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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB/A



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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, 2005



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

For the transition period from  to

Commission
file number 0-23031



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VERTICAL HEALTH SOLUTIONS, INC.

(Name of small business issuer in its charter)



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|                                                                  |  |                                    
|----------------------------------------------------------------- |  | -----------------------------------
|Florida                                                           |  | 59-3635262                         
|(State of or other jurisdiction of incorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                                  | 
|2595 Tampa Rd. Palm Harbor, Florida                               |  | 34684                              
|(Address of principal executive offices)                          |  | (Zip Code)                         

Issuers telephone number (727) 547-2654



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

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



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

Check 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 $4,447,291

The aggregate market value of the
voting common stock held by non-affiliates of the Registrant was $915,385 based upon the last reported trade of the stock, which was 1,100 on March 24, 2006 at $.50 per share.

The number of shares outstanding of the Issuers common stock at $.001 par value as of March 31, 2006 was 15,554,543.

DOCUMENTS ARE INCORPORATED BY REFERENCE:

None.

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



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PART I



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

General

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

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 formed a new subsidiary called LabelClick, Inc. d/b/a Vitality Systems, 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.

Our Private Label Operations

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

LabelClick does not manufacture any of the products sold. LabelClick subcontracts on a purchase order basis with a number of manufacturers (including Geopharma, Inc., an affiliate, from which the company purchased 18% of its goods during
2005) to provide high quality animal health supplements and animal healthcare products for the private label program. LabelClick do not enter into contracts with the manufacturers, as is customary in the industry. For quality control purposes,
LabelClick may source and purchase the raw materials used for the production of proprietary products and send them directly to the manufacturer. In other cases, the manufacturer provides the raw materials for the products. In each case, prior to
manufacturing, each ingredient is analyzed by the manufacturer to ascertain the accuracy of the Certificate of Analysis data provided by the raw materials suppliers prior to the use in our formulations. Each manufacturing facility with which
LabelClick subcontracts is registered with the United States Food and Drug Administration. For larger orders, the subcontractors will apply the private labels LabelClick produces. For smaller orders, it is more economical for LabelClick to complete
this task once the manufactured products are returned to the distribution center in their containers.

LabelClick does not engage in
traditional research and development activities.



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Marketing and Sales

In the fiscal year ended December 31, 2005, approximately 42 percent of our total sales were to veterinary clinics and approximately 58 percent were to distributors. Our geographical market is defined as the
continental United States, however initial concentration has been on accounts in the southeast, southwest and northwest region of the United States.

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

Competition

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

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

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

Backlog

The Companys revenues are processed through its system from sales orders generated and issued by the Companys customers. The Company fulfills
the sales orders on a turn-around time of between one to two days. As such, at any given point in time, the Company does not experience a backlog of unfilled sales orders. At December 31, 2005, the Company had $13,327 of backlog sales orders.

Trademarks

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

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

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



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Principal Suppliers and Sources of Supply

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

Quality Control

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

Our Pharmacy
Operations

Our pharmacy, Drug Depot, Inc., d/b/a APS Pharmacy, provides specialized compounding pharmaceutical prescription services to
veterinarians and their customers in the companion animal sector. 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, 2005, approximately 49.9% of our sales were to customers of the companion animal sector. Our geographical market is defined as the continental United States, however initial concentration has been on customers in the
southeast and southwest regions of the United States.

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

Government Regulation

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



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

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

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

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

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

Employees

As of December 31, 2005, the Company had 16 full-time employees. Of such employees, six were engaged in
marketing and sales, three were devoted to warehousing and distribution, one was devoted to graphics and database administration, three employees operated the pharmacy and four were responsible for management and administration. None of the
Companys employees are covered by a collective bargaining agreement. The Company considers its relations with its employees to be good.

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

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



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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, 2005, the Companys quarterly reports on Form 10-QSB, the Companys current reports on Form 8-K, periodic press releases, as well as other public documents and statements, may contain
forward-looking statements within the meaning of the Act.

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

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

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

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

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

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



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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.



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

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

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

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

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



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

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

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

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

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

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

Concentration of Customers. For the year ended December 31, 2005, 34.5% of consolidated revenues were received from two customers, representing a concentration of credit risk. If the Companys major
customers substantially reduced their volume of purchases from the Company, the Companys business, financial condition, results of operations and cash flows could be materially adversely affected.

General Risks

Key Personnel. As a small
company with 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



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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.



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

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

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 lease contains three consecutive one-year renewal options to continue the lease after the expiration of the original lease on October 31, 2006 unless
terminated earlier. The rental under the lease is $31,740 annually.

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

As of December 31, 2005, the Company had real property, equipment, furniture, and leasehold improvements, net of accumulated depreciation, in the approximate amount of $58,667.



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

During 2005, the Company was
involved in a lawsuit concerning patent rights issues. The suit was settled in 2006, the obligation for payment will be borne by Labelclick, Inc., the subsidiary that was sold, effectively on January 18, 2006. 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, 2005.

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, 2004     |  | $    | .25  |     | $ | 0.40
|June 30, 2004      |  |      | 1.75 |     |   | 0.70
|September 30, 2005 |  |      | 1.57 |     |   | 0.60
|December 31, 2004  |  |      | 0.88 |     |   | 0.41
|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



---

As of December 31, 2005, 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 SecuritiesOn May 27, 2004, we entered into a Securities Purchase Agreement with Laurus Master Fund, Ltd. (Laurus), under which we issued and sold to Laurus in a
private placement (i) $4,000,000 of Series A Cumulative Convertible Preferred Stock (the Series A Preferred Stock) of our wholly-owned subsidiary, Vertical Health Ventures, Inc., that is convertible into shares of our common stock,
and (ii) a warrant to purchase 820,000 shares of our common stock. This agreement was amended on September 17, 2004.

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 acquired and canceled the remaining $3,900,000 of
Series A Preferred Stock of its subsidiary that was convertible into shares of common stock of the Company (the Series A) and paid 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 Company completed
the transaction by payment of the funds, approximately ($3,827,631), held in the restricted cash account at North Fork Bank and the issuance of 640,000 shares of the Companys common stock. The common stock will not be registered under the
Securities Act of 1933 at the time of initial issue. The common stock may be registered in the future when the Company files for registration of other securities.

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 was 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 was redeemed on November 28, 2005.

Sale of LabelClick, 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 $9,263.13, 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.

On January 18, 2006, Thaddeus J. Shalek, the Chief Financial Officer of the Company was appointed Chief Executive 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, 2005 Compared To Year Ended December 31, 2004

Revenues. The Company generated revenues of $4,447,291 for
the year ended December 31, 2005, an increase of $1,163,345 or 35.4 %, compared to $3,283,946 for the year ended December 31, 2004. The increase in revenues was primarily attributable to increased marketing efforts, increased
distribution and the addition of the operations of APS Pharmacy which resulted in increases in our customer base and related volume of recurring and new customer sales.



