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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, 2006



| ̈ | 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 ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|2595 Tampa Rd. Palm Harbor, Florida      |  | 34684     
|(Address of principal executive offices) |  | (Zip Code)

Issuers telephone number (727) 547-2654

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 whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 ̈

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

Issuers revenues for its most recent fiscal year were $754,914

The aggregate market value of the voting common stock held by non-affiliates of the Registrant was $751,615 based upon the last reported trade of the stock, which was on April 10, 2007 at $.15 per share.

The number of shares outstanding of the Issuers common stock at $.001 par value as of December 31, 2006 was 16,423,755.

DOCUMENTS ARE INCORPORATED BY REFERENCE:

None.

Transitional Small Business Disclosure Format (check
one):    Yes ̈No  x



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Index to Financial Statements

PART I



|Item 1. | DESCRIPTION OF BUSINESS.
|------- | ------------------------

General

The Company, through its wholly-owned subsidiary, operates a Florida retail and veterinary compounding pharmacy providing specialized compounding
pharmaceutical prescription services to veterinarians and their customers in the companion animal sector.

On January 18, 2006, the
Company entered into an agreement with Vitality Systems, Inc. (Vitality), pursuant to which Vitality purchased all of the outstanding stock of the Companys wholly-owned subsidiary Labelclick, Inc. The purchase price consisted of a
7% promissory note in the principal amount of $300,000, together with the assumption of all debt and personal guarantee of the outstanding bank debt included in the estimated amount of $1,800,000. The promissory note has a term of three years and is
payable monthly in the principal amount of $9,263.13, together with accrued and unpaid interest. The Agreement is effective as of January 4, 2006. Vitality is owned by Stephen Watters, our Chief Executive Officer and a director, Brian Nugent,
our President and a director, and Jugal K. Taneja, a consultant and a director. In connection with the sale, the Company received an independent valuation of LabelClick which supported the price paid by Vitality and the sale was approved by the
Companys independent directors.

In connection with the agreement to sell Labelclick, Stephen Watters and Brian Nugent resigned as
officers of the Company and Jugal K. Taneja agreed to the termination of his consulting agreement with the Company. Each of the employment agreements and the consulting agreement were terminated effective as of January 18, 2006, without further
payment or obligation beyond those which have accrued through and including January 18, 2005, but excluding any termination payments otherwise payable pursuant to the agreements. Messrs. Watters, Nugent and Taneja remain members of the
Companys Board of Directors

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



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formed a new subsidiary called LabelClick, Inc. d/b/a Vitality Systems. In November 2004, we formed a new subsidiary called Drug Depot, Inc. through which we
operate. The Companys executive offices are located at 2595 Tampa Rd. Palm Harbor, Florida 34684 and its telephone number is (727) 547-2654. 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.

We are currently
seeking and reviewing potential merger candidates. We will attempt to locate and negotiate with a business entity for the combination of that target company with us. The combination will normally take the form of a merger, stock- for-stock exchange
or stock-for-assets exchange. In most instances the target company will wish to structure the business combination to be within the definition of a tax-free reorganization under Section 351 or Section 368 of the Internal Revenue Code of
1986, as amended. No assurances can be given that we will be successful in locating or negotiating with any target company.

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. 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, 2006, approximately all 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.

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.

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, 2008. 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, 2006, the Company had 6 full-time employees. Of such employees, five employees operated the pharmacy and one was 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



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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 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, 2006, 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



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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.

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 there under (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



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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 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.



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General Risks

Key Personnel. As a small company with a total of only sixteen 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 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 88.23% 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.



|Item 2. | DESCRIPTION OF PROPERTY.
|------- | ------------------------

Effective October 1,
2004, Drug Depot, Inc., the continuing veterinary compounding pharmacy, 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 company exercised a one year renewal
option in October 2006. The lease contains two consecutive one-year renewal options to continue the lease after the expiration of the renewal lease on October 31, 2007 unless terminated earlier. The rental under the lease is approximately
$35,000 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.



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As of December 31, 2006, the Company had real property, equipment, furniture, and leasehold
improvements, net of accumulated depreciation, in the approximate amount of $12,125.



|Item 3. | LEGAL PROCEEDINGS.
|------- | ------------------

The Company is not currently a
party to any other legal proceeding, 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, 2006.

PART II



|Item 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
|------- | ---------------------------------------------------------------------------------------------------------------

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, 2005     |  | $    | 0.70  |     | $ | 0.35
|June 30, 2005      |  |      | 1.01  |     |   | 0.26
|September 30, 2005 |  |      | 0.80  |     |   | 0.35
|December 31, 2005  |  | $    | 0.85  |     | $ | 0.42
|March 31, 2006     |  | $    | 0.55  |     | $ | 0.45
|June 30, 2006      |  |      | 0.50  |     |   | 0.30
|September 30, 2006 |  |      | 0.30  |     |   | 0.13
|December 31, 2006  |  | $    | 0.145 |     | $ | 0.12

As of December 31, 2006, there were approximately 232 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 Securities:

On February 10, 2006, Vertical Health Solutions, Inc.
(the Company), issued an aggregate of 656,714 shares of common stock to eight holders of options and warrants in exchange for the cancellation of such options and warrants. Those receiving shares of common stock included the following
affiliates of the Company:



|                   |  |        
|------------------ |  | -------
|Name               |  | Shares 
|Jugal K. Taneja    |  | 234,857
|Stephen M. Watters |  | 234,857
|Patrick Sheppard   |  | 12,000 
|Alfred Lehmkuhl    |  | 52,000 
|Brian T. Nugent    |  | 32,000 
|Thaddeus Shalek    |  | 50,000 



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The shares were issued in reliance on the exemption provided by section 4(2) under the Securities Act of
1933.

On May 28, 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 Preferred Stock of its subsidiary that is convertible into shares of common stock of the Company (the Preferred Stock), and
(ii) warrants to purchase 820,000 shares of common stock at a price equal to $1.87 per share, exercisable until May 27, 2011 (the Series A Warrants).

On May 26, 2006, the Company entered into a Warrant Cancellation Agreement with Laurus. Pursuant to the agreement, the Company canceled the 820,000
outstanding Series A Warrants and in exchange, agreed to issue 200,000 shares of the Companys common stock to Laurus. The common stock will not be registered under the Securities Act of 1933 at the time of initial issuance. The Company granted
piggy-back registration rights to Laurus and the common stock may be registered in the future if and when the Company files for registration of other securities.

The issuance of the 200,000 shares of common stock were exempt from registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of such Securities Act and Regulation D promulgated thereunder
based upon the representations of Laurus that it was an accredited investor (as defined under Rule 501 of Regulation D) and that it was purchasing such securities without a present view toward a distribution of the securities. In
addition, there was no general advertisement conducted in connection with the sale of the securities.

Sale of Label Click, Inc. (Wholly
Owned Subsidiary)

On January 18, 2006, the Company, entered into an agreement with Vitality Systems, Inc. (Vitality),
pursuant to which Vitality purchased all of the outstanding stock of the Companys wholly-owned subsidiary Labelclick, Inc. (Labelclick). The purchase price consisted of a 7% promissory note in the principal amount of $300,000,
together with the assumption and personal guarantee of the purchasers of debt in the aggregate amount of $1,800,000. The promissory note has a term of three years and is payable monthly in the principal amount of $9,263, together with accrued and
unpaid interest. The Agreement is effective as of January 4, 2006. Vitality is owned by Stephen Watters, our former Chief Executive Officer and a current director, Brian Nugent, our former President and a current director, and Jugal K. Taneja,
a former consultant and a current director. In connection with the sale, the Company received an independent valuation of LabelClick which supported the price paid by Vitality and the sale was approved by the Companys independent directors.

In connection with the agreement to sell Labelclick, Stephen Watters and Brian Nugent resigned as officers of the Company and Jugal K.
Taneja agreed to the termination of his consulting agreement with the Company. Each of the employment agreements and the consulting agreement were terminated effective as of January 18, 2006, without further payment or obligation beyond those
which have accrued through and including January 18, 2005, but excluding any termination payments otherwise payable pursuant to the agreements. Messrs. Watters, Nugent and Taneja remain members of the Companys Board of Directors.

