree, cash flowprovided by sales of our products.

 

OnNovember 21, 2006, we obtained a $250,000 short-term loan from anunrelated party. We were also able to obtain a commitment for an additional$250,000 from an unrelated party that funded in January 2007. Each loanprovided for the issuance of 400,000 restricted shares and interest at 10% perannum. The loans matured at the earlier of six months from funding or the finalclosing of a private placement.

 

OnMarch 5, 2007, we announced that the Company had raised $2,000,000 ingross proceeds in a private placement transaction, which would close subject toshareholder and American Stock Exchange approval. On March 7, 2007, theshareholders approved the private placement transaction, and on March 27,we closed the transaction. At the time of closing, we paid in full theshort-term loans of $500,000 plus accrued interest of $13,425 leaving us withno short-term or long-term debt at this time, other than trade accounts payableand other accrued liabilities.

 

OnMay 8, 2007, the Company announced that it had completed the sale of onemillion units in a private placement transaction resulting in gross proceeds of$2,000,000, which would close subject to American Stock Exchange approval. On May 24,2007, we closed the transaction.

 

Weused $1,178,996 of cash for operations in the year ended December 31,2007, compared to $2,992,028  of cash for operations in the year ended December 31,2006. The use of cash in our operations results from incurring 

 

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andaccruing expenses to suppliers necessary to generate business and service ourcustomers at a time when revenues did not keep pace with expenses. As of December 31,2007, we had $2,245,858 in cash and cash equivalents available to fund futureoperations. Net working capital increased from ($659,328) at December 31,2006, to $2,120,479 at December 31, 2007.

 

Inthe event that we are successful in completing our business plan of increasingthe number of distributors, sales levels and consequently increasedprofitability, we believe that our cash resources will be sufficient to fundour operations for the next 24 months. If our business operations do not resultin increased product sales, our business viability, financial position, resultsof operations and cash flows will likely be adversely affected. Further, if weare not successful in achieving profitability, additional capital will berequired to conduct ongoing operations. We cannot predict the terms upon whichwe could raise such capital or if any capital would be available at all.

 

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

 

***Off-Balance SheetItems****.*  We had no off-balance sheet items as of December 31,2007.

 

**ITEM 7. FINANCIAL STATEMENTS**

** **

The financial statements are included in this annual report on Form 10-KSBat page F-1.

 

### **Index to Financial Statements**

** **
| Report of Independent Registered Public  Accounting Firm                                                                        | F-1 |
|---------------------------------------------------------------------------------------------------------------------------------|-----|
| Consolidated Balance Sheets as of  December 31, 2007 and 2006                                                              | F-2 |
| Consolidated Statements of Operations for  the years ended December 31, 2007 and 2006.                                     | F-3 |
| Consolidated Statements of Changes in  Shareholders’ Equity (Deficit) for the years ended December 31, 2007 and  2006 | F-4 |
| Consolidated Statements of Cash Flows for  the Years Ending December 31, 2007 and 2006                                     | F-5 |
| Notes to Consolidated Financial Statements                                                                                      | F-6 |

** **

**ITEM 8. CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

None.

 

**ITEM 8A. CONTROLS AND PROCEDURES**

** **

**Item 8A(T). Controls and Procedures.**

 

*(a) Evaluation of Disclosure Controls andProcedures.*  Ourmanagement, with the participation of our Chief Executive Officer (CEO),evaluated the effectiveness of our disclosure controls and procedures as of theend of the period covered by this report. Based on that evaluation, our CEOconcluded that our disclosure controls and procedures as of the end of theperiod covered by this report were effective such that the information requiredto be disclosed by us in reports filed under the Securities Exchange Act of1934 is (i) recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms and (ii) accumulatedand communicated to our management, including our CEO, as appropriate to allowtimely decisions regarding disclosure. A controls system cannot provideabsolute assurance, however, that the objectives of the controls system aremet, and no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within a company have beendetected.

 

*Management’s Annual Report on Internal Control overFinancial Reporting.*  Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act). Our internal control over financial reporting is a processdesigned to provide reasonable 

 

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assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes of accounting principles generallyaccepted in the United States.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Therefore, even those systems determined to beeffective can provide only reasonable assurance of achieving their controlobjectives.

 

Ourmanagement, with the participation of the CEO, evaluated the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2007.  In making this assessment, our management used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in Internal Control — Integrated Framework.  Based on thisevaluation, our management, with the participation of the President, concludedthat, as of December 31, 2007, our internal control over financialreporting was effective.

 

(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 8B. OTHER INFORMATION**

 

**Sale of Unregistered Equity Securities**

 

On February 19, 2008XELR8 Holdings, Inc. (the “Company”) announced that it had sold 500,000units of its securities at $1 per unit to a group of accredited investors. Each unit consists of one share of common stock and six/tenths (6/10) ofa Class G Warrant to purchase common stock. As a part of the privateplacement terms, the Company agreed to reduce the exercise price of its Series EWarrants and Series F Warrants previously purchased by the same investorsin a prior private placement. The Class G Warrants have an exercise priceof $1.50 and are exerciseable for a five year period with a call provision bythe Company if the Company’s share price closes above $2.50 for twentyconsecutive days. The Amended Class E 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 $3.00 for twenty consecutivedays. The Amended Class 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.

 

The Company’s placementagent was Burnham Hill Partners, a division of Pali Capital, Inc. and JohnThomas Financial acted as a consultant to the Company. The placement iscontingent upon approval of the unit issuance by the American StockExchange.  The Company will have15,697,170 shares outstanding after completion of the private placement sale.The subscription and registration rights agreement do not require the Companyto file a resale registration statement covering the shares of common stock,but do require the Company to file a resale registration statement covering theshares of common stock underlying the warrants to be filed with the U.S.Securities and Exchange Commission within one year of the closing date.

 

The Company will receiveapproximately $440,000 in net proceeds after placement fees and other estimatedcosts of the offering.

 

**Issuanceon Press Release**

 

On March 26, 2008, the Company issued a pressrelease in connection with its year end results and investor conference call, a copy of which has been filed herewith.

 

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**PART III**

 

**ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS**

** **

### **Directors and Executive Officers**

### ** **

The following sets forth certain information regarding each of ourdirectors and executive officers:

 
| **Name**                | ** ** | **Age** | ** ** | **Position**                                                   | ** ** | **Committee**                 | ** ** |
|-------------------------|------------|---------|------------|----------------------------------------------------------------|------------|-------------------------------|------------|
| John B.  McCandless     |       | 59      |       | Chairman                                                       |       | —                        |       |
| John D.  Pougnet        |       | 36      |       | Chief  Executive Officer, Chief Financial Officer and Director |       | —                        |       |
| Douglas  Ridley         |       | 51      |       | President  and Director                                        |       | —                        |       |
| Daniel  Rumsey          |       | 46      |       | Director                                                       |       | Audit/Compensation/Nominating |       |
| Anthony  Petrelli       |       | 55      |       | Director                                                       |       | Compensation/Nominating       |       |
| AJ Robbins              |       | 61      |       | Director                                                       |       | Audit/Compensation/Nominating |       |
| Anthony  DiGiandomenico |       | 41      |       | Director                                                       |       | Audit                         |       |

 

Directorshold office until the next annual meeting of stockholders following theirelection unless they resign or are removed as provided in the bylaws. Our Boardof Directors has determined that our directors, other than Mr. McCandless,Pougnet and Ridley, are “independent directors” under the American StockExchange listing standards. Our officers serve at the discretion of our Boardof Directors.

 

Thefollowing is a summary of our directors’ and executive officers’ businessexperience.

 

**John B. McCandless, Director.  **Mr. McCandless was appointed as adirector on February 19, 2004. He is currently providing consultingservices to the Company as well as other nutrition and direct sellingcompanies. From October 2003 until December 2006 Mr. McCandlessserved as the Vice President of Technical Services at Weider NutritionInternational. Mr. McCandless provided operations and product consultingservices to nutrition and direct selling companies as a consultant from November 2002to October 2003, and from October 1995 to November 2002, heserved as Senior Vice President and Chief Operating Officer for USANA HealthSciences, a health science company.

 

**John D. Pougnet, Chief Executive Officer and ChiefFinancial Officer.  **Mr. Pougnet was appointed a Director on July 11, 2007 andChief Executive Officer on October 11, 2006. Prior to that Mr. Pougnetwas appointed as Chief Financial Officer in September 2005. Immediatelyprior to joining the Company, Mr. Pougnet was Assurance Senior Manager atKPMG, LLP, a global network of professional services firms providing Audit, Taxand 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.

 

**Douglas Ridley,President and Director.  **Mr. Ridley wasappointed as a Director on January 1, 2004, and in June 2005 Mr. Ridleyjoined the Company as President. Mr. Ridley was an independent consultantto us from April 2003 until December 31, 2003. Prior to joining theCompany Mr. Ridley was President of Simply Because, a gift productsnetwork marketing company, from 2003 until 2005 and from 1997 until May 2005,was President of Chad Management Co., LLC, a nutritional products networkmarketing company.

 

**AJ Robbins, Director.  **Mr. Robbins was appointed as a directoron July 10, 2006, and serves on our Audit and Compensation Committees. Mr. Robbinsis currently the Managing Partner of AJ Robbins PC, which he founded in 1986. Mr. Robbin’spractice focuses on accounting and auditing for corporate and securities work for both private and public companies. Mr. Robbinsis a Certified Public Accountant registered in Colorado, New York and 

 

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California as well as a member of the American Instituteof Certified Public Accountants and his firm is registered with Public CompanyAccounting Oversight Board.

 

**Daniel Rumsey, Director.  **Mr. Rumsey was appointed as a directoron August 17, 2007, and serves on our Audit and Compensation Committees. Mr. Rumseyis active in advising boards, private equity and hedge funds and banks inconnection with public and private financings, restructurings, turnarounds,mergers and acquisitions and crisis management.  He currently serves asChairman of the Board and Interim Chief Financial Officer of Prescient AppliedIntelligence, a leading provider of supply chain and advanced commercesolutions for retailers and suppliers, as well as Chief Executive Officer andChairman of the Board of Azzurra Holding Corporation (formerly P-Com, Inc.),a public company that recently emerged from protection under Chapter 11 of theU.S. Bankruptcy Code.    Prior to joining Azzurra, Mr. Rumseywas Vice President and General Counsel of Knowledge Kids Network, Inc., amulti-media education company.  Prior to joining Knowledge Kids Network, Inc.,Mr. Rumsey was the President and General Counsel of Aspen Learning Systemsand NextSchool, Inc.   Mr. Rumsey sold Aspen LearningSystems and NextSchool to Knowledge Kids Network in 1999.  Mr. Rumseyalso served as an attorney at the U.S. Securities & ExchangeCommission’s Division of Corporation Finance.  Mr. Rumsey currentlyserves on the Board of Directors of Prescient Applied Intelligence, Inc.,World Racing Group, Inc., and Azzurra Holding Corporation.   Mr. Rumseyis a graduate of the University of Denver and the University of Denver Collegeof Law.