---

Gross profit. The Company achieved a gross profit of $1,974,121 for the year ended
December 31, 2005, an increase of $42,478 or 2.2%, compared to $1,931,643 for the year ended December 31, 2004. Gross profit, as a percentage of revenues, decreased from 58.8 % for the year ended December 31, 2004 to 44.4% for
the year ended December 31, 2005. The decrease in gross margin was primarily due to an increase in production, promotion and advertising costs.

Operating expenses. The Company incurred operating expenses of $2,473,551 for the year ended December 31, 2005, an increase of $515,419 or 26.3%, compared to $1,958,132 for the year ended December 31,
2004. The increase was primarily attributable to an increase in payroll due to the addition of staff, related payroll expenses, advertising, consulting fees, insurance, travel, professional fees, telephone and travel associated with the increase in
sales volume.

Interest expense, net of interest income. Interest income, net of interest expense was $10,903 for the year ended
December 31, 2005, compared to $408 of net interest expense for the year ended December 31, 2004. The decrease in interest expense, net of interest income was primarily a result of increases in principal payments on outstanding obligations
and the issuance of the Company preferred stock.

Income taxes. The Company had no income tax provision for the years ended
December 31, 2005 and 2004, due to the use of the net operating loss carryforward from prior years against 2005 income and a net operating loss during 2004. 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 $743,655 for the year ended December 31, 2005, compared to $487,943, as restated, for the year ended December 31, 2004. The increase was due to the issuance of the preferred stock by our wholly owned
subsidiary, Vertical Health Ventures, Inc. during 2005 and the related derivative accounting requirements.

Net income (loss) per share.Net loss per share was $.10 for the year ended December 31, 2005, compared to net loss income per share of $(.01) for the year ended December 31, 2004 (restated).

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, 2005 and 2004. 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 $14,782 and a working capital deficit of $978,077 at December 31, 2005, compared to cash of $34,320 and a working capital deficit of $3,864,163 at December 31, 2004 (Restated).

Net cash used in operating activities was $165,917 for the year ended December 31, 2005, as compared to net cash used in operating
activities of $109,658 for the year ended December 31, 2004. The usage of cash was primarily attributable to the decrease in accounts receivable of $136,822, an increase in inventories of $328,052, an decrease in prepaid expenses of $6,072, a
decrease in other current assets of $24,856, an increase in the amounts due to affiliates $74,065, increase in other assets of $24,856, added to by the net loss, an increase in accounts payable of $93,702 and an increase in accrued expenses of
$220,642, and an increase in amounts due to related parties of $35,943.

Net cash used in investing activities was $11,032, representing
the purchases of property and equipment of $11,032.

Net cash provided by financing activities was $157,411, represented by an increase in
the line of credit in the amount of $35,000, proceeds from the issuance of common stock of $200,000, proceeds from the issuance of long-term obligations in the amount of $368,345, offset by a decrease in notes payable to related parties in the
amount of $43,207, payments of long-term obligations of $197,712, payments of $2,525 as costs to obtain financing and payment of preferred dividends in the amount of $202,490.

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 |  | 39  |  | Director                                            |  | 2000          
|                   |  |     | 
|Brian T. Nugent    |  | 31  |  | President and Director                              |  | 2001          
|                   |  |     | 
|Thaddeus J. Shalek |  | 56  |  | Chief Executive Officer and Chief Financial Officer |  | 2006          
|                   |  |     | 
|Jugal K. Taneja    |  | 62  |  | Director                                            |  | 2000          
|                   |  |     | 
|Alfred Lehmkuhl    |  | 74  |  | Director                                            |  | 2002          
|                   |  |     | 
|Patrick Sheppard   |  | 58  |  | 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 Office of the Company. Stephen M. Watters had served as a director and as the
Companys Chief Executive Officer since its inception and our Chief Financial Officer from August 2002 through October 2004. Mr. Watters had also served as Chief Executive Officer and Secretary of Labelclick, Inc. since its
inception. Prior to working with us, Mr. Watters was the Co-founder, Chief Executive Officer and President, of Drugmax, Inc., from September 1998 until August 2000. DrugMax is a publicly-held company operating as a wholesaler and retailer of
pharmaceuticals, over-the counter drugs, health and beauty care products and private label dietary supplements. From September through November 1998, Mr. Watters served as Vice President of Finance of Dynamic Health Products, Inc., a
publicly-held nutraceutical products company. Prior to that, he worked in the investment banking and brokerage businesses from April 1992 to September 1998. He received his Executive Masters of Business Administration degree from Case Western
Reserve University in 1997.

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.

Ted Shalek, CPA/CVA has served as the Companys Chief Financial Officer since October 2004 and the Treasurer of Drug Depot, Inc., since inception.
Mr. Shalek has more than 30 years of tax and accounting experience. From November 1985 until October 2004, Ted was president of his own accounting and business financial consulting firm, concentrating in tax preparation, auditing, planning and
negotiating financing, merger/acquisition planning and investigation, and business valuations. From April 1979 until November 1985 Ted worked as a tax partner with McManamon, Shalek & Co. CPAs in Rocky River, Ohio, and prior to that
time, as a manager for Cooper & Lybrand (now PriceWaterhouseCoopers). He was a part-time instructor of business taxation & financial accounting at Cuyahoga Community College in Cleveland, Ohio from May 2000 until May 2004. Ted has
served as an arbitrator for the NASD since 1984. Ted is a member of several professional organizations, including the American Institute of Certified Public Accountants and National Association of Certified Business Valuation Analysts. Ted received
his Bachelors of Science in Business Administration with a major in Accounting from John Carroll University, Cleveland, Ohio. On January 4, 2006 Ted Shalek was appointed as the Chief Executive Officer of the Company.

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 2005 and 2004, the Company is not aware of any director, officer or beneficial owner of more than ten percent of the
Companys Common Stock that failed to file reports required by Section 16(a) of the Securities Exchange Act of 1934 on a timely basis during fiscal year 2005.