On January 18, 2006, Thaddeus J. Shalek, the Chief Financial Officer of the Company was appointed Chief Executive Officer of the Company. On
July 7, 2006, Thaddeus J. Shalek resigned as Chief Executive and Financial Officers and member of the Board of Directors. On July 7, 2006, Stephen M. Watters was appointed Chief Executive and Financial Officer of the Company.



|Item 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
|------- | ----------------------------------------------------------

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, 2006 Compared To Year Ended December 31, 2005

Revenues. The Company generated revenues of $754,914 for the year ended December 31, 2006, a decrease of $3,692,377 or 83 %, compared to
$4,447,291 for the year ended December 31, 2005. The decrease in revenues was primarily attributable to the sale of the subsidiary Labelclick, Inc. on January 4, 2006.

Gross profit. The Company achieved a gross profit of $383,068 for the year ended December 31, 2006, a decrease of $1,591,053 or 81%, compared
to $1,974,121 for the year ended December 31, 2005. Gross profit, as a percentage of revenues, increased from 44% for the year ended December 31, 2005 to 49% for the year ended December 31, 2006. The increase in gross margin was
primarily due to selling additional higher profit margin products.

Operating expenses. The Company incurred operating expenses of
$667,907 for the year ended December 31, 2006, a decrease of $1,805,644 or 73%, compared to $2,473,551 for the year ended December 31, 2005. The decrease was primarily attributable to the sale of the subsidiary Labelclick, Inc. as of
January 4, 2006.

Interest expense, net of interest income. Interest income, net of interest expense was $14,517 for the year
ended December 31, 2006, compared to $10,903 of net interest expense for the year ended December 31, 2005. The decrease in interest expense, net of interest income was primarily a result of the decreases in outstanding debt.

Income taxes. The Company had no income tax provision for the years ended December 31, 2006 and 2005. 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 $0 for the
year ended December 31, 2006, compared to $743,655, for the year ended December 31, 2005. The decrease was due to the lack of issuance of preferred stock during the year ended 2006.

Net loss per share.Net loss per share was $.01 for the year ended December 31, 2006, compared to net loss per share of $.10 for the year
ended December 31, 2005.

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, 2006 and 2005. 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 $87,645 and a working capital deficit of $41,830 at December 31, 2006, compared to cash of $14,782 and a working capital
deficit of $970,401 at December 31, 2005.

Net cash provided by operating activities was $80,487 for the year ended December 31,
2006, as compared to net cash used in operating activities of $165,917 for the year ended December 31, 2005. The provision of cash was primarily attributable to the decrease in the net loss and the reduced operations of the company.

Net cash used by investing activities was $8,986, representing the costs of acquired tradename.

Net cash provided by financing activities was $1,362, represented proceeds from related party debt of $46,316 less payments on notes payable of $99,486.

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 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.
|------- | ---------------------

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



|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 |  | 40  |  | Chief Executive and Chief Financial Officer, Director |  | 2000          
|                   |  |     | 
|Jugal K. Taneja    |  | 63  |  | Director                                              |  | 2000          
|                   |  |     | 
|Brian T. Nugent    |  | 33  |  | Director                                              |  | 2001          
|                   |  |     | 
|Alfred Lehmkuhl    |  | 75  |  | Director                                              |  | 2002          
|                   |  |     | 
|Patrick Sheppard   |  | 59  |  | Director                                              |  | 2002          

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

On January 4, 2006 Stephen Watters resigned as Chief Executive Officer of the Company and effective July 7, 2006, was reappointed Chief
Executive and Financial Officer of the Company. 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.

On January 4, 2006 Brian Nugent resigned as President and Chief
Operating Officer of the Company. Brian Nugent had served as our President and Chief Operating Officer since April 2001. Mr. Nugent had 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.

On July 7, 2006, Ted Shalek, CPA/CVA resigned as the Companys Chief Executive Officer and Chief Financial Officer, an office he had held 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.

On January 4, 2006, Jugal Taneja resigned as a consultant to the Company. Jugal K. Taneja had 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 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 2006 and 2005, 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 2006.

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)



|                                                                     |  |                            |     |  |                     |  |           |  |                  |  |                       |  |                            |  |                    
|-------------------------------------------------------------------- |  | -------------------------- | --- |  | ------------------- |  | --------- |  | ---------------- |  | --------------------- |  | -------------------------- |  | -------------------
|                                                                     |  | Summary Compensation Table |     |  |                     |  |           | 
|Name Principal Positions                                             |  | Year Ended                 |     |  | Salary ($)          |  | Bonus ($) |  | Stock Awards ($) |  | Option Awards ($) (A) |  | All Other Compensation ($) |  | Total ($)          
|Steven M. Watters, (2) Chief Executive & Financial Officer, Director |  | 200620052004               |     |  | 8,042165,000165,000 |  |        |  |               |  |                    |  |                         |  | 8,042165,000165,000
|                                                                     |  |                            |     |  |                     |  |          
|Brian T. Nugent, (3) Former President and Chief Operating Officer    |  | 200620052004               |     |  | 8,044165,000140,000 |  |        |  |               |  |                    |  |                         |  | 8,044165,000140,000
|                                                                     |  |                            |     |  |                     |  |          
|Thaddeus J. Shalek (4) Former Chief Financial Officer                |  | 200620052004               | (1) |  | 48,076125,00026,442 |  |        |  |               |  |                    |  |                         |  | 48,076125,00026,442
|                                                                     |  |                            |     |  |                     |  |          
|Jugal K. Taneja (5) Director                                         |  | 200620052004               | (2) |  | 7,983165,000103,666 |  |        |  |               |  |                    |  |                         |  | 7,983165,000103,666

---

|(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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr. Stephen M. Watters served as the Companys Chief Executive Officer since its inception and was reappointed as Chief Executive Officer and Chief Financial Officer
on July 7, 2006
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Mr. Brian Nugent has served as the Companys President since April 2001 and resigned on January 18, 2006
|--- | --------------------------------------------------------------------------------------------------------

|(4) | Mr. Thaddeus J. Shalek, CPA has served as the Companys Chief Financial Officer since October 2004 and Chief Executive Officer since January 2006 on July 7, 2006
he resigned from both offices.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

During the year ended December 31, 2006, 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.

DIRECTOR COMPENSATION

Directors who are also employees receive no compensation for serving on the Board. The Companys non-employee
directors receive options to purchase shares of common stock at the market price on the date they are granted, reimbursement of expenses incurred consequential to their service and may receive additional options at the discretion of the Board.

The following table summarizes compensation paid to all of our non-employee directors:



|     |  |                              |   |                |   |                 |  |                                         |  |                                                                       |   |                          |  |          |   |  |   |   |  |   | 
|---- |  | ---------------------------- | - | -------------- | - | --------------- |  | --------------------------------------- |  | --------------------------------------------------------------------- | - | ------------------------ |  | -------- | - |  | - | - |  | - | 
|Name |  | FeesEarned orPaid inCash ($) |   | StockAwards($) |   | OptionAwards($) |  | Non-EquityIncentive PlanCompensation($) |  | Change inPension
ValueandNonqualifiedDeferredCompensationEarnings ($) |   | All OtherCompensation($) |  | Total($)
|None |  | $                            |  |                | $ |                |  | $                                       |  |                                                                       | $ |                         |  | $        |  |  | $ |  |  | $ | 



---

Employment Agreements

The Company had 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. On January 4, 2006, Mr. Watters, Mr. Nugent and Mr. Taneja resigned their respective positions with the Company as part of the negotiations
for the sale of the Label Click, Inc. subsidiary stock and the employment agreements were terminated.

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.