 

**AnthonyPetrelli, Director.  **Mr. Petrelli wasappointed as a director on August 17, 2007, and serves on our CompensationCommittee. Mr. Petrelli has been engaged in the areas of corporatefinance, investment banking underwriting, sales management and securitiestrading for more than 30 years. Mr. Petrelli joined Neidiger, Tucker,Bruner, Inc. in May of 1987 and currently serves as Senior VicePresident and a member of the Board of Directors. He is also its ManagingDirector of Corporate Finance/Investment Banking and oversees public andprivate 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 is a current board memberand past Chairman of the National Investment Banking Association. Mr. Petrellicurrently serves on the Board of Arena Resources, Inc., a publicly tradedcompany traded on the New York Stock Exchange. 

 

**Anthony DiGiandomenico, Director.  **Mr. DiGiandomenico was appointed as adirector on May 25, 2004, and serves on our Audit Committee. Mr. DiGiandomenicoco-founded MDB Capital Group LLC, a NASD member broker-dealer, in 1997 andserves as a managing director of the firm. From 1990 to 1995, he served asPresident and Chief Executive Officer of the Digian Company, a real estatedevelopment company. He currently serves on the Board of Directors of OrionAcquisition Corp. II, a corporation which files reports pursuant to theSecurities Exchange Act of 1934, which was formed in 1995 to acquire anoperating business by purchase, merger or otherwise.

 

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

 

**BOARD OF DIRECTORS**

 

**BoardCommittees**

 

Thestanding committees of the Board of Directors are comprised of the AuditCommittee, Compensation Committee and the Corporate Governance &Nominating Committee.

 

TheAudit Committee is comprised of Messrs. Rumsey, DiGiandomenico and Robbinsand oversees our financial reporting processes, including (i) reviewingwith management and the outside auditors the audited 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 2007 the Audit Committee met four timestelephonically.

 

TheCompensation Committee is comprised of Messrs. Petrelli, Robbins andRumsey. At the direction of the full Board, the Compensation Committee reviewsand makes recommendations with respect to compensation of our directors,executive officers and senior management. The Compensation Committeeadministers our Stock Incentive 

 

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Plan.The Compensation Committee met four times during 2007 and approved variousother matters by unanimous written consent.

 

TheCorporate Governance & Nominating Committee is comprised of Messrs. Rumsey,Robbins and McCandless. At the direction of the full Board, the Committeereview, investigate qualified nominees for election to the Board when vacanciesoccur and makes recommendations with respect to the nomination of directors.The Committee met once in 2007.

 

TheCorporate Governance & Nominating Committee strives to identify andattract director nominees with a variety of experience who have the businessbackground and personal integrity to represent the interests of allshareholders. Although the Board has not established any specific minimumqualifications that must be met by a director nominee, factors considered inevaluating potential candidates include educational achievement, managerialexperience, business acumen, financial sophistication, direct selling industryexpertise and strategic planning and policy-making skills. Depending upon thecurrent needs of the Board, some factors may be weighed more or less heavilythan others in the Board’s deliberations. The Board evaluates the suitabilityof a potential director nominee on the basis of written information concerningthe candidate, discussions with persons familiar with the background andcharacter of the candidate and personal interviews with the candidate. TheCorporate Governance & Nominating Committee also assists the Board indeveloping and monitoring the Company’s corporate governance guidelines.

 

**Attendanceat Meetings**

 

TheBoard held four meetings during 2007. Various matters were also approved by theunanimous written consent of the directors during the last fiscal year. Eachdirector attended at least 75% of the aggregate of (i) the total number ofmeetings of the Board and (ii) the total number of meetings held by allcommittees of the Board on which such director served. We have no formal policywith respect 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**

### ** **

We have adopted a Code of Ethics that applies to all of our directors,officers and employees. We publicize the Code of Ethics through posting thepolicy on our website, http://www.XELR8.com. We will disclose on our websiteany waivers of, or amendments to, our Code of Ethics.

 

**ITEM 10. EXECUTIVE COMPENSATION**

** **

**CompensationDiscussion and Analysis**

 

Theobjective of the Company’s compensation program is to attract, retain andreward management who demonstrates the required skill to develop the Companyinto a leader in the nutrition and network marketing field. Through thedevelopment of the Company’s business plan, the compensation program isdesigned to incentivize management in the creation of shareholder value. Thecompensation program has been designed to reward executives for establishing theCompany in the network marketing field, developing products that can besuccessfully sold in that channel and creating shareholder wealth.

 

Currentlythe Company has used two elements of compensation for management, currentcompensation, in the form of cash, and long-term equity compensation in theform of grants of stock option awards. The Company has also used the award ofoptions to replace cash compensation for employees and the issuance of stock asa method of fulfilling its obligations under employment contracts. As theCompany has not been profitable since its inception, the Company has not had acash bonus program, but rather relied on the potential of the long-term awardsas incentives to compensate its executives. The Company has identified and disclosedto its executives what levels of 

 

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profitabilitywould be required in order to create a cash bonus plan. Typically the currentcompensation is set at a base level, with variances based on the achievement ofcertain benchmarks with regards to monthly net sales targets.

 

Thecash compensation enables the Company to attract management with the requiredskills and experience while the awards of stock options are used as a method ofretaining executives for long term growth. Additionally, the Company has usedthe awards of stock and options as a method of reducing cash outflow.

 

TheCompany has determined the amount of short and long term compensation based ona number of factors: level of experience of the employee in his or herrespective field, prevailing market rates for individuals performing similarfunctions at competing companies in a similar industry and stage of developmentof the Company. The Company has attempted to evenly balance the compensationbetween current and long-term for its executives, with the long-term awardrequiring some form of vesting, typically over a two or four year period.During the current year, the executives were granted what is typically along-term compensation award, stock options, in lieu of short term cashcompensation, and were vested into their options over a shorter period of time.The Company has also used options on a performance basis for certainindividuals, with the achievement of certain goals resulting in the vesting inthe options. Going forward the Company intends to base awards to managementbased on the achievement of certain predetermined sales goals. When evaluatingthe compensation of executives on an annual basis, the Company has reviewedpast compensation received by the executive in both current and long-termawards when determining any additional awards, as well as the achievement ofcertain sales and profitability targets for selected executives.

 

Eachelement of the compensation program is designed to further the Company’s goalsof attracting and retaining high caliber individuals with the experience togrow the Company and ultimately create and increase shareholder wealth. Theincentive based awards were directly tied to the achievement of an objective,whereas the other awards that were based on the vesting period were used as amechanism to retain skilled executives. In the performance based awards, whereeither long-term awards are vested or there is an increase in current cashcompensation, it is the practice of the Company to link the overall objectivesof the Company with the respective objectives for that executive and his or herability to exercise influence over the outcome.

 

Thefollowing table sets forth information with respect to compensation earned bythe executive officers of the Company for 2007 and 2006.

 

**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 ($)** | ** ** | **($)**    | ** ** | **($)**    | ** ** | **($)(5)** | ** ** | **($)**          | ** ** | **($)**            | ** ** | **($)(1)**       | ** ** | **($)**    | ** ** |
| John D. Pougnet,             |       | 2007       |       | 158,886             |       | —     |       | 38,500     | (3)        | 103,378    |       | —           |       | —             |       | —           |       | 300,761    |       |
| Chief Executive  Officer and |       | 2006       |       | 116,891             |       | —     |       | —     |       | 138,878    |       | —           |       | —             |       | —           |       | 255,769    |       |
| Chief Financial  Officer (2) |       | —     |       |                |       |       |       |       |       |       |       |             |       |               |       |             |       | —     |       |
| Sanford D.  Greenberg,       |       | 2007       |       | 50,927              |       | —     |       | —     |       | —     |       | —           |       | —             |       | —           |       | 50,927     |       |
| Founder (4)                  |       | 2006       |       | 95,192              |       | —     |       | 540,000    | (4)        | 59,988     |       | —           |       | —             |       | 15,231           |       | 710,407    |       |
| Douglas Ridley,              |       | 2007       |       | 143,886             |       | —     |       | 35,000     | (3)        | 78,656     |       | —           |       | —             |       | —           |       | 257,539    |       |
| President                    |       | 2006       |       | 163,814             |       | —     |       | —     |       | —     |       | —           |       | —             |       | —           |       | 163,814    |       |

 

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| (1) | Includes  auto allowance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Mr. Pougnet  joined the Company in September 2005 as Chief Financial Officer. On  October 11, 2006 he replaced Mr. Earnest Mathis as Chief Executive  Officer.                                                                                                                                                                                                                                                                                                                                             |
| (3) | On  March 27, 2007 a principal shareholder, Mr. Sanford Greenberg,  granted shares of his own stock to certain employees of the company. Under  the guidance issued by the Securities and Exchange Commission in Staff  Accounting Bulletin 107 (SAB 107), share-based payments issued to an employee  of a reporting entity by a related party or other holder of economic interest  in the entity as compensation for services provided to the entity are to be  recorded as a compensation expense by the entity. |
| (4) | On  November 17, 2006 the Company agreed to issue to  Mr. Greenberg  1,500,000 shares of its common stock in return for  an amendment to his current employment agreement pursuant to which he will  forfeit all future base salary amounting to $396,923  due under the agreement and 250,000 vested  options in exchange for the issuance of the shares and payment of a sales  commission equal to 1% of the net sales until 2019.                                                                      |
| (5) | The  company uses a Black-Scholes option-pricing model (Black-Scholes model) to  estimate the fair value of the stock option grant. The use of a valuation  model requires the company to make certain assumptions with respect to selected  model inputs. Expected volatility was calculated based on the historical  volatility of the company’s stock price. In the future the average expected  life will be based on the                                                                                             |

 

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                        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. The risk-freeinterest rate is based on U.S. Treasury zero-coupon issues with a remaining termequal to the expected life assumed at the date of the grant. The following werethe factors used in the Black Sholes model to calculate the compensationexpense:

 
| ** **                | ** ** | **For the year ended December 31, 2007** | ** ** |
|---------------------------|------------|-------------------------------------------------------------------|------------|
| Stock price  volatility   |       | 96.7 to 98.7                                                      | %          |
| Risk-free  rate of return |       | 3.34 to 4.95                                                      | %          |
| Annual  dividend yield    |       | 0                                                                 | %          |
| Expected  life            |       | 1.5 to 4.5 Years                                                  |       |