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)



|                                                          |  |                    |  |            |                       |          |     |                             |     |                              |     |                                            |     |         |                          |  |    
|--------------------------------------------------------- |  | ------------------ |  | ---------- | --------------------- | -------- | --- | --------------------------- | --- | ---------------------------- | --- | ------------------------------------------ | --- | ------- | ------------------------ |  | ---
|                                                          |  | AnnualCompensation |  |            |                       |          |     |                             |     | Long-TermCompensation        |     |                                           
|                                                          |  |                    |  |            |                       |          |     |                             |     | Awards                       |     | LTIPPayouts($)                             |     | Payouts
|Name and Principal Position                               |  | Year               |  | Salary ($) |                       | Bonus($) |     | Other AnnualCompensation($) |     | RestrictedStockAward(shares) |     | SecuritiesUnderlyingOptions /SARs(#)(1)(2) |     |         | All OtherCompensation($)
|Stephen M. Watters (2) Chief Executive Officer            |  | 200520042003       |  | $$$        | 165,000165,000152,500 |          |  |                             |  |                              |  |                                            |  |         |                       |  | 
|Brian T. Nugent President and Chief Operating Officer (3) |  | 200520042003       |  | $$$        | 165,000140,000140,000 |          |  |                             |  |                              |  |                                            |  |         |                       |  | 
|Thaddeus J. Shalek Chief Financial Officer (4)            |  | 200520042002       |  | $$$        | 125,00026,442        |          |  |                             |  |                              |  |                                            |  |         |                       |  | 
|Jugal K. Taneja, Consultant (5)                           |  | 200520042003       |  | $$$        | 165,000103,666103,666 |          |   |                             |   |                              |   |                                            |   |         |                        |  |  

---

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



---

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



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



|(4) | Mr. Thaddeus J. Shalek, CPA has served as the Companys Chief Financial Officer since October 2004 and Chief Executive Officer since January 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



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

During the year ended December 31, 2005, the Company paid each director a fee of $500 for each meeting attended by such director. Outside directors who serve on board committees will be paid a fee of $100 for
each committee meeting attended by such director. In addition, directors receive reimbursement for reasonable expenses incurred in attending meetings.

Employment Agreements

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

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.

Option Grants in Last Year and Stock Option Grant.

No options were granted during the year ended December 31, 2005.

Aggregate Option Exercise of Last Fiscal year and Fiscal Year-End Option Values

The following table provides information on the value of the named executive officers unexercised options at December 31, 2005. No shares of Common Stock were acquired upon exercise of options during the fiscal year ended
December 31, 2005.





|                             |  |                                           |  |                                                      |  |             |   |               |   |  
|---------------------------- |  | ----------------------------------------- |  | ---------------------------------------------------- |  | ----------- | - | ------------- | - | -
|                             |  | Number of Unexercised Options at Year End |  | Value of Unexercised In-The-MoneyOptions at Year End
|Name                         |  | Exercisable                               |  | Unexercisable                                        |  | Exercisable |   | Unexercisable
|Jugal K. Taneja, Chairman    |  | 460,000                                   |  | 0                                                    |  | $           | 0 |               | $ | 0
|Stephen M. Watters, Director |  | 460,000                                   |  | 0                                                    |  | $           | 0 |               | $ | 0
|Brian T. Nugent, Director    |  | 160,000                                   |  | 0                                                    |  | $           | 0 |               | $ | 0
|Albert Lehmkuhl, Director    |  | 60,000                                    |  | 0                                                    |  | $           | 0 |               | $ | 0
|Patrick Sheppard, Director   |  | 60,000                                    |  | 0                                                    |  | $           | 0 |               | $ | 0



|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, 2005 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)                             |  | 6,149,444                                 |  | 39.5                               | %
|Common |  | Brian T. Nugent (4)                               |  | 1,069,075                                 |  | 6.87                               | %
|Common |  | Jugal K. Taneja(5)                                |  | 4,615,787                                 |  | 29.67                              | %
|Common |  | Patrick Sheppard(6)                               |  | 326,675                                   |  | 2.1                                | %
|Common |  | Alfred Lehmkuhl(7)                                |  | 1,562,395                                 |  | 10.0                               | %
|Common |  | All officers and directors as a group (5 persons) |  | 13,723,376                                |  | 88.23                              | %

---

|(1) | Except as otherwise indicated, the address of each beneficial owner is c/o Vertical Health Solutions, Inc. at 2595 Tampa Road, ., 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. Includes 428,570 shares issuable upon exercise of presently
exercisable warrants to purchase common stock at $.65 per share and 710,000 shares issuable upon exercise of options to purchase common stock and warrants convertible into common stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



|(6) | Of the shares beneficially owned by Mr. Sheppard, includes 110,000 shares issuable upon exercise of options to purchase common stock and warrants convertible into common stock.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

On
April 15, 2005 the Company issued 500,000 shares each of common stock to Steve Watters and Jugal Taneja for the payment of $200,000 to the Company that was used to may the Preferred dividends to Laurus Master Fund, Ltd.

As of December 31, 2004, the Company had an outstanding obligation to Mr. Watters in the amount of approximately $87,075, for working capital
advances made to the Company. This obligation is included in amounts due to related parties.

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, 2005 and 2004, the Company had an outstanding obligation to Brian T. Nugent, a principal shareholder, Director, President and Chief Operating Officer, in the amounts of approximately $20,596 and $2,283, respectively, for working
capital advances made to the Company. This obligation is included in the amounts due to related parties.

As of December 31, 2005 and
2004, the Company had an outstanding obligation to Thaddeus J. Shalek, Chief Financial Officer of the Company, in the amounts of approximately $ -0- and $6,608, 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, 2005, the Company sold Geopharma
$4,754 of raw materials, and purchases of products from subsidiaries of Geopharma were approximately $310,216. As of December 31, 2005, approximately $203,420 was due to subsidiaries of Geopharma and is included in obligations to affiliates and
Geopharma owed the Company $-0-.

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**                                                                                                                                                         



---

|     |  |                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------
|     | 
|10.6 |  | Stephen Watters warrant agreement*                                                                                     
|     | 
|10.7 |  | Jugal K. Taneja warrant agreement*                                                                                     
|     | 
|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.
|-- | ----------------------------------------------------------------------------------------------



|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, 2005 and December 31, 2004, and for review of the financial statements
included in the Companys quarterly reports on Form 10-QSB during such fiscal years, were $37,182 and $26,500, respectively.

Tax Fees. The aggregate
fees billed for tax preparation and related services by our auditors were $0 and $0 for the years ended December 31, 2005 and 2004, respectively.

