##### Index to Financial Statements

10KSB 1 d10ksb.htm FORM 10-KSB FOR DECEMBER 31, 2004

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------



For the transition period from              to



Commission file number 0-23031



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VERTICAL HEALTH SOLUTIONS, INC.

(Name of small business issuer in its charter)



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|                                                                  |  |                                     
|----------------------------------------------------------------- |  | ------------------------------------
|Florida                                                           |  | 59-3635262                          
|(State of or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|855 Dunbar Rd. Oldsmar, Florida          |  | 34677     
|(Address of principal executive offices) |  | (Zip Code)



Issuers
telephone number (727) 548-8345



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



Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock



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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this
form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB.    Yes  x    No ̈



Issuers revenues for its most recent fiscal year were $3,283,946.



The aggregate market value of the voting common stock held by non-affiliates
of the Registrant was $1,302,600 based upon the last reported trade of the stock, which was 2,571 on March 29, 2005 at $.35 per share.



The number of shares outstanding of the Issuers common stock at $.001 par value as of March 29, 2005 was 13,876,931.



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##### Index to Financial Statements

PART I



Item 1. BUSINESS.



General



The Company,
through its wholly-owned subsidiaries, develops, markets and distributes customized private label supplements and health products to veterinarians in the companion animal sector which consists of canine, feline, equine and numerous other household
pets, and to a lesser extent, other veterinary distributors. The company is also a licensed wholesale distributor of veterinary pharmaceuticals to veterinary clinics. Additionally, the Company operates a Florida retail and veterinary compounding
pharmacy.



Vertical Health Solutions, Inc., was incorporated on
March 2000, as a Florida corporation under the name LabelClick.com, Inc. In January 2001, we changed our name to Vertical Health Solutions, Inc. and formed a new subsidiary called LabelClick, Inc. d/b/a Vitality Systems, through which we operate.
The Companys executive offices are located at 855 Dunbar Ave., Oldsmar, Florida 34677 and its telephone number is (727) 548-8345. References in this Annual Report on Form 10-KSB refer to Vertical Health Solutions, Inc. and, as applicable, its
subsidiaries as the Company or Vertical, unless the context otherwise requires.



Our Private Label Operations



We provide custom private label supplements and health products to veterinarians in the companion animal sector. Custom private label products are generic products offered by many providers, which are then customized through the application
of a product label specific to each client. For instance, the vitamins sold by Dr. Smith may be labeled as Dr. Smiths Multi-Vitamin. Our product line consists of products that are used in daily veterinary medicine to address animal healthcare
problems such as arthritis, allergies, hip dysplasia, immune function, muscle development, skin care and general health and well-being. We offer private labeling solutions that allow our customers to customize private-label vitamins and animal
health nutritional supplements in small quantities tailored to their buying power and storage capacity. This permits the veterinarians to essentially offer uniquely labeled products to their clients that are unavailable from any other source.
Customers can use the basic names we supply, modified for their purpose or can direct us to use a name specifically designed for them. Once the name is chosen, our custom supplement labels also typically include customers business name,
contact information and logo for efficient marketing to their customers. We currently offer over 50 different products for private labeling, compared to the one to two dozen offered by typical brand name producers.



We do not manufacture any of the products we sell. We subcontract on a
purchase order basis with a number of manufacturers (including Geopharma, Inc., an affiliate of ours, from which we purchased 40.0% of our goods during 2004) to provide high quality animal health supplements and animal healthcare products for our
private label program. We do not enter into contracts with the manufacturers, as is customary in our industry. For quality control purposes, we may source and purchase the raw materials used for the production of our proprietary products and send
them directly to the manufacturer. In other cases, the manufacturer provides the raw materials for the products. In each case, prior to manufacturing, each ingredient is analyzed by the manufacturer to ascertain the accuracy of the Certificate of
Analysis data provided by the raw materials suppliers prior to the use in our formulations. Each manufacturing facility with which we subcontract is registered with the United States Food and Drug Administration. For larger orders, the
subcontractors will apply the private labels we produce. For smaller orders, it is more economical for Vertical to complete this task once the manufactured products are returned to our distribution center in their containers.



At the present time, we do not engage in traditional research and development
activities. As our business and product lines continue to expand and the demands of our customers grow, we anticipate that such activities will be undertaken in order to more effectively compete.



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##### Index to Financial Statements

Marketing and Sales



In the fiscal year ended December 31, 2004, approximately 39 percent of our total sales were to veterinary clinics and approximately 61 percent were to
distributors. Our geographical market is defined as the continental United States, however initial concentration has been on accounts in the southeast, southwest and northwest region of the United States.



LabelClick, Inc. utilizes a combination of inside sales and marketing and
outside sales representatives for its sales and marketing efforts. All of LabelClicks sales efforts focus on retaining the existing sales base and developing new customers.



Competition



The veterinary distribution industries in which the Company operates are highly competitive. Numerous companies, many of which have greater size and
greater financial, personnel, distribution and other resources than the Company, compete with the Company in its distribution and product development businesses.



The Companys branded products face substantial competition from broad line manufacturers, major private label
manufacturers and, more recently, large pharmaceutical companies. Increased competition from such companies could have a material adverse affect on the Company because such companies have greater financial and other resources available to them and
possess marketing and distribution capabilities far greater than those of the Company.



The Company competes on the basis of product quality, competitive pricing, its ability to develop new product lines and customer service. The Companys ability to compete favorably with its competitors with
respect to its branded products will depend primarily upon its development of brand recognition in the veterinary industry, its ability to quickly develop new products with market potential, to successfully advertise, market and promote its
products, as well as its product quality and the development of a strong and effective distribution network.



Backlog



The
Companys revenues are processed through its system from sales orders generated and issued by the Companys customers. The Company fulfills the sales orders on a turn-around time of between one to two days. As such, at any given point in
time, the Company does not experience a backlog of unfilled sales orders. At December 31, 2004, the Company had no backlog sales orders.



Trademarks



The Company believes that protecting some of its trademarks is crucial to its business strategy of building strong brand name recognition and that such
trademarks have significant value in the marketing of its products.



The Companys policy is to pursue registrations of all the trademarks associated with its key products, and the Company is currently reviewing matters related to such filings. The Company relies on common law trademark rights to
protect its unregistered trademarks. Common law trademark rights generally are limited to the geographic area in which the trademark is actually used, while a United States federal registration of a trademark enables the registrant to stop the
unauthorized use of the trademark by any third party anywhere in the United States. Furthermore, the protection available, if any, in foreign jurisdictions may not be as extensive as the protection available to the Company in the United States.



Although the Company seeks to ensure that it does not infringe
on the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual property infringement claims against the Company. Any infringement claims by third parties against the Company may have a
material adverse effect on the Companys business, financial condition, results of operations and cash flows.



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##### Index to Financial Statements

Principal Suppliers and Sources of Supply



The Company obtains all of its raw materials and products from third party suppliers. Many of the raw materials used in the
Companys products are harvested internationally. The Company does not have contracts with any suppliers committing such suppliers to provide materials required for the production of its products. There can be no assurance that suppliers will
provide products needed by the Company in the quantities requested or at a price the Company is willing to pay. Because the Company does not control the actual production of these products, it is also subject to delays caused by interruption in
production of materials based on conditions not within its control. Such conditions include job actions or strikes by employees of suppliers, weather, crop conditions, transportation interruptions and natural disasters or other catastrophic events.
The inability of the Company to obtain adequate supplies of its products at favorable prices, or at all, could have a material adverse effect on the Companys business, financial condition, results of operations and cash flows.



Quality Control



The Companys products are manufactured in accordance with the Good Manufacturing Practices (GMPs)
prescribed by the FDA, all other applicable regulatory standards, and rigorous quality control procedures used by the manufacturers of the products which the Company purchases. The Company places special emphasis on quality control. See
BusinessGovernment Regulation below.



Our Pharmacy
Operations



Our pharmacy, Drug Depot, Inc., d/b/a APS
Pharmacy, provides specialized compounding pharmaceutical prescription services to veterinarians and their customers in the companion animal sector and retail fulfillment of prescriptions to the retail public. APS Pharmacy customizes companion
animal medications in a variety of strengths, sizes, dosage forms and flavors based on veterinary and patient requirements.



Drug Depot, Inc. began operations on November 1, 2004 through the acquisition of the operating assets and operations of T & L Pharmacies, Inc.



Marketing and Sales



During the fiscal year ended December 31, 2004, approximately 60.4% of our
sales were to customers of the companion animal sector. Our geographical market is defined as the continental United States, however initial concentration has been on customers in the southeast and southwest regions of the United States.



Drug Depot, Inc. utilizes a combination of inside sales and fax
advertising for its sales and marketing efforts. All of Drug Depot, Inc.s sales efforts focus on retaining the current customer sales base and developing new customers.



Government Regulation



State and federal government agencies regulate the distribution of many of our animal health products. Specifically, the U.S. Department of Agriculture,
the Food and Drug Administration and the Drug Enforcement Administration are charged with regulating our industry and the distribution of certain of our products. In particular, they regulate the formulation and purity of our products, which are
subject to review during the manufacturing process. In addition, several State Boards of Pharmacy require us to obtain appropriate licensing for the sale of animal health products in their jurisdiction, as well as requiring us to collect sales and
use taxes on our product sales therein. However, since we do not manufacture the products we sell, we are not subject to the stringent Federal and state laws, which regulate the manufacturing process, nor are we required to undergo regular
inspections or certifications of our facilities or our activities. Finally, we are subject to federal and state labor regulations governing our relationship with employees, including minimum wage requirements, overtime, working conditions and
citizenship requirements.



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##### Index to Financial Statements

We may be subject to additional laws or regulations by the Food and Drug Administration or other Federal,
state or foreign regulatory authorities. The Company cannot predict the nature of any future laws, regulations, interpretations or applications, nor can it determine what effect additional governmental regulations or administrative orders, when and
if promulgated, would have on its business in the future. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not capable of reformulation, additional record
keeping, expanded documentation of the properties of certain products, expanded or different labeling, and/or scientific substantiation. Any or all of such requirements could have a material adverse effect on the Companys business, financial
condition, results of operations and cash flows.



Advertising,
labeling, sales and manufacturing of dietary supplements and conventional foods are also regulated by state and local authorities. There can be no assurance that state and local authorities will not commence regulatory action, which could restrict
the permissible scope of the Companys product claims or its ability to sell in that state.



Governmental regulations in foreign countries where the Company may commence or expand sales may prevent or delay entry into the market or prevent or
delay the introduction, or require the reformulation, of certain of the Companys products. Compliance with such foreign governmental regulations is generally the responsibility of the Companys distributors for those countries. These
distributors are independent contractors over whom the Company has limited control.



In house training is provided to all applicable employees to ensure compliance with regulations. Thus far, the Company has not incurred additional expenses in order to comply with FDA requirements. The Company
believes that it is substantially in compliance with all FDA record keeping and reporting requirements and all environmental regulations affecting the Company.



Dispensing prescription medications is governed at the state level by the board of pharmacy, or similar regulatory agencies, of each state where
prescription medications are dispensed. We are subject to regulation by the State of Florida and are licensed by the Florida Board of Pharmacy. Our license is valid until February 28, 2007. We are also licensed and/or regulated by other state
pharmacy boards and other regulatory authorities including, but not necessarily limited to, the United States Food and Drug Administration (FDA) and the United States Environmental Protection Agency (EPA). As a licensed
pharmacy in the State of Florida, we are subject to the Florida Pharmacy Act and regulations promulgated hereunder. To the extent that we are unable to maintain our license with the Florida Board of Pharmacy as a community pharmacy, or if we do not
maintain the licenses granted by other state pharmacy boards, or if we become subject to actions by the FDA, or other enforcement regulators, our distribution of prescription medications to veterinarians could cease, which could have a material
adverse effect on our operations.



Employees



As of December 31, 2004, the Company had 17 full-time employees. Of such
employees, six were engaged in marketing and sales, three were devoted to warehousing and distribution, one was devoted to graphics and database administration, three employees operated the pharmacy and four were responsible for management and
administration. None of the Companys employees are covered by a collective bargaining agreement. The Company considers its relations with its employees to be good.



In each case, the employees are permitted to participate in employee benefit plans of the Company that may be in effect from
time to time, to the extent eligible, and each employee may be entitled to receive an annual bonus as determined at the sole discretion of the Companys Board of Directors based on the Boards evaluation of the employees performance
and the financial performance of the Company. Each of the employees is eligible for grant of stock options in accordance with the provisions of the Companys 1999 Stock Option Plan, as determined by the Administrator of the Plan.



In March 1999, the Companys Board of Directors adopted the
Companys 1999 Stock Option Plan, which has been approved by the Companys shareholders. The purpose of the 1999 Plan is to enable the Company to attract and retain top-quality executive employees, officers, directors and consultants and
to



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##### Index to Financial Statements

provide such executive employees, officers, directors and consultants with an incentive to enhance stockholder return. The 1999 Plan provides for the grant
to officers, directors, or other key employees and consultants of the Company, of options to purchase up to an aggregate of 1,500,000 shares of common stock.



Cautionary Statements for Purposes of The Safe Harbor Provisions of The Private Securities Litigation Reform Act of 1995



The Private Securities Litigation Reform Act of 1995 (the Act)
provides a safe harbor for forward-looking statements to encourage companies to provide prospective information, so long as such information is identified as forward-looking and is accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statement(s). The Company desires to take advantage of the safe harbor provisions of the Act.



Except for historical information, the Companys Annual Report on Form
10-KSB for the year ended December 31, 2004, the Companys quarterly reports on Form 10-QSB, the Companys current reports on Form 8-K, periodic press releases, as well as other public documents and statements, may contain forward-looking
statements within the meaning of the Act.



In addition,
representatives of the Company may, from time to time, participate in speeches and calls with market analysts, conferences with investors and potential investors in the Companys securities, and other meetings and conferences. Some of the
information presented in such speeches, calls, meetings and conferences may be forward-looking within the meaning of the Act.



It is not reasonably possible to itemize all of the many factors and specific events that could affect the Company and/or the Companys industry as a
whole. In some cases, information regarding certain important factors that could cause actual results to differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed in forward-looking statements made by or on
behalf of the Company may appear or be otherwise conveyed together with such statements. The following additional factors (in addition to other possible factors not listed) could affect the Companys actual results and cause such results to
differ materially from those projected, forecasted, estimated, budgeted or otherwise expressed in forward-looking statements made by or on behalf of the Company.



Government Regulation.The packaging, labeling, advertising, promotion, distribution and sale of the Companys
products are all subject to extensive regulation by numerous federal, state and other government agencies. Because of the broad language of the laws applicable to the Companys business, it is difficult for the Company to remain in strict
compliance. If the Company fails to or is unable to comply with applicable laws and governmental regulations, the Companys business could be adversely affected. See Business  Government Regulation.