There were no options granted during the year ended December 31, 2006.



|Item 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|-------- | -----------------------------------------------------------------------------------------------

The following table sets forth certain information, as of December 31, 2006 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.



|       |  |                                                   |  |                                           |  |                                    |  
|------ |  | ------------------------------------------------- |  | ----------------------------------------- |  | ---------------------------------- | -
|Class  |  | Name and Address of Beneficial Owner(1)           |  | Amount andNature ofBeneficialOwnership(2) |  | ApproximateTitle ofPercent OfClass |  
|Common |  | Stephen M. Watters(3)                             |  | 5,240,965                                 |  | 31.9                               | %
|Common |  | Brian T. Nugent (4)                               |  | 891,075                                   |  | 5.4                                | %
|Common |  | Jugal K. Taneja(5)                                |  | 3,637,872                                 |  | 22.2                               | %
|Common |  | Patrick Sheppard                                  |  | 178,675                                   |  | 1.1                                | %
|Common |  | Alfred Lehmkuhl(6)                                |  | 1,464,395                                 |  | 8.9                                | %
|Common |  | All officers and directors as a group (5 persons) |  | 11,412,982                                |  | 69.5                               | %

---

|(1) | Except as otherwise indicated, the address of each beneficial owner is c/o Vertical Health Solutions, Inc. at 2595 Tampa Road, Ste. E, Palm Harbor, FL 34684.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

|(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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Of the shares beneficially owned by Mr. Taneja, 450,994 shares are owned by Manju Taneja, Mr. Tanejas
wife. 553,750 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Of the shares beneficially owned by Mr. Lehmkuhl, 76,200 shares are held by Mr. Lehmkuhl as custodian for each of Joseph J. Zam, Jr. and Katelyn C. Zam,
Mr. Lehmkuhls grandchildren.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|-------- | -----------------------------------------------

On
January 4, 2006, Vertical Health Solutions, Inc. (the Company), entered into an agreement with Vitality Systems, Inc. (Vitality), pursuant to which Vitality purchased all of the outstanding stock of the Companys
wholly-owned subsidiary Labelclick, Inc. (Labelclick). The purchase price consisted of a 7% promissory note in the principal amount of $300,000, together with the assumption and personal guarantee of the purchasers of debt in the
aggregate amount of $1,800,000. The promissory note has a term of three years and is payable monthly in the principal amount of $9,263.13, together with accrued and unpaid interest. The Agreement is effective as of January 4, 2006. Vitality is
owned by Stephen Watters, our former Chief Executive Officer and a current director, Brian Nugent, our former President and a current director, and Jugal K. Taneja, a former consultant and a current director. In connection with the sale, the Company
received an independent valuation of Labelclick which supported the price paid by Vitality and the sale was approved by the Companys independent directors.

In connection with the agreement to sell Labelclick, Stephen Watters and Brian Nugent resigned as officers of the Company and Jugal K. Taneja agreed to the termination of his consulting agreement with the Company.
Each of the employment agreements and the consulting agreement were terminated effective as of January 18, 2006, without further payment or obligation beyond those which have accrued through and including January 18, 2005, but excluding
any termination payments otherwise payable pursuant to the agreements. Messrs. Watters, Nugent and Taneja remain members of the Companys Board of Directors.

As of December 31, 2006 and 2005, the Company had an outstanding obligation to Thaddeus J. Shalek, Chief Financial Officer of the Company, in the amounts of approximately $15,000 and $0, respectively, for working
capital advances made to the Company. This obligation is included in the 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. 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, 2006, the Company sold Geopharma $1,184 of raw materials, and there were no purchases of products from subsidiaries of Geopharma. As of December 31, 2006, there was no amount due to
subsidiaries of Geopharma.



---

PART IV



|Item 13. | 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.                                                                                                            



|     |  |                                                                                                                                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1  |  | Specimen Stock Certificate*                                                                                                                                                                                 
|     | 
|4.2  |  | 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.
|     | 
|4.3  |  | 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.**                                                                                                                                                     
|     | 
|10.5 |  | Form of Consulting Agreement with Jugal K. Taneja**                                                                                                                                                         



|     |  |                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------
|10.8 |  | Stephen Watters warrant agreement*                                                                                     
|     | 
|10.9 |  | Jugal K. Taneja warrant agreement*                                                                                     
|     | 
|14.1 |  | Code of Ethics of Vertical Health Solutions, Inc.***                                                                   
|     | 
|31.1 |  | Certification Of Principal Executive 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.
|- | ---------------------------------------------------------------------------------------------------

|** | Incorporated by reference to the Companys 10-KSB filed for the year ending December 31, 2004.
|-- | ----------------------------------------------------------------------------------------------

|*** | Incorporated by reference to the Companys 10-KSB filed for the year ending December 31, 2005.
|--- | ----------------------------------------------------------------------------------------------



---

|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, 2006 and December 31, 2005, and for review of the financial statements
included in the Companys quarterly reports on Form 10-QSB during such fiscal years, were $34,095 and $67,338, 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 $0 for each of the years ended December 31, 2006 and 2005.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, 2006 and 2005, respectively.

All Other Fees. For the fiscal year ended December 31, 2006, 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.

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: |  | By:                             |  | /s/ Stephen M. Watters                             
|       |  |                                 |  | Stephen M. Watters,                                
|       |  |                                 |  | Chief Executive Officer and Chief Financial Officer

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. Watters Stephen M. Watters |  | Director |  | April 17, 2007
|          |  |                                           | 
|By:       |  | /s/ Jugal K. Taneja Jugal
K. Taneja       |  | Director |  | April 17, 2007
|          |  |                                           | 
|By:       |  | /s/ Alfred Lehmkuhl Alfred Lehmkuhl       |  | Director |  | April 17, 2007
|          |  |                                           | 
|          |  | /S/ Brian T. Nugent Brian
T. Nugent       |  | Director |  | April 17, 2007
|          |  |                                           | 
|By:       |  | /s/ Patrick Sheppard Patrick
Sheppard     |  | Director |  | April 17, 2007



---

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, 2006 and 2005                                              |  | F-3       
|                                                                                                          | 
|Consolidated Statements of Operations for the years ended December 31, 2006 and 2005                      |  | F-4       
|                                                                                                          | 
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2006 and 2005 |  | F-5       
|                                                                                                          | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005                      |  | F-6  F-7 
|                                                                                                          | 
|Notes to Consolidated Financial Statements                                                                |  | F-8  F-23



---

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors

Vertical Health Solutions, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Vertical Health Solutions, Inc. and subsidiaries as of December 31, 2006 and 2005 and
the related statement of operations, changes in stockholders equity, and cash flows for the years ended December 31, 2006 and 2005. 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 audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audits 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 audits provide a reasonable basis for our opinion.

The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company had a net loss of $184,675 or the year ended December 31, 2006 and had a
working capital deficit of $41,830 as of December 31, 2006. These conditions raise substantial doubt about the Companys ability to continue as a going concern. The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern, which assumes the realization of assets and satisfaction of liabilities in the normal course of business, and does not include any adjustments that may result from the outcome of this uncertainty.

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, 2006 and 2005 and the results of operations and cash flows for the years 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                 
|April 16, 2007                 