All
Other Fees. For the fiscal year ended December 31, 2005, 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: July 14, 2006 |  |  |  | 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                                                     |  | July 14, 2006
|          |  |                                           | 
|By:       |  | /s/ Brian T. Nugent Brian T.
Nugent       |  | Director                                                     |  | July 14, 2006
|          |  |                                           | 
|By:       |  | /s/ Stephen M. Watters Stephen
M. Watters |  | Chief Executive Officer, ChiefFinancial Officer and Director |  | July 14, 2006
|          |  |                                           | 
|By:       |  | /s/ Jugal K. Taneja Jugal K.
Taneja       |  | Consultant and Director                                      |  | July 14, 2006
|          |  |                                           | 
|By:       |  | /s/ Alfred Lehmkuhl Alfred
Lehmkuhl       |  | Director                                                     |  | July 14, 2006
|          |  |                                           | 
|By:       |  | /s/ Patrick Sheppard Patrick
Sheppard     |  | Director                                                     |  | July 14, 2006



---

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, 2005 and 2004                                             |  | F-3       
|                                                                                                         | 
|Consolidated Statements of Operations for the year ended December 31, 2005 and 2004                      |  | F-4       
|                                                                                                         | 
|Consolidated Statements of Changes in Stockholders Equity for the year ended December 31, 2005 and 2004 |  | F-5       
|                                                                                                         | 
|Consolidated Statements of Cash Flows for the year ended December 31, 2005 and 2004                      |  | 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 sheet of Vertical Health Solutions, Inc. and subsidiaries as of December 31, 2005 and 2004 and the related statement of operations, changes in stockholders equity, and cash
flows for the years ended December 31, 2005 and 2004. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audit.

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

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 $715,088 for the year ended December 31, 2005 and had a working capital deficit of $978,897 as of December 31, 2005. 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, 2005 and 2004 and the results of operations
and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.



|                               
|-------------------------------
|BRIMMER, BUREK & KEELAN LLP    
|                               
|/s/ Brimmer, Burek & Keelan LLP
|Tampa, Florida                 
|April 24, 2006                 



F-2



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2005 and 2004 (Restated)



|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | --------- | - | -------------- | - | ---------- | -
|                                                                                                                                                                                                                                           |  | 2005 |           |   | 2004(Restated) |  
|ASSETS                                                                                                                                                                                                                                     |  |      |           |   |                |   |            |  
|Current assets:                                                                                                                                                                                                                            |  |      |           |   |                |   |            |  
|Cash                                                                                                                                                                                                                                       |  | $    | 14,782    |   |                | $ | 34,320     |  
|Accounts receivable, net                                                                                                                                                                                                                   |  |      | 257,873   |   |                |   | 394,695    |  
|Inventories, net                                                                                                                                                                                                                           |  |      | 744,060   |   |                |   | 416,008    |  
|Prepaid expenses                                                                                                                                                                                                                           |  |      | 36,139    |   |                |   | 30,067     |  
|Other current assets                                                                                                                                                                                                                       |  |      | 33,972    |   |                |   | 83,680     |  
|Due from affiliates                                                                                                                                                                                                                        |  |      | 480       |   |                |   | 479        |  
|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  
|Total current assets                                                                                                                                                                                                                       |  |      | 1,087,306 |   |                |   | 959,249    |  
|Cash, Restricted                                                                                                                                                                                                                           |  |      |          |   |                |   | 3,730,258  |  
|Property and equipment, net                                                                                                                                                                                                                |  |      | 58,667    |   |                |   | 71,197     |  
|Goodwill                                                                                                                                                                                                                                   |  |      | 430,000   |   |                |   | 430,000    |  
|Intangible assets, net of amortization                                                                                                                                                                                                     |  |      | 6,913     |   |                |   | 2,157      |  
|Other assets                                                                                                                                                                                                                               |  |      | 3,000     |   |                |   | 25,856     |  
|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  
|Total assets                                                                                                                                                                                                                               |  | $    | 1,585,886 |   |                | $ | 5,218,717  |  
|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                             |  |      |           |   |                |   |            |  
|Current liabilities:                                                                                                                                                                                                                       |  |      |           |   |                |   |            |  
|Accounts payable                                                                                                                                                                                                                           |  | $    | 447,017   |   |                | $ | 328,840    |  
|Other payables                                                                                                                                                                                                                             |  |      |          |   |                |   | 5,457      |  
|Line of credit                                                                                                                                                                                                                             |  |      | 400,000   |   |                |   | 365,000    |  
|Current portion of obligations under capital leases                                                                                                                                                                                        |  |      | 7,676     |   |                |   | 17,294     |  
|Current portion of long-term obligations                                                                                                                                                                                                   |  |      | 104,975   |   |                |   | 78,845     |  
|Accrued expenses                                                                                                                                                                                                                           |  |      | 293,532   |   |                |   | 72,890     |  
|Accrued preferred dividends                                                                                                                                                                                                                |  |      |          |   |                |   | 155,419    |  
|Obligations to affiliates                                                                                                                                                                                                                  |  |      | 210,144   |   |                |   | 136,079    |  
|Notes payable to related parties                                                                                                                                                                                                           |  |      | 71,968    |   |                |   | 115,175    |  
|Due to related parties                                                                                                                                                                                                                     |  |      | 108,067   |   |                |   | 72,123     |  
|Derivative financial instruments                                                                                                                                                                                                           |  |      | 414,328   |   |                |   | 3,476,290  |  
|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  
|Total current liabilities                                                                                                                                                                                                                  |  |      | 2,057,707 |   |                |   | 4,823,412  |  
|Obligations under capital leases, less current portion                                                                                                                                                                                     |  |      |           |   |                |   | 961        |  
|Long-term obligations, less current portion                                                                                                                                                                                                |  |      | 382,965   |   |                |   | 190,442    |  
|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  
|Total liabilities                                                                                                                                                                                                                          |  |      | 2,440,672 |   |                |   | 5,014,815  |  
|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  
|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 |  |      |          |   |                |   | 331,524    |  
|Common stock, $.001 par value, 100,000,000 shares authorized; 15,554,543 and 13,876,931 shares issued and outstanding,
respectively                                                                                                        |  |      | 15,555    |   |                |   | 13,877     |  
|Additional Paid-In Capital                                                                                                                                                                                                                 |  |      | 1,674,311 |   |                |   | 1,453,577  |  
|Accumulated equity (deficit)                                                                                                                                                                                                               |  |      | 2,544,651 |   |                |   | (1,595,076 | )
|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  
|Total stockholders equity (deficit)                                                                                                                                                                                                       |  |      | (854,786  | ) |                |   | 203,902    |  
|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  
|Total liabilities and stockholders equity (deficit)                                                                                                                                                                                       |  | $    | 1,585,886 |   |                | $ | 5,218,717  |  
|                                                                                                                                                                                                                                           |  |      |           |   |                |   |            |  

See accompanying notes to consolidated financial statements.