Our pharmacy operations are subject to extensive regulations and failure
to comply with those regulations could result in severe penalties and damage to our brand.



We are subject to extensive federal, state and local licensing and registration laws and regulations with respect to our business, including our pharmacy
and franchise operations and the pharmacists we employ. Regulations in these areas often involve subjective interpretation and we do not know if our attempts to comply with these regulations will be deemed sufficient by the appropriate regulatory
agencies. While we believe we have satisfied our licensing and registration requirements and continue to actively monitor our compliance with these requirements, we cannot ensure you that such monitoring will be adequate to achieve full compliance.
Violations of any of these regulations could result in various penalties, including suspension or revocation of our licenses or registrations, and seizure of our inventory or monetary fines, any of which could adversely affect our operations and
damage our brand.



We also are subject to requirements under
the Controlled Substances Act and Federal Drug Enforcement Agency regulations, as well as state and local laws and regulations related to our pharmacy operations such as registration, security, record keeping and reporting requirements related to
the purchase, storage and dispensing of controlled substances, prescription drugs and certain over-the-counter drugs.



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##### Index to Financial Statements

Under the Food, Drug & Cosmetic Act of 1938, the distribution of adulterated or misbranded homeopathic remedies or other drugs is prohibited. Violations
could result in substantial fines and other monetary penalties, seizure of the misbranded or adulterated items, and/or criminal sanctions. We also are required to comply with the Dietary Supplement Health and Education Act when selling dietary
supplements and vitamins.



In addition, our pharmacy
compounding services are subject to Food and Drug Administration regulation. The Food and Drug Administration also regulates drug advertising and promotion, including direct-to-patient advertising, done by or on behalf of manufacturers and
marketers. If we expand our product and service offerings, more of our products and services will likely be subject to Food and Drug Administration regulation. Failure to comply with these regulations could result in significant penalties which may
be material. We also are subject to federal statutes and state legislation that prohibit the offer, payment, solicitation, or receipt of any remuneration directly or indirectly in exchange for, or intended to induce, the referral of patients or the
sale or purchase of services and supplies covered by certain governmental programs (Anti-Kickback Laws). We also are subject to the Ethics in Patient Referrals Act of 1989, commonly referred to as Stark Law, which prohibits the billing
of federally-funded health care programs for certain health care services provided by entities with which the referring physician has certain financial arrangements. Violations of these laws are punishable by civil sanctions, including significant
monetary penalties and exclusion from participation in the Medicare and Medicaid programs, and criminal sanctions in the case of the Anti-Kickback Law. Due to the breadth and complexity of these laws, there can be no assurance that we, any of our
personnel, or any of our significant customers or business partners, will not become subject to sanctions that could have a material adverse effect on our business, financial condition and results of operations. Additionally, the sanctioning or
exclusion of a manufacturer or recipient of our products or services, even for activities unrelated to us, could also have a material adverse effect on our business, financial condition and results of operations.



Pursuant to the Omnibus Budget and Reconciliation Act of 1990 and similar
state and local laws and regulations, our pharmacists are required to offer counseling to our customers about medication, dosage, delivery systems, common side effects, adverse effects or interactions and therapeutic contraindications, proper
storage, prescription refill and other information deemed significant by our pharmacists. In the event that our pharmacists provide erroneous or misleading information to our customers, we may be subject to liability or negative publicity that could
have an adverse impact on our business. Although we carry general, professional and product liability insurance, our insurance may not cover potential claims of this type or may not be adequate to protect us from all liability that may be imposed.



The Health Insurance Portability and Accountability Act of
1996, and regulations promulgated thereunder (collectively HIPAA), require health care providers like us to comply with specified standards for electronic billing and other transactions and to adopt and comply with policies and
procedures to protect the security and privacy of an individuals protected health information consistent with HIPAA requirements, and prohibit the use or dissemination of an individuals protected health information without the
individuals consent. There are significant civil monetary and criminal penalties for failure to comply.



Possible Adverse Publicity. The Company is dependent on consumers perceptions and may be adversely affected by publicity associated with
illness or other adverse effects from the consumption of its products (or similar products distributed by other companies) and future reports of research that are perceived as less favorable or that question earlier research. Future scientific
research or publicity may not be favorable to the nutritional supplement or pharmaceutical industry or to any particular product, and may not be consistent with earlier favorable research or publicity. The Company is highly dependent upon
consumers perceptions of the safety and quality of its products as well as nutritional supplements distributed by other companies. Thus, the mere publication of reports asserting that those products may be harmful or questioning their efficacy
could adversely affect the Company regardless of whether such reports are scientifically supported or whether the claimed harmful effects would be present at the dosages recommended for such products.



Exposure to Product Liability. The Company faces an inherent risk of
exposure to product liability claims in the event that the use of its products results in injury. Management believes that the Company has



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##### Index to Financial Statements

adequate insurance, but if it does not, product liabilities relating to its products could adversely affect the Company. Although many of the ingredients in
the Companys products are vitamins, minerals, herbs and other substances for which there is a long history of animal consumption, some of its products contain ingredients for which no such history exists. In addition, although management
believes all of the Companys products are safe when taken as directed, there is little long-term experience with human consumption of certain of these product ingredients in concentrated form. Accordingly, the Company cannot assure that its
products, even when used as directed, will have the effects intended or will not have harmful side effects. Any such unintended effects may result in adverse publicity or product liability claims that could adversely affect the Company.



Importance of Development of New Products. Products currently
experiencing strong popularity and rapid growth may not maintain their sales over time. As a result, it will be important for the Company to be able to develop new products. The Company cannot assure that its efforts to develop new products will be
successful.



Competition.The animal health nutritional
supplement industry is highly competitive. Numerous companies, many of which have greater size and greater financial, personnel, distribution, marketing and other resources than the Company, compete with us in the development and marketing of
dietary supplements. Competition from such companies could have a material adverse effect on the Company. The Company also faces competition from OTC distribution channels of private label dietary supplements offered by retail store chains, mass
merchandisers and internet websites. See Business  Competition.



Principal Suppliers and Sources of Supply.The Company depends on third-party suppliers to provide its products. Many of the raw materials used in its products are harvested internationally. The Company cannot
assure that suppliers will provide the products needed in the quantities requested or at a price the Company is willing to pay. Because the Company does not control the actual production of these products, delivery to the Company is also subject to
delays caused by interruption in production of products based on conditions not within the control of the Company. The Companys inability to obtain adequate supplies of products at favorable prices, or at all, could adversely affect the
Companys business.



Limited Trademark Protection: No
Patents. The Companys policy is to pursue registrations for all of the trademarks associated with its key proprietary products. The Company relies on common law trademark rights to protect its unregistered trademarks. Common law trademark
rights generally are limited to the geographic area in which the trademark is actually used, while a United States federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third party anywhere
in the United States. The Company intends to register its trademarks in certain foreign jurisdictions where its products are sold. However, the protection available, if any, in such jurisdictions may not be as extensive as the protection available
to the Company in the United States. Also, because the Company has no patents on its proprietary products, another company may replicate them.



Infringement on Intellectual Property Rights of Others.Although the Company seeks to ensure that it does not infringe on the intellectual property
rights of others, the Company cannot assure that third parties will not assert intellectual property claims against the Company. Infringement claims by third parties against the Company may have a material adverse affect on the Company.



Concentration of Customers. For the year ended December 31, 2004,
39.5% of consolidated revenues were received from two customers, representing a concentration of credit risk. If the Companys major customers substantially reduced their volume of purchases from the Company, the Companys business,
financial condition, results of operations and cash flows could be materially adversely affected.



General Risks



Key
Personnel. As a small company with only seventeen employees, the Companys success depends on the services of its senior management team. If the Company loses the services of one or more of these employees, the Company could be materially
adversely affected.



Growth Management.The Company
believes that continued growth may strain its management, operations, sales and administrative personnel and other resources. In order to serve the needs of its



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##### Index to Financial Statements

existing and future customers the Company intends to increase its workforce.The Companys ability to manage further growth depends in
part upon its ability to expand its operating, management, information and financial systems, which may significantly increase its future operating expenses. The Company cannot assure that its business will grow in the future or that it will be able
to effectively manage its growth.



Possible Future
Acquisitions. The Company expects to pursue additional acquisitions in the future as a part of its business strategy. The Company cannot assure that attractive acquisition opportunities will be available to it or that it will be able to obtain
financing for future acquisitions. If the Company is unable to consummate future acquisitions, its business, financial condition and operating results could be adversely affected.



Acquisitions involve numerous risks, including the risk that the acquired business will not perform in accordance with
expectations, difficulties in the integration of the operations and products of the acquired businesses with the Companys business, the diversion of managements attention from other aspects of the Companys business, the risks
associated with entering geographic and product markets in which the Company has limited or no direct prior experience, and the potential loss of key employees of the acquired business arising out of such acquired business. Future acquisitions would
likely require additional financing, which would likely result in an increase in the Companys indebtedness or the issuance of additional capital stock, which may be dilutive to the Companys shareholders.



Provisions on the Payment of Dividends.The Company has not declared
cash dividends on its common stock and the Company does not anticipate paying cash dividends in the foreseeable future.



Anti-Takeover Provisions. Certain provisions of the Companys Articles of Incorporation (the Articles) and Bylaws (the
Bylaws), certain sections of the Florida Business Corporation Act, and the ability of the Board of Directors to issue shares of preferred stock and to establish the voting rights, preferences and other terms may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved the Companys Board of Directors, including takeovers which shareholders may deem to be in their best interests.



Control by Certain Stockholders. Directors, executive officers and related
family members beneficially own approximately 73% of the outstanding shares of the Companys common stock. Therefore, these stockholders will have significant control over the election of the Companys directors and most of the
Companys corporate actions.



Exposure to Natural
Disasters. The Companys facility is located in the greater Tampa Bay, Florida area, which is prone to hurricanes. The Companys business could be adversely affected should its ability to distribute products be impacted by such event.



There are a Large Number of Shares Underlying our Warrants
and Series A Preferred Stock that may be Available for Future Sale and the Sale of these Shares may Depress the Market Price of our Common Stock.As of March 28, 2005, we had outstanding warrants to purchase 820,000 shares of our common stock at
a price of $1.87 per share, and there was outstanding Series A Preferred Stock of Vertical Health Ventures, Inc. that is convertible into up to 7,594,936 shares of our common stock. The sale of these shares may adversely affect the market price of
our common stock.



The Issuance of Shares Upon Conversion of
our Convertible Securities and Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to our Existing Stockholders.The issuance of shares upon conversion of our convertible securities and exercise of warrants may result
in substantial dilution to the interests of other stockholders since the selling stockholder may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholder may not convert their Series A Preferred Stock
and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholder from converting and/or exercising some of their holdings
and then converting the rest of their holdings. In this way, the selling stockholder could sell more than this limit while never holding more than this limit, which will have the effect of further diluting the proportionate equity interest and
voting power of holders of our common stock, including investors in this offering.



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##### Index to Financial Statements

Item 2. DESCRIPTION OF PROPERTY.



Effective March 1, 2003, Labelclick, Inc. entered into a three year lease of approximately 4,600 square feet of office and
warehouse space for its executive offices and its operations in Oldsmar, Florida. This facility serves as the Companys corporate headquarters and is also used for its offices, warehousing and shipping operations. The lease contains an option
to continue for two years after March 1, 2006 through February 28, 2008, unless terminated earlier. The rental under the lease is $19,200 annually.



Effective October 1, 2004, Drug Depot, Inc. entered into a two year lease of approximately 3,000 square feet of office and retail space for its operations
in Palm Harbor, Florida. The lease contains three consecutive one-year renewal options to continue the lease after the expiration of the original lease on October 31, 2006 unless terminated earlier. The rental under the lease is $28,800 annually.



The Company believes that its facilities and equipment are
generally well maintained and in good operating condition. In the opinion of management of the Company, the properties are adequately covered by insurance.



As of December 31, 2004, the Company had real property, equipment, furniture, and leasehold improvements, net of accumulated depreciation, in the
approximate amount of $71,197.



Item 3. LEGAL PROCEEDINGS.



The Company is not currently a party to any legal proceedings, which it
believes will have a material adverse affect on its results of operations.



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.



There were no matters submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2004.



PART II



Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.



Market for Securities



In October 2003, the Company filed Form 211, under the U.S. Securities and Exchange Commission Rule 15c2-11, to apply with NASD Regulation for listing of
its common stock and warrants on the OTC Bulletin Board. In January 2004, the Companys common stock began trading on the OTC Bulletin Board under the symbol VHSL. There is a limited trading market for the Companys stock,
therefore historical price information is limited. High and low sales prices since that time, by quarter-ended date, are as follows:



|                   |  |      |      |     |   |     
|------------------ |  | ---- | ---- | --- | - | ----
|                   |  | High |      | Low
|March 31, 2004     |  | $    | 1.25 |     | $ | 0.40
|June 30, 2004      |  |      | 1.75 |     |   | 0.70
|September 30, 2004 |  |      | 1.57 |     |   | 0.60
|December 31, 2004  |  | $    | 0.88 |     | $ | 0.41



---

##### Index to Financial Statements

As of December 31, 2004, there were approximately 253 stockholders of record of the Companys common
stock.



Dividend Policy



Historically, the Company has not declared or paid any cash dividends on its
common stock. Any future determination to pay dividends on its common stock will depend upon the Companys results of operations, financial condition and capital requirements, applicable restrictions under any contractual arrangements and such
other factors deemed relevant by the Companys Board of Directors.



Recent Sales of Unregistered SecuritiesOn May 27, 2004, we entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd. (Laurus), under which we issued and sold to Laurus in a private placement (i)
$4,000,000 of Series A Cumulative Convertible Preferred Stock (the Series A Preferred Stock) of our wholly-owned subsidiary, Vertical Health Ventures, Inc., that is convertible into shares of our common stock, and (ii) a warrant to
purchase 820,000 shares of our common stock. This agreement was amended on September 17, 2004.



Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



The statements contained in this Report that are not historical are forward-looking statements, including statements regarding the Companys expectations,
intentions, beliefs or strategies regarding the future. Forward-looking statements include the Companys statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements
included in this Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Companys actual results could
differ materially from those in such forward-looking statements. Additionally, the following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Report. The
discussion is based upon such consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles.



Overview



The Company, primarily, derives its revenues from developing, packaging and wholesaling a wide variety of private labeled nutriceutical veterinary
products and certain pharmaceuticals. Revenues are billed and recognized as product is shipped, net of discounts, allowances, returns and credits.