F-2



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2006 and 2005



|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                                                           |  | 2006 |            |   | 2005 |  
|ASSETS                                                                                                                                                                                                                                     |  |      |            |   |      |   |            |  
|Current assets:                                                                                                                                                                                                                            |  |      |            |   |      |   |            |  
|Cash                                                                                                                                                                                                                                       |  | $    | 87,645     |   |      | $ | 14,782     |  
|Accounts receivable, net                                                                                                                                                                                                                   |  |      | 37,622     |   |      |   | 257,873    |  
|Inventories, net                                                                                                                                                                                                                           |  |      | 84,271     |   |      |   | 744,060    |  
|Prepaid expenses                                                                                                                                                                                                                           |  |      | 0          |   |      |   | 36,139     |  
|Other current assets                                                                                                                                                                                                                       |  |      | 2,858      |   |      |   | 33,972     |  
|Current portion of note due from related parties                                                                                                                                                                                           |  |      | 83,776     |   |      |   | 480        |  
|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  
|Total current assets                                                                                                                                                                                                                       |  |      | 296,172    |   |      |   | 1,087,306  |  
|                                                                                                                                                                                                                                           |  |     
|Property and equipment, net                                                                                                                                                                                                                |  |      | 12,125     |   |      |   | 58,667     |  
|Goodwill                                                                                                                                                                                                                                   |  |      | 0          |   |      |   | 430,000    |  
|Intangible assets, net of amortization                                                                                                                                                                                                     |  |      | 8,621      |   |      |   | 6,913      |  
|Other assets                                                                                                                                                                                                                               |  |      | 3,000      |   |      |   | 3,000      |  
|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  
|                                                                                                                                                                                                                                           |  |     
|Total assets                                                                                                                                                                                                                               |  | $    | 319,918    |   |      | $ | 1,585,886  |  
|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  
|                                                                                                                                                                                                                                           |  |     
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                             |  |      |            |   |      |   |            |  
|Current liabilities:                                                                                                                                                                                                                       |  |      |            |   |      |   |            |  
|Accounts payable                                                                                                                                                                                                                           |  | $    | 106,117    |   |      | $ | 447,017    |  
|Line of credit                                                                                                                                                                                                                             |  |      | 0          |   |      |   | 400,000    |  
|Current portion of obligations under capital leases                                                                                                                                                                                        |  |      | 0          |   |      |   | 7,676      |  
|Current portion of long-term obligations                                                                                                                                                                                                   |  |      | 94,663     |   |      |   | 104,975    |  
|Accrued expenses                                                                                                                                                                                                                           |  |      | 76,482     |   |      |   | 293,532    |  
|Obligations to affiliates                                                                                                                                                                                                                  |  |      | 0          |   |      |   | 210,144    |  
|Notes payable to related parties in default                                                                                                                                                                                                |  |      | 76,482     |   |      |   | 71,968     |  
|Notes payable to related parties                                                                                                                                                                                                           |  |      | 15,000     |   |      |   | 0          |  
|Notes payable                                                                                                                                                                                                                              |  |      | 15,000     |   |      |   | 0          |  
|Due to related parties                                                                                                                                                                                                                     |  |      | 45,740     |   |      |   | 108,067    |  
|Derivative financial instruments                                                                                                                                                                                                           |  |      | 0          |   |      |   | 414,328    |  
|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  
|Total current liabilities                                                                                                                                                                                                                  |  |      | 338,002    |   |      |   | 2,057,707  |  
|                                                                                                                                                                                                                                           |  |     
|Long-term obligations, less current portion                                                                                                                                                                                                |  |      | 66,543     |   |      |   | 382,965    |  
|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  
|Total liabilities                                                                                                                                                                                                                          |  |      | 404,545    |   |      |   | 2,440,672  |  
|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  
|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 outstanding Series A 10% Cumulative, Convertible Preferred Stock, $.01 par value,
4,000,000 shares authorized; no shares and 3,900,000 shares issued and outstanding, respectively |  |      |           |   |      |   |           |  
|Common stock, $.001 par value, 100,000,000 shares authorized; 16,423,755 and 13,876,931 shares issued and outstanding,
respectively                                                                                                        |  |      | 16,424     |   |      |   | 15,555     |  
|Additional Paid-In Capital                                                                                                                                                                                                                 |  |      | 2,628,275  |   |      |   | 1,674,311  |  
|Accumulated deficit                                                                                                                                                                                                                        |  |      | (2,729,326 | ) |      |   | (2,544,651 | )
|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  
|Total stockholders deficit                                                                                                                                                                                                                |  |      | (84,627    | ) |      |   | (854,786   | )
|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  
|Total liabilities and stockholders deficit                                                                                                                                                                                                |  | $    | 319,918    |   |      | $ | 1,585,886  |  
|                                                                                                                                                                                                                                           |  |      |            |   |      |   |            |  

See accompanying notes to consolidated financial statements.



F-3



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2006 and 2005



|                                                                       |  |      |            |   |      |   |            |  
|---------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                       |  | 2006 |            |   | 2005 |  
|Sales                                                                  |  | $    | 754,914    |   |      | $ | 4,447,291  |  
|Cost of goods sold                                                     |  |      | 383,068    |   |      |   | 2,473,170  |  
|                                                                       |  |      |            |   |      |   |            |  
|                                                                       |  |     
|Gross profit                                                           |  | $    | 371,846    |   |      | $ | 1,974,121  |  
|Operating expenses:                                                    |  |      |            |   |      |   |            |  
|Selling, general and administrative expenses                           |  |      | 667,907    |   |      |   | 2,473,551  |  
|                                                                       |  |      |            |   |      |   |            |  
|Total operating expenses                                               |  |      | 667,907    |   |      |   | 2,473,551  |  
|                                                                       |  |      |            |   |      |   |            |  
|                                                                       |  |     
|Operating loss before other income and expense                         |  |      | (296,061   | ) |      |   | (499,430   | )
|Other income (expense):                                                |  |      |            |   |      |   |            |  
|Interest income                                                        |  |      | 18,050     |   |      |   | 79,292     |  
|Other income and expenses, net                                         |  |      | 0          |   |      |   | 5,254      |  
|Impairment of goodwill                                                 |  |      | (430,000   | ) |      |   |            |  
|Derivative instrument income (expense), net                            |  |      | 187,873    |   |      |   | (231,815   | )
|Gain on sale of subsidiary                                             |  |      | 192,541    |   |      |   |            |  
|Gain on extinguishment of debt                                         |  |      | 146,455    |   |      |   |            |  
|Interest expense                                                       |  |      | (3,533     | ) |      |   | (68,389    | )
|                                                                       |  |      |            |   |      |   |            |  
|Total other income (expense)                                           |  |      | 111,386    |   |      |   | (215,658   | )
|                                                                       |  |      |            |   |      |   |            |  
|Loss before income taxes                                               |  |      | (184,675   | ) |      |   | (715,088   | )
|Income taxes                                                           |  |      | 0          |   |      |   | 0          |  
|                                                                       |  |      |            |   |      |   |            |  
|Net Loss                                                               |  |      | (184,675   | ) |      |   | (715,088   | )
|Preferred stock dividends                                              |  |      | 0          |   |      |   | 743,655    |  
|                                                                       |  |      |            |   |      |   |            |  
|Net loss available to common stockholders                              |  | $    | (184,675   | ) |      | $ | (1,458,743 | )
|                                                                       |  |      |            |   |      |   |            |  
|Basic and diluted loss per share                                       |  | $    | (0.01      | ) |      | $ | (0.10      | )
|                                                                       |  |      |            |   |      |   |            |  
|Basic and diluted weighted average number of common shares outstanding |  |      | 16,253,509 |   |      |   | 14,672,839 |  
|                                                                       |  |      |            |   |      |   |            |  

See accompanying notes to consolidated financial statements.



F-4



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY DEFICIT

Years Ended December 31, 2006 and 2005



|                                                                          |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   |          |  
|------------------------------------------------------------------------- |  | --------------- | - |  | ------------ | -------- | ------------------------ | ------ | ---------- | ------------------ | - | ------ | ------------------------- | - | --------- | - |  | - | ---------- | - |  | - | -------- | -
|                                                                          |  | Preferred Stock |   |  | Common Stock |          | AdditionalPaid-inCapital |        |            | AccumulatedDeficit |   |        | TotalStockholdersDeficit |  
|                                                                          |  | Shares          |   |  | Dollars      |          |                          | Shares |            | Dollars            |   |        |                          
|Balance at December 31, 2004 (Restated)                                   |  | 3,900,000       |   |  | $            | 331,524  |                          |        | 13,876,931 |                    | $ | 13,877 |                           | $ | 1,453,577 |   |  | $ | (1,595,076 | ) |  | $ | 203,902  |  
|                                                                          |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   |          |  
|Issuance of common stock for cash                                         |  |                 |   |  |              |          |                          |        | 1,000,000  |                    |   | 1,000  |                           |   | 199,000   |   |  |   |            |   |  |   | 200,000  |  
|Issuance of stock for services                                            |  |                 |   |  |              |          |                          |        | 37,610     |                    |   | 38     |                           |   | 24,437    |   |  |   |            |   |  |   | 24,475   |  
|Accretion of preferred stock value                                        |  |                 |   |  |              | 509,168  |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   | 509,168  |  
|Issuance of common stock in connection with retirement of preferred stock |  | (3,900,000      | ) |  |              | (840,692 | )                        |        | 640,000    |                    |   | 640    |                           |   | (2,703    | ) |  |   |            |   |  |   | (842,755 | )
|                                                                          |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   | 0        |  
|Net loss                                                                  |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   | (715,088   | ) |  |   | (715,088 | )
|Preferred stock dividends                                                 |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   | (234,487   | ) |  |   | (234,487 | )
|                                                                          |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   |          |  
|Balance at December 31, 2005                                              |  | 0               |   |  | $            | 0        |                          |        | 15,554,541 |                    | $ | 15,555 |                           | $ | 1,674,311 |   |  | $ | (2,544,651 | ) |  | $ | (854,785 | )
|Non recognized gain on sale of subsidiary                                 |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   | 869,833   |   |  |   |            |   |  |   | 869,833  |  
|                                                                          |  |                 |   |  |              |          |                         
|Issuance of common stock for the cancellation of warrants                 |  |                 |   |  |              |          |                          |        | 656,714    |                    |   | 656    |                           |   | (656      | ) |  |   |            |   |  |   | -0-      |  
|Issuance of common stock for consulting services                          |  |                 |   |  |              |          |                          |        | 12,500     |                    |   | 13     |                           |   | 4,987     |   |  |   |            |   |  |   | 5,000    |  
|Issuance of common stock for the exchange of warrants                     |  |                 |   |  |              |          |                          |        | 200,000    |                    |   | 200    |                           |   | 79,800    |   |  |   |            |   |  |   | 80,000   |  
|Net loss                                                                  |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   | (184,675   | ) |  |   | (184,675 | )
|                                                                          |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   |          |  
|Balance at December 31, 2006                                              |  | 0               |   |  | $            | 0        |                          |        | 16,423,755 |                    | $ | 16,424 |                           | $ | 2,628,275 |   |  | $ | (2,729,326 | ) |  | $ | (84,627  | )
|                                                                          |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   |          |  

See accompanying notes to consolidated financial statements.