F-3



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31, 2005 and 2004 (Restated)



|                                                                       |  |      |            |   |                |   |            |  
|---------------------------------------------------------------------- |  | ---- | ---------- | - | -------------- | - | ---------- | -
|                                                                       |  | 2005 |            |   | 2004(Restated) |  
|Sales                                                                  |  | $    | 4,447,291  |   |                | $ | 3,283,946  |  
|Cost of goods sold                                                     |  |      | 2,473,170  |   |                |   | 1,352,303  |  
|                                                                       |  |      |            |   |                |   |            |  
|Gross profit                                                           |  |      | 1,974,121  |   |                |   | 1,931,643  |  
|Operating expenses:                                                    |  |      |            |   |                |   |            |  
|Selling, general and administrative expenses                           |  |      | 2,473,551  |   |                |   | 1,958,132  |  
|                                                                       |  |      |            |   |                |   |            |  
|Total operating expenses                                               |  |      | 2,473,551  |   |                |   | 1,958,132  |  
|                                                                       |  |      |            |   |                |   |            |  
|Operating (loss) before other income and expense                       |  |      | (499,430   | ) |                |   | (26,489    | )
|Other income (expense):                                                |  |      |            |   |                |   |            |  
|Interest income                                                        |  |      | 79,292     |   |                |   | 32,283     |  
|Other income and expenses, net                                         |  |      | 5,254      |   |                |   | 40,925     |  
|Derivative instrument income (expense), net                            |  |      | (231,815   | ) |                |   | 306,710    |  
|Interest expense                                                       |  |      | (68,389    | ) |                |   | (32,691    | )
|                                                                       |  |      |            |   |                |   |            |  
|Total other income (expense)                                           |  |      | (215,658   | ) |                |   | 347,738    |  
|                                                                       |  |      |            |   |                |   |            |  
|Income (Loss) before income taxes                                      |  |      | (715,088   | ) |                |   | 320,738    |  
|Income taxes                                                           |  |      | 0          |   |                |   | 0          |  
|                                                                       |  |      |            |   |                |   |            |  
|Net Income (Loss)                                                      |  |      | (715,088   | ) |                |   | 320,738    |  
|Preferred stock dividends                                              |  |      | 743,655    |   |                |   | 487,943    |  
|                                                                       |  |      |            |   |                |   |            |  
|Net (loss) available to common stockholders                            |  | $    | (1,458,743 | ) |                | $ | (167,205   | )
|                                                                       |  |      |            |   |                |   |            |  
|Basic and diluted loss per share                                       |  | $    | (0.10      | ) |                | $ | (.01       | )
|                                                                       |  |      |            |   |                |   |            |  
|Basic and diluted weighted average number of common shares outstanding |  |      | 14,672,839 |   |                |   | 13,716,147 |  
|                                                                       |  |      |            |   |                |   |            |  

See accompanying notes to consolidated financial statements.



F-4



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY DEFICIT

Year Ended December 31, 2005 and 2004 (Restated)



|                                                                           |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   |          |  
|-------------------------------------------------------------------------- |  | --------------- | - |  | ------------ | -------- | ------------------------ | ------ | ---------- | ------------------ | - | ------ | ------------------------- | - | --------- | - |  | - | ---------- | - |  | - | -------- | -
|                                                                           |  | Preferred Stock |   |  | Common Stock |          | AdditionalPaid-inCapital |        |            | AccumulatedDeficit |   |        | TotalStockholdersDeficit |  
|                                                                           |  | Shares          |   |  | Dollars      |          |                          | Shares |            | Dollars            |   |        |                          
|Balances at December 31, 2003                                              |  |                |   |  | $            |         |                          |        | 13,709,375 |                    | $ | 13,709 |                           | $ | 1,168,731 |   |  | $ | (1,427,871 | ) |  | $ | (245,431 | )
|Issuance of common stock in payment of an outstanding obligation of $3,793 |  |                |   |  |              |         |                          |        | 3,700      |                    |   | 4      |                           |   | 3,789     |   |  |   |           |   |  |   | 3,793    |  
|Issuance of common stock in payment of surety bond                         |  |                |   |  |              |         |                          |        | 10,000     |                    |   | 10     |                           |   | 9,990     |   |  |   |           |   |  |   | 10,000   |  
|Issuance of Series A cumulative preferred stock                            |  | 4,000,000       |   |  |              |          |                          |        |           |                    |   | 0      |                           |   |           |   |  |   |            |   |  |   |          |  
|Accretion of preferred stock value for derivative instrument               |  |                 |   |  |              | 332,524  |                          |        |           |                    |   | 0      |                           |   |           |   |  |   |            |   |  |   | 332,524  |  
|Issuance of stock options for services                                     |  |                |   |  |              | 0        |                          |        |           |                    |   | 0      |                           |   | 270,221   |   |  |   | 0          |   |  |   | 270,221  |  
|Issuance of common stock due to conversion of preferred stock              |  | (100,000        | ) |  |              | (1,000   | )                        |        | 153,856    |                    |   | 154    |                           |   | 846       |   |  |   | 0          |   |  |   | 0        |  
|Net income                                                                 |  |                |   |  |              |         |                          |        |           |                    |   |       |                           |   |          |   |  |   | 320,738    |   |  |   | 320,738  |  
|Preferred stock dividends                                                  |  |                |   |  |              |         |                          |        |           |                    |   |       |                           |   |          |   |  |   | (487,943   | ) |  |   | (487,943 | )
|                                                                           |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   |          |  
|Balances 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 | )
|                                                                           |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   |          |  
|Balances at December 31, 2005                                              |  | 0               |   |  | $            | 0        |                          |        | 15,554,541 |                    | $ | 15,555 |                           | $ | 1,674,311 |   |  | $ | (2,544,651 | ) |  | $ | (854,786 | )
|                                                                           |  |                 |   |  |              |          |                          |        |            |                    |   |        |                           |   |           |   |  |   |            |   |  |   |          |  

See accompanying notes to consolidated financial statements.



F-5



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31, 2005 and 2004 (Restated)