Cost of goods sold is comprised of material product costs, packaging and labeling costs, direct personnel compensation and other statutory benefits and
indirect costs relating to the labor to support product purchase, receipt, packaging, and warehousing. Research and development expenses are charged against cost of goods sold as incurred and are not material to the Companys operations.



Selling, general and administrative costs include management
and general office salaries, advertising and promotional expenses, sales and marketing and other indirect operating costs.



Interest and other income (expense) consist primarily of interest expense associated with borrowings to finance working capital needs.



Results of Operations



Year Ended December 31, 2004 Compared To Year Ended December 31, 2003



Revenues. The Company generated revenues of $3,283,946 for the year
ended December 31, 2004, an increase of $1,241,789 or 60.8 %, compared to $2,042,157 for the year ended December 31, 2003. The increase in revenues was primarily attributable to increased marketing efforts,, increased distribution and the addition
of the operations of APS Pharmacy which resulted in increases in our customer base and related volume of recurring and new customer sales.



---

##### Index to Financial Statements

Gross profit. The Company achieved a gross profit of $1,931,643 for the year ended December 31,
2004, an increase of $1,013,559 or 110.4%, compared to $918,084 for the year ended December 31, 2003. Gross margin, as a percentage of revenues, increased from 44.9 % for the year ended December 31, 2003 to 58.8% for the year ended December 31,
2004. The increase in gross margin was primarily due to a decrease in production costs and an increase in volume purchase discounts.



Operating expenses. The Company incurred operating expenses of $1,958,132 for the year ended December 31, 2004, an increase of $1,049,601 or
115.5%, compared to $908,531 for the year ended December 31, 2003. The increase was primarily attributable to an increase in payroll due to the addition of staff, related payroll expenses, advertising, consulting fees, insurance, travel,
professional fees, telephone and travel associated with the increase in sales volume.



Interest expense, net of interest income. Interest expense, net of interest income was $408 for the year ended December 31, 2004, compared to $29,227 for the year ended December 31, 2003. The decrease in
interest expense, net of interest income was primarily a result of increases in principal payments on outstanding obligations and the issuance of the Company preferred stock.



Income taxes. The Company had no income tax provision for the years ended December 31, 2004 and 2004, due to the use
of the net operating loss carryforward from prior years against 2004 income and a net operating loss during 2003. No tax benefit has been provided due to the uncertainty in the utilization of the loss carryforwards. These net operating losses may be
carried forward for up to 20 years.



Preferred
dividends. Preferred dividends on the Companys preferred stock were $155,419 for the year ended December 31, 2004, compared to $72,788 for the year ended December 31, 2003. The increase was due to the issuance of the preferred stock by our
wholly owned subsidiary, Vertical Health Ventures, Inc. during 2004.



Net income (loss) per share.Net loss per share was $.01 for the year ended December 31, 2004, compared to net loss per share of $.01 for the year ended December 31, 2003.



Inflation; Seasonality.Management believes that there was no material effect on operations or the financial
condition of the Company as a result of inflation for the years ended December 31, 2004 and 2003. Management also believes that its business is not seasonal; however, significant promotional activities can have a direct impact on sales volume in any
given quarter.



Financial Condition, Liquidity and
Capital Resources



The Company had cash of $34,320 and
a working capital deficit of $387,872 at December 31, 2004, compared to cash of $72,499 and a working capital deficit of $175,877 at December 31, 2003.



Net cash used in operating activities was $109,658 for the year ended December 31, 2004, as compared to net cash used in operating activities of $112,785
for the year ended December 31, 2003. The usage of cash was primarily attributable to the increase in accounts receivable of $259,933 , an increase in inventories of $38,083 , an increase in prepaid expenses of $3,532 , a decrease in other current
assets of $16,016, a decrease in the amounts due to affiliates $133,167, decrease in other assets of $24,203, offset, in part by the net income, an increase in accounts payable of $94,895 and an increase in accrued expenses of $16,683, and an
increase in amounts due to related parties of $48,628.



Net
cash used in investing activities was $258,848, representing the purchases of property and equipment of $26,469 and Goodwill of $232,379 in the acquisition of our pharmacy business.



Net cash provided by financing activities was $330,327, primarily represented by an increase in the line of credit in the
amount of $365,000, proceeds from the issuance of convertible preferred stock of 100,000, a decrease in notes payable to related parties in the amount of $53,498, offset by payments of long-term obligations of $81,175.



Management believes that cash expected to be generated from operations and current cash
reserves will be sufficient for the Company to meet its capital expenditures and working capital needs for its operations as



---

##### Index to Financial Statements

presently conducted. The Companys future liquidity and cash requirements will depend on a wide range of factors, including the level of business in
existing operations, expansion of facilities and possible acquisitions. In particular, if cash flows from operations are not sufficient, it will be necessary for the Company to raise capital or seek additional financing. While there can be no
assurance that such raising of capital or seeking of additional financing would be available in amounts and on terms acceptable to the Company, management believes that such financing would likely be available on acceptable terms.



Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



See consolidated financial statements following Item of this Annual Report
on Form 10-KSB.



Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK.



The Company does not have any material
market risk sensitive financial instruments.



Item 8. CHANGES IN AND
DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.



None.



Item 8a. CONTROLS AND PROCEDURES.



Evaluation of disclosure controls and procedures.



An evaluation was performed under the supervision and with the
participation of our management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure procedures. Based on managements evaluation as of the end of the period
covered by this Annual Report, our principal executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended
(the Exchange Act) were sufficiently effective to ensure that the information required to be disclosed by us in the reports that we file under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness.



Changes in internal controls.



There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of the evaluation referred to above, nor were there any significant deficiencies or material weaknesses in our internal controls. Accordingly, no corrective actions were
required or undertaken except as disclosed.



PART III



Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.



The
following are the names and certain information regarding the current Directors and Executive Officers of the Company:



|                   |  |     |  |                                                 |  |               
|------------------ |  | --- |  | ----------------------------------------------- |  | --------------
|Name               |  | Age |  | Position                                        |  | Director Since
|Stephen M. Watters |  | 38  |  | Chief Executive Officer, Director               |  | 2000          
|Brian T. Nugent    |  | 30  |  | Chief Operating Officer, President and Director |  | 2001          
|Thaddeus J. Shalek |  | 55  |  | Chief Financial Officer                         |  |               
|Jugal K. Taneja    |  | 61  |  | Consultant and Director                         |  | 2000          
|Alfred Lehmkuhl    |  | 73  |  | Director                                        |  | 2002          
|Patrick Sheppard   |  | 57  |  | Director                                        |  | 2002          



---

##### Index to Financial Statements

Pursuant to the Companys bylaws, each director serves for a term of one year and until his
successor is duly qualified. Officers are elected annually by the Board of Directors (subject to the terms of any employment agreement), at the Companys annual meeting, to hold such office until an officers successor has been duly
appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board. Some of the directors and executive officers of the Company also serve in various capacities with subsidiaries of the Company. There are no family
relationships among any of the Companys other directors and executive officers.



Background of Executive Officers and Directors



Stephen M. Watters has served as a director and as the Companys Chief Executive Officer since its inception and our Chief Financial Officer from August 2002 through October 2004. Mr. Watters has also served as Chief Executive Officer
and Secretary of Labelclick, Inc. since its inception. Prior to working with us, Mr. Watters was the Co-founder, Chief Executive Officer and President, of Drugmax, Inc., from September 1998 until August 2000. DrugMax is a publicly-held company
operating as a wholesaler and retailer of pharmaceuticals, over-the counter drugs, health and beauty care products and private label dietary supplements. From September through November 1998, Mr. Watters served as Vice President of Finance of
Dynamic Health Products, Inc., a publicly-held nutraceutical products company. Prior to that, he worked in the investment banking and brokerage businesses from April 1992 to September 1998. He received his Executive Masters of Business
Administration degree from Case Western Reserve University in 1997.



Brian Nugent has served as our President and Chief Operating Officer since April, 2001. Mr. Nugent has also served as President and Treasurer of Labelclick, Inc. since its inception and also President of Drug Depot, Inc., our wholly owned
specialty pharmacy located in Palm Harbor, Florida since inception. Prior to joining Vertical Health Solutions, Inc., Mr. Nugent spent three years working in management for the Tampa Bay Buccaneers of the National Football League where he was
responsible for establishing business relationships and managing daily operations. He received his Bachelors of Science in Multi-National Business Operations from the Florida State University in 1997.



Ted Shalek, CPA/CVA has served as the Companys Chief Financial Officer
since October 2004 and the Treasurer of Drug Depot, Inc., since inception. Mr. Shalek has more than 30 years of tax and accounting experience. From November 1985 until October 2004, Ted was president of his own accounting and business financial
consulting firm, concentrating in tax preparation, auditing, planning and negotiating financing, merger/acquisition planning and investigation, and business valuations. From April 1979 until November 1985 Ted worked as a tax partner with McManamon,
Shalek & Co. CPAs in Rocky River, Ohio, and prior to that time, as a manager for Cooper & Lybrand (now PriceWaterhouseCoopers). He was a part-time instructor of business taxation & financial accounting at Cuyahoga Community College
in Cleveland, Ohio from May 2000 until May 2004. Ted has served as an arbitrator for the NASD since 1984. Ted is a member of several professional organizations, including the American Institute of Certified Public Accountants and National
Association of Certified Business Valuation Analysts. Ted received his Bachelors of Science in Business Administration with a major in Accounting from John Carroll University, Cleveland, Ohio.



Jugal K. Taneja has served as a director of the Company since its inception
and as a consultant to the Company since March 2000. In addition to his service to the Company, Mr. Taneja operates several other companies. He serves as Co-Chairman of the Board of DrugMax, Inc., and from October 2000 to November 2004 served as
DrugMaxs Chief Executive Officer. He previously served as DrugMaxs Chief Executive Officer from its inception in October 1993 through April 1995, and again from January 1996 until August 1999. Further, he served at various times over the
years as DrugMaxs President and Secretary. DrugMax is a publicly-held company operating as a wholesaler and retailer of pharmaceuticals, over-the counter drugs, health and beauty care products and private label dietary supplements. Mr. Taneja



---

##### Index to Financial Statements

also serves as Chairman and a director of Geopharma, Inc., a publicly-held nutraceutical products company. He has also served as the Dynamic Health
Products Chairman of the Board since 1992. Until June 1998 and from November 1999 until February 2002, he also served as the Companys Chief Executive Officer. Dynamic Health is a publicly-held company that markets and distributes health
and beauty products. Mr. Taneja holds degrees in Petroleum Engineering, Mechanical Engineering, and a Masters in Business Administration from Rutgers University.



Patrick J. Sheppard has been a Director since August 2002. Mr. Sheppard has been the President of S & H Associates, a construction
company specializing in the commercial development of healthcare and retail facilities, since June 1996. Since June 1996, he has served as President of Purtec Systems, Inc., a Florida corporation that provides consulting services to the water
purification industry. Mr. Sheppard serves as a Director to Medcom Facilities, a real estate holding company, ICOT Center, Inc., a large commercial flex space park in Clearwater, Florida, and for the Montessori Schools, a private elementary and
middle school in Pinellas County, Florida. He has been a licensed Florida Real Estate Broker since July 1979 and owner of Terra Realty Management, Inc., a Real Estate management and consulting company since October 2001.



Alfred F. Lehmkuhl has been a Director since May 2002. Since June 1988, he
has been Chief Executive Officer of Seven Limers, Inc., an agricultural equipment and supply company, and KAS Trucking, Inc., a regulated common carrier trucking company. He served as President and Chief Executive Officer of Horns Crop
Service, Inc., an agricultural supply company from September 1984 to December 1993. Mr. Lehmkuhl holds a Bachelor of Science degree in Animal Nutrition from The Ohio State University.



Section 16(a) Beneficial Ownership Reporting Compliance



Based solely upon a review of Forms 3, 4, 5, and amendments thereto, furnished to the Company during fiscal year 2003 and
2004, the Company is not aware of any director, officer or beneficial owner of more than ten percent of the Companys Common Stock that failed to file reports required by Section 16(a) of the Securities Exchange Act of 1934 on a timely basis
during fiscal year 2004.



Code of Ethics



The Company has adopted its Code of Ethics and Business Conduct for
Officers, Directors and Employees, that applies to all of the officers, directors and employees of the Company. The Code of Ethics is filed as an exhibit to this Report on Form 10-KSB.



Item 10. EXECUTIVE COMPENSATION



SUMMARY COMPENSATION TABLE (1)



|                                                          |  |                     |  |            |                       |          |     |                             |     |                              |     |                                             |     |                |     |                          |    
|--------------------------------------------------------- |  | ------------------- |  | ---------- | --------------------- | -------- | --- | --------------------------- | --- | ---------------------------- | --- | ------------------------------------------- | --- | -------------- | --- | ------------------------ | ---
|                                                          |  | Annual Compensation |  |            |                       |          |     | Long-Term Compensation     
|                                                          |  |                     |  |            |                       |          |     |                             |     |                              |     | Awards                                      |     |                |     | Payouts                 
|Name and Principal Position                               |  | Year                |  | Salary ($) |                       | Bonus($) |     | Other AnnualCompensation($) |     | RestrictedStockAward(shares) |     | SecuritiesUnderlyingOptions /SARs (#)(1)(2) |     | LTIPPayouts($) |     | All OtherCompensation($)
|Stephen M. Watters (2) Chief Executive Officer            |  | 200420032002        |  | $$$        | 165,000152,500152,500 |          |  |                             |  |                              |  |                                             |  |                |  |                          | 
|Brian T. Nugent President and Chief Operating Officer (3) |  | 200420032002        |  | $$$        | 140,000106,666       |          |  |                             |  |                              |  |                                             |  |                |  |                          | 
|Thaddeus J. Shalek Chief Financial Officer (4)            |  | 200420032002        |  | $$$        | 26,442              |          |  |                             |  |                              |  |                                             |  |                |  |                          | 
|Jugal K. Taneja, Consultant (5)                           |  | 20042003            |  | $$         | 103,666103,666        |          |   |                             |   |                              |   |                                             |   |                |   |                          |  

---

|(1) | The compensation described in this table does not include medical and dental insurance benefits received by the named executive officers, if applicable, which are available
generally to all employees of the Company and certain perquisites and other personal benefits received by the named executive officers, the value of which does not exceed the lesser of $50,000 or 10% of any such officers total salary and bonus
disclosed in the table.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Index to Financial Statements

|(2) | Mr. Stephen M. Watters served as the Companys Chief Executive Officer since its inception.
|--- | -------------------------------------------------------------------------------------------

|(3) | Mr. Brian Nugent has served as the Companys President since April 2001.
|--- | ------------------------------------------------------------------------

|(4) | Mr. Thaddeus J. Shalek, CPA has served as the Companys Chief Financial Officer since October, 2004.
|--- | ----------------------------------------------------------------------------------------------------

|(5) | Mr. Jugal K. Taneja has served as a Consultant since March 2000.
|--- | ----------------------------------------------------------------



During the year ended December 31, 2004, the Company paid each director a fee of $500 for each meeting attended by such director. Outside directors who
serve on board committees will be paid a fee of $100 for each committee meeting attended by such director. In addition, directors receive reimbursement for reasonable expenses incurred in attending meetings.