F-5



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006 and 2005



|                                                                                          |  |      |          |   |      |   |          |  
|----------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                          |  | 2006 |          |   | 2005 |  
|Cash flows from operating activities:                                                     |  |      |          |   |      |   |          |  
|Net loss                                                                                  |  | $    | (184,675 | ) |      | $ | (715,088 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |      |          |   |      |   |          |  
|Depreciation and amortization                                                             |  |      | 4,155    |   |      |   | 25,927   |  
|Interest on restricted cash                                                               |  |      |          |   |      |   | (79,292  | )
|Gain on extinguishment of debt                                                            |  |      | (146,455 | ) |      |   | 0        |  
|Impairment of goodwill                                                                    |  |      | 430,000  |   |      |   | 0        |  
|Derivative instrument (income) expense, net                                               |  |      | (187,873 | ) |      |   | (231,815 | )
|Gain on sale of subsidiary                                                                |  |      | (192,541 | ) |      |   | 0        |  
|Common stock issued for services                                                          |  |      | 5,000    |   |      |   | 0        |  
|Amortization of deferred consulting fees                                                  |  |      | 0        |   |      |   | 74,564   |  
|Expenses paid by reduction of note receivable                                             |  |      | 272,192  |   |      |   | 0        |  
|Changes in operating assets and liabilities:                                              |  |      |          |   |      |   |          |  
|Accounts receivable                                                                       |  |      | (7,522   | ) |      |   | 136,822  |  
|Inventories                                                                               |  |      | (31,362  | ) |      |   | (328,052 | )
|Prepaid expenses                                                                          |  |      | 4,235    |   |      |   | (6,072   | )
|Other current assets                                                                      |  |      | 24,856   |   |      |   | 49,708   |  
|Due to/from affiliates, net                                                               |  |      | 0        |   |      |   | 74,065   |  
|Other assets                                                                              |  |      | 0        |   |      |   | 24,856   |  
|Accounts payable                                                                          |  |      | 77,505   |   |      |   | 93,702   |  
|Other payables                                                                            |  |      | 0        |   |      |   | (5,457   | )
|Accrued expenses                                                                          |  |      | 12,972   |   |      |   | 220,642  |  
|Due to related parties                                                                    |  |      | 0        |   |      |   | 35,943   |  
|                                                                                          |  |      |          |   |      |   |          |  
|Net cash provided by (used in) operating activities                                       |  |      | 80,487   |   |      |   | (165,917 | )
|                                                                                          |  |      |          |   |      |   |          |  
|                                                                                          |  |     
|Cash flows from investing activities:                                                     |  |      |          |   |      |   |          |  
|Purchases of property and equipment                                                       |  |      | 0        |   |      |   | (11,032  | )
|Purchase of intangible assets                                                             |  |      | (8,986   | ) |      |   | 0        |  
|                                                                                          |  |      |          |   |      |   |          |  
|Net cash used in investing activities                                                     |  |      | (8,986   | ) |      |   | (11,032  | )
|                                                                                          |  |      |          |   |      |   |          |  
|                                                                                          |  |     
|Cash flows from financing activities:                                                     |  |      |          |   |      |   |          |  
|Cash transferred in sale of subsidiary                                                    |  |      | (14,100  | ) |      |   | 0        |  
|Net change in credit line payable                                                         |  |      | 0        |   |      |   | 35,000   |  
|Proceeds (payments) from issuance of long-term obligations                                |  |      | 0        |   |      |   | 368,345  |  
|Payments of long-term obligations                                                         |  |      | (99,486  | ) |      |   | (197,712 | )
|Proceeds (payments) of related party notes                                                |  |      | 46,316   |   |      |   | (43,207  | )
|Issuance of common stock for cash                                                         |  |      | 0        |   |      |   | 200,000  |  
|Payments of costs for financing                                                           |  |      | 0        |   |      |   | (2,525   | )
|Payments of preferred dividends                                                           |  |      | 0        |   |      |   | (202,490 | )
|Proceeds from related party loans                                                         |  |      | 68,632   |   |      |   | 0        |  
|                                                                                          |  |      |          |   |      |   |          |  
|Net cash provided by financing activities                                                 |  |      | 1,362    |   |      |   | 157,411  |  
|                                                                                          |  |      |          |   |      |   |          |  
|Net increase (decrease) in cash                                                           |  |      | 72,863   |   |      |   | (19,538  | )
|Cash at beginning of period                                                               |  |      | 14,782   |   |      |   | 34,320   |  
|                                                                                          |  |      |          |   |      |   |          |  
|Cash at end of period                                                                     |  | $    | 87,645   |   |      | $ | 14,782   |  
|                                                                                          |  |      |          |   |      |   |          |  

See accompanying notes to consolidated financial statements.



F-6



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWSContinued

Years Ended December 31, 2006 and 2005



|                                                                         |  |      |       |      |   |        
|------------------------------------------------------------------------ |  | ---- | ----- | ---- | - | -------
|                                                                         |  | 2006 |       | 2005
|Supplemental disclosure of cash flow information:                        |  |      |       |      |   |        
|Cash paid during the period for interest                                 |  | $    | 3,533 |      | $ | 52,233 
|Cash paid during the period for income taxes                             |  | $    | 0     |      | $ | 0      
|Supplemental schedule of non-cash financing activities:                  |  |      |       |      |   |        
|Accrual of preferred stock dividends                                     |  | $    | 0     |      | $ | 187,416
|Issuance of common stock in payment of accrued preferred stock dividends |  | $    | 0     |      | $ | 187,416
|Stock issued for services                                                |  | $    | 5,000 |      | $ | 24,475 

On January 4, 2006, the Company sold a subsidiary which included $1,013,938 of assets and debt of $1,873,558
in exchange for a $300,000 note receivable.

See accompanying notes to consolidated financial statements.



F-7



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

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, 2006 include the accounts of Vertical Health Solutions, Inc. and its wholly owned subsidiary (collectively called the Company), Vertical Health Ventures and Drug
Depot, Inc. All intercompany accounts and balances have been eliminated in consolidation.

Derivative Financial Instruments

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow or market risks. However certain other financial
instruments, such as warrants to acquire common stock and the embedded conversion features of preferred stock instruments that are indexed to the Companys common stock, are classified as liabilities when either (a) the holder possesses
rights to net-cash settlement or (b) physical or net share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying
contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. Fair value for option based derivative financial
instruments is determined using the Black-Scholes Option Pricing Model. Fair value for cash flow derivatives is determined using discounted future cash flows of the probable expected outcomes of the derivative contract. As of December 31, 2006,
all derivative financial instruments have been retired or exchanged.

The captions derivative financial instruments consist of
(a) the embedded conversion feature bifurcated from the Preferred Stock issued to Laurus Master Fund, Ltd. (Laurus), (b) the Warrants issued in connection with the Laurus Preferred Stock and (c) interest rate index. These derivative
financial instruments are indexed to an aggregate of zero and 820,000 shares at December 31, 2006 and 2005, respectively and are carried at fair value as of those respective dates.

At December 31, 2006 and 2005 the following derivative liabilities related to warrants are outstanding:



|                                                                          |  |                |  |                                   |   |                        |      |                    |         |                 |  |                    |   |  |   |        
|------------------------------------------------------------------------- |  | -------------- |  | --------------------------------- | - | ---------------------- | ---- | ------------------ | ------- | --------------- |  | ------------------ | - |  | - | -------
|Issue Date                                                                |  | ExpirationDate |  | Instrument                        |   | ExercisePrice perShare |      | Value atissue date |         | Valueat12/31/06 |  | Value at12/31/2005
|5/27/2004                                                                 |  | 5/26/2011      |  | 820,000Warrants-LaurusCapitalLtd. |   | $                      | 1.87 |                    | $       | 1,389,829       |  | $                  | 0 |  | $ | 414,328
|                                                                          |  |                |  |                                   |   |                        |      |                    |         |                 |  |                    |   |  |   |        
|Fair value of freestanding derivative instrument liabilities for warrants |  |                |  |                                   | $ | 0                      |      | $                  | 414,328
|                                                                          |  |                |  |                                   |   |                        |      |                    |         |                 |  |                    |   |  |   |        

Fair values for option-based financial instruments are determined using the Black-Scholes Option Model.
Significant assumptions warrants for convertible Series A Preferred Stock include: a strike price of $1.87, volatility  222% and a risk free interest rate of 4.20%.