 

**Grantsof Plan-Based Awards**

 

In2007, we issued the options listed below. There were no stock options exercisedin 2007. The following table sets forth the options granted in 2007:

 
| ** **                                           | ** ** | ** **  | ** ** | **Number of  Non-Equity  Incentive Plan  Units** | ** ** | **Estimated Future Payouts Under  Non-Equity Incentive Plan Awards** | ** ** | **Estimated Future Payouts Under  Equity Incentive Plan Awards** | ** ** | **All Other  Stock Awards:  Number of  Shares of  Stock or** | ** ** | **All Other  Option Awards:  Number of  Securities  Underlying** | ** ** | **Exercise or  Base Price  of Option** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                           | ** ** | **Grant**   | ** ** | **Granted**                                                | ** ** | **Threshold**                                                                                      | ** ** | **Target**                                                                                     | ** ** | **Maximum**                                                                           | ** ** | **Threshold**                                                                   | ** ** | **Target**                                            | ** ** | **Maximum** | ** ** | **Units** | ** ** | **Options** | ** ** | **Awards** | ** ** |
| **Name**                                             | ** ** | **Date(1)** | ** ** | **(#)**                                                    | ** ** | **($)**                                                                                            | ** ** | **($)**                                                                                        | ** ** | **($)**                                                                               | ** ** | **(#)**                                                                         | ** ** | **(#)**                                               | ** ** | **(#)** | ** ** | **(#)** | ** ** | **(#)** | ** ** | **($ / Sh)(1)** | ** ** |
| John Pougnet,                                        |       | 3/26/2007   |       | 0                                                          |       | 0                                                                                                  |       | 0                                                                                              |       | 0                                                                                     |       | 0                                                                               |       | 0                                                     |       | 0 |   | 0 |   | 100,000 | (3) | $ | 1.55 |   |
| Chief Executive Officer  and Chief Financial Officer |       |        |       |                                                       |       |                                                                                               |       |                                                                                           |       |                                                                                  |       |                                                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| Douglas Ridley,                                      |       |        |       |                                                       |       |                                                                                               |       |                                                                                           |       |                                                                                  |       |                                                                            |       |                                                  |       |   |   |   |   |   |   |   |   |
| President(6)                                         |       | 3/27/2007   |       | 0                                                          |       | 0                                                                                                  |       | 0                                                                                              |       | 0                                                                                     |       | 0                                                                               |       | 0                                                     |       | 0 |   | 0 |   | 70,000 | (2) | $ | 1.00 |   |

 

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| (1) | The Company  uses the same date for the Grant Date and the Approval Date. The Company’s  closing market price for the Grant Date is used to determine the exercise  price of the options.                                                                                                                                                                                                                                             |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The award  was granted under the Company’s 2003 Stock Incentive Plan. The closing price  of the Company’s private placement transaction that occurred on the same day  was used as the market value of the stock. The employee has five years from  the date of issue to exercise the option, and the award was fully vested on  the date of the award. The terms of the award are determined by the 2003  Stock Incentive Plan. |
| (3) | The award  was granted under the Company’s 2003 Stock Incentive Plan. The employee has  five years from the date of issue to exercise the option, and the award will  vest over a twenty-two month period. The terms of the award are determined by  the 2003 Stock Incentive Plan                                                                                                                                                    |

 

**EmploymentContracts**

 

During2006 the Company entered amended employment contracts with Mr. Mathis, Mr. Greenbergand Mr. Pougnet.

 

On March 2,2005, in connection with Mr. Greenberg’s resignation as Chairman, ChiefExecutive Officer, and President, Mr. Greenberg’s employment agreement wasamended and restated to provide that his primary duties involve training,motivating, and recruiting independent distributors. Mr. Greenbergreceived a salary of $150,000 per year and may receive bonuses in such amountsas determined by our Board of Directors. On July 10, 2006, Mr. Greenberg’scontract was amended to reduce his base salary for a period of one year to$75,000 and Mr. Greenberg was granted 150,000 options to purchase theCompany’s common stock. Mr. Greenberg will also be eligible to participatein bonuses on the same basis as our executives under any executive bonus planadopted by us. Either party may terminate the agreement upon 30 days priorwritten notice. Additionally, Mr. Greenberg may be terminated for “justcause” as defined in the employment agreement upon one business day’s priorwritten notice. Mr. Greenberg may terminate his employment for “goodreason” as defined in employment agreement. If we terminate Mr. Greenbergwithout just cause or he terminates his employment for good reason, he isentitled to three years salary payable over the 36 month period commencing October 1,2006 regardless of when terminated. Mr. Greenberg’s employment agreementalso includes a non-competition provision for a period of two years after histermination of employment or, if later, one year after final payment of anypay-out provision upon termination. On March 2, 2005, in connection with Mr. Mathis’employment as Chief Executive Office, Mr. Greenberg forfeited options topurchase 275,000 shares. In addition, Mr. Greenberg has agreed to forfeitoptions to purchase 50,000 shares when the April 2005 public offering wascompleted. On November 17, 2006 the Company agreed to issue to Mr. Greenberg 1,500,000 shares of its common stock in return for an amendment to his currentemployment agreement pursuant to which he will forfeit all future base salaryamounting to $396,923 due under the agreement and 250,000 vested options inexchange for the issuance of the shares and payment of a sales commission equalto 1% of the net sales until 2019.

 

On September 12,2005, John D. Pougnet joined us as our Chief Financial Officer and effective October 1,2006 was appointed also as our Chief Executive Officer. On Mr. Pougnet’semployment agreement is for a two-year 

 

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term and hewill receive a base salary of $140,000, and may receive bonuses in such amountsas determined by our Compensation Committee. Additionally, Mr. Pougnetwill have an option to purchase 50,000 shares of our common stock, with anexercise price of $1.80. The options will vest in equal amounts over a four-yearperiod on December 31 starting on December 31, 2005. On March 3,2006 Mr. Pougnet was granted additional options to purchase 100,000 sharesof our common stock. On July 10, 2006 Mr. Pougnet’s contract wasamended to reduce his base salary to $90,000 for a year and Mr. Pougnetwas granted options to purchase 100,000 shares of our common stock. Mr. Pougnetwill also be eligible to participate in bonuses on the same basis as otherexecutives under any executive bonus plan adopted by us. If Mr. Pougnet’semployment were terminated other than for cause, disability or without goodreason by Mr. Pougnet, he would be provided severance pay equal to twelvemonths, payable in equal monthly installments. On March 26, 2007,the Company entered into an Amendment to the Employment  Agreement with Mr. Pougnet,the company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO).The Amendment provides that Mr. Pougnet will serve as in both capacitiesof Chief Executive Officer and Chief Financial Officer, the term of Employee’semployment as Chief Executive Officer pursuant to this Second Amendment shallcommence effective as of October 11, 2006 and shall continue to February 1,2008 (“CEO Amended Term”) and the term of Employee’s employment as ChiefFinancial Officer pursuant to this Amendment shall commence effective as of October 11,2006 and terminate on December 31, 2008. Employee will receive ascompensation for all responsibilities a base salary (“Base Salary”) of $127,000per year. So long as the Employee is employed as the Company’s CEO and CFO, theBase Salary shall increase: (i) to $150,000 per year upon the completionof the Private Placement, (ii) to $14,583/month (1/12 of $175,000) foreach month the company is at or above breakeven (defined as when net monthlysales meet or exceed net monthly expenses on a cash basis) and $12,500/month(1/12 of $150,000) for each month the company is below breakeven, and (iii) to$205,000 per year commencing October 1, 2007. Employee’s salary as CFOshall be $150,000 per year as long as net revenues are above financialbreakeven and $175,000 per year after the first month that monthly net salesexceed $900,000. In addition the Employee shall receive options to purchase anaggregate of an additional 100,000 shares of Employer’s common stock pursuantto the Incentive Stock Option Plan and shall vest on a pro-rata basis at theend of each month of Employee’s employment beginning March 2007 and endingDecember 31, 2008. The Agreement provides for compensation to be paid inthe event the Employee is terminated for cause or if the Company chooses toappoint a new Chief Executive Officer during the term of this agreement.

 

40

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** **

**Outstanding Equity Awards as of December 31, 2007**

 
| ** **                   | ** ** | **Option  Awards** | ** ** | **Stock  Awards** | ** ** |
|------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                   | ** ** | ** **         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity** | ** ** |
| ** **                   | ** ** | ** **         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Incentive** | ** ** |
| ** **                   | ** ** | ** **         | ** ** | ** **        | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Equity Incentive** | ** ** | **Plan Awards:** | ** ** |
| ** **                   | ** ** | ** **         | ** ** | ** **        | ** ** | **Incentive** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Plan Awards:** | ** ** | **Market or** | ** ** |
| ** **                   | ** ** | ** **         | ** ** | ** **        | ** ** | **Plan Awards:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Market** | ** ** | **Number of** | ** ** | **Payout Value** | ** ** |
| ** **                   | ** ** | **Number of**      | ** ** | **Number of**     | ** ** | **Number of** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number of** | ** ** | **Value of** | ** ** | **Unearned** | ** ** | **of Unearned** | ** ** |
| ** **                   | ** ** | **Securities**     | ** ** | **Securities**    | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** | **Shares or** | ** ** | **Shares or** | ** ** | **Shares, Units** | ** ** | **Shares, Units** | ** ** |
| ** **                   | ** ** | **Underlying**     | ** ** | **Underlying**    | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** | **Units of** | ** ** | **Units of** | ** ** | **or Other** | ** ** | **or Other** | ** ** |
| ** **                   | ** ** | **Unexercised**    | ** ** | **Unexercised**   | ** ** | **Unexercised** | ** ** | **Option** | ** ** | ** ** | ** ** | **Stock That** | ** ** | **Stock That** | ** ** | **Rights That** | ** ** | **Rights That** | ** ** |
| ** **                   | ** ** | **Options**        | ** ** | **Options**       | ** ** | **Unearned** | ** ** | **Exercise** | ** ** | **Option** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** | **Have Not** | ** ** |
| ** **                   | ** ** | **(#)**            | ** ** | **(#)**           | ** ** | **Options** | ** ** | **Price** | ** ** | **Expiration** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** | **Vested** | ** ** |
| **Name**                     | ** ** | **Exercisable**    | ** ** | **Unexercisable** | ** ** | **(#)** | ** ** | **($)** | ** ** | **Date** | ** ** | **(#)** | ** ** | **($)** | ** ** | **(#)** | ** ** | **($)** | ** ** |
| ** **                   | ** ** | ** **         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| John  Pougnet,               | ** ** | 37,500             | ** ** | 12,500            | ** ** | ** ** | ** ** | $ | 1.80 | ** ** | 9/11/2015 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** |               | ** ** |              | ** ** | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Chief  Executive Officer     | ** ** | 45,833             | ** ** | 54,167            | ** ** | ** ** | ** ** | $ | 1.39 | ** ** | 3/9/2011 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** |               | ** ** |              | ** ** | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| and  Chief Financial Officer | ** ** | 100,000            | ** ** | 0                 | ** ** | ** ** | ** ** | $ | 0.65 | ** ** | 5/27/2011 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** |               | ** ** |              | ** ** | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** | 45,455             | ** ** | 54,545            | ** ** | ** ** | ** ** | $ | 1.55 | ** ** | 3/25/2012 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** |               | ** ** |              | ** ** | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sanford  D. Greenberg        | ** ** | 225,000            | ** ** | 0                 | ** ** | ** ** | ** ** | $ | 3.00 | ** ** | 1/1/2013 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** |               | ** ** |              | ** ** | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Founder                      | ** ** | 150,000            | ** ** | 0                 | ** ** | ** ** | ** ** | $ | 0.65 | ** ** | 5/27/2011 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** |               | ** ** |              | ** ** | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Douglas  Ridley,             | ** ** | 10,000             | ** ** | 0                 | ** ** | ** ** | ** ** | $ | 5.00 | ** ** | 12/2/2010 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** |               | ** ** |              | ** ** | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| President                    | ** ** | 20,000             | ** ** | 0                 | ** ** | ** ** | ** ** | $ | 3.20 | ** ** | 5/12/2010 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** |               | ** ** |              | ** ** | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** | 150,000            | ** ** | 50,000            | ** ** | ** ** | ** ** | $ | 1.58 | ** ** | 5/30/2009 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** |               | ** ** |              | ** ** | ** ** | ** ** |   | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         | ** ** | 70,000             | ** ** | 0                 | ** ** | ** ** | ** ** | $ | 1.00 | ** ** | 3/26/2012 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |

 

 **StockOption Exercises and Stock Vested**

 

There were no options exercised by the named executiveofficers during the year ended December 31, 2007.

 
| ** **                                            | ** ** | **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,                                         |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |
| Chief Executive Officer and   Chief Financial Officer |       |                               |       |                    |       |   |   |   |   |
|                                                  |       |                               |       |                    |       |   |   |   |   |
| Sanford D. Greenberg,                                 |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |
| Founder                                               |       |                               |       |                    |       |   |   |   |   |
|                                                  |       |                               |       |                    |       |   |   |   |   |
| Douglas Ridley,                                       |       | 0                                  |       | 0                       |       | 0 |   | 0 |   |
| President                                             |       |                               |       |                    |       |   |   |   |   |

 

**Post-Employment Compensation, Pension Benefits, NonqualifiedDeferred Compensation**

 

There were no post-employment compensation, pension ornonqualified deferred compensation benefits earned by the executive officersduring the year ended December 31, 2007.

 

**Director Compensation**

 
| ** **              | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Change in** | ** ** | ** **         | ** ** | ** ** | ** ** |
|-------------------------|------------|------------------------------|------------|------------|------------|------------|------------|-------------------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **              | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Pension**        | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Value and** | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **              | ** ** | **Nonqualified**   | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** | **Non-Equity**          | ** ** | **Deferred**       | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Fees Earned or** | ** ** | **Stock**  | ** ** | **Option** | ** ** | **Incentive Plan** | ** ** | **Compensation**   | ** ** | **All Other** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **Paid in Cash**   | ** ** | **Awards** | ** ** | **Awards** | ** ** | **Compensation**        | ** ** | **Earnings**       | ** ** | **Compensation**   | ** ** | **Total**  | ** ** |
| **Name**                | ** ** | **($)**                      | ** ** | **($)**    | ** ** | **($)(1)** | ** ** | **($)**                 | ** ** | **($)**            | ** ** | **($)**            | ** ** | **($)**    | ** ** |
|                    | ** ** |                         | ** ** |       | ** ** |       | ** ** |                    | ** ** |               | ** ** |               | ** ** |       | ** ** |
| AJ  Robbins             | ** ** | 17,250                       | ** ** | 0          | ** ** | 111,392    | ** ** | 0                       | ** ** | 0                  | ** ** | 0                  | ** ** | 128,642    | ** ** |
|                    | ** ** |                         | ** ** |       | ** ** |       | ** ** |                    | ** ** |               | ** ** |               | ** ** |       | ** ** |
| Anthony  Petrelli       | ** ** | 5,000                        | ** ** | 0          | ** ** | 38,119     | ** ** | 0                       | ** ** | 0                  | ** ** | 0                  | ** ** | 43,119     | ** ** |
|                    | ** ** |                         | ** ** |       | ** ** |       | ** ** |                    | ** ** |               | ** ** |               | ** ** |       | ** ** |
| Daniel  Rumsey          | ** ** | 6,500                        | ** ** | 0          | ** ** | 50,826     | ** ** | 0                       | ** ** | 0                  | ** ** | 0                  | ** ** | 57,326     | ** ** |
|                    | ** ** |                         | ** ** |       | ** ** |       | ** ** |                    | ** ** |               | ** ** |               | ** ** |       | ** ** |
| John  McCandless        | ** ** | 28,100                       | ** ** | 0          | ** ** | 111,392    | ** ** | 0                       | ** ** | 0                  | ** ** | 0                  | ** ** | 139,492    | ** ** |
|                    | ** ** |                         | ** ** |       | ** ** |       | ** ** |                    | ** ** |               | ** ** |               | ** ** |       | ** ** |
| Anthony  DiGiandomenico | ** ** | 6,500                        | ** ** | 0          | ** ** | 111,392    | ** ** | 0                       | ** ** | 0                  | ** ** | 0                  | ** ** | 117,892    | ** ** |

 

 

41

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----

(1)  The company uses a Black-Scholes option-pricing model (Black-Scholesmodel) to estimate the fair value of the stock option grant. The use of avaluation model requires the company to make certain 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. The risk-freeinterest rate is based on U.S. Treasury zero-coupon issues with a remainingterm equal to the expected life assumed at the date of the grant. The followingwere the factors used in the Black Sholes model to calculate the compensationexpense:

 
| ** **                       | ** ** | **For the year ended   December 31, 2007** | ** ** |
|----------------------------------|------------|--------------------------------------------------------------------------|------------|
| Stock price volatility |       | 96.7 to 98.7                                                   | %          |
| Risk-free rate of return         |       | 3.34 to 4.95                                                             | %          |
| Annual dividend yield            |       | 0                                                                        | %          |
| Expected life                    |       | 1.5 to 4.5 Years                                                         |       |

 

During 2007 the Company compensated all Board membersfor their participation at Board meetings, and Audit and Compensation Committeemeetings. Additionally, the Company paid Mr. Robbins an additional $15,000as Chairman of the Audit Committee. Additionally, Messrs. McCandless,Robbins, Rumsey and DiGiandomenico were granted 80,000 options to purchasecommon stock for their services, while Mr. Petrelli received 60,000options to purchase common stock for his services. Finally, the Company engagedMr. McCandless on a monthly basis as a consultant to the Company.

 

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

 

**Security Ownership of Certain Beneficial Owners andManagement**

 

The following table sets forth certain informationwith respect to the ownership of our Common Stock as of the record date, by (i) eachperson who is known by us to own of record or beneficially more than 5% of ourCommon Stock, (ii) each of our directors and officers. Unless otherwiseindicated, the stockholders listed in the table have sole voting and investmentpowers with respect to the shares of Common Stock. Shareholdings include sharesheld by family members. The addresses of the individuals listed below are inthe Company’s care at 480 South Holly Street, Denver, Colorado 80246 unlessotherwise noted.

 
| ** **                                                                     | ** ** | **Number of** | ** ** | **Percent of** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| **Name and Address**                                                 | ** ** | **Shares(1)**      | ** ** | **Class(2)**        | ** ** |
| John D. Pougnet  Chief Executive Officer, Chief Financial Officer and Director |       | 289,112            | (3)        | 1.8                 | %          |
|                                                                           |       |               |       |                |       |
| John B.  McCandless Chairman                                                   |       | 190,000            | (4)        | 1.2                 | %          |
|                                                                           |       |               |       |                |       |
| Douglas Ridley  President and Director                                         |       | 288,750            | (5)        | 1.8                 | %          |
|                                                                           |       |               |       |                |       |
| Daniel Rumsey  Director                                                        |       | 70,000             | (6)        |                | *          |
|                                                                           |       |               |       |                |       |
| Anthony B. Petrelli  Director                                                  |       | 97,750             | (7)        |                | *          |
|                                                                           |       |               |       |                |       |
| AJ Robbins  Director                                                           |       | 106,667            | (8)        |                | *          |
|                                                                           |       |               |       |                |       |
| Anthony DiGiandomenico  Director                                               |       | 567,018            | (9)        | 3.5                 | %          |
|                                                                           |       |               |       |                |       |
| Total officer and director                                                     |       | 1,529,297          |       | 8.9                 | %          |
|                                                                           |       |               |       |                |       |
| Sanford D Greenberg                                                            |       | 3,764,406          | (10)       | 23.4                | %          |
|                                                                           |       |               |       |                |       |
| Warren Cohen  595 South Broadway Suite 200  Denver, CO 80209              |       | 1,338,800          | (11)       | 8.5                 | %          |
|                                                                           |       |               |       |                |       |
| Total beneficial ownership                                                     |       | 6,632,503          |       | 38.0                | %          |

 