Employment Agreements



We currently maintain employment agreements with Mr. Watters, for his services as our Chief Executive Officer, Mr. Nugent, for his services
as our President and Chief Operating Officer, Mr. Shalek, for his services as our Chief Financial Officer and a consulting agreement with Mr. Taneja, one of our Directors. In February 2005, we entered into a new three-year employment agreement with
Mr. Watters at an initial annual base salary of $165,000, plus an annual performance bonus and stock options to be determined by the Board of Directors. Also in February 2005, we entered into a new three-year consulting agreement with Mr. Taneja at
an initial annual consulting fee of $165,000. In February 2005, we entered into a new three-year employment agreement with Mr. Nugent at an initial annual base salary of $165,000, plus annual performance bonus and stock options to be determined by
the Board of Directors. In October 2004, we entered into a three-year employment agreement with Mr. Shalek at an annual base salary of $125,000, plus annual performance bonus and stock options to be determined by the Board of Directors.



Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.



The following table sets forth certain information, as of
December 31, 2004 with respect to the beneficial ownership of the outstanding Common Stock by (i) any holder of more than five (5%) percent; (ii) each of the Companys executive officers and directors; and (iii) the directors and executive
officers of the Company as a group. An asterisk indicates beneficial ownership of less than 1% of the outstanding Common Stock. Except as otherwise indicated, each of the shareholders listed below has sole voting and investment power over the shares
beneficially owned.



---

##### Index to Financial Statements

|       |  |                                                   |  |                                            |  |                                    |  
|------ |  | ------------------------------------------------- |  | ------------------------------------------ |  | ---------------------------------- | -
|Class  |  | Name and Address of Beneficial Owner(1)           |  | Amount and Nature ofBeneficialOwnership(2) |  | ApproximateTitle ofPercent OfClass |  
|Common |  | Stephen M. Watters(3)                             |  | 5,649,444                                  |  | 38.1                               | %
|Common |  | Brian T. Nugent (4)                               |  | 1,069,075                                  |  | 7.7                                | %
|Common |  | Jugal K. Taneja(5)                                |  | 4,115,787                                  |  | 27.7                               | %
|Common |  | Patrick Sheppard(6)                               |  | 326,675                                    |  | 2.4                                | %
|Common |  | Alfred Lehmkuhl(7)                                |  | 1,562,395                                  |  | 11.2                               | %
|Common |  | All officers and directors as a group (5 persons) |  | 12,723,376                                 |  | 92.3                               | %

---

|(1) | Except as otherwise indicated, the address of each beneficial owner is c/o Vertical Health Solutions, Inc. at 855 Dunbar, Ave., Oldsmar, FL 34677.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to the shares shown. Except where
indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of voting securities shown as beneficially owned by them.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Of the shares beneficially owned by Mr. Watters, 1,913,868 shares are owned by SMW Capital Group Limited Partnership, a company owned and controlled by Mr. Watters. Also includes
228,575 shares are owned by Kristen Watters, Mr. Watters wife. Mr. Watters disclaims beneficial ownership of the shares registered in the name of his wife. Includes 428,570 shares issuable upon exercise of presently exercisable warrants to
purchase common stock at $.65 per share and 710,000 shares issuable upon exercise of options to purchase common stock and warrants convertible into common stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Of the shares beneficially owned by Mr. Nugent, 95,240 shares are owned by Julie Nugent, Mr. Nugents wife. Mr. Nugent disclaims beneficial ownership of the shares registered
in the name of his wife. Also includes 210,000 shares issuable upon exercise of options to purchase common stock and warrants convertible into common stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Of the shares beneficially owned by Mr. Taneja, 450,994 shares are owned by Manju Taneja, Mr. Tanejas wife. 285,720 shares are owned by Carnegie Capital LLC, a company owned
and controlled by Mr. Taneja, 553,750 shares are owned by 21stCentury Healthcare Fund L.P., a company controlled by
Mr. Taneja, and 322,232 shares are owned by Bryan Capital Limited Partnership, a company wholly-owned by Dynamic Health Products, Inc., a public company which is controlled by Mr. Taneja. Mr. Taneja disclaims beneficial ownership of the shares
registered in the name of his wife. Includes 428,570 shares issuable upon exercise of presently exercisable warrants to purchase common stock at $.65 per share and 710,000 shares issuable upon exercise of options to purchase common stock and
warrants convertible into common stock.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Of the shares beneficially owned by Mr. Sheppard, 50,000 shares are issuable upon exercise of 50,000 options at $1.02 per share. Mr. Sheppards beneficial ownership also
includes 110,000 shares issuable upon exercise of options to purchase common stock and warrants convertible into common stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Of the shares beneficially owned by Mr. Lehmkuhl, 38,100 shares are held by Mr. Lehmkuhl as custodian for each of Joseph J. Zam, Jr. and Katelyn C. Zam, Mr. Lehmkuhls
grandchildren. Also includes 50,000 shares issuable upon exercise of 50,000 options at $1.02 per share and 110,000 shares issuable upon exercise of options to purchase common stock and warrants convertible into common stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



As of December 31, 2004, the Company had an outstanding
promissory note payable to Stephen M. Watters, a principal shareholder, Director and Chief Executive Officer of the Company, in the amount of approximately $24,029, with interest at the rate of 9% per annum. In addition, as of December 31, 2004, the
Company had an outstanding obligation to Mr. Watters in the amount of approximately $46,254, for working capital advances made to the Company. This obligation is included in amounts due to related parties.



As of December 31, 2004 and 2003, the Company had an outstanding obligation
to Brian T. Nugent, a principal shareholder, Director, President and Chief Operating Officer, in the amounts of approximately $2,283 and $2,442, respectively, for working capital advances made to the Company. This obligation is included in the
amounts due to related parties.



As of December 31, 2004 and
2003, the Company had an outstanding obligation to Thaddeus J. Shalek, Chief Financial Officer of the Company, in the amounts of approximately $6,608 and $-0-, respectively, for working capital advances made to the Company. This obligation is
included in the amounts due to related parties.



---

##### Index to Financial Statements

As of December 31, 2004, the Company had an outstanding promissory note payable to Jugal K. Taneja, a
principal shareholder and a Director of the Company, in the amount of approximately $24,029, with interest at the rate of 9% per annum.



Amounts due from and to affiliates represent balances owed to or from the Company for sales or purchases occurring in the normal course of business.
Amounts due from and to these affiliates are in the nature of trade payables or receivables and fluctuate based on sales and purchasing volume and payments received. The Company believes that material affiliated transactions and loans, and business
relationships entered into by the Company or its subsidiaries with certain of its officers, directors and principal shareholders or their affiliates were on terms no less favorable than the Company could have obtained from independent third parties.
Any future transactions between the Company and its officers, directors or affiliates will be subject to approval by a majority of disinterested directors or shareholders in accordance with Florida law.



Geopharma, Inc. (Geopharma), a publicly traded company, is a
supplier of manufactured dietary supplements and health and beauty care products. Jugal K. Taneja, a principal shareholder and Director of the Company, is also a Director, Chairman of the Board, and principal shareholder of Geopharma. For the year
ended December 31, 2004, the Company sold Geopharma $7,040 of raw materials, and purchases of products from subsidiaries of Geopharma were approximately $469,145. As of December 31, 2004, approximately $129,355 was due to subsidiaries of Geopharma
and is included in obligations to affiliates and Geopharma owed the Company $7,040.



In October 2003, the Company issued 4,865,895 (973,179 pre-split) shares of common stock of the Company upon conversion of 973,179 shares of Series A preferred stock of the Company.



In October 2003, the Company issued 658,520 (131,704 pre-split) shares of
common stock of the Company in payment of $131,704 of accrued preferred share dividends.



PART IV



Item 13. EXHIBITS AND
REPORTS ON FORM 8-K.



(a)(1) Consolidated Financial Statements.



See consolidated financial statements commencing on page
F-1.



(a)(2) Exhibits.



The following exhibits are filed with this report:



|    |  |                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 |  | Amended and Restated Articles of Incorporation*                                                                                                                                                             
|    | 
|3.2 |  | Amendment Creating Class of Preferred Stock*                                                                                                                                                                
|    | 
|3.3 |  | By-Laws*                                                                                                                                                                                                    
|    | 
|3.4 |  | Certificate of Incorporation of Vertical Health Ventures, Inc., a wholly-owned subsidiary of the Company, filed as Exhibit 3.4 to Form SB-2, File No. 333-116682.                                           
|    | 
|3.5 |  | Certificate of Designation of Vertical Health Ventures, Inc., designating the rights of Series A Cumulative Convertible Preferred Stock, as amended, filed as Exhibit 3.5 to Form SB-2, File
No. 333-116682.
|    | 
|3.6 |  | Bylaws of Vertical Health Ventures, Inc, filed as Exhibit 3.6 to Form SB-2, File No. 333-116682.                                                                                                            



---

##### Index to Financial Statements

|     |  |                                                                                                                                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Specimen Stock Certificate*                                                                                                                                                                                 
|     | 
|4.2  |  | Securities Purchase Agreement dated as of May 27, 2004, filed as Exhibit 4.1 to Form 8-K, filed with the Securities and Exchange Commission on June 4,2004, and incorporated herein by
reference.           
|     | 
|4.3  |  | Registration Rights Agreement dated as of May 27, 2004, filed as Exhibit 4.2 to Form 8-K, filed with the Securities and Exchange Commission on June 4, 2004, and incorporated herein by
reference.          
|     | 
|4.4  |  | Form of Common Stock Purchase Warrant dated as of May 27, 2004, filed as Exhibit 4.3 to Form 8-K, filed with the Securities and Exchange Commission on June 4, 2004, and incorporated herein by
reference.  
|     | 
|4.5  |  | Stock Pledge Agreement dated as of May 27, 2004, filed as Exhibit 4.4 to Form 8-K, filed with the Securities and Exchange Commission on June 4, 2004, and incorporated herein by
reference.                 
|     | 
|4.6  |  | Subsidiary Guaranty dated as of May 27, 2004, filed as Exhibit 4.5 to Form 8-K, filed with the Securities and Exchange Commission on June 4, 2004, and incorporated herein by
reference.                    
|     | 
|4.7  |  | Series A Bank Escrow Agreement dated as of May 27, 2004, filed as Exhibit 4.6 to Form 8-K, field with the Securities and Exchange Commission on June 4, 2004, and incorporated herein by
reference.         
|     | 
|4.8  |  | Restricted Account Side Letter dated as of May 27, 2004, filed as Exhibit 4.7 to Form 8-K, filed with the Securities and Exchange Commission on June 4, 2004, and incorporated herein by
reference.         
|     | 
|4.9  |  | Restricted Account Agreement dated a of May 27, 2004, filed as Exhibit 4.8 to Form 8-K, filed with the Securities and Exchange Commission on June 4, 2004, and incorporated herein by
reference.            
|     | 
|4.10 |  | Amendment No. 1 to Securities Purchase Agreement, dated as of September 20, 2004, filed as exhibit 4.9 to Companys Report on Form SB2/A dated as of October 20, 2004, and incorporated
herein by reference.
|     | 
|4.11 |  | Form of Redeemable Class A Warrant Agreement between Vertical Health Solutions, Inc. and Registrar and Transfer Company*                                                                                    
|     | 
|10.1 |  | Form of 2001 Stock Option Plan*                                                                                                                                                                             
|     | 
|10.2 |  | Form of Employment Agreement with Stephen M. Watters                                                                                                                                                        
|     | 
|10.3 |  | Form of Employment Agreement with Brian T. Nugent                                                                                                                                                           
|     | 
|10.4 |  | Form of Employment Agreement with Thaddeus J. Shalek, filed as an exhibit to the Companys Report on Form 8-K dated as of October 6, 2004, and incorporated herein by
reference.                            
|     | 
|10.5 |  | Form of Consulting Agreement with Jugal K. Taneja                                                                                                                                                           
|     | 
|10.6 |  | Promissory Note issued to Stephen Watters, dated December 1, 2001*                                                                                                                                          
|     | 
|10.7 |  | Promissory Note issued to Jugal K. Taneja, dated December 1, 2001*                                                                                                                                          



---

##### Index to Financial Statements

|     |  |                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------
|10.8 |  | Stephen Watters warrant agreement*                                                                                     
|     | 
|10.9 |  | Jugal K. Taneja warrant agreement*                                                                                     
|     | 
|14.1 |  | Code of Ethics of Vertical Health Solutions, Inc.                                                                      
|     | 
|21.1 |  | Vertical Health Solutions, Inc.  List of Subsidiaries.                                                                
|     | 
|31.1 |  | Certification Of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                
|     | 
|31.2 |  | Certification Of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                
|     | 
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|* | Incorporated by reference to the Companys registration statement on Form SB-2, file no. 333-74766.
|- | ---------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K.



During the three-month period ending December 31, 2004, the Company filed one report on Form 8-K related to the acquisition of the operating assets of T
& L Pharmacies, Inc. through the Companys wholly owned subsidiary, Drug Depot, Inc. d/b/a APS Pharmacy.



Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.



Audit Fees. The aggregate fees billed by our auditors to date, for professional services rendered for the audit of the Companys annual financial statements for the
years ended December 31, 2004 and December 31, 2003, and for review of the financial statements included in the Companys quarterly reports on Form 10-QSB during such fiscal years, were $26,500 and $15,000, respectively.



Audit-Related Fees. The aggregate fees billed for assurance and related services by our
auditors that are reasonably related to the performance of the audit or review of our financial statements were $25,600 and $15,000 for the years ended December 31, 2004 and 2003, respectively.



Tax Fees. The aggregate fees billed for tax preparation and related services by our auditors
were $0 and $0 for the years ended December 31, 2004 and 2003, respectively.



All Other Fees. For the fiscal year ended December 31, 2003, the Company incurred fees to auditors of $0 for services rendered to the Company, other than the services covered in Audit Fees, Audit-Related Fees or
Tax Fees.