|                                                                                                  |  |      |          |   |                 |   |          |  
|------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | --------------- | - | -------- | -
|                                                                                                  |  | 2005 |          |   | 2004 (Restated) |  
|Cash flows from operating activities:                                                             |  |      |          |   |                 |   |          |  
|Net income (loss)                                                                                 |  | $    | (715,088 | ) |                 | $ | 320,738  |  
|Adjustments to reconcile net loss to net cash used in operating activities:                       |  |      |          |   |                 |   |          |  
|Depreciation and amortization                                                                     |  |      | 25,927   |   |                 |   | 20,446   |  
|Interest on restricted cash                                                                       |  |      | (79,292  | ) |                 |   | (32,258  | )
|Derivative instrument (income) expense, net                                                       |  |      | 231,815  |   |                 |   | (306,710 | )
|Amortization of deferred consulting fees                                                          |  |      | 74,564   |   |                 |   | 170,800  |  
|Changes in operating assets and liabilities:                                                      |  |      |          |   |                 |   |          |  
|Accounts receivable                                                                               |  |      | 136,822  |   |                 |   | (259,933 | )
|Inventories                                                                                       |  |      | (328,052 | ) |                 |   | (38,083  | )
|Prepaid expenses                                                                                  |  |      | (6,072   | ) |                 |   | (3,532   | )
|Other current assets                                                                              |  |      | 49,708   |   |                 |   | 16,016   |  
|Due to/from affiliates, net                                                                       |  |      | 74,065   |   |                 |   | (133,167 | )
|Other assets                                                                                      |  |      | 24,856   |   |                 |   | (24,203  | )
|Accounts payable                                                                                  |  |      | 93,702   |   |                 |   | 94,895   |  
|Other payables                                                                                    |  |      | (5,457   | ) |                 |   | 22       |  
|Accrued expenses                                                                                  |  |      | 220,642  |   |                 |   | 16,683   |  
|Due to related parties                                                                            |  |      | 35,943   |   |                 |   | 48,628   |  
|                                                                                                  |  |      |          |   |                 |   |          |  
|Net cash used in operating activities                                                             |  |      | (165,917 | ) |                 |   | (109,658 | )
|                                                                                                  |  |      |          |   |                 |   |          |  
|Cash flows from investing activities:                                                             |  |      |          |   |                 |   |          |  
|Purchases of property and equipment                                                               |  |      | (11,032  | ) |                 |   | (26,469  | )
|Purchases of goodwill                                                                             |  |      | 0        |   |                 |   | (232,379 | )
|                                                                                                  |  |      |          |   |                 |   |          |  
|Net cash used in investing activities                                                             |  |      | (11,032  | ) |                 |   | (258,848 | )
|                                                                                                  |  |      |          |   |                 |   |          |  
|Cash flows from financing activities:                                                             |  |      |          |   |                 |   |          |  
|Net change in credit line payable                                                                 |  |      | 35,000   |   |                 |   | 365,000  |  
|Proceeds from release of restricted cash in connection with partial conversion of preferred stock |  |      | 0        |   |                 |   | 100,000  |  
|Proceeds from issuance of long-term obligations                                                   |  |      | 368,345  |   |                 |   |         |  
|Payments of long-term obligations                                                                 |  |      | (197,712 | ) |                 |   | (81,175  | )
|Payment of related party notes payable                                                            |  |      | (43,207  | ) |                 |   | (53,498  | )
|Issuance of common stock for cash                                                                 |  |      | 200,000  |   |                 |   |         |  
|Payments of costs for financing                                                                   |  |      | (2,525   | ) |                 |   |          |  
|Payments of preferred dividends                                                                   |  |      | (202,490 | ) |                 |   |         |  
|                                                                                                  |  |      |          |   |                 |   |          |  
|Net cash provided by financing activities                                                         |  |      | 157,411  |   |                 |   | 330,327  |  
|                                                                                                  |  |      |          |   |                 |   |          |  
|Net increase (decrease) in cash                                                                   |  |      | (19,538  | ) |                 |   | (38,179  | )
|Cash at beginning of period                                                                       |  |      | 34,320   |   |                 |   | 72,499   |  
|                                                                                                  |  |      |          |   |                 |   |          |  
|Cash at end of period                                                                             |  | $    | 14,782   |   |                 | $ | 34,320   |  
|                                                                                                  |  |      |          |   |                 |   |          |  

See accompanying notes to consolidated financial statements.



F-6



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWSContinued

Year Ended December 31, 2005 and 2004 (Restated)



|                                                                         |  |      |         |                 |   |          
|------------------------------------------------------------------------ |  | ---- | ------- | --------------- | - | ---------
|                                                                         |  | 2005 |         | 2004 (Restated)
|Supplemental disclosure of cash flow information:                        |  |      |         |                 |   |          
|Cash paid during the period for interest                                 |  | $    | 52,233  |                 | $ | 31,068   
|Cash paid during the period for income taxes                             |  | $    | 0       |                 | $ |         
|Supplemental schedule of non-cash financing activities:                  |  |      |         |                 |   |          
|Conversion of Series A Preferred stock into common stock                 |  | $    | 0       |                 | $ |         
|Accrual of preferred stock dividends                                     |  | $    | 187,416 |                 | $ | 155,417  
|Issuance of common stock in payment of accrued preferred stock dividends |  | $    | 187,416 |                 | $ |         
|Conversion of credit line payable to note payable                        |  | $    | 0       |                 | $ |         
|Issuance of note payable for acquisition                                 |  | $    | 0       |                 | $ | 215,000  
|Stock issued for surety bond                                             |  | $    | 0       |                 | $ | 10,000   
|Stock issued for services                                                |  | $    | 24,475  |                 | $ | 3,793    
|Options issued for consulting services                                   |  | $    | 0       |                 | $ | 270,221  
|Restricted cash proceeds (net of $202,000 cost for transaction)          |  | $    | 0       |                 | $ | 3,798,000

See accompanying notes to consolidated financial statements.



F-7



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2005 AND 2004

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, 2005 and 2004 include the accounts of Vertical Health Solutions, Inc. and its wholly-owned subsidiaries (collectively the Company), Labelclick, Inc. VHS
Genesis Corp Vertical Health Ventures, and Drug Depot, Inc. All intercompany accounts and balances have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to the financial statements as of and for the year ended
December 31, 2004 to conform to the presentation as of and for the year ended December 31, 2005.

Restatements

Unless otherwise noted, all information presented as of and for the years ended December 31, 2005 and 2004 has been adjusted to retroactively reflect
the effect of Derivative accounting which increased income for 2004 $306,710 or .02 per share.

Restatement Financial Derivatives

The Company corrected its accounting for derivative financial instruments to conform to the requirements of Statements of Financial Accounting Standards
No. 133, as amended. Embedded conversion features that meet the definition of derivative financial instruments have, where applicable, been bifurcated from host instruments and, in all instances: derivative financial instruments have been
recorded as liabilities and are carried at fair value. Net fair value adjustments included in earnings (loss) related to these instruments amounted to ($ 231,815) during the year ended December 31, 2005. The effect of the restatement on the
comparative statement of operations for the year ended December 31, 2004 was $306,710, and earnings (loss) per share was impacted for the same period by $.02 per share.

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.

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

Intangible Asset

The intangible asset consisted of costs to obtain the Companys loans and line of credit, web site and trademark acquisition costs and was being
amortized using the straight-line method over a period of 3 and 15 years. Amortization charged to operations was $3,389 and $1,948 in 2005 and 2004.

Goodwill

Effective April 1, 2002, with the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangibles (SFAS 142), intangible assets with an indefinite life, namely goodwill, are not amortized. Intangible assets with indefinite lives will be tested for impairment yearly and will also be tested for impairment between the annual
tests, should an event occur or should circumstances change that would indicate that the carrying amount may be impaired.