42

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----

| *         | Less  than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  (1) | All  entries exclude beneficial ownership of shares issuable pursuant to options  that have not vested or that are not otherwise exercisable as of the date  hereof and which will not become vested or exercisable within 60 days of  March 19, 2008.                                                                                                                                                                                                          |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  (2) | Percentages  are rounded to nearest one-tenth of one percent. Percentages are based on  15,697,170 shares of common stock outstanding. Options that are  presently exercisable or exercisable within 60 days are deemed to be  beneficially owned by the person holding the options for the purpose of  computing the percentage ownership of that person, but are not treated as  outstanding for the purpose of computing the percentage of any other person. |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  (3) | Comprised  of 29,500 shares held of record and 259,612 shares issuable pursuant to  options which are presently exercisable or which become exercisable within 60  days of March 19, 2008.                                                                                                                                                                                                                                                                      |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  (4) | Comprised  of 190,000 shares issuable pursuant to options which are presently  exercisable or which become exercisable within 60 days of March 19,  2008.                                                                                                                                                                                                                                                                                                       |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  (5) | Comprised  of 20,000 shares held of record and 268,750 shares issuable pursuant to  options which are presently exercisable or which become exercisable within 60  days of March 19, 2008.                                                                                                                                                                                                                                                                      |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  (6) | Comprised  of 20,000 shares held of record and 50,000 shares issuable pursuant to  options which are presently exercisable or which become exercisable within 60  days of March 19, 2008.                                                                                                                                                                                                                                                                       |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  (7) | Comprised  of 77,500 shares pursuant to options which are presently exercisable or which  become exercisable within 60 days of March 19, 2008, and 10,125  Class A warrants and 10,125 Class B warrants.                                                                                                                                                                                                                                              |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  (8) | Comprised  of 106,667 shares issuable pursuant to options which are presently  exercisable or which become exercisable within 60 days of March 19,  2008.                                                                                                                                                                                                                                                                                                       |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|  (9) | Comprised  of 323,493 shares issuable pursuant to public warrants and 156,667 shares  pursuant to options which are presently exercisable or which become  exercisable within 60 days of March 19, 2008, and 66,800 shares held of  record and 10,029 Class A warrants and 10,029 Class B warrants.                                                                                                                                                   |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (10)      | Comprised  of 3,389,406 shares held of record either held directly or as custodian for a  minor child and 375,000 shares issuable pursuant to options which are  presently exercisable or which become exercisable within 60 days of  March 19, 2008.                                                                                                                                                                                                           |
|      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (11)      | Comprised  of 1,338,800 shares held of record.                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

43

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**ITEM12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

We lease an office, located at 480 SouthHolly Street, Denver, Colorado, from the father of Sanford D. Greenberg, ourfounder, for $3,900 per month. The lease expired on March 31, 2006, withan automatic monthly extension right and a two month notice period for theCompany to terminate the lease. Our annual office rent for 2007 and 2006 was$42,780 and $40,680, respectively.

 

44

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**ITEM13. 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.                                                                                                    |

 

45

----

 
| 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.                                                                             |
| 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    |
| 99.1    |   | Press Release issued on March 26, 2008 filed herewith.                                                                                                                                                  |

 

46

----

 

**ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

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

 

**Audit Fees and Audit Related**

 

We paid Gordon, Hughes & Banks, LLPa total of $9,292 for professional services rendered in review of the March 31,June 30 and September 30, 2007 Form 10-QSB and $25,457 for theaudit of our financials for the year ended December 31, 2006.

 

 Wepaid Gordon, Hughes & Banks, LLP a total of $4,918 for professionalservices rendered in review of our filings of two Registration Statements filedon Form SB-3 in the year ended December 31, 2007.

 

We paid Gordon, Hughes & Banks, LLPa total of $25,966 for professional services rendered in review of the March 31,June 30 and September 30, 2006 Form 10-QSB and audit of ourfinancials for the year ended December 31, 2005.

 

We paid Gordon, Hughes & Banks, LLPa total of $250 for professional services rendered in review of our privateplacement transaction in 2006.

 

**Tax Fees**

 

We paid Gordon, Hughes & Banks, LLPa total of $4,350 professional services rendered in connection with thepreparation of our federal and state income tax returns for the year ended December 31,2006.

 

We paid Gordon, Hughes & Banks, LLPa total of $4,000 professional services rendered in connection with thepreparation of our federal and state income tax returns for the year ended December 31,2005.

 

**All Other Fees**

 

None.

 

47

----

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) ofExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, on March 28, 2008.

 
|     | **XELR8 HOLDINGS, INC.** |
|----------|--------------------------|
|     | ** **               |
|     | ** **               |
| By  |                     | */s/ John D. Pougnet.* |
|     |                     | John D. Pougnet |
|     |                     | Chief Executive Officer, |
|     |                     | Chief Financial Officer, and |
|     |                     | Director |
|     |                     |   |
|     |                     |   |
| By  |                     | */s/ John B. McCandless* |
|     |                     | John B. McCandless. |
|     |                     | Chairman |
|     |                     |   |
| By  |                     | */s/ Douglas Ridley* |
|     |                     | Douglas Ridley |
|     |                     | President and 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 |
|          |                          |  |  |  |

 

48

----

 

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

 

To the Board of Directors

XELR8Holdings, Inc.

Denver,Colorado

 

Wehave audited the accompanying consolidated balance sheets of XELR8 Holdings, Inc.as of December 31, 2007 and2006 and the related consolidated statements of operations, changes inshareholders’ equity (deficit) and cash flows for each of the two years thenended.  These consolidated financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement. The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis  for designing audit proceduresthat are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of XELR8Holdings, Inc. as of December 31,2007 and 2006, and the results of its operations and its cash flows foreach of years then ended, in conformity with accounting principles generallyaccepted in the United States of America.

 

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

 

F-1

----

 

**XELR8 HOLDINGS, INC.**

# **CONSOLIDATED BALANCE SHEETS**

# **For the Years Ended December 31,2007 and 2006**

 
| ** **                                                                                                                           | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                           |       |        |       |        |       |
| Current assets:                                                                                                                      |       |        |       |        |       |
| Cash and cash equivalents                                                                                                            |       | $           | 2,245,858  |        | $          | 76,147 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $ 12,231 and $10,706, respectively                              |       | 7,460       |       | 4,785       |       |
| Inventory, net of allowance for  obsolescence of $ 189,403 and $41,655, respectively                                            |       | 370,843     |       | 411,364     |       |
| Prepaid expenses and other current assets                                                                                            |       | 329,015     |       | 259,292     |       |
| Total current assets                                                                                                                 |       | 2,953,176   |       | 751,588     |       |
|                                                                                                                                 |       |        |       |        |       |
| Intangible assets, net                                                                                                               |       | 17,959      |       | 11,212      |       |
| Property and equipment, net                                                                                                          |       | 81,405      |       | 123,943     |       |
| Deferred offering and loan costs                                                                                                     |       | —      |       | 133,889     |       |
|                                                                                                                                 |       |        |       |        |       |
| Total assets                                                                                                                         |       | $           | 3,052,540  |        | $          | 1,020,632 |   |
|                                                                                                                                 |       |        |       |        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY  (DEFICIT)**                                                                             |       |        |       |        |       |
| Current liabilities:                                                                                                                 |       |        |       |        |       |
| Accounts payable and accrued expenses                                                                                                |       | $           | 832,697    |        | $          | 1,160,916 |   |
| Short-term note payable                                                                                                              |       | —      |       | 250,000     |       |
|                                                                                                                                 |       |        |       |        |       |
| Total Liabilities                                                                                                                    |       | 832,697     |       | 1,410,916   |       |
|                                                                                                                                 |       |        |       |        |       |
| **Commitments and Contingencies (Note 7)**                                                                                           |       |        |       |        |       |
|                                                                                                                                 |       |        |       |        |       |
| **SHAREHOLDERS’ EQUITY (DEFICIT) (Note 2):**                                                                                    |       |        |       |        |       |
| Preferred stock, authorized 5,000,000  shares, $.001 par value, none issued or outstanding                                           |       | —      |       | —      |       |
| Common stock, authorized 50,000,000 shares,  $.001 par value, 15,197,170 and 10,097,170 shares issued and outstanding,  respectively |       | 15,197      |       | 10,097      |       |
| Additional paid in capital                                                                                                           |       | 22,696,657  |       | 16,849,900  |       |
| Accumulated (deficit)                                                                                                                |       | (20,492,011 | )          | (17,250,281 | )          |
|                                                                                                                                 |       |        |       |        |       |
| Total shareholders’ equity (deficit)                                                                                            |       | 2,219,843   |       | (390,284    | )          |
|                                                                                                                                 |       |        |       |        |       |
| Total liabilities and shareholders’ equity                                                                                      |       | $           | 3,052,540  |        | $          | 1,020,632 |   |

 

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

 

F-2

----

 

**XELR8 HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**For the Years Ended December 31, 2007and 2006**

 
| ** **                                                     | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                           |       |       |       |       |       |
| Net revenue                                                    |       | $          | 4,853,046  |       | $          | 2,148,420 |   |
| Cost of goods sold                                             |       | 1,380,663  |       | 775,762    |       |
| Gross profit                                                   |       | 3,472,383  |       | 1,372,658  |       |
|                                                           |       |       |       |       |       |
| Operating expenses:                                            |       |       |       |       |       |
| Selling and marketing expenses                                 |       | 3,180,392  |       | 2,626,613  |       |
| General and administrative expenses                            |       | 3,107,469  |       | 3,275,689  |       |
| Research and development expenses                              |       | 17,828     |       | 73,921     |       |
| Depreciation and amortization                                  |       | 58,033     |       | 66,333     |       |
| Total operating expenses                                       |       | 6,363,722  |       | 6,042,556  |       |
|                                                           |       |       |       |       |       |
| Net (loss) from operations                                     |       | (2,891,339 | )          | (4,669,898 | )          |
| Other income (expense)                                         |       |       |       |       |       |
| Interest income                                                |       | 87,646     |       | 34,337     |       |
| Gain on disposial of asset                                     |       | 1,500      |       | —     |       |
| Interest (expense)                                             |       | (439,537   | )          | (33,888    | )          |
|                                                           |       |       |       |       |       |
| Total other income (expense)                                   |       | (350,391   | )          | 449        |       |
|                                                           |       |       |       |       |       |
| Net (loss)                                                     |       | $          | (3,241,730 | )          | $          | (4,669,449 | ) |
|                                                           |       |       |       |       |       |
| Net (loss) per common share                                    |       |       |       |       |       |
| Basic and diluted net (loss) per share                         |       | $          | (0.23      | )          | $          | (0.48 | ) |
|                                                           |       |       |       |       |       |
| Weighted average common shares outstanding,  basic and diluted |       | 13,951,691 |       | 9,714,021  |       |

 

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

 

F-3

----

 