---

##### Index to Financial Statements

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



|                      |  |                                 |  |                                             
|--------------------- |  | ------------------------------- |  | --------------------------------------------
|                      |  | VERTICAL HEALTH SOLUTIONS, INC.
|                      |  |                                
|Dated: March 30, 2005 |  | By:                             |  | /s/ Stephen M. Watters                      
|                      |  |                                 |  | Stephen M. Watters, Chief Executive Officer,
|                      |  |                                
|                      |  |                                 |  | /s/ Thaddeus J. Shalek, CPA                 
|                      |  |                                 |  | Thaddeus J. Shalek, CPA                     



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.



|          |  |                                          |  |                                                 |  |               
|--------- |  | ---------------------------------------- |  | ----------------------------------------------- |  | --------------
|Signature |  | Title                                    |  | Date                                           
|          |  |                                          | 
|By:       |  | /s/ Stephen M. WattersStephen M. Watters |  | Chief Executive Officer and Director            |  | March 30, 2005
|          |  |                                          | 
|By:       |  | /s/ Brian T. NugentBrian T. Nugent       |  | President, Chief Operating Officer and Director |  | March 30, 2005
|          |  |                                          | 
|By:       |  | /s/ Thaddeus J. ShalekThaddeus J. Shalek |  | Chief Financial Officer                         |  | March 30, 2005
|          |  |                                          | 
|By:       |  | /s/ Jugal K. TanejaJugal K. Taneja       |  | Consultant and Director                         |  | March 30, 2005
|          |  |                                          | 
|By:       |  | /s/ Alfred LehmkuhlAlfred Lehmkuhl       |  | Director                                        |  | March 30, 2005
|          |  |                                          | 
|By:       |  | /s/ Patrick SheppardPatrick Sheppard     |  | Director                                        |  | March 30, 2005



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES



|                                                                                                         |  |           
|-------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                         |  | PAGE      
|Independent Auditors Report                                                                             |  | F-2       
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                             |  | F-3       
|Consolidated Statements of Operations for the year ended December 31, 2004 and 2003                      |  | F-4       
|Consolidated Statements of Changes in Stockholders Equity for the year ended December 31, 2004 and 2003 |  | F-5       
|Consolidated Statements of Cash Flows for the year ended December 31, 2004 and 2003                      |  | F-6  F-7 
|Notes to Consolidated Financial Statements                                                               |  | F-8  F-23



---

##### Index to Financial Statements

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors

Vertical Health Solutions, Inc. and Subsidiaries



We have audited the accompanying consolidated balance sheet of Vertical Health Solutions, Inc. and subsidiaries as of December 31, 2004 and
2003 and the related statement of operations, changes in stockholders equity, and cash flows for the years ended December 31, 2004 and 2003. These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Vertical Health Solutions, Inc. as of December 31, 2004 and 2003 and the results of operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.



|                               
|-------------------------------
|BRIMMER, BUREK & KEELAN LLP    
|                               
|/s/ Brimmer, Burek & Keelan LLP

Tampa, Florida

March 25 2005



F-2



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003



|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                                                   |  | 2004 |            |   | 2003 |  
|ASSETS                                                                                                                                                                                                                             |  |      |            |   |      |   |            |  
|Current assets:                                                                                                                                                                                                                    |  |      |            |   |      |   |            |  
|Cash                                                                                                                                                                                                                               |  | $    | 34,320     |   |      | $ | 72,499     |  
|Accounts receivable, net                                                                                                                                                                                                           |  |      | 394,695    |   |      |   | 134,762    |  
|Inventories, net                                                                                                                                                                                                                   |  |      | 416,008    |   |      |   | 377,925    |  
|Prepaid expenses                                                                                                                                                                                                                   |  |      | 30,067     |   |      |   | 26,535     |  
|Other current assets                                                                                                                                                                                                               |  |      | 83,680     |   |      |   | 275        |  
|Due from affiliates                                                                                                                                                                                                                |  |      | 479        |   |      |   | 2,024      |  
|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  
|Total current assets                                                                                                                                                                                                               |  |      | 959,249    |   |      |   | 614,020    |  
|Cash, Restricted                                                                                                                                                                                                                   |  |      | 3,730,258  |   |      |   |           |  
|Property and equipment, net                                                                                                                                                                                                        |  |      | 71,197     |   |      |   | 45,847     |  
|Goodwill                                                                                                                                                                                                                           |  |      | 430,000    |   |      |   |           |  
|Intangible assets, net of amortization                                                                                                                                                                                             |  |      | 2,157      |   |      |   |           |  
|Other assets                                                                                                                                                                                                                       |  |      | 25,856     |   |      |   | 5,758      |  
|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  
|Total assets                                                                                                                                                                                                                       |  | $    | 5,218,717  |   |      | $ | 665,625    |  
|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                     |  |      |            |   |      |   |            |  
|Current liabilities:                                                                                                                                                                                                               |  |      |            |   |      |   |            |  
|Accounts payable                                                                                                                                                                                                                   |  | $    | 328,840    |   |      | $ | 247,738    |  
|Other payables                                                                                                                                                                                                                     |  |      | 5,457      |   |      |   | 5,435      |  
|Line of credit                                                                                                                                                                                                                     |  |      | 365,000    |   |      |   |           |  
|Current portion of obligations under capital leases                                                                                                                                                                                |  |      | 17,294     |   |      |   | 23,482     |  
|Current portion of long-term obligations                                                                                                                                                                                           |  |      | 78,845     |   |      |   | 81,577     |  
|Accrued expenses                                                                                                                                                                                                                   |  |      | 72,890     |   |      |   | 41,207     |  
|Accrued preferred dividends                                                                                                                                                                                                        |  |      | 155,419    |   |      |   |           |  
|Obligations to affiliates                                                                                                                                                                                                          |  |      | 136,079    |   |      |   | 270,791    |  
|Notes payable to related parties                                                                                                                                                                                                   |  |      | 115,175    |   |      |   | 96,172     |  
|Due to related parties                                                                                                                                                                                                             |  |      | 72,123     |   |      |   | 23,495     |  
|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  
|Total current liabilities                                                                                                                                                                                                          |  |      | 1,347,122  |   |      |   | 789,897    |  
|Obligations under capital leases                                                                                                                                                                                                   |  |      | 961        |   |      |   | 2,978      |  
|Long-term obligations, less current portion                                                                                                                                                                                        |  |      | 190,442    |   |      |   | 118,181    |  
|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  
|Total liabilities                                                                                                                                                                                                                  |  |      | 1,538,525  |   |      |   | 911,056    |  
|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  
|Commitments and contingencies                                                                                                                                                                                                      |  |      |           |   |      |   |           |  
|Stockholders equity (deficit):                                                                                                                                                                                                    |  |      |            |   |      |   |            |  
|Preferred stock, $.001 par value, 5,000,000 shares authorized:                                                                                                                                                                     |  |      |            |   |      |   |            |  
|Series A 10% cumulative, convertible, 1,000,000 shares authorized, no shares issued and outstanding                                                                                                                                |  |      |           |   |      |   |           |  
|Undesignated, 4,000,000 shares authorized, no shares or outstandingSeries A 10% Cumulative, Convertible Preferred Stock, $.01 par value,
4,000,000 shares authorized; 3,900,000 and no shares issued and outstanding, respectively |  |      | 39,000     |   |      |   |           |  
|Common stock, $.001 par value, 48,000,000 shares authorized; 13,876,931 and 13,709,375 shares issued and outstanding,
respectively                                                                                                 |  |      | 13,877     |   |      |   | 13,709     |  
|Additional paid in capital                                                                                                                                                                                                         |  |      | 9,196,577  |   |      |   | 1,168,731  |  
|Accumulated equity (deficit)                                                                                                                                                                                                       |  |      | (5,569,262 | ) |      |   | (1,427,871 | )
|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  
|Total stockholders equity (deficit)                                                                                                                                                                                               |  |      | 3,680,192  |   |      |   | (245,431   | )
|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                                               |  | $    | 5,218,717  |   |      | $ | 665,625    |  
|                                                                                                                                                                                                                                   |  |      |            |   |      |   |            |  



See accompanying notes
to consolidated financial statements.



F-3



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31, 2004 and 2003



|                                                                       |  |      |            |   |      |   |           |  
|---------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|                                                                       |  | 2004 |            |   | 2003 |  
|Sales                                                                  |  | $    | 3,283,946  |   |      | $ | 2,042,157 |  
|                                                                       |  |     
|Cost of goods sold                                                     |  |      | 1,352,303  |   |      |   | 1,124,073 |  
|                                                                       |  |      |            |   |      |   |           |  
|Gross profit                                                           |  |      | 1,931,643  |   |      |   | 918,084   |  
|                                                                       |  |      |            |   |      |   |           |  
|Operating expenses:                                                    |  |      |            |   |      |   |           |  
|Selling, general and administrative expenses                           |  |      | 1,958,132  |   |      |   | 908,531   |  
|                                                                       |  |      |            |   |      |   |           |  
|Total operating expenses                                               |  |      | 1,958,132  |   |      |   | 908,531   |  
|                                                                       |  |      |            |   |      |   |           |  
|Operating income (loss) before other income and expense                |  |      | (26,489    | ) |      |   | 9,553     |  
|                                                                       |  |      |            |   |      |   |           |  
|Other income (expense):                                                |  |      |            |   |      |   |           |  
|Interest income                                                        |  |      | 32,283     |   |      |   | 80        |  
|Other income and expenses, net                                         |  |      | 40,925     |   |      |   | 30,430    |  
|Loss on disposition of equipment                                       |  |      |           |   |      |   | (13,397   | )
|Interest expense                                                       |  |      | (32,691    | ) |      |   | (29,307   | )
|                                                                       |  |      |            |   |      |   |           |  
|Total other income (expense)                                           |  |      | 40,517     |   |      |   | (12,194   | )
|                                                                       |  |      |            |   |      |   |           |  
|Income (Loss) before income taxes                                      |  |      | 14,028     |   |      |   | (2,641    | )
|                                                                       |  |     
|Income taxes                                                           |  |      | 0          |   |      |   | 0         |  
|                                                                       |  |      |            |   |      |   |           |  
|Net Income (Loss)                                                      |  |      | 14,028     |   |      |   | (2,641    | )
|                                                                       |  |     
|Preferred stock dividends                                              |  |      | 155,419    |   |      |   | 72,788    |  
|                                                                       |  |      |            |   |      |   |           |  
|Net (loss) available to common stockholders                            |  | $    | (141,391   | ) |      | $ | (75,429   | )
|                                                                       |  |      |            |   |      |   |           |  
|Basic and diluted loss per share                                       |  | $    | (0.01      | ) |      | $ | (0.01     | )
|                                                                       |  |      |            |   |      |   |           |  
|Basic and diluted weighted average number of common shares outstanding |  |      | 13,716,147 |   |      |   | 9,493,991 |  
|                                                                       |  |      |            |   |      |   |           |  



See accompanying notes
to consolidated financial statements.



F-4



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY DEFICIT

Year Ended December 31, 2004 and 2003



|                                                                                                       |  |                 |   |  |              |          |   |        |            |         |   |                            |  |                     |           |  |                             |            |   |  |   |           |  
|------------------------------------------------------------------------------------------------------ |  | --------------- | - |  | ------------ | -------- | - | ------ | ---------- | ------- | - | -------------------------- |  | ------------------- | --------- |  | --------------------------- | ---------- | - |  | - | --------- | -
|                                                                                                       |  |                 |   |  |              |          |   |        |            |         |   | Additional Paid-in Capital |  | Accumulated Deficit |           |  | Total Stockholders Deficit |           
|                                                                                                       |  | Preferred Stock |   |  | Common Stock |          |   |       
|                                                                                                       |  | Shares          |   |  | Dollars      |          |   | Shares |            | Dollars |   |                            | 
|Balances at December 31, 2003 (Restated)                                                               |  | 973,179         |   |  | $            | 973,179  |   |        | 7,984,960  |         | $ | 7,985                      |  | $                   | 8,995     |  | $                           | (1,352,442 | ) |  | $ | (362,283  | )
|Issuance of 200,000 shares of common stock at $1.02 per share for cash, net of offering costs          |  |                |   |  |              |         |   |        | 200,000    |         |   | 200                        |  |                     | 60,377    |  |                             |           |   |  |   | 60,577    |  
|Conversion of 973,179 shares of preferred stock into 4,865,895 shares of common stock                  |  | (973,179        | ) |  |              | (973,179 | ) |        | 4,865,895  |         |   | 4,866                      |  |                     | 968,313   |  |                             |           |   |  |   | 0         |  
|Issuance of 658,520 shares of common stock in payment of $131,704 of accrued preferred stock dividends |  |                |   |  |              |         |   |        | 658,520    |         |   | 658                        |  |                     | 131,046   |  |                             |           |   |  |   | 131,704   |  
|Net (loss)                                                                                             |  |                |   |  |              |         |   |        |           |         |   |                           |  |                     |          |  |                             | (2,641     | ) |  |   | (2,641    | )
|Dividends on preferred stock                                                                           |  |                |   |  |              |         |   |        |           |         |   |                           |  |                     |          |  |                             | (72,788    | ) |  |   | (72,788   | )
|                                                                                                       |  |                 |   |  |              |          |   |        |            |         |   |                            |  |                     |           |  |                             |            |   |  |   |           |  
|Balances at December 31, 2003                                                                          |  |                |   |  | $            |         |   |        | 13,709,375 |         | $ | 13,709                     |  | $                   | 1,168,731 |  | $                           | (1,427,871 | ) |  | $ | (245,311  | )
|Issuance of common stock in payment of an outstanding obligation of $3,793                             |  |                |   |  |              |         |   |        | 3,700      |         |   | 4                          |  |                     | 3,789     |  |                             |           |   |  |   | 3,793     |  
|Issuance of common stock in payment of surety bond                                                     |  |                |   |  |              |         |   |        | 10,000     |         |   | 10                         |  |                     | 9,990     |  |                             |           |   |  |   | 10,000    |  
|Issuance of Series A cumulative preferred stock - including renegotiation of price                     |  | 4,000,000       |   |  |              | 40,000   |   |        |           |         |   |                           |  |                     | 6,234,626 |  |                             | (2,491,626 | ) |  |   | 3,783,000 |  
|Amended exercise price of prior issuance of warrants                                                   |  |                |   |  |              |         |   |        |           |         |   |                           |  |                     | 1,508,374 |  |                             | (1,508,374 | ) |  |   |          |  
|Issuance of stock options for services                                                                 |  |                |   |  |              |         |   |        |           |         |   |                           |  |                     | 270,221   |  |                             |           |   |  |   | 270,221   |  
|Issuance of common stock due to conversion of preferred stock                                          |  | (100,000        | ) |  |              | (1,000   | ) |        | 153,856    |         |   | 154                        |  |                     | 846       |  |                             |           |   |  |   |          |  
|Net income                                                                                             |  |                |   |  |              |         |   |        |           |         |   |                           |  |                     |          |  |                             | 14,028     |   |  |   | 14,028    |  
|Preferred stock dividends                                                                              |  |                |   |  |              |         |   |        |           |         |   |                           |  |                     |          |  |                             | (155,419   | ) |  |   | (155,419  | )
|                                                                                                       |  |                 |   |  |              |          |   |        |            |         |   |                            |  |                     |           |  |                             |            |   |  |   |           |  
|Balances at December 31, 2004                                                                          |  | 3,900,000       |   |  | $            | 39,000   |   |        | 13,876,931 |         | $ | 13,877                     |  | $                   | 9,196,577 |  | $                           | (5,569,262 | ) |  | $ | 3,680,192 |  
|                                                                                                       |  |                 |   |  |              |          |   |        |            |         |   |                            |  |                     |           |  |                             |            |   |  |   |           |  



See accompanying notes
to consolidated financial statements.