Cash and Cash Equivalents

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

Accounts Receivable

Accounts receivable 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.



F-8



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

Inventories

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

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. Accelerated methods are used for tax depreciation.

Goodwill

The Goodwill was recorded on the books as a result of the acquisition of the pharmacy operations by the wholly owned subsidiary, Drug Depot, Inc, d/b/a
APS Pharmacy on November 1, 2004. The Goodwill is not being amortized in accordance with the provisions of SFAS 142; however, due to the disposition of LabelClick Inc. and the continued losses, management has recorded an impairment of the
goodwill at $430,000 and included this amount in the accompanying statement of operation for the year ended December 31, 2006.

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. The
Company recorded $430,000 as an impairment loss related to goodwill during the year ended December 31, 2006. There were no impairment losses recorded during the year ended December 31, 2005.

Gain on Sale of Subsidiary

On January 18, 2006,
the Company entered into an agreement with Vitality Systems, Inc. (Vitality), pursuant to which Vitality purchased all of the outstanding stock of the Companys wholly-owned subsidiary LabelClick, Inc. The purchase price consisted
of a 7% promissory note in the principal amount of $300,000, together with the assumption of all debt and personal guarantee of the outstanding bank debt included in the estimated amount of $1,800,000. The promissory note has a term of three years
and is payable monthly in the principal amount of $9,263, together with accrued and unpaid interest. The Agreement is effective as of January 4, 2006. Vitality is owned by Stephen Watters, our Chief Executive Officer and a director, Brian
Nugent, our former President and a director, and Jugal K. Taneja, a former consultant and a director. In connection with the sale, the Company received an independent valuation of LabelClick which supported the price paid by Vitality and the sale
was approved by the Companys independent directors.

The Statement of Operations reflects only the portion of the income attributable
to shareholders other than Messrs. Watters, Taneja and Nugent because, as buyers, they are related parties. The amount of gain recognized was approximately $192,541 which represented approximately 32% of outside ownership. The non recognized gain
due to common ownership was approximately $869,833 and was charged to additional paid in capital. The activity of LabelClick for the four days of 2006 prior to the sale was immaterial.

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



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

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 are 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.

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, 2006 and 2005, 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 todate.

Segment Information

In accordance with the provisions of Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures About Segments of an
Enterprise and Related Information, a company is required to disclose selected financial and other related information about its operating segments. Operating segments are components of an enterprise about which separate financial information is
available and is utilized by the chief operating decision maker related to the allocation of resources and in the resulting assessment of the segments overall performance. As of and for the twelve months ended December 31 2005 the Company had
two industry segments: Manufacturing and Pharmacy Services. The Pharmacy Services segment was not in existence as of September 30, 2004, it was acquired on November 1, 2004. For the year ended December 31, 2006 the Company only had one segment.

In addition to being presented separately, intersegment financial data is included in the gross segment amounts disclosed below in order
to present accurate segment information, whereas on the condensed consolidated balance sheets and statements of operations, all intercompany transactions have been eliminated in consolidation.

Presented below is condensed segment information as of and for the year ended December 30, 2005.



|                  |  |                         |           |  
|----------------- |  | ----------------------- | --------- | -
|                  |  | December 31, 2005       |          
|Revenues          |  |                         |           |  
|Manufacturing     |  | $                       | 3,679,607 |  
|Pharmacy services |  |                         | 767,685   |  
|Gross Profit      |  |                         |           |  
|Manufacturing     |  |                         | 1,600,534 |  
|Pharmacy services |  |                         | 373,587   |  
|Operating Income  |  |                         |           |  
|Manufacturing     |  |                         | 427,886   |  
|Pharmacy services |  |                         | (71,544   | )
|                  | 
|                  |  | As of December 31, 2005 |          
|Assets            |  |                         |           |  
|Manufacturing     |  | $                       | 1,507,646 |  
|Pharmacy services |  | $                       | 78,239    |  
|Corporate         |  | $                       | 1,585,885 |  
|                  |  |                         |           |  



F-10



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

Stock Based Compensation

In December 2004, the Financial Accounting Standards Board (FASB) issued a revision to SFAS No. 123, SFAS 123R Share-Base Payment. SFAS No. 123R
requires all companies to measure compensation costs for all share based payment, including stock options, at fair value and expense such payments over the service period. SFAS No. 123R specifies that companies must use an option-pricing model
to estimate fair value, although it does not specifically require the use of a particular model. The new standard is effective for annual periods beginning after December 15, 2005 and, therefore, was effective for the Company beginning with the
first quarter of 2006. Under the provisions of FAS 123R, companies can select from three transition methods for the implementation of this standard. The modified prospective method would require all new awards that are granted after the effective
date to use the provisions of FAS 123R. Under this method, for vested awards that are outstanding on the effective date of FAS 123R , a company would not have to record any additional compensation expense. For unvested awards that are outstanding on
the effective date, of FAS 123R and were previously included as part of pro forma net income and earnings per share under the provisions of FAS 123 would be charged to expense over the remaining vesting period, without any changes in measurement.
The second alternative is a variation of the modified prospective method, which would allow companies to restate earlier interim periods in the year that FAS 123R is adopted using the applicable FAS 123 pro forma amounts. Under the third
alternative, the modified retrospective method, companies would apply the modified prospective method and also restate their prior financial statements to include the amounts that were previously recognized in their pro forma disclosures under the
original provisions of FAS 123. The Company had no unvested employee stock options as of January 1, 2006, therefore, there is no financial statement impact regarding the adoption of FAS 123R.

Additionally, the Company extinguished 820,000 warrants in exchange for 200,000 shares of common stock valued at $80,000. The fair value of the warrants was determined
at the date of the exchange using the Black Scholes Option Model using the following variables:



|                        |  |         |  
|----------------------- |  | ------- | -
|Volatility              |  | 121.70  | %
|Term                    |  | 5 years |  
|Risk free interest rate |  | 4.95    | %
|Dividend                |  | 0       |  

Advertising Costs

The Company charges advertising costs to expense as incurred. Advertising expense was $5,914 and $69,687 for the years ended December 31, 2006 and 2005, respectively.



F-11



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

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,
2006 and 2005, the fair value of the Companys long-term obligations approximated its carrying value.



F-12



---

NOTE 2 GOING CONCERN

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of Vertical Health Solutions, Inc.
(VHS) as a going concern. However, VHS has sustained operating losses in recent years. Further for the year ended December 31, 2006, VHS had negative working capital of approximately $41,830. The Company has incurred losses in previous years
resulting in an accumulated deficit of approximately $2,729,326. These factors raise substantial doubt about the ability of Vertical Health Solutions, Inc. to continue as a going concern.

The Company is pursuing equity financing for the further growth of the business and other acquisitions: failure to secure such financing or to raise
additional capital may result in the Company depleting its available funds and not being able to pay its obligations.

The financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets of the amounts and classification of liabilities that may result from the possible inability of the Company to
continue as a going concern.

NOTE 3 RELATED PARTY TRANSACTIONS

On January 18, 2006, the Company entered into an agreement with Vitality Systems, Inc. (Vitality), pursuant to which Vitality purchased all of the outstanding stock of the Companys wholly-owned
subsidiary Labelclick, Inc. The purchase price consisted of a 7% promissory note in the principal amount of $300,000, together with the assumption of all debt and personal guarantee of the outstanding bank debt included in the estimated amount of
$1,800,000. The promissory note has a term of three years and is payable monthly in the amount of $9,263, accrued and unpaid interest. The Agreement is effective as of January 4, 2006. Vitality is owned by Stephen Watters, our former Chief
Executive Officer and a director, Brian Nugent, our former President and a director, and Jugal K. Taneja, a former consultant and a director. In connection with the sale, the Company received an independent valuation of LabelClick which supported
the price paid by Vitality and the sale was approved by the Companys independent directors.