**XELR8 HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF**

**CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**

**For the Years Ended December 31, 2007and 2006**

 
| ** **                                                                        | ** ** | ** **            | ** ** | ** **       | ** ** | ** **      | ** ** | ** **    | ** ** | **Total**              | ** **  |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------------|------------|---------------|------------|------------------------|-------------|
| ** **                                                                        | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional**  | ** ** | ** **    | ** ** | **shareholders’** | ** **  |
| ** **                                                                        | ** ** | **Common Stock** | ** ** | **paid in** | ** ** | **Accumulated** | ** ** | **equity**    | ** ** |
| ** **                                                                        | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**     | ** ** | **(deficit)** | ** ** | **(deficit)**          | ** **  |
| **Balances, January 1, 2006**                                                |       | 9,618,900             |       | 9,619            |       | 15,990,889      |       | (12,580,832   | )          | 3,419,676              |        |
|                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Issuance of common stock warrants                                                 |       | —                |       | —           |       | 72,936          |       | —        |       | 72,936                 |        |
|                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Issuance of common stock for services                                             |       | 478,270               |       | 478              |       | 222,522         |       | —        |       | 223,000                |        |
|                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Stock-based compensation                                                          |       | —                |       | —           |       | 563,553         |       | —        |       | 563,553                |        |
|                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| Net (loss)                                                                        |       | —                |       | —           |       | —          |       | (4,669,449    | )          | (4,669,449             | )           |
|                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| **Balances, December 31, 2006**                                              |       | 10,097,170            |       | $                | 10,097     |            | $          | 16,849,900    |       | $                      | (17,250,281 | ) | $ | (390,284 | ) |
|                                                                              |       |                  |       |             |       |            |       |          |       |                   |        |
| 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 |   |

 

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

 

F-4

----

 

**XELR8 HOLDINGS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**For the Years Ended December 31, 2007and 2006**

 
|                                                                |   | **2007**   | ** ** | **2006**   |   |
|---------------------------------------------------------------------|--------|------------|------------|------------|--------|
| Cash flows from operating activities:                               |   |       |       |       |   |
| Net income (loss)                                                   |   | $          | (3,241,730 | )          | $      | (4,669,449 | ) |
| Adjustments to reconcile                                            |   |       |       |       |   |
| Depreciation and amortization                                       |   | 58,033     |       | 66,333     |   |
| (Gain) on sale of equipment                                         |   | (1,500     | )          | —     |   |
| Stock and stock options issued for services                         |   | 1,372,408  |       | 859,489    |   |
| Interest expense and amortization related  to bridge loan financing |   | 428,889    |       | —     |   |
| Change in allowance for doubtful accounts                           |   | 1,525      |       | 5,243      |   |
| Change in allowance for inventory  obsolescence                     |   | 147,748    |       | 24,776     |   |
| Change in allowance for product returns                             |   | 30,866     |       | 25,013     |   |
| Changes in assets and liabilities:                                  |   |       |       |       |   |
| Accounts receivable                                                 |   | (4,200     | )          | (1,270     | )      |
| Inventory                                                           |   | (107,227   | )          | 106,609    |   |
| Other current assets                                                |   | (69,723    | )          | (88,679    | )      |
| Accounts payable and accrued expenses                               |   | 205,915    |       | 679,907    |   |
| Net cash (used) by operating activities                             |   | (1,178,996 | )          | (2,992,028 | )      |
|                                                                |   |       |       |       |   |
| Cash flows from investing activities:                               |   |       |       |       |   |
| Proceeds from maturity of investments                               |   | —     |       | 110,000    |   |
| Proceeds from sale of equipment                                     |   | 1,500      |       | —     |   |
| Capital expenditures                                                |   | (22,242    | )          | (71,846    | )      |
| Net cash (used) provided by investing  activities                   |   | (20,742    | )          | 38,154     |   |
|                                                                |   |       |       |       |   |
| Cash flow from financing activities:                                |   |       |       |       |   |
| Proceeds from bridge loan financing                                 |   | 250,000    |       | 250,000    |   |
| Repayments of bridge financing                                      |   | (500,000   | )          | —     |   |
| Issuance of common stock, net of offering  costs                    |   | 3,619,449  |       | —     |   |
| Deferred offering costs                                             |   | —     |       | (25,000    | )      |
| Net cash provided by financing activities                           |   | 3,369,449  |       | 225,000    |   |
|                                                                |   |       |       |       |   |
| NET INCREASE (DECREASE) IN CASH                                     |   | 2,169,711  |       | (2,728,874 | )      |
| CASH AND CASH EQUIVALENTS, BEGINNING OF THE  PERIOD                 |   | 76,147     |       | 2,805,021  |   |
| CASH AND CASH EQUIVALENTS, END OF THE  PERIOD                       |   | $          | 2,245,858  |       | $      | 76,147 |   |
|                                                                |   |       |       |       |   |
| **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     |       | $      | — |   |

 

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

 

F-5

----

 

**XELR8 HOLDINGS, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

***Organization and Business***

 

The consolidated financial statements include those of XELR8 Holdings, Inc.,(BZI) (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, a sports hydration drink, a protein shake, a sports energy drink, ameal replacement drink, a functional food snack and a full product line ofvitamins and minerals in the form of tablets, softgels or capsules, all ofwhich are manufactured using our proprietary 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 XELR8International, Inc. and XELR8 Canada, Corp.

 

***Liquidity and Basisof Presentation***

 

The accompanying financial statements havebeen prepared in conformity with accounting principles generally accepted inthe United States of America, which contemplates continuation of the Company asa going concern.  The Company incurred anet loss of $3,241,730 for the year ended December 31, 2007 and hasincurred significant net losses since inception.

 

The Company has been developing awareness of its products through itsmarketing plan and product innovation. Within time, management believes that demand for its products willdevelop to allow the Company to become profitable, through the development ofits independent distributor and customer base. Management believes that thecash resources will be sufficient to fund its operations for the nexttwenty-four months. If the business operations do not result in increasedproduct sales, our business viability, financial position, results ofoperations and cash flow will likely be adversely affected. Consequently,management may elect to raise money during the year ended December 31,2008 to meet any shortfalls from operations (see Note 9 Subsequent Eventsregarding the Company’s placement transaction completed in February 2008).  However a realization of significant portionof the assets in the accompanying balance sheet is dependent on the continuedoperations of the Company, which in turn is dependent on the increase inindependent distributors and customer base or the additional capital raisedthrough a placement of its securities.

 

***Principles ofConsolidation***

 

The accompanying financial statements include the accounts of XELR8Holdings, Inc. 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 affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period.  

 

F-6

----

 

Managementbelieves that the estimates utilized in the preparation of the financialstatements are prudent and reasonable. Actual results could differ from these estimates.

 

***Revenue Recognition***

 

The Company ships its products by common carrier and receives paymentin the form of cash, credit card 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 all subsequent orders placed by customers anddistributors, the Company allows resalable products to be returned within 12months of the purchase date for a 100% 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 estimatedreturns are recorded when the merchandise is shipped since performance by theCompany is considered met when products are in the hands of the common carrier.Amounts received for unshipped merchandise are recorded as customer depositsand are included in accrued liabilities.

 

***Cash and CashEquivalents***

 

For the purposes of reporting cash flows, the Company considers allcash and highly liquid investments with an original maturity of three months orless to be cash equivalents. The Company considers deposits in banks andinvestments purchased with original maturities of more than three months andless than a year 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 $100,000 are subject to credit risk, and theCompany believes that the financial institutions are financially sound and therisk of loss is minimal.

 

During 2007, the Company relied significantly onthree suppliers for 77% of its purchases of raw materials for supplements,drinks and marketing materials held for sale. The Company does have reliance on a single supplier, which supplied 64%of inventory purchases. The Company entered into an Exclusive ManufacturingAgreement with this supplier to produce the Bazi product. Management believesthat its purchasing requirements can be readily met from alternative sources.

 

***Fair Value ofFinancial 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.

 

F-7

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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, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Purchased materials            |       | $                               | 58,746     |                            | $          | 245,447 |   |
| Finished goods                 |       | 501,500                         |       | 207,572                         |       |
| Reserve for obsolete inventory |       | (189,403                        | )          | (41,655                         | )          |
|                           |       | $                               | 370,843    |                            | $          | 411,364 |   |

*** ***

***A summary of the reserve for obsolete andexcess inventory was as follows as of December 31, 2007 and 2006:***

 
| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Balance as of January 1    |       | $        | 41,655     |     | $          | 16,879 |   |
| Addition to provision           |       | 216,760  |       | 123,511  |       |
| Write-off of obsolete inventory |       | (69,012  | )          | (98,735  | )          |
| Balance as of December 31  |       | $        | 189,403    |     | $          | 41,655 |   |

 

***Property andEquipment***

 

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***

 

The Company reviews its long-lived assets for impairment wheneverchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  For purposes ofevaluating the recoverability of long-lived assets, the recoverability test isperformed using undiscounted net cash flows estimated to be generated by theasset. An impairment was not deemed necessary in either 2007 or 2006.

 

***Intangible Assets***

 

The Company’s intangible assets, consisting of trademarks and patent costs,are being amortized over their estimated life of 15 years. The Companyevaluates the useful lives of its intangible assets annually and adjusts thelives according to the expected useful life. During 2006 the Company recordedan impairment of intangible assets related to products no longer sold.

 

***Advertising Costs***

 

Advertising and marketing costs were $494,883 and$612,819 for the years ended December 31, 2007 and 2006, respectively, andare expensed as incurred or the first time the advertising takes place.

 

***IncomeTaxes***

 

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 attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities 

 

F-8

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and theirrespective tax basis.  Deferred taxassets and liabilities are measured using enacted tax rates in effect for theyear in which those temporary differences are expected to be recovered orsettled.

 

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-BasedCompensation***

 

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.

 

TheCompany adopted the provisions of SFAS 123R using the modified prospectivetransition method. In accordance with this transition method, the Company’sconsolidated financial statements for prior periods have not been restated toreflect 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 grant date fair value estimated in accordance with theoriginal provisions 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.

 

Totalshare-based compensation expense, for all of the Company’s share-based awardsrecognized for the year ended December 31, 2007, was $1,372,409 or $0.10per share basic and diluted compared with the $859,489 or $0.09 per share forthe year ended December 31, 2006.

 

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

 

F-9

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| ** **               | ** ** | **Year ended December 31, 2007** | ** ** | **Year ended December 31, 2006** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
|                     |       |                                                 |       |                                                 |       |
| Stock price volatility   |       | 96.7 to 98.7                                         | %          | 92.9 to 97.1                                         | %          |
| Risk-free rate of return |       | 3.34 to 4.95                                         | %          | 4.76 to 5.27                                         | %          |
| Annual dividend yield    |       | 0                                                    | %          | 0                                                    | %          |
| Expected life            |       | 1.5 to 4.5 Years                                     |       | 2.5 to 5 Years                                       |       |

 

***NetLoss Per Share***

 

Earnings per share requires presentation of both basic earnings percommon share and diluted earnings per common share.  Since the Company has a net loss for allperiods presented, any common stock equivalents would not be included in theweighted average calculation since their effect would be anti-dilutive.