F-8



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

Inventories

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

Property and Equipment

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

Impairment
of Assets

The Companys policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets,
certain identifiable intangibles and goodwill when certain events have taken place that indicate that the remaining balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the
Company uses an estimate of related undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The impairment write-down would be the difference between
the carrying amounts and the fair value of these assets. Losses on impairment are recognized by a charge to earnings. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. There
were no impairment losses during the years ended December 31, 2005 and 2004.

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, 2005 AND 2004

Earnings (Loss) Per Common Share

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

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at December 31, 2005 and 2004, 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.

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.

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 years ended December 30, 2005 and
2004.



|                  |  |                        |           |   |                                 |   |           |  
|----------------- |  | ---------------------- | --------- | - | ------------------------------- | - | --------- | -
|                  |  | Twelve Months Ended    |          
|                  |  | December 31, 2005      |           |   | December 31, 2004 (Restated)    |  
|Revenues          |  |                        |           |   |                                 |   |           |  
|Manufacturing     |  | $                      | 3,679,607 |   |                                 | $ | 3,195,634 |  
|Pharmacy services |  |                        | 767,685   |   |                                 |   | 88,312    |  
|Gross Profit      |  |                        |           |   |                                 |   |           |  
|Manufacturing     |  |                        | 1,600,534 |   |                                 |   | 1,897,840 |  
|Pharmacy services |  |                        | 373,587   |   |                                 |   | 33,803    |  
|Operating Income  |  |                        |           |   |                                 |   |           |  
|Manufacturing     |  |                        | 427,886   |   |                                 |   | 2,004     |  
|Pharmacy services |  |                        | (71,544   | ) |                                 |   | (28,493   | )
|                  |  |                       
|                  |  | As ofDecember 31, 2005 |           |   | As ofDecember 31, 2004(Restate) |  
|Assets            |  |                        |           |   |                                 |   |           |  
|Manufacturing     |  | $                      | 1,507,646 |   |                                 | $ | 4,977,607 |  
|Pharmacy services |  | $                      | 78,239    |   |                                 | $ | 241,110   |  
|Corporate         |  | $                      | 1,585,885 |   |                                 | $ | 5,218,717 |  



F-10



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

Stock Based Compensation

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

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



|                                                 |  |      |            |   |                |   |          |  
|------------------------------------------------ |  | ---- | ---------- | - | -------------- | - | -------- | -
|                                                 |  | 2005 |            |   | 2004(Restated) |  
|Net Income (loss), as reported                   |  | $    | (1,458,743 | ) |                | $ | (167,205 | )
|Compensation cost based on the fair value method |  |      | 23,710     |   |                |   | 20,747   |  
|                                                 |  |      |            |   |                |   |          |  
|Pro forma net loss                               |  | $    | (1,482,453 | ) |                | $ | (187,952 | )
|                                                 |  |      |            |   |                |   |          |  
|Basic and diluted loss per share                 |  |      |            |   |                |   |          |  
|As reported                                      |  | $    | (.09       | ) |                | $ | .00      |  
|                                                 |  |      |            |   |                |   |          |  
|Pro forma                                        |  | $    | (.10       | ) |                | $ | (.02     | )
|                                                 |  |      |            |   |                |   |          |  

Advertising Costs

The Company charges advertising costs to expense as incurred. Advertising expense was $69,687 and $15,611 for the years ended December 31, 2005 and 2004, respectively.



F-11



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

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,
2005 and 2004, the fair value of the Companys long-term obligations approximated its carrying value.

Derivative Financial Instruments

The captions 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 820,000 shares at
December 31, 2005 and 4,720,000 shares at December 31, 2004 and are carried at fair value as of those respective dates.

At
December 31, 2005 and 2004 the following derivative liabilities related to warrants and embedded instruments were outstanding:



|                                                                                                                    |  |                |           |                                                      |   |                        |      |                    |           |                    |  |                              |         |  |   |          
|------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | ---------------------------------------------------- | - | ---------------------- | ---- | ------------------ | --------- | ------------------ |  | ---------------------------- | ------- |  | - | ---------
|Issue Date                                                                                                          |  | ExpirationDate |           | Instrument                                           |   | ExercisePrice perShare |      | Value atissue date |           | Value at12/31/2005 |  | Value at12/31/2004(Restated)
|5/27/2004                                                                                                           |  | 5/26/2011      |           | 820,000Warrants-LaurusCapital Ltd.                   |   | $                      | 1.87 |                    | $         | 1,389,829          |  | $                            | 414,328 |  | $ | 416,290  
|                                                                                                                    |  |                |           |                                                      |   |                        |      |                    |           |                    |  |                              |         |  |   |          
|Fair value of freestanding derivative instrument liabilities for warrants                                           |  | $              | 414,328   |                                                      | $ | 416,290               
|                                                                                                                    |  |                |           |                                                      |   |                        |      |                    |           |                    |  |                              |         |  |   |          
|                                                                                                                    |  |                |           |                                                      |   |                       
|Issue Date                                                                                                          |  | ExpirationDate |           | Instrument                                           |   | ExercisePrice perShare |      | Value atissue date |           | Value at12/31/2005 |  | Value at12/31/2004          
|5/27/2004                                                                                                           |  | 5/26/2011      |           | Series AConvertiblePreferred StockLaurus CapitalLtd. |   | $                      | 0.65 |                    | $         | 4,071,856          |  | $                            |        |  | $ | 3,060,000
|Fair value of bifurcated embedded derivative instrument liabilities associated with the above mentioned
instruments |  |                |           |                                                      |   |                        |      |                    |          
|                                                                                                                    |  |                |           |                                                      |   |                        |      |                    |           |                    |  |                              |         |  |   |          
|                                                                                                                    |  |                |           |                                                      | $ |                       |      | $                  | 3,060,000
|                                                                                                                    |  |                |           |                                                      |   |                        |      |                    |           |                    |  |                              |         |  |   |          
|Total derivative financial instruments                                                                              |  | $              | 5,461,685 |                                                      | $ | 414,328                |      | $                  | 3,476,290
|                                                                                                                    |  |                |           |                                                      |   |                        |      |                    |           |                    |  |                              |         |  |   |          
|Preferred Stock consists of the following as of December 31, 2005 and 2004:                                         |  |                |           |                                                      |   |                        |      |                    |          
|4,000,000 shares authorized; 0 and 3,900,000 shares issued and outstanding                                          |  | $              | -0-       |                                                      |   |                        |      | $                  | 331,524  
|                                                                                                                    |  |                |           |                                                      |   |                        |      |                    |           |                    |  |                              |         |  |   |          

Fair values for option-based financial instruments are determined using the Black-Scholes Option
Model. Significant assumptions for the embedded conversion feature and warrants for the convertible Series A Preferred Stock include: a strike price of $.65 and $1.87 respectively, volatility  222% and a risk free interest rate of 4.20%.