In connection with the agreement to sell
Labelclick, Stephen Watters and Brian Nugent resigned as officers of the Company and Jugal K. Taneja agreed to the termination of his consulting agreement with the Company. Each of the employment agreements and the consulting agreement were
terminated effective as of January 18, 2006, without further payment or obligation beyond those which have accrued through and including January 18, 2005, but excluding any termination payments otherwise payable pursuant to the agreements.
Messrs. Watters, Nugent and Taneja remain members of the Companys Board of Directors. However, Stephen Watters was reinstated as CEO and CFO in April 2006 as a result of the resignation of Thaddeus Shalek former CEO and CFO.

As of December 31, 2006 and 2005, the Company had an outstanding promissory note payable to Stephen M. Watters, a principal shareholder, Director
and former Chief Executive Officer of the Company, in the amounts of approximately $ -0- and $87,075, respectively, for working capital advances made to the Company. This obligation is included in amounts due to related parties. During the year
ended December 31, 2006, Mr. Watters applied $10,000 due him by the Company to reduce the amount of the note receivable, related parties.

As of December 31, 2006 and 2005, the Company had an outstanding obligation to Brian T. Nugent, a principal shareholder, Director, former President and Chief Operating Officer of the Company, in the amounts of approximately $-0- and
$20,596, respectively, for working capital advances made to the Company. During the year ended December 31, 2006, Mr. Nugent applied $10,000 due him by the Company to reduce the amount of the note receivable, related parties.



F-13



---

As of December 31, 2006 and 2005, the Company had an outstanding obligation to Ted Shalek, former
Chief Executive and Financial Officer, in the amounts of approximately $15,000 and $-0-, respectively, for working capital advances made to the Company. This obligation is included in amounts due to related parties.

As of December 31, 2006, the Company applied $51,877 of an obligation to Vitality Systems, Inc., owned by Stephen M. Watters, an officer of the
Company, Jugal K. Taneja and Brian T. Nugent, principal shareholders and Directors of the Company, to the note receivable, related party. 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 Geopharma. For the year ended December 31, 2006 and 2005, there were sales of products to Geopharma or its subsidiaries in the amount of $1,184 and $4,754,
respectively, and there were $0 and $310,216 of purchases of products from subsidiaries of Geopharma. As of December 31, 2006 and 2005, there were $0 and $203,420 due to subsidiaries of Geopharma.

During the year ended December 31, 2006, the Company and a majority shareholders company used one of the Companys bank accounts to clear
credit card charges for both the company and the shareholders company. The Company collects all of the cash related to sales on American Express in this bank account and establishes a liability to the majority shareholders company
for their portion of these collections. The liability is paid monthly, is unsecured and bears no interest. As of December 31, 2006, $45,740 is owed to the majority shareholder for credit card collections in December.

NOTE 4ACCOUNTS RECEIVABLE, NET

Accounts
receivable, net consist of the following:



|                                          |  |      |        |   |      |   |         |  
|----------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | -
|                                          |  | 2006 |        |   | 2005 |  
|Accounts receivable                       |  | $    | 39,622 |   |      | $ | 264,872 |  
|Less allowance for uncollectible accounts |  |      | (2,000 | ) |      |   | (7,000  | )
|                                          |  |      |        |   |      |   |         |  
|Total                                     |  | $    | 37,622 |   |      | $ | 257,872 |  
|                                          |  |      |        |   |      |   |         |  

For the years ended December 31, 2006 and 2005, bad debt expense charged to operations for
estimated uncollectible accounts receivable was $2,350 and $2,000, respectively.



F-14



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

NOTE 5INVENTORIES, NET

Inventories, net consist of the following:



|                              |  |      |        |      |   |         |  
|----------------------------- |  | ---- | ------ | ---- | - | ------- | -
|                              |  | 2006 |        | 2005 |  
|Raw materials                 |  | $    | 39,892 |      | $ | 137,498 |  
|Finished goods                |  |      | 44,379 |      |   | 648,982 |  
|                              |  |      |        |      |   |         |  
|                              |  |      | 84,271 |      |   | 786,480 |  
|Less reserve for obsolescence |  |      | 0      |      |   | (42,420 | )
|                              |  |      |        |      |   |         |  
|Total                         |  | $    | 84,271 |      | $ | 744,060 |  
|                              |  |      |        |      |   |         |  

NOTE 6PROPERTY AND EQUIPMENT, NET

Property and equipment, net consist of the following:



|                                               |  |      |        |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | -
|                                               |  | 2006 |        |   | 2005 |  
|Furniture and fixtures                         |  | $    | 9,951  |   |      | $ | 7,684   |  
|Equipment                                      |  |      | 5,746  |   |      |   | 103,289 |  
|Leasehold improvements                         |  |      | 4,371  |   |      |   | 6,298   |  
|                                               |  |      |        |   |      |   |         |  
|                                               |  |      | 20,068 |   |      |   | 117,271 |  
|Less accumulated depreciation and amortization |  |      | (7,943 | ) |      |   | (58,604 | )
|                                               |  |      |        |   |      |   |         |  
|Total                                          |  | $    | 12,125 |   |      | $ | 58,667  |  
|                                               |  |      |        |   |      |   |         |  

Depreciation expense charged to operations was $3,790 and $23,563 for the years ended
December 31, 2006 and 2005.

NOTE 7LINE OF CREDIT

During 2005, the Company refinanced its prior line of credit and borrowed a total of $400,000 pursuant to a line of credit, that matured on February 10 2006 and bears interest at a variable rate of 1.0% over the
prime rate with an initial rate of 6.50% per annum. The loan had an outstanding principal balance of $400,000 at December 31, 2005 and 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 2006 as part of the sale of the Label Click, Inc stock. The balance at December 31, 2006 is $ -0-.



F-15



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

NOTE 8INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2006 and 2005 is as follows:



|                                      |  |      |     |      |   |  
|------------------------------------- |  | ---- | --- | ---- | - | -
|                                      |  | 2006 |     | 2005
|Current income tax expense (benefit)  |  | $    | -0- |      | $ | 
|Deferred income tax expense (benefit) |  |      | -0- |      |   | 
|                                      |  |      |     |      |   |  
|Income tax expense (benefit)          |  | $    |    |      | $ | 
|                                      |  |      |     |      |   |  

Income taxes for the years ended December 31, 2006 and 2005 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:



|                                                         |  |      |          |   |      |   |            |  
|-------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ---------- | -
|                                                         |  | 2006 |          |   | 2005 |  
|Computed tax expense (benefit) at the statutory rate 34% |  | $    | (62,790  | ) |      | $ | (1,186,000 | )
|Increase (decrease) in taxes resulting from:             |  |      |          |   |      |   |            |  
|Gain on extinguishment of debt                           |  |      | (49,800  | ) |      |   |            |  
|Gain on sale of subsidiary                               |  |      | 302,260  |   |      |   |            |  
|Change in valuation allowance                            |  |      | (125,770 | ) |      |   |            |  
|Derivative Income                                        |  |      | (63,900  | ) |      |   | 1,186,000  |  
|                                                         |  |      |          |   |      |   |            |  
|Current income tax expense (benefit)                     |  | $    |         |   |      | $ |           |  
|                                                         |  |      |          |   |      |   |            |  

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



|                                |  |      |          |   |      |   |          |  
|------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                |  | 2006 |          |   | 2005 |  
|Deferred tax assets:            |  |      |          |   |      |   |          |  
|Net operating loss carryforward |  | $    | 460,000  |   |      | $ | 590,000  |  
|Less valuation allowance        |  |      | (460,000 | ) |      |   | (590,000 | )
|                                |  |      |          |   |      |   |          |  
|Gross deferred tax asset        |  |      |         |   |      |   |         |  
|Gross deferred tax liability    |  |      |         |   |      |   |         |  
|                                |  |      |          |   |      |   |          |  
|Net deferred tax asset          |  | $    |         |   |      | $ |         |  
|                                |  |      |          |   |      |   |          |  

The Company has available at December 31, 2006, approximately $1,350,000 of unused operating
loss carryforwards that may be applied against future taxable income and that expire in various years from 2020 to 2025. The Company does not have a reasonable expectation of utilizing the tax benefit of the net operating loss carryforward and
therefore has provided a full valuation allowance against the deferred tax asset.