 

***Recent AccountingPronouncements***

 

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

 

InJune 2006, the FASB ratified the consensuses of Emerging Issues Task Force(“EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remittedto Governmental Authorities Should Be Presented in the Income Statement (ThatIs, Gross versus Net Presentation).”  EITF 06-3 clarifies that thescope of this Issue includes any tax assessed by a governmental authority thatis imposed concurrently with or subsequent to a revenue-producing transactionbetween a seller and a customer and indicates that the income statementpresentation on either a gross basis or a net basis of the taxes within thescope of the Issue is an accounting policy decision that should be disclosed.Furthermore, for taxes reported on a gross basis, an enterprise should disclosethe amounts of those taxes in interim and annual financial statements for eachperiod for which an income statement is presented. The consensus is effective,through retrospective application, for periods beginning after December 15,2006. The Company currently presents taxes on a net basis within the scope ofthis issue.

 

InFebruary 2007, the FASB issued SFAS No. 159, “Fair Value Option forFinancial Assets and Financial Liabilities” (“SFAS No. 159”). Under SFAS No. 159,entities may choose to measure at fair value many financial instruments andcertain other items that are not currently required to be measured at fairvalue. SFAS No. 159 also establishes recognition, presentation, anddisclosure requirements designed to facilitate comparisons between entitiesthat choose different measurement attributes for similar types of assets andliabilities. SFAS No. 159 does not affect any existing accountingliterature that requires certain assets and liabilities to be carried at fairvalue. SFAS No. 159 is effective for us beginning January 1, 2008.The adoption of this standard is not expected have any impact on our financialposition or results of operations.

 

InNovember 2007, the FASB issued SFAS 141 (revised 2007), “BusinessCombination” (“SFAS 141R”) and SFAS 160, “Noncontrolling Interests inConsolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”).SFAS 141R will change how business acquisitions are accounted for and willimpact financial statements both on the acquisition date and in subsequentperiods. SFAS 160 will change the accounting and reporting for minorityinterests, which will be recharacterized as noncontrolling interests andclassified as a component of equity. SFAS 141R and SFAS 160 are effective forfiscal years beginning on or after December 15, 2008. SFAS 141R will beapplied prospectively. SFAS 160 requires retroactive adoption of thepresentation and disclosure requirements for existing minority interests. All otherrequirements of SFAS 160 will be applied prospectively. Early adoption isprohibited for both standards. The adoption of this standard is not expectedhave any impact on our financial position or results of operations.

 

F-10

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

 

Theauthorized capital stock of the Company consists of 50,000,000 shares of commonstock at $.001 par value and 5,000,000 shares of preferred stock at $.001 parvalue.  The holders of the common stockare entitled to receive, when and as declared by the Board of Directors,dividends payable either in cash, in property or in shares of the common stockof the Company.  Dividends have nocumulative rights and dividends will not accumulate if the Board of Directorsdoes not declare such dividends.  ThroughDecember 31, 2007, no dividends have been declared or paid by the Company.

 

OnMarch 29, 2006, the Company engaged Carnell Williams, a professionalathlete to endorse the Company’s products. The Company paid Mr. Williamsan initial fee of 44,444 shares valued at $60,000 based on the Company’sclosing common stock price of $1.35, the day that the agreement was reached.

 

OnNovember 21, 2006, the Company entered into a Bridge Financing Agreementwith Asset Protection Fund (“APF”), whereby APF loaned the Company $250,000.The term of the loan was the shorter of when the Company completed a PrivatePlacement Offering or six months from the loan origination date and it accruedinterest at a rate of 10% per annum. Additionally, the Company issued APF400,000 shares of restricted common stock as a loan fee. The Company recorded adeferred loan cost of $140,000 based on the Company’s closing common stockprice on the day that the loan was funded. The deferred loan cost was amortizedover the term of the loan and recorded as additional interest expense. On March 27,2007, the Company completed the private placement transaction and repaid theloan to Asset Protection Fund of $250,000 plus accrued interest of $8,630. Forthe years ended December 31, 2007 and 2006, the Company recognized$108,000 and $32,000, respectively, of interest expense related to theamortization 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 Private Placement Offering or six months from theloan origination date and it accrued interest at a rate of 10% per annum.Additionally, the Company issued GPF 400,000 shares of restricted common stockas a loan fee. The Company recorded, as interest expense, an amount based onthe Company’s closing common stock price on the day that the loan was funded,and the Company recorded $320,000 representing the fair value of the stockprovided. This deferred loan cost was to be amortized over the term of the loanand recorded as an additional interest expense. On March 27, 2007 theCompany repaid the loan plus accrued interest of $4,795. For the year ended December 31,2007, the Company recognized $320,000 of interest expense in connection withthis transaction.

 

OnDecember 18, 2006, the Company entered into an agreement with LighthouseCapital for the referral of APF and GPF, or other potential financing contactsto the Company. The term of this Agreement was for a period of sixty days fromthe date of the Agreement and the Company would pay a fee in the amount of200,000 restricted shares of the Company’s common stock to the referralrepresentative upon funding received from any one or more referrals in thetotal aggregate amount of $500,000. On January 16, 2007, GPF funded theCompany $250,000, to aggregate $500,000 received by the Company from thereferrals of Lighthouse Capital. Per the terms of the Agreement, the Companyissued Lighthouse Capital 200,000 shares and recorded an expense of $160,000based on the closing market price on the date of the funding.

 

OnMarch 5, 2007, the Company announced that it had completed the sale of twomillion units in a private placement transaction for gross proceeds of$2,000,000. The placement was sold to accredited individual and institutionalinvestors. The units 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 was comprisedof one share and one half of a warrant to purchase a share of common stock atan exercise price of $1.50 per share. The shares of common stock and theshares underlying the warrants have been registered under the Securities Act of1933, 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 

 

F-11

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inconnection with the offering, netting the Company $1,778,094 in proceeds.Additionally, the Company engaged a number of selling agents in connection withthe sale of the private placement and paid compensation of 108,500 warrants fortheir efforts.

 

OnMarch 7, 2007, at the annual shareholder meeting, the shareholder approvedan increase in the number of shares issuable under the 2003 Stock IncentivePlan to 2,200,000 shares of our Common Stock. For the year ended December 31,2007 the Company recorded an expense of $822,676 related to options issued toathletes, consultants, employees and executives of the Company. Additionally,at the shareholder meeting, the stockholders of the Company approved thecreation of the 2006 Distributor Option Plan and reserved thereunder options topurchase 500,000 shares of common stock. The Company recorded an expense of$39,732 for the year ended December 31, 2007, in connection with theissuance of options under this plan.

 

OnMarch 26, 2007, the Company entered into an amended employment contract (“EmploymentAgreement”) with Sanford Greenberg to provide for the assignment of thebenefits and obligations of the Employee Agreement from XELR8 Holdings, Inc.to XELR8, Inc. The amendment provides that Mr. Greenberg will receiveannual compensation of $1. Additionally, Mr. Greenbergwaives any and all rights to participate in any incentive executive bonus planof the Company, but will receive a bonus equal to one percent (1%) of the netsales of XELR8, Inc. from November 1, 2006, for a period of 12 years. Further, Mr. Greenberg shall receive 1,500,000 restricted shares of theCompany, and he agreed to waive and forfeit options for 250,000 shares of theCompany’s common stock that were granted on April 1, 2004. The1,500,000 restricted shares were issued on March 27, 2007, in satisfactionof the obligation of $540,000 which was recorded in the year ended December 31,2006 financial statements. The fair value was determined based on the closingmarket value of the Company share price on the date that the Company and Mr. Greenbergagreed to the amendment, subject to shareholder approval, of November 17,2006.

 

OnApril 6, 2007, Mr. Greenberg granted 200,000 shares of common stockto the employees of the Company. Under the guidance issued by the SEC in Staff AccountingBulletin 107 (SAB 107), share-based payments 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. As a principal shareholder, Mr. Greenberg,is a holder of an economic interest in the entity, and therefore the Company isrequired to record an expense of  $350,000 in stock based compensation andan off-setting entry directly to additional paid in capital  based on theshare price on the date of the grant.

 

OnMay 8, 2007, the Company announced that it had completed the sale of onemillion units in a private placement transaction for gross proceeds of$2,000,000. The placement was sold to an accredited individual andinstitutional investors. The units were sold under the exemption provided inRegulation D of Rule 506 and Section 415 of the Securities Act. Theterms of the private placement provided for a unit offering at $2.00 perunit.  Each unit was comprised of one share of common stock, half of a Class Ewarrant to purchase common stock and half of a Class F warrant to purchasecommon stock.  The Class E warrants have an exercise price of $2.00and are for a five year period with a call provision by the Company when theCompany’s share price trades above $4.50 for twenty consecutive days. The Class Fwarrants have an exercise price of $2.00 and a five year term, with no callprovision. The shares of common stock and the shares underlying the warrantshave been registered under the Securities Act of 1933, as amended, and may beoffered or sold in the United States. The Company incurred $158,645 of offeringexpenses in connection with the offering, netting the Company $1,841,355 inproceeds. Additionally, the Company engaged a number of selling agents inconnection with the sale of the private placement and paid compensation of55,000 warrants for their efforts.

 

**NOTE 3 – STOCK OPTIONS**

 

Effective July 1, 2003, the shareholders of the Company adoptedthe 2003 Stock Incentive Plan (the “Plan”). The Plan includes incentive and non-qualified stock options andrestricted stock grants.  The initialmaximum number of shares of common stock available for grants under the Planwas 800,000 shares. The Plan provides that with respect to incentive stockoptions (“ISO”) the option price per share must be at least the fair marketvalue (as determined by the Compensation Committee or, in lieu thereof, theBoard of Directors) of the common stock on the date the stock option is grantedor based on daily quotes from an exchange or quotation system designated by theCompensation Committee as the primary market for the shares.  Under the Plan, if an ISO is granted to anemployee who owns more than 10% of the total combined 

 

F-12

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voting power of all classes of stock of the Company or any of itssubsidiaries, then the option price must be at least 110% of the fair marketvalue of the stock subject to the option, and the term of the option must notexceed 5 years from the date of grant. Under the Plan, if for any reason, a change in control of the Companyoccurred, all shares subject to the Plan immediately become vested andexercisable. On October 15, 2004, the shareholders approved an amendmentto the Plan to increase the number of shares available under the Plan to1,000,000 shares of common stock.

 

OnJuly 22, 2005, the shareholders approved an amendment to the Plan toincrease the number of shares available under the Plan to 1,800,000 shares ofcommon stock, and again on March 7, 2007 and on November 12, 2007 theshareholder approved an increase in the Plan bringing the total sharesavailable under the Plan to 3,000,000.