F-5



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31, 2004 and 2003



|                                                                            |  |      |          |   |      |   |          |  
|--------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                            |  | 2004 |          |   | 2003 |  
|Cash flows from operating activities:                                       |  |      |          |   |      |   |          |  
|Net income (loss)                                                           |  | $    | 14,028   |   |      | $ | (2,641   | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |      |          |   |      |   |          |  
|Depreciation and amortization                                               |  |      | 20,446   |   |      |   | 9,685    |  
|Loss on disposition and sale of equipment                                   |  |      |         |   |      |   | 13,397   |  
|Interest on restricted cash                                                 |  |      | (32,258  | ) |      |   |         |  
|Amortization of deferred consulting fees                                    |  |      | 170,800  |   |      |   |         |  
|Changes in operating assets and liabilities:                                |  |      |          |   |      |   |          |  
|Accounts receivable                                                         |  |      | (259,933 | ) |      |   | (34,558  | )
|Inventories                                                                 |  |      | (38,083  | ) |      |   | (233,910 | )
|Prepaid expenses                                                            |  |      | (3,532   | ) |      |   | (11,465  | )
|Other current assets                                                        |  |      | 16,016   |   |      |   | 9,793    |  
|Due to/from affiliates, net                                                 |  |      | (133,167 | ) |      |   | 154,979  |  
|Other assets                                                                |  |      | (24,203  | ) |      |   | (2,207   | )
|Accounts payable                                                            |  |      | 94,895   |   |      |   | 45,914   |  
|Other payables                                                              |  |      | 22       |   |      |   | (1,994   | )
|Accrued expenses                                                            |  |      | 16,683   |   |      |   | (34,860  | )
|Due to related parties                                                      |  |      | 48,628   |   |      |   | (24,918  | )
|                                                                            |  |      |          |   |      |   |          |  
|Net cash used in operating activities                                       |  |      | (109,658 | ) |      |   | (112,785 | )
|                                                                            |  |      |          |   |      |   |          |  
|Cash flows from investing activities:                                       |  |      |          |   |      |   |          |  
|Proceeds from the sales of equipment                                        |  |      |         |   |      |   | 10,000   |  
|Purchases of property and equipment                                         |  |      | (26,469  | ) |      |   | (34,786  | )
|Purchases of goodwill                                                       |  |      | (232,379 | ) |      |   |         |  
|                                                                            |  |      |          |   |      |   |          |  
|Net cash used in investing activities                                       |  |      | (258,848 | ) |      |   | (24,786  | )
|                                                                            |  |      |          |   |      |   |          |  
|Cash flows from financing activities:                                       |  |      |          |   |      |   |          |  
|Net change in credit line payable                                           |  |      | 365,000  |   |      |   |         |  
|Proceeds from issuance of convertible preferred stock                       |  |      | 100,000  |   |      |   |         |  
|Proceeds from issuance of long-term obligations                             |  |      |         |   |      |   | 36,979   |  
|Payments of long-term obligations                                           |  |      | (81,175  | ) |      |   | (101,000 | )
|Net proceeds from (Payment of) related party notes payable                  |  |      | (53,498  | ) |      |   | (3,828   | )
|Proceeds from issuance of common stock                                      |  |      |         |   |      |   | 204,000  |  
|Payments of offering costs                                                  |  |      |         |   |      |   | (54,150  | )
|                                                                            |  |      |          |   |      |   |          |  
|Net cash provided by financing activities                                   |  |      | 330,327  |   |      |   | 82,001   |  
|                                                                            |  |     
|Net increase (decrease) in cash                                             |  |      | (38,179  | ) |      |   | (55,570  | )
|Cash at beginning of period                                                 |  |      | 72,499   |   |      |   | 128,069  |  
|                                                                            |  |      |          |   |      |   |          |  
|Cash at end of period                                                       |  | $    | 34,320   |   |      | $ | 72,499   |  
|                                                                            |  |      |          |   |      |   |          |  



See accompanying notes
to consolidated financial statements.



F-6



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWSContinued

Year Ended December 31, 2004 and 2003



|                                                                         |  |      |           |      |   |        
|------------------------------------------------------------------------ |  | ---- | --------- | ---- | - | -------
|                                                                         |  | 2004 |           | 2003
|Supplemental disclosure of cash flow information:                        |  |      |           |      |   |        
|Cash paid during the period for interest                                 |  | $    | 31,068    |      | $ | 40,239 
|                                                                         |  |      |           |      |   |        
|Cash paid during the period for income taxes                             |  | $    |          |      | $ |       
|                                                                         |  |      |           |      |   |        
|Supplemental schedule of non-cash financing activities:                  |  |      |           |      |   |        
|Conversion of Series A Preferred stock into common stock                 |  | $    |          |      | $ | 973,179
|                                                                         |  |      |           |      |   |        
|Accrual of preferred stock dividends                                     |  | $    | 155,417   |      | $ | 72,788 
|                                                                         |  |      |           |      |   |        
|Issuance of common stock in payment of accrued preferred stock dividends |  | $    |          |      | $ | 131,704
|                                                                         |  |      |           |      |   |        
|Conversion of credit line payable to note payable                        |  | $    |          |      | $ | 175,000
|                                                                         |  |      |           |      |   |        
|Issuance of note payable for acquisition                                 |  | $    | 215,000   |      | $ |       
|                                                                         |  |      |           |      |   |        
|Stock issued for surety bond                                             |  | $    | 10,000    |      | $ |       
|                                                                         |  |      |           |      |   |        
|Stock issued for liabilities                                             |  | $    | 3,793     |      | $ |       
|                                                                         |  |      |           |      |   |        
|Options issued for consulting services                                   |  | $    | 270,221   |      | $ |       
|                                                                         |  |      |           |      |   |        
|Restricted cash proceeds (net of $202,000 cost for transaction)          |  | $    | 3,798,000 |      | $ |       
|                                                                         |  |      |           |      |   |        



See accompanying notes
to consolidated financial statements.



F-7



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2004 AND 2003



NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Vertical Health Solutions, Inc., incorporated as Labelclick.com, Inc. on March 3, 2000 under the laws of the State of Florida, is located in Oldsmar,
Florida and develops, markets and distributes animal health products to veterinarians and distributors. The Company changed its name to Vertical Health Solutions, Inc. on January 11, 2001.



Principles of Consolidation



The accompanying consolidated financial statements for the years ended
December 31, 2004 and 2003 include the accounts of Vertical Health Solutions, Inc. and its wholly-owned subsidiaries (collectively the Company), Labelclick, Inc. VHS Genesis Corp Vertical Health Ventures, and Drug Depot, Inc. All
intercompany accounts and balances have been eliminated in consolidation.



Restatements



Unless otherwise noted, all
information presented as of and for the years ended December 31, 2004 and 2003 has been adjusted to retroactively reflect the five-for-one forward split of the Companys common stock in November 2003 (see Note 11).



Cash and Cash Equivalents



For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.



Accounts Receivable



Accounts receivable, net are stated at estimated net realizable value. Accounts receivable are comprised of balances due from customers net of estimated allowances for uncollectible accounts. In determining collectibility, historical trends
are evaluated and specific customer issues are reviewed to arrive at appropriate allowances (see Note 3).



Intangible Asset



The
intangible asset consisted of costs to obtain the Companys loans and line of credit and web site and was being amortized using the straight-line method over a period of 3 years. Amortization charged to operations was $1,948 and $- 0- in 2004
and 2003.



F-8



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



Inventories



Inventories, net are stated at
the lower of cost or market. Cost is determined using the first-in, first-out method (see Note 4).



Property and Equipment



Depreciation is provided for using the straight-line method, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives ranging from three to seven years. Leasehold improvements are
amortized using the straight-line method over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Leased equipment under capital leases is amortized using the straight-line method over the lives of the
respective leases or over the service lives of the assets for those leases that substantially transfer ownership. (See Note 5). Accelerated methods are used for tax depreciation.



Impairment of Assets



The Companys policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles
and goodwill when certain events have taken place that indicate that the remaining balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related
undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The impairment write-down would be the difference between the carrying amounts and the fair
value of these assets. Losses on impairment are recognized by a charge to earnings. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. There were no impairment losses during
the years ended December 31, 2004 and 2003.



Income Taxes



The Company utilizes the guidance provided by Statement of Financial
Accounting Standards No. 109, Accounting For Income Taxes (SFAS 109). Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. Valuation allowances are provided if
necessary to reduce deferred tax assets to the amount expected to be realized.



F-9



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



Earnings
(Loss) Per Common Share



The Company utilizes the guidance
provided by Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). Earnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earnings
(loss) per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income by the weighted average number of
shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. During the periods presented, common stock equivalents were not considered as their effect would be
anti-dilutive. (See Note 12)



Use of Estimates



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at December 31, 2004
and 2003, as well as the reported amounts of revenues and expenses for the years then ended. The actual outcome of the estimates could differ from the estimates made in the preparation of the consolidated financial statements.



Revenue Recognition



Revenues are recognized when the merchandise is shipped and title passes to the customer. Revenue is recorded net of any
discounts, allowances, returns or credits. Returns are allowed for certain products and are subject to a restocking fee. The Company has not experienced any significant discounts, allowances, returns or credits to date.



Segment Information



The Company utilizes the guidance provided by Statement of Financial Accounting Standards No. 131, Disclosures About
Segments Of An Enterprise And Related Information (SFAS 131). Certain information is disclosed in accordance with SFAS 131, based on the way management organizes financial information for making operating decisions and assessing performance.
For the years ended December 31, 2004 and 2003 and currently, the Company operates in a single segment. Management will evaluate additional segment disclosure requirements as it expands the operations of the Company.



F-10



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



Stock
Based Compensation



The Company accounts for equity
instruments issued to employees for services based on the fair value of the equity instruments issued and accounts for equity instruments issued to other than employees based on the fair value of the consideration received or the fair value of the
equity instruments whichever is more reliably measurable.



The
Company accounts for stock based compensation in accordance with SFAS 123, Accounting for Stock-Based Compensation. The provisions of SFAS 123 allow companies to either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (APB 25) but disclose the pro forma effects on net income (loss) had the fair value of the
options been expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option incentive plans. No stock-based employee compensation cost is reflected in net income, as all options granted under the plan had an
exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS
123 to stock-based employee compensation.



|                                                 |  |      |          |   |      |   |         |  
|------------------------------------------------ |  | ---- | -------- | - | ---- | - | ------- | -
|                                                 |  | 2004 |          |   | 2003 |  
|Net Income (loss), as reported                   |  | $    | (141,391 | ) |      | $ | (75,429 | )
|Compensation cost based on the fair value method |  |      | 89,364   |   |      |   |        |  
|                                                 |  |      |          |   |      |   |         |  
|Pro forma net loss                               |  | $    | (230,755 | ) |      | $ | (75,429 | )
|                                                 |  |      |          |   |      |   |         |  
|Basic and diluted loss per share                 |  |      |          |   |      |   |         |  
|As reported                                      |  | $    | (.01     | ) |      | $ | (.01    | )
|                                                 |  |      |          |   |      |   |         |  
|Pro forma                                        |  | $    | (.02     | ) |      | $ | (.01    | )
|                                                 |  |      |          |   |      |   |         |  



Advertising Costs



The Company charges advertising costs to expense as incurred. Advertising
expense was $15,611 and $12,511 for the years ended December 31, 2004 and 2003, respectively.



F-11



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



Fair
Value of Financial Instruments



The Company, in estimating
its fair value disclosures for financial instruments, uses the following methods and assumptions:



Cash, Accounts Receivable, Accounts Payable and Accrued Expenses: The carrying amounts reported in the balance sheet for cash, accounts receivable,
accounts payable and accrued expenses approximate their fair value due to their relatively short maturity.



Long-Term Obligations: The fair value of the Companys fixed-rate long-term obligations is estimated using discounted cash flow analyses,
based on the Companys current incremental borrowing rates for similar types of borrowing arrangements. At December 31, 2004 and 2003, the fair value of the Companys long-term obligations approximated its carrying value.



Reclassifications



Certain items previously reported in the prior year have been reclassified to conform to the current year presentation.



NOTE 2RELATED PARTY TRANSACTIONS



As of December 31, 2004 and 2003, the Company had an outstanding promissory
note payable to Stephen M. Watters, a principal shareholder, Director and Chief Executive Officer of the Company, in the amounts of approximately $24,029 and $48,086, respectively, with interest at the rate of 9% per annum. In addition, as of
December 31, 2004 and 2003, the Company had an outstanding obligation to Mr. Watters in the amounts of approximately $46,254 and $21,053, respectively for working capital advances made to the Company. This obligation is included in amounts due to
related parties.



As of December 31, 2004 and 2003, the Company
had an outstanding promissory note payable to Jugal K. Taneja, a principal shareholder and a Director of the Company, in the amounts of approximately $24,029 and $48,086, respectively, with interest at the rate of 9% per annum.



As of December 31, 2004 and 2003, the Company had an outstanding obligation
to Brian T. Nugent, a principal shareholder, Director, President and Chief Operating Officer of the Company, in the amounts of approximately $2,283 and $2,442, respectively, for working capital advances made to the Company. This obligation is
included in amounts due to related parties.



F-12



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



As of December 31, 2004 and 2003, the Company had an outstanding obligation to Thaddeus J. Shalek Chief Financial Officer of the Company, in the amounts of approximately $6,608 and $ -0-, respectively, for working capital advances made to
the Company. This obligation is included in amounts due to related parties.



Amounts due from and to affiliates represent balances owed to or from the Company for sales or purchases occurring in the normal course of business. Amounts due from and to these affiliates are in the nature of trade
payables or receivables and fluctuate based on sales and purchasing volume and payments received. Any future transactions between the Company and its officers, directors or affiliates will be subject to approval by a majority of disinterested
directors or shareholders in accordance with Florida law.