F-16



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

NOTE 9LONG-TERM OBLIGATIONS

Long-term obligations consist of the following at December 31, 2006 and 2005:



|                                                                                                                                                                                                                                                                |  |      |         |      |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                                                                                                                                                                                                |  | 2006 |         | 2005
|Promissory note payable to a financial institution, bearing interest at 7.50% per annum, due in monthly principal and interest payments
of approximately $9,862 through February 2010. The note is collateralized by a shareholders stock and corporate assets. |  | $    | 0       |      | $ | 396,446
|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.       |  |      | 0       |      | $ | 4,059  
|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.                                                             |  |      | 0       |      | $ | 6,485  
|Promissory note payable to T & L Pharmacies, Inc., bearing interest at 7% per annum, due in monthly principal and interest payments
of $6,639 through November, 2007 collateralized by accounts receivable and inventory. This note currently is in default.    |  |      | 146,206 |      |   | 152,919
|                                                                                                                                                                                                                                                                |  |      |         |      |   |        
|                                                                                                                                                                                                                                                                |  |      | 146,206 |      |   | 559,909
|Less current maturities                                                                                                                                                                                                                                         |  |      | 79,663  |      |   | 176,943
|                                                                                                                                                                                                                                                                |  |      |         |      |   |        
|Total                                                                                                                                                                                                                                                           |  | $    | 66,543  |      | $ | 382,966
|                                                                                                                                                                                                                                                                |  |      |         |      |   |        

At December 31, 2006, aggregate maturities of long-term obligations are as follows:



|                         |  |   |        
|------------------------ |  | - | -------
|Year ending December 31, |  |  
|2007                     |  | $ | 79,663 
|2008                     |  |   | 66,543 
|                         |  |   |        
|Total                    |  | $ | 146,206
|                         |  |   |        



F-17



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

On February 10, 2005, the Company entered into a new financing
arrangement , whereby the Companys indebtedness to a previous financial institution with a principal balance of $109,023, along with a portion of the then existing line of credit was converted to a promissory note payable to the new financial
institution with interest at the rate of 7.50% per annum, with principal and interest being paid monthly in the amount of approximately $9,862, for 60 months commencing February 10, 2005. This note was paid during 2006 and the balance at
December 31, 2006 is $.0.

NOTE IN DEFAULT

The Company obtained a waiver from the note holder (T&L Pharmacies Inc.) for indefinite deferral of principal and interest payments until a merger or increase in cash flow permits resumption of payments.

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).

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.

In February, 2006 the company exchanged approximately 650,000 shares of common in cancellation
of all options and warrants outstanding. No options are outstanding as of December 31, 2006.

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:



|                        |  |   |  |         |  
|----------------------- |  | - |  | ------- | -
|                        |  |   |  | 2005    |  
|Risk-free interest rate |  | % |  | 3.81    | %
|Dividend yield          |  | % |  | 0       | %
|Volatility              |  | % |  | 222.10  | %
|Average expected term   |  |   |  | 4 years |  



|                                               |  |                  |   |      |                                 |      |                  |           |   |                                 |   |     
|---------------------------------------------- |  | ---------------- | - | ---- | ------------------------------- | ---- | ---------------- | --------- | - | ------------------------------- | - | ----
|                                               |  | 2006             |   | 2005
|                                               |  | Number of Shares |   |      | Weighted Average Exercise Price |      | Number of Shares |           |   | Weighted Average Exercise Price
|Outstanding at January 1,                      |  | 1,200,000        |   |      | $                               | 1.02 |                  | 650,000   |   |                                 | $ | 1.02
|Granted                                        |  |                  |   |      |                                 | 1.02 |                  | 650,000   |   |                                 |   | 1.04
|Exercised/Exchanged                            |  | (1,200,00        | ) |      |                                 |     |                  |          |   |                                 |   |    
|Forfeited                                      |  |                 |   |      |                                 |     |                  | (100,00   | ) |                                 |   |    
|                                               |  |                  |   |      |                                 |      |                  |           |   |                                 |   |     
|Outstanding at December 31,                    |  | -0-              |   |      | $                               | -0-  |                  | 1,200,000 |   |                                 |   | 1.02
|                                               |  |                  |   |      |                                 |      |                  |           |   |                                 |   |     
|Options exercisable at December 31,            |  | -0-              |   |      | $                               | -0-  |                  | 1,200,000 |   |                                 |   | 1.02
|                                               |  |                  |   |      |                                 |      |                  |           |   |                                 |   |     
|Weighted average fair value of options granted |  |                  |   |      | $                               | -0-  |                  |           |   |                                 | $ |    
|                                               |  |                  |   |      |                                 |      |                  |           |   |                                 |   |     



F-18



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

NOTE 11SHAREHOLDERS DEFICIT



F-19



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2006 AND 2005

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.



F-20



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In April 2005, the Company sold 1,000,000 of common stock to Steve Watters and Jugal Taneja for $100,000.

In August 2005, the Company issued 37,610 shares of common stock to unrelated parties in payment of outstanding obligations of $24,475.

On November 28, 2005, the Company and its wholly owned subsidiary, Vertical Health Ventures, Inc., entered into a Repayment Agreement
with Laurus Master Fund, LTD. (Laurus). The Company will reacquire and cancel the remaining $3,900,000 of Series A Preferred Stock of its subsidiary that is convertible into shares of common stock of the Company (the Series
A) and pay all currently accrued but unpaid preferred dividends of $216,802 and a prepayment redemption fee of $195,000. The Series A Preferred Stock was part of the financing entered into by the Company on May 27, 2004.

The terms of the Series A Preferred Stock, originally, $4,000,000 includes 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 common stock (but subject to the conversion requirements discussed below). If paid in shares of 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 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 net proceeds of this offering were placed in a restricted account and pledged as
collateral for the stated value, dividends and fees related to the Series A that has not been converted or redeemed.

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

On April 15, 2005, Vertical Health Solutions, Inc., a Florida corporation (the Company), converted two promissory notes with an
aggregate principal amount of $200,000 into shares of common stock at the rate of $.20 per share. The promissory notes, each in the principal amount of $100,000, were issued to Stephen M. Watters, our former Chief Executive Officer, and Jugal M.
Taneja, a member of our Board of Directors and a consultant to the Company. Each of Messrs. Watters and Taneja received 500,000 shares of our common stock.

In February 2006 the company issued approximately 650,000 shares of restricted common stock in cancellation of all outstanding employee stock options and warrants totaling 1,200,000. All options cancelled were fully
vested. The value of the restricted stock was approximately equal to the fair value of the options at the date of the exchange so no additional compensation expense resulted to the company. As a result, there are no outstanding employee stock
options or warrants as of December 31, 2006.

In May 2006, the Company issued approximately 200,000 shares of common stock to cancel the
outstanding warrants to Laurus in final cancellation of the financing that was settled as of December 31, 2005. The resulting issuance of common stock resulted in final settlement and accounting for the derivative financial instrument so that no
derivative liabilities exist as of December 31, 2006.

NOTE 12SALE OF SUBSIDIARY

On January 18, 2006, the Company entered into an agreement with Vitality Systems, Inc. (Vitality), pursuant to which Vitality purchased
all of the outstanding stock of the Companys wholly-owned subsidiary Labelclick, Inc. The purchase price consisted of a 7% promissory note in the principal amount of $300,000, together with the assumption of all debt and personal guarantee of
the outstanding bank debt included in the estimated amount of $1,800,000. The promissory note has a term of three years and is payable monthly in the principal amount of $9,263, together with accrued and unpaid interest. The Agreement is effective
as of January 4, 2006. Vitality is owned by Stephen Watters, our Chief Executive Officer and a director, Brian Nugent, our former President and a director, and Jugal K. Taneja, a former consultant and a director. In connection with the sale,
the Company received an independent valuation of LabelClick which supported the price paid by Vitality and the sale was approved by the Companys independent directors.

In connection with the agreement to sell Labelclick, Stephen Watters and Brian Nugent resigned as officers of the Company and Jugal K. Taneja agreed to
the termination of his consulting agreement with the Company. Each of the employment agreements and the consulting agreement were terminated effective as of January 18, 2006, without further payment or obligation beyond those which have accrued
through and including January 18, 2005, but excluding any termination payments otherwise payable pursuant to the agreements. Messrs. Watters, Nugent and Taneja remain members of the Companys Board of Directors. However, Stephen Watters
was reinstated as CEO and CFO in April 2006 as a result of the resignation of Thaddeus Shalek former CEO and CFO.



F-21