 

A summary of the status of the Plan for the years ended December 31,2007 and 2006, together with changes during each of the years then ended, ispresented in the following table:

 

**2003 Stock Incentive Plan**

 
| ** **                                               | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | ** **           | ** ** | **Weighted** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|-------------------|------------|------------|------------|----------------------|------------|--------------|------------|
| ** **                                               | ** ** | ** **    | ** ** | ** **        | ** ** | ** ** | ** ** | ** **           | ** ** | **Average**  | ** ** |
| ** **                                               | ** ** | **Qualified** | ** ** | **Non-qualified** | ** ** | ** ** | ** ** | **Exercise**         | ** ** | **Exercise** | ** ** |
| ** **                                               | ** ** | **Options**   | ** ** | **Options**       | ** ** | **Total**  | ** ** | **Price Range** | ** ** | **Price**    | ** ** |
| Balances, January 1, 2006                           |       | 688,000       |       | 809,350           |       | 1,497,350  |       | $1.28 to $5.00       |       | $            | 3.40       |   |
| Granted                                                  |       | 100,000       |       | 201,000           |       | 301,000    |       | $0.45 to $3.20       |       | $            | 1.25       |   |
| Forfeited                                                |       | —        |       | —            |       | —     |       | —               |       | —       |       |
| Balances, December 31, 2006                         |       | 788,000       |       | 1,010,350         |       | 1,798,350  |       | $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       |   |
| Number of options exercisable At  December 31, 2007 |       | 730,585       |       | 1,183,883         |       | 1,914,469  |       | $0.45 to $5.00       |       | $            | 2.51       |   |

 

The following table setsforth the exercise price range, number of shares, weighted average exerciseprice and remaining contractual lives at December 31, 2007:

 
| ** **   | ** ** | **Outstanding**    | ** ** | **Exercisable**         | ** ** |
|--------------|------------|--------------------|------------|-------------------------|------------|
| ** **   | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **   | ** ** | ** **         | ** ** | **Weighted**            | ** ** | **Average** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| **Exercise** | ** ** | **Number of** | ** ** | **Average**             | ** ** | **Contractual** | ** ** | **Shares** | ** ** | **Average** | ** ** |
| **Prices**   | ** ** | **Outstanding**    | ** ** | **Exercise Price** | ** ** | **Life (months)** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| 5.00         |       | 518,700            |       | $                       | 5.00       |   | 25.2 |   | 510,242 |   | $ | 5.00 |   |
| 3.20         |       | 145,000            |       | $                       | 3.20       |   | 31.8 |   | 145,000 |   | $ | 3.20 |   |
| 2.19 to 2.55 |       | 290,000            |       | $                       | 2.25       |   | 49.2 |   | 196,885 |   | $ | 2.28 |   |
| 1.28 to 1.80 |       | 900,100            |       | $                       | 1.54       |   | 37.8 |   | 620,319 |   | $ | 1.54 |   |
| 1.00 to 1.15 |       | 410,000            |       | $                       | 1.01       |   | 52.4 |   | 322,022 |   | $ | 1.01 |   |
| 0.45 to 0.65 |       | 120,000            |       | $                       | 0.52       |   | 42.8 |   | 120,000 |   | $ | 0.52 |   |
|         |       | 2,383,800          |       |                    |       |   |   | 1,914,469 |   |   |   |

 

AtDecember 31, 2007, 616,200 options were available for future grants underthe 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 of

 

F-13

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sharespurchasable, vesting provisions and any other provisions of options grantedunder the 2006 Distributor Stock Incentive Plan will be established at the timeof grant. The 2006 Distributor Stock Incentive Plan will be administered by theBoard of the Company. The term of the option will be three years unless thatadministrator designates a different term for a specific award, but no optionsmay be granted for terms of greater than ten years. Options will vest andbecome exercisable in whole or in one or more installments at such time as maybe determined by the plan administrator. The exercise price may not be lessthan the fair market value of the Common Stock on the date of grant. Theinitial maximum number of shares of common stock available for grants under thePlan was 500,000 shares, and on November 12, 2007, this was increased to1,500,000.

 

A summary of the status of the Plan for the year ended December 31,2007, together with changes during each of the years then ended, is presentedin the following table:

 

**2006 Distributor 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                                                |       | —            |       | —     |       | —               |       | —                    |       |
| Balances, December 31, 2007                         |       | 84,500            |       | 84,500     |       | $0.45 to $5.00       |       | $                         | 1.21       |   |
| Number of options exercisable At  December 31, 2007 |       | 84,500            |       | 84,500     |       | $0.45 to $5.00       |       | $                         | 1.21       |   |

 

The following table setsforth the exercise price range, number of shares, weighted average exerciseprice and remaining contractual lives at December 31, 2007:

 
| ** **            | ** ** | **Outstanding**    | ** ** | **Exercisable**         | ** ** |
|-----------------------|------------|--------------------|------------|-------------------------|------------|
| ** **            | ** ** | ** **         | ** ** | ** **              | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | ** **         | ** ** | **Weighted**            | ** ** | **Average** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| **Exercise**          | ** ** | **Number of** | ** ** | **Average**             | ** ** | **Contractual** | ** ** | **Shares** | ** ** | **Average** | ** ** |
| **Prices**            | ** ** | **Outstanding**    | ** ** | **Exercise Price** | ** ** | **Life (months)** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| $ 0.49 to  $1.90 |       | 84,500             |       | $                       | 1.21       |   | 29.1 |   | 84,500 |   | $ | 1.21 |   |
|                  |       | 84,500             |       |                    |       |   |   | 84,500 |   |   |   |
|                       |            |                    |            |                         |            |  |  |  |  |  |  |  |  |

 

At December 31, 2007, 1,415,500 options were available for futuregrants under the Plan.

 

**NOTE 4 – PROPERTY AND EQUIPMENT**

 

Property and equipment consisted of the following:

 

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| ** **                    | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Furniture & fixtures |       | $                           | 50,963     |                        | $          | 50,963 |   |
| Office equipment              |       | 15,456                      |       | 18,438                      |       |
| Software                      |       | 245,912                     |       | 245,912                     |       |
| Leasehold improvements        |       | 121,605                     |       | 121,605                     |       |
|                          |       | 433,936                     |       | 436,918                     |       |
| Accumulated depreciation      |       | (352,531                    | )          | (312,975                    | )          |
|                          |       |                        |       |                        |       |
|                          |       | $                           | 81,405     |                        | $          | 123,943 |   |

 

Depreciation expense was $46,372 and $41,326for the years ended December 31, 2007 and 2006, respectively.

 

**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.Amortization expense was $11,661 and $25,007 for the years ended December 31,2007 and December 31, 2006, respectively. 

 

Intangible assets are:

 
| ** **                              | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Patents and trademarks                  |       | $                           | 68,460     |                        | $          | 50,052 |   |
| Accumulated amortization and Impairment |       | (50,501                     | )          | (38,840                     | )          |
|                                    |       |                        |       |                        |       |
|                                    |       | $                           | 17,959     |                        | $          | 11,212 |   |

 

**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 the following:**
| ** **               | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Current:                 |       |     |       |     |       |
| Federal                  |       | $        | —     |     | $          | — |   |
| State                    |       | —   |       | —   |       |
|                     |       | —   |       | —   |       |
| Deferred:                |       |     |       |     |       |
| Federal                  |       | —   |       | —   |       |
| State                    |       | —   |       | —   |       |
|                     |       | —   |       | —   |       |
|                     |       |     |       |     |       |
| **Income Tax Provision** |       | $        | —     |     | $          | — |   |

 

**Reconciliation of effective tax rate:**

 
| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Federal taxes at statutory rate        |       | 34.0000  | %          | 34.00    | %          |
| State taxes, net of federal benefit    |       | 2.5600   | %          | 3.06     | %          |
| Permanent items                        |       | (5.4800  | )%         |     |       |
| Generation of general business credits |       | —   | %          |     |       |
|                                   |       |     |       |     |       |
| Valuation allowance                    |       | (31.0800 | )%         | (37.06   | )%         |
| 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:

 
| Deferred tax assets:                                |   |       |      |       |   |
|-----------------------------------------------------|--------|------------|-----------|------------|--------|
| Net operating losses                                |   | $          | 5,160,023 |       | $      | 4,533,000 |   |
| Other                                               |   | 701,672    |      | (45,000    | )      |
| Gross deferred tax assets                           |   | 5,861,695  |      | 4,488,000  |   |
|                                                |   |       |      |       |   |
| Deferred tax liabilities:                           |   |       |      |       |   |
| Gross deferred tax liabilities                      |   | —     |      | —     |   |
| Net deferred tax assets before valuation  allowance |   | 5,861,695  |      | 4,488,000  |   |
|                                                |   |       |      |       |   |
| Valuation Allowance                                 |   | (5,861,695 | )         | (4,488,000 | )      |
| Deferred Tax Assets (Liabilities), Net              |   | $          | —    |       | $      | — |   |

 

At December 31, 2007 approximately $13,923,000 of net operatingloss carryforwards for federal income tax purposes were available to offsetfuture taxable income through the year 2027. 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.  Managementconsiders the scheduled reversal of deferred tax liabilities, 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 

 

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is more likelythan not that the Company will not 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.

 

**NOTE 7 – COMMITMENTS**

 

We lease our current corporate office space from Arnold Greenberg, thefather of our Founder, Sanford D. Greenberg. We paid $38,830 and $42,780 inrent for the years ended December 31, 2006 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 the same amount.

 

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 $64,869 and $102,856 for the years ended December 31, 2007 and 2006,respectively. Minimum future rentals under these agreements at December 31,2007 are as follows:

 
| **Year** | ** ** | ** ** | ** ** |
|----------|------------|------------|------------|
| 2008     |       | $          | 61,154     |   |
| 2009     |       | 22,404     |       |
| 2010     |       | 22,404     |       |
| 2011     |       | 18,477     |       |
| 2012     |       | 11,245     |       |
|     |       | $          | 135,684    |   |
|          |            |            |            |  |  |

 

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

 

**NOTE 9 – SUBSEQUENT EVENTS**

 

On February 19, 2008XELR8 Holdings, Inc. (the “Company”) announced that it had sold 500,000units of its securities at $1 per unit to a group of accredited investors. Each unit consists of one share of common stock and six/tenths (6/10) ofa Class G Warrant to purchase common stock. As a part of the privateplacement terms, the Company agreed to reduce the exercise price of its Series EWarrants and Series F Warrants previously purchased by the same investorsin a prior private placement. The Class G Warrants have an exercise priceof $1.50 and are exerciseable for a five year period with a call provision bythe Company if the Company’s share price closes above $2.50 for twentyconsecutive days. The Amended Class E 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 $3.00 for twenty consecutivedays. The Amended Class 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.

 

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