Geopharma, Inc. (Geopharma), a publicly traded company, is a supplier of manufactured dietary supplements and health and beauty care products. Jugal K. Taneja, a principal shareholder and Director of the Company, is also a
Director, Chairman of the Board, and principal shareholder of Innovative. For the years ended December 31, 2004 and 2003, there were no sales of products to Geopharma or its subsidiaries, and purchases of products from subsidiaries of Geopharma were
approximately $469,145 and $782,484. As of December 31, 2004 and 2003, approximately $129,355 and $247,671 was due to subsidiaries of Geopharma and is included in obligations to affiliates.



DrugMax, Inc. (DrugMax), a publicly traded company, is a
wholesale distributor of pharmaceuticals, over-the-counter products, health and beauty care aids, nutritional supplements and other related products. Jugal K. Taneja, a principal shareholder and Director of the Company, is also a Director, Chairman
of the Board, and principal shareholder of DrugMax. For the years ended December 31, 2004, and 2003 sales of products to subsidiaries of DrugMax were approximately $-0- and $1,863 and there were no purchases of products from subsidiaries of DrugMax.
At December 31, 2004 and 2003, $-0- and $-0- was due to DrugMax or its subsidiaries.



F-13



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



Bayshore Media, Inc. (Bayshore) is a marketer of private label bottled water and health products. Stephen M. Watters, a principal shareholder, Director and Chief Executive Officer of the Company, is also a principal shareholder
and Chief Executive Officer of Bayshore. Brian T. Nugent, a Director, President and Chief Operating Officer of the Company, is also a principal shareholder and President of Bayshore. Jugal K. Taneja, a principal shareholder and Director of the
Company, is also a principal shareholder of Bayshore. For the years ended December 31, 2004 and 2003, sales of products to Bayshore were approximately $-0-and $2,952 and purchases of products from Bayshore were approximately $816 and $52. In
addition, Bayshore charged the Company consulting fees of approximately $-0- and $9,075, respectively for graphic services provided to the Company. The charges were on an hourly basis for services rendered. As of December 31, 2004 and 2003,
approximately $-0- and $1,999 was due from Bayshore and is included in amounts due from affiliates.



Dynamic Health Products, Inc. (Dynamic), a publicly traded company, is a marketer and distributor of dietary supplements and health and beauty
care products, and is a principal stockholder of the Company. Mr. Taneja, a principal shareholder and Director of the Company is also a Director, Chairman of the Board and principal shareholder of Dynamic. For the years ended December 31, 2004 and
2003, the Company charged a subsidiary of Dynamic consulting fees of $ -0- and $640, respectively for graphic services provided and Dynamic charged the Company consulting fees of approximately $5,213 and $10,088, respectively, for accounting and
administrative services provided to the Company. The charges were on an hourly basis for services rendered. As of December 31, 2004 and 2003, $-0- and $7,735 was due to Dynamic and is included in obligations to affiliates.



In October 2003, the Company issued 4,865,895 (973,179 pre-split) shares of
common stock of the Company upon conversion of 973,179 shares of Series A preferred stock of the Company.



In October 2003, the Company issued 658,520 (131,704 pre-split) shares of common stock of the Company in payment of $131,704 of accrued preferred share
dividends.



On October 31, 2004, Vertical Health Solutions,
Inc., through its wholly-owned subsidiary, Drug Depot, Inc. (Drug Depot), entered into an agreement with T&L Pharmacies, Inc., a Florida corporation (T&L Pharmacies), pursuant to which Drug Depot acquired
substantially all of the assets of T&L Pharmacies (other than accounts receivable and cash), effective as of such date. T&L Pharmacies is a Largo, Florida retail and compounding pharmacy which does business under the name Advanced Pharmacy
Solutions. The purchase price for such assets consisted of (i) $215,000, (ii) an additional approximate amount of $62,700 in payment of the value of fixed assets and inventory; and (iii) a promissory note in the amount of $215,000, with interest at
7% per year, amortizable over 36 months. T & L Pharmacies, Inc. is owned by Mandeep Taneja, son of Jugal Taneja, a Director of Vertical, and Michelle LaGamba, wife of William LaGamba, CEO of DrugMax.



The Company acquired the assets of T & L Pharmacies, Inc. to enhance the
current relationship with the veterinary community by providing additional products and services. The operations of the pharmacy from the date of acquisition are included in the consolidated financial statements of the Company. The purchase price
for the assets is allocated in the following table:



|                       |  |   |        
|---------------------- |  | - | -------
|Inventory              |  | $ | 52,314 
|Property and equipment |  |   | 10,419 
|Goodwill               |  |   | 430,000
|                       |  |   |        
|Total Assets           |  | $ | 492,733
|                       |  |   |        



The following is a
presentation of the unaudited consolidated pro forma operations:



|                                             |  |      |           |   |      |   |           |  
|-------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                             |  | 2004 |           |   | 2003 |  
|Revenue                                      |  | $    | 7,296,100 |   |      | $ | 8,719,700 |  
|Net Income (loss) before extraordinary items |  |      | (141,400  | ) |      |   | (142,300  | )
|Earnings (loss) per share                    |  | $    | (0.01     | ) |      | $ | (0.01     | )



NOTE 3ACCOUNTS RECEIVABLE,
NET



Accounts receivable, net consist of the following:



|                                          |  |      |         |   |      |   |         |  
|----------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                          |  | 2004 |         |   | 2003 |  
|Accounts receivable                       |  | $    | 399,695 |   |      | $ | 135,762 |  
|Less allowance for uncollectible accounts |  |      | (5,000  | ) |      |   | (1,000  | )
|                                          |  |      |         |   |      |   |         |  
|Total                                     |  | $    | 394,695 |   |      | $ | 134,762 |  
|                                          |  |      |         |   |      |   |         |  



For the years ended
December 31, 2004 and 2003, bad debt expense charged to operations for estimated uncollectible accounts receivable was $4,000 and $-0-, respectively.



F-14



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



NOTE
4INVENTORIES, NET



Inventories, net consist of the following:



|                              |  |      |         |   |      |   |         |  
|----------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                              |  | 2004 |         |   | 2003 |  
|Raw materials                 |  | $    | 65,742  |   |      | $ | 72,970  |  
|Finished goods                |  |      | 375,686 |   |      |   | 338,855 |  
|                              |  |      |         |   |      |   |         |  
|                              |  |      | 441,428 |   |      |   | 411,825 |  
|Less reserve for obsolescence |  |      | (25,420 | ) |      |   | (33,900 | )
|                              |  |      |         |   |      |   |         |  
|Total                         |  | $    | 416,008 |   |      | $ | 377,925 |  
|                              |  |      |         |   |      |   |         |  



NOTE 5PROPERTY AND
EQUIPMENT, NET



Property and equipment, net consist of the
following:



|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2004 |         |   | 2003 |  
|Furniture and fixtures                         |  | $    | 7,684   |   |      | $ | 6,749   |  
|Equipment                                      |  |      | 92,256  |   |      |   | 54,641  |  
|Leasehold improvements                         |  |      | 6,298   |   |      |   | 1,000   |  
|                                               |  |      |         |   |      |   |         |  
|                                               |  |      | 106,238 |   |      |   | 62,390  |  
|Less accumulated depreciation and amortization |  |      | (35,041 | ) |      |   | (16,543 | )
|                                               |  |      |         |   |      |   |         |  
|Total                                          |  | $    | 71,197  |   |      | $ | 45,847  |  
|                                               |  |      |         |   |      |   |         |  



Depreciation expense
charged to operations was $18,498 and $9,685 for the years ended December 31, 2004 and 2003.



NOTE 6LINE OF CREDIT



During 2004, the Company borrowed $365,000 pursuant to a line of credit, which will mature on April 16 2005 and bears interest at a variable rate of 1.5% over the prime rate with an initial rate of 5.75% per annum. The loan which had an
outstanding principal balance of $365,000 at December 31, 2004 is secured by certain assets owned by a related party. The total amount available under the terms of the line of credit was $500,000. The loan was refinanced in February 2005.



F-15



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



NOTE
7INCOME TAXES



Income tax expense (benefit) for the
years ended December 31, 2004 and 2003 is as follows:



|                                      |  |      |        |   |      |   |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | -
|                                      |  | 2004 |        |   | 2003
|Current income tax expense (benefit)  |  | $    | 4,800  |   |      | $ | 
|Deferred income tax expense (benefit) |  |      | (4,800 | ) |      |   | 
|                                      |  |      |        |   |      |   |  
|Income tax expense (benefit)          |  | $    |       |   |      | $ | 
|                                      |  |      |        |   |      |   |  



Income taxes for the
years ended December 31, 2004 and 2003 differs from the amounts computed by applying the effective income tax rate of 34% to income before income taxes as a result of the following:



|                                             |  |      |   |  |      |  
|-------------------------------------------- |  | ---- | - |  | ---- | -
|                                             |  | 2004 |   |  | 2003 |  
|Computed tax expense at the statutory rate   |  | 34   | % |  | 34   | %
|Increase (decrease) in taxes resulting from: |  |      |   |  |      |  
|Net operating loss                           |  | (34  | ) |  | (34  | )
|                                             |  |      |   |  |      |  
|Current income tax expense (benefit)         |  |     | % |  |     | %
|                                             |  |      |   |  |      |  



Temporary differences
that give rise to deferred tax assets and liabilities:



|                                |  |      |          |   |      |   |          |  
|------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                |  | 2004 |          |   | 2003 |  
|Deferred tax assets:            |  |      |          |   |      |   |          |  
|Net operating loss carryforward |  | $    | 438,000  |   |      | $ | 440,000  |  
|Less valuation allowance        |  |      | (438,000 | ) |      |   | (440,000 | )
|                                |  |      |          |   |      |   |          |  
|Gross deferred tax asset        |  |      |         |   |      |   |         |  
|Gross deferred tax liability    |  |      |         |   |      |   |         |  
|                                |  |      |          |   |      |   |          |  
|Net deferred tax asset          |  | $    |         |   |      | $ |         |  
|                                |  |      |          |   |      |   |          |  



The Company has
available at December 31, 2004, approximately $1,286,000 of unused operating loss carryforwards that may be applied against future taxable income and that expire in various years from 2020 to 2023.



F-16



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



NOTE
8LONG-TERM OBLIGATIONS



Long-term obligations
consist of the following at December 31, 2004 and 2003:



|                                                                                                                                                                                                                                                            |  |      |         |      |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                            |  | 2004 |         | 2003
|Promissory note payable to a financial institution, bearing interest at 6.75% per annum, due in monthly principal and interest payments of
approximately $6,400 through June 2006. The note is collateralized by a shareholders stock and corporate assets. |  | $    | 109,023 |      | $ | 175,000
|                                                                                                                                                                                                                                                            |  |     
|Promissory notes payable to a financial institution, bearing interest at fixed interest rates of 7.75% per annum, due in monthly principal and
interest payments of approximately $469 through September 2006. The notes are collateralized by equipment.   |  |      | 9,157   |      |   | 17,265 
|                                                                                                                                                                                                                                                            |  |     
|Promissory note payable to a financing company, bearing interest at 10.5% per annum, due in monthly principal and interest payments of
approximately $198 through May 2004. The note is collateralized by equipment.                                        |  |      | -0-     |      |   | 7,943  
|                                                                                                                                                                                                                                                            |  |     
|Promissory note payable to a financing company, bearing interest at 8.78% per annum and requiring principal and interest payments of $249
through May 2008. The note is collateralized by software.                                                         |  |      | 8,608   |      |   | -0-    
|                                                                                                                                                                                                                                                            |  |     
|Promissory note payable to T & L Pharmacies, Inc., bearing interest at 7% per annum, due in monthly principal and interest payments of
approximately $6,638.58 through November, 2007 collateralized by accounts receivable and inventory.                  |  |      | 209,615 |      |   | -0-    
|                                                                                                                                                                                                                                                            |  |      |         |      |   |        
|                                                                                                                                                                                                                                                            |  |      | 336,403 |      |   | 199,758
|Less current maturities                                                                                                                                                                                                                                     |  |      | 145,961 |      |   | 81,577 
|                                                                                                                                                                                                                                                            |  |      |         |      |   |        
|Total                                                                                                                                                                                                                                                       |  | $    | 190,442 |      | $ | 118,181
|                                                                                                                                                                                                                                                            |  |      |         |      |   |        



The current maturities
are presented in the balance sheet as $78,845  Current portion of long-term liabilities and $67,116 included in the notes payable to related parties at of December 31, 2004 and $81,577  Current portion of long-term liabilities at
December 31, 2003.



At December 31, 2004, aggregate maturities
of long-term obligations are as follows:



|                         |  |   |        
|------------------------ |  | - | -------
|Year ending December 31, |  |  
|2005                     |  | $ | 145,961
|2006                     |  |   | 115,757
|2007                     |  |   | 74,311 
|                         |  |   |        
|Total                    |  | $ | 336,403
|                         |  |   |        



F-17



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



On November 29, 2003, the Company entered into a Change in Terms Agreement, whereby the Companys indebtedness to a financial institution in the form of a Revolving Line of Credit, with a principal balance of $175,000, was converted to
a promissory note payable to the financial institution, with interest at the rate of 6.75% per annum, with principal and interest being paid monthly in the amount of approximately $6,400, for 29 months commencing January 29, 2004.



NOTE 9COMMITMENTS AND CONTINGENCIES



Capital Leases



The Company is the lessee of warehouse and office equipment under capital leases expiring in 2006. The assets and
liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the lower of their related lease terms or their estimated productive
lives. Depreciation of assets under capital leases is included in depreciation expense for 2004 and 2003. The cost of the property under capital leases included in property and equipment, net was $5,900 and $5,900 at December 31, 2004 and 2003. The
accumulated depreciation on these assets was $2,163 and $983 at December 31, 2004 and 2003.



Minimum future lease payments under capital leases as of December 31, 2004 for each of the next five years and in aggregate are:



|                                  |  |   |        |  
|--------------------------------- |  | - | ------ | -
|Year ending December 31,          |  |   |       
|2005                              |  | $ | 17,294 |  
|2006                              |  |   | 4,126  |  
|2007                              |  |   | -0-    |  
|2008                              |  |   | -0-    |  
|2009                              |  |   | -0-    |  
|                                  |  |   |        |  
|                                  |  |   | 21,420 |  
|Less amount representing interest |  |   | (3,164 | )
|                                  |  |   |        |  
|Total                             |  | $ | 18,256 |  
|                                  |  |   |        |  



Interest rates vary on
capitalized leases from 17% to 19.8% and are imputed based on the lower of the Companys incremental borrowing rates at the inception of each lease or the lessors implicit rate of return.



The agreements with the finance company contains various restrictive
covenants on the use and assignment of the equipment. At December 31, 2003 the Company was in breach of the assignment covenant related to one of the agreements. Under the terms of the agreement, the finance company may call the obligation if the
Company is in violation of any restrictive covenant. As of March 25, 2005, the finance company has not waived the assignment requirement, and accordingly the entire amount of the lease obligation, $15,276, has been included in current liabilities.



F-18



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



Operating
Leases



The Company has operating leases for facilities
and certain equipment that expire at various dates through 2006. Certain leases provide an option to extend the lease term. Certain leases provide for payment by the Company of any increases in property taxes, insurance, and common area maintenance
and utilities, over a base amount and others provide for payment of all property taxes and insurance by the Company.



Future minimum lease payments, by year and in aggregate under non-cancelable operating leases, consist of the following at December 31, 2004:



|                         |  |   |       
|------------------------ |  | - | ------
|Year ending December 31, |  |  
|2005                     |  | $ | 61,208
|2006                     |  |   | 35,411
|2007                     |  |   | -0-   
|2008                     |  |   | -0-   
|2009                     |  |   | -0-   
|Thereafter               |  |   | -0-   
|                         |  |   |       
|                         |  | $ | 96,619
|                         |  |   |       



Total rent expense for
the year ended December 31, 2004 and 2003 was approximately $47,923 and $39,014.



Employment Agreements



Effective November 1,
2003 the Company entered into an Employment Agreement with Stephen M. Watters, the Companys Chief Executive Officer, for a term of three years. The annual base salary payable under the agreement is $165,000, payable in bi-weekly payments of
approximately $6,346, plus a monthly auto allowance of $600. The amount of base salary payable is subject to periodic review and adjustment. Under the terms of the agreement, Mr. Watters is eligible for certain fringe benefits and participation in
any executive bonus plan created at the discretion of the Compensation Committee of the Board of Directors of the Company.



F-19



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



Effective November 1, 2003, based on mutual agreement between the parties, the Company entered into a new Employment Agreement with Brian T. Nugent, the Companys President and Chief Operating Officer, for a term of three years, and
the previous Employment Agreement between the parties was cancelled. The annual base salary payable under the new agreement is $140,000, payable in bi-weekly payments of approximately $5,385, plus a monthly auto allowance of $600. The amount of base
salary payable is subject to periodic review and adjustment. Under the terms of the agreement, Mr. Nugent is also eligible for certain fringe benefits and participation in any executive bonus plan created at the discretion of the Compensation
Committee of the Board of Directors of the Company.



Effective
October 4, 2004, based on mutual agreement between the parties, the Company entered into a new Employment Agreement with Thaddeus J. Shalek, the Companys Chief Financial Officer, for a term of three years, and the previous Employment Agreement
between the parties was cancelled. The annual base salary payable under the new agreement is $125,000, payable in bi-weekly payments of approximately $4,808, plus a monthly auto allowance of $500. The amount of base salary payable is subject to
periodic review and adjustment. Under the terms of the agreement, Mr. Shalek is also eligible for certain fringe benefits and participation in any executive bonus plan created at the discretion of the Compensation Committee of the Board of Directors
of the Company.



Consulting Agreement



Effective November 1, 2003, the Company entered into a Consulting Agreement
with Jugal K. Taneja, for a term of three years. Mr. Taneja has served as a Director of the Company since its inception. Annual base compensation payable under the agreement is $110,000, payable in monthly payments of approximately $9,167. The
agreement contains termination for disability, for cause, and for good reason, and it also contains confidentiality and non-competition provisions that prohibit Mr. Taneja from competing with the Company under certain circumstances. The period
covered by the non-competition provisions will end three years after the termination of the consultants consulting agreement with the Company.



Litigation



The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company
believes that none of the claims that were outstanding as of December 31, 2004 should have a material adverse impact on its financial condition or results of operations.



F-20



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



NOTE 10
 STOCK OPTIONS



During 2001, the Company adopted a
stock option plan to be administered by the board of directors. Under the plan, the exercise price of any options granted may not be less than 100% of the fair market value of the Companys common stock on the date of the grant (110% for
holders of more than 10% of the total combined voting power of all classes of capital stock then outstanding).



The following summarizes information about the aggregate stock option activity for the year ended December 31, 2004:



In October 2003, the Board of Directors approved the issuance of options to
purchase 650,000 units (130,000 pre-split) to members of the Board of Directors. The options are exercisable at $1.02 per unit ($5.10 pre-split), each consisting of one share of common stock and one redeemable Class A warrant.



On February 11, 2004, the Company granted qualified options to purchase
20,425 shares of its common stock and non-qualified options to purchase 79,575 shares of our common stock to employees. Half of the options vest on February 11, 2005 and half vest on February 11, 2006. The options are exercisable at a price of $1.20
per share.



On May 10, 2004, the Company granted 550,000
options to our officers and directors. The options were vested upon grant and are exercisable at a price of $1.01 per share.



The fair value of each option grant was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average
assumptions:



|                        |  |         |   |  |            |  
|----------------------- |  | ------- | - |  | ---------- | -
|                        |  | 2004    |   |  | 2003       |  
|Risk-free interest rate |  | 3.81    | % |  | 4.85       | %
|Dividend yield          |  | 0       | % |  | 0          | %
|Volatility              |  | 222.10  | % |  | 1          | %
|Average expected term   |  | 5 years |   |  | 4.75 years |  



|                                               |  |                  |  |                              |      |                 |         |                              |   |     
|---------------------------------------------- |  | ---------------- |  | ---------------------------- | ---- | --------------- | ------- | ---------------------------- | - | ----
|                                               |  | 2004             |  | 2003                        
|                                               |  | Number of Shares |  | WeightedAverageExercisePrice |      | Numberof Shares |         | WeightedAverageExercisePrice
|Outstanding at January 1,                      |  | 650,000          |  | $                            | 1.02 |                 |        |                              | $ |    
|Granted                                        |  | 650,000          |  |                              | 1.04 |                 | 650,000 |                              |   | 1.02
|Exercised                                      |  |                 |  |                              |     |                 |        |                              |   |    
|Forfeited                                      |  |                 |  |                              |     |                 |        |                              |   |    
|                                               |  |                  |  |                              |      |                 |         |                              |   |     
|Outstanding at December 31,                    |  | 1,300,000        |  | $                            | 1.03 |                 | 650,000 |                              |   | 1.02
|                                               |  |                  |  |                              |      |                 |         |                              |   |     
|Options exercisable at December 31,            |  | 1,200,000        |  | $                            | 1.02 |                 | 650,000 |                              |   | 1.02
|                                               |  |                  |  |                              |      |                 |         |                              |   |     
|Weighted average fair value of options granted |  |                  |  | $                            | 1.03 |                 |         |                              | $ |    
|                                               |  |                  |  |                              |      |                 |         |                              |   |     



F-21



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



Stock options outstanding and exercisable under the plan as of December 31, 2004, were:



|                             |  |                   |  |                              |      |                                              |      |                   |           |                              |   |     
|---------------------------- |  | ----------------- |  | ---------------------------- | ---- | -------------------------------------------- | ---- | ----------------- | --------- | ---------------------------- | - | ----
|                             |  | Outstanding       |  | Exercisable                 
|                             |  | Number of Options |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractedLife (yrs) |      | Number of Options |           | WeightedAverageExercisePrice
|Exercise prices $1.01  1.20 |  | 1,300,000         |  | $                            | 1.03 |                                              | 4.25 |                   | 1,200,000 |                              | $ | 1.02



NOTE 11SHAREHOLDERS
DEFICIT



During May 2001, the Company issued warrants to
purchase 428,575 shares (85,715 pre-split) each to two of its officers at an exercise price of $0.65 per share ($3.28 pre-split). These warrants expire in May 2005. The effect of applying SFAS 123 pro forma net loss is not necessarily representative
of the effects on reported net income (loss) for future years due to, among other things, the vesting period of the warrants and the fair value of additional grants in future years. Had compensation cost been determined based upon the fair value at
the grant date for awards consistent with the methodology prescribed under SFAS 123, the Companys net (loss) would not have been materially different.



On June 30, 2002 an affiliate converted $429,846 in notes and accrued interest in 429,846 shares of Series A preferred stock and on December 31, 2002
certain affiliates of the Company converted an aggregate of $172,500 in unpaid salary and consulting fees into 172,500 shares of Series A preferred stock.



On April 21, 2003, the Companys Registration Statement on Form SB-2, Amendment No. 9, was declared effective by the U.S. Securities and Exchange
Commission. Pursuant to the Companys registered offering, in June 2003, the Company sold an aggregate of 40,000 units, consisting of 200,000 (40,000 pre-split) shares of common stock and 200,000 (40,000 pre-split) redeemable class A common
stock purchases warrants. The Company received cash proceeds aggregating $204,000 and charged deferred offering costs aggregating approximately $143,423 against the offering proceeds.



In October 2003, the Company issued 4,865,895 (973,179 pre-split) shares of common stock of the Company upon conversion of
973,179 shares of Series A preferred stock of the Company.



F-22



---

##### Index to Financial Statements

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2004 AND 2003



In October 2003, the Company issued 658,520 (131,704 pre-split) shares of common stock of the Company in payment of $131,704 of accrued preferred share dividends.



On October 24, 2003, the Board of Directors of the Company approved a forward split of its outstanding shares of common
stock on a five-for-one basis effective November 20, 2003, such that for each share of Company common stock held as of November 10, 2003, each shareholder was entitled to receive four additional shares of Company common stock. The payment date for
the additional shares of Company common stock was November 20, 2003. After the forward split the Company had 13,709,375 shares of common stock issued and outstanding.



In July 2004, the Company issued 10,000 shares of restricted common stock to one of the members of the Board of Directors as
compensation for posting a $100,000 surety bond on behalf of the Company to maintain its wholesale pharmaceutical license in the state of Florida.



In May 2004, the Company issued 3,700 shares of restricted common stock to an unrelated party in payment of an outstanding obligation of $3,793.



On May 27, 2004, the Company entered into a Securities
Purchase Agreement with Laurus Master Fund, Ltd. (Laurus), under which the Company issued and sold to Laurus in a private placement (i) $4,000,000 of Series A Cumulative Convertible Preferred Stock of its wholly-owned subsidiary,
Vertical Health Ventures, Inc., that is convertible into shares of common stock of the Company (the Series A), and (ii) warrants to purchase 820,000 shares of the Companys common stock at a price equal to $1.87 per share,
exercisable until May 27, 2011 (the Series A Warrants).



The stated value of the Series A is $4,000,000. The Series A pays dividends at the rate per annum equal to the prime rate published in The Wall Street Journal from time to time, plus two percent (2%). Dividends on the
Series A are payable monthly commencing December 1, 2004 (accruing from May 27, 2004), and may be paid, at the investors option, in (i) cash at a 2% premium, or (ii) shares of Company common stock (but subject to the conversion requirements
discussed below). If paid in shares of Company common stock the number of shares to be issued shall equal the total amount due, divided by $1.67 (107% of the average closing price of the common stock for the ten trading days immediately prior to the
issuance date of the Series A). If the average closing price of the Companys common stock for five consecutive trading days is greater than $1.92 (115% of the conversion price), Laurus is required to convert their Series A into an amount equal
to the lesser of (i) 20% of the aggregate dollar trading volume of the common stock for such five consecutive trading days, or (ii) all of the Series A then outstanding. The Company may only make one such conversion demand every month. The holder
shall not be entitled to convert any amount which would result in the holder being the beneficial owner of more than 4.99% of the Companys common stock, unless 75 days prior notice is given to the Company or the Company is in default of
its obligations.



The net proceeds of this offering are placed
in a restricted cash account and pledged as collateral for the stated value, dividends and fees related to the Series A that has not been converted or redeemed.



As of September 17, 2004 the agreement was amended to decrease the stock conversion price from $1.67 per share to .65 per share. The resulting discount
has been calculated and is included in the presentation of the Stockholders Equity Section of the enclosed financial statements.



NOTE 12EARNINGS (LOSS) PER SHARE



Earnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earnings (loss) per
share are calculated by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing the net income
(loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. Convertible debt and preferred stock warrants, officer,
employee and non-employee stock options that are considered potentially dilutive are included in the fully diluted share calculation at December 31, 2004.



The following sets forth the computation of basic and diluted net earnings (loss) per common share:



|                                                   |  |      |            |   |      |   |           |  
|-------------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|                                                   |  | 2004 |            |   | 2003 |  
|Numerator:                                         |  |      |            |   |      |   |           |  
|Net income (loss)                                  |  | $    | 14,028     |   |      | $ | (2,641    | )
|Less preferred stock dividend                      |  |      | (155,419   | ) |      |   | (72,788   | )
|                                                   |  |      |            |   |      |   |           |  
|Net income (loss) available to common stockholders |  | $    | (141,391   | ) |      | $ | (75,429   | )
|                                                   |  |      |            |   |      |   |           |  
|Denominator:                                       |  |      |            |   |      |   |           |  
|Weighted average basic shares outstanding          |  | $    | 13,717,069 |   |      | $ | 9,493,991 |  
|Stock options                                      |  |      |           |   |      |   |           |  
|Warrants                                           |  |      |           |   |      |   |           |  
|Convertible note                                   |  |      |            |   |      |   |          |  
|                                                   |  |      |            |   |      |   |           |  
|Weighted average fully diluted shares outstanding  |  | $    | 13,717,069 |   |      | $ | 9,493,991 |  
|                                                   |  |      |            |   |      |   |           |  
|Net earnings per common shareBasic and diluted    |  | $    | (.01       | ) |      | $ | (.01      | )
|                                                   |  |      |            |   |      |   |           |  



During the periods presented, common
stock equivalents were not considered as their effect would be anti-dilutive.



NOTE 13CONCENTRATION OF CREDIT RISK



Concentrations of credit risk with respect to trade receivables are limited due to the distribution of sales over a large customer base. For the year ended December 31, 2004, two customers represented 39.5%



NOTE 14SUBSEQUENT EVENT



On February 15, 2005, Vertical Health Solutions, Inc., a Florida corporation
(the Company), completed the borrowing on a Business Loan Agreement with Patriot Bank of Trinity, Florida, dated as of February 10, 2005. The loan is a term loan in the amount of $500,000 which bears interest at the rate of 6.75% per
annum. The loan will be repaid on a monthly basis over a five year period.



On February 10, 2005, the Company entered into a Business Loan Agreement for a one-year business line of credit with Patriot Bank of Trinity, Florida. The total amount available on the loan is $500,000. The loan has
provision for an interest rate of 6.5% per annum on the outstanding balance. The loan is required to be repaid in full on February 10, 2006. The Company borrowed $200,000 under the line of credit on February 16, 2005.



Approximately $600,000 of the proceeds from the foregoing loans were used to
repay the Companys outstanding indebtedness to First Community Bank.



F-23