Reclassifications

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

NOTE 2RELATED PARTY TRANSACTIONS

On April 15, 2005 the Company issued 500,000 shares of common stock to Steve Watters and Jugal Taneja for the payment of
$200,000 to the Company that was used to may the Preferred dividends to Laurus Master Fund, Ltd.

As of December 31, 2005 and
2004, the Company had an outstanding promissory note payable to Stephen M. Watters, a principal shareholder, Director and Chief Executive Officer of the Company, in the amounts of approximately $-0- and $24,029, respectively, with interest at the
rate of 9% per annum. In addition, as of December 31, 2005 and 2004, the Company had an outstanding obligation to Mr. Watters in the amounts of approximately $87,075 and $46,254, respectively for working capital advances made to the
Company. This obligation is included in amounts due to related parties.

As of December 31, 2005 and 2004, the Company had an
outstanding promissory note payable to Jugal K. Taneja, a principal shareholder and a Director of the Company, in the amounts of approximately $-0- and $24,029, respectively, with interest at the rate of 9% per annum.

As of December 31, 2005 and 2004, the Company had an outstanding obligation to Brian T. Nugent, a principal shareholder, Director, President and
Chief Operating Officer of the Company, in the amounts of approximately $20,596 and $2,283, respectively, for working capital advances made to the Company. This obligation is included in amounts due to related parties.



F-12



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

As of December 31, 2005 and 2004, the Company had an outstanding
obligation to Thaddeus J. Shalek Chief Financial Officer of the Company, in the amounts of approximately $-0- and $6,608, respectively, for working capital advances made to the Company. This obligation is included in amounts due to related parties.

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

Geopharma, Inc. (Geopharma), a publicly traded company, is a supplier of manufactured dietary supplements and health and beauty care products. Jugal K. Taneja, a principal shareholder and Director of the Company, is also a
Director, Chairman of the Board, and principal shareholder of Innovative. For the years ended December 31, 2005 and 2004, there were $4,754 and no sales of products to Geopharma or its subsidiaries, and purchases of products from subsidiaries
of Geopharma were approximately $310,216 and $469,145. As of December 31, 2005 and 2004, approximately $203,420 and $129,355 was due to subsidiaries of Geopharma and is included in obligations to affiliates.

DrugMax, Inc. (DrugMax), a publicly traded company, is a wholesale distributor of pharmaceuticals, over-the-counter products, health and
beauty care aids, nutritional supplements and other related products. Jugal K. Taneja, a principal shareholder and Director of the Company, is also a Director, Chairman of the Board, and principal shareholder of DrugMax. For the years ended
December 31, 2005, and 2004 sales of products to subsidiaries of DrugMax were approximately $ -0- and $-0- and there were no purchases of products from subsidiaries of DrugMax. At December 31, 2005 and 2004, $6,724 and $6,724 was due to
DrugMax or its subsidiaries.



F-13



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

Bayshore Media, Inc. (Bayshore) is a marketer of private
label bottled water and health products. Stephen M. Watters, a principal shareholder, Director and Chief Executive Officer of the Company, is also a principal shareholder and Chief Executive Officer of Bayshore. Brian T. Nugent, a Director,
President and Chief Operating Officer of the Company, is also a principal shareholder and President of Bayshore. Jugal K. Taneja, a principal shareholder and Director of the Company, is also a principal shareholder of Bayshore. For the years ended
December 31, 2005 and 2004, sales of products to Bayshore were approximately $-0-and $-0- and purchases of products from Bayshore were approximately $-0- and $816. In addition, Bayshore charged the Company consulting fees of approximately $-0-
and $-0-, respectively for graphic services provided to the Company. The charges were on an hourly basis for services rendered. As of December 31, 2005 and 2004, approximately $-0- and $-0- was due from Bayshore and is included in amounts due
from affiliates.

Dynamic Health Products, Inc. (Dynamic), a publicly traded company, is a marketer and distributor of dietary
supplements and health and beauty care products, and is a principal stockholder of the Company. Mr. Taneja, a principal shareholder and Director of the Company is also a Director, Chairman of the Board and principal shareholder of Dynamic. For
the years ended December 31, 2005 and 2004, the Company charged a subsidiary of Dynamic consulting fees of $ -0- and $-0-, respectively for graphic services provided and Dynamic charged the Company consulting fees of approximately $-0- and
$5,213, respectively, for accounting and administrative services provided to the Company. The charges were on an hourly basis for services rendered. As of December 31, 2005 and 2004, $-0- was due to Dynamic and is included in obligations to
affiliates.

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

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

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

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



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

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



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

NOTE 3ACCOUNTS RECEIVABLE, NET

Accounts receivable, net consist of the following:



|                                          |  |      |         |   |                |   |         |  
|----------------------------------------- |  | ---- | ------- | - | -------------- | - | ------- | -
|                                          |  | 2005 |         |   | 2004(Restated) |  
|Accounts receivable                       |  | $    | 264,872 |   |                | $ | 399,695 |  
|Less allowance for uncollectible accounts |  |      | (7,000  | ) |                |   | (5,000  | )
|                                          |  |      |         |   |                |   |         |  
|Total                                     |  | $    | 257,872 |   |                | $ | 394,695 |  
|                                          |  |      |         |   |                |   |         |  

For the years ended December 31, 2005 and 2004, bad debt expense charged to operations for
estimated uncollectible accounts receivable was $2,000 and $4,000, respectively.



F-14



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

NOTE 4INVENTORIES, NET

Inventories, net consist of the following:



|                              |  |      |         |   |                |   |         |  
|----------------------------- |  | ---- | ------- | - | -------------- | - | ------- | -
|                              |  | 2005 |         |   | 2004(Restated) |  
|Raw materials                 |  | $    | 137,498 |   |                | $ | 65,742  |  
|Finished goods                |  |      | 648,982 |   |                |   | 375,686 |  
|                              |  |      |         |   |                |   |         |  
|                              |  |      | 786,480 |   |                |   | 441,428 |  
|Less reserve for obsolescence |  |      | (42,420 | ) |                |   | (25,420 | )
|                              |  |      |         |   |                |   |         |  
|Total                         |  | $    | 744,060 |   |                | $ | 416,008 |  
|                              |  |      |         |   |                |   |         |  

NOTE 5PROPERTY AND EQUIPMENT, NET

Property and equipment, net consist of the following:



|                                               |  |      |         |   |                |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | -------------- | - | ------- | -
|                                               |  | 2005 |         |   | 2004(Restated) |  
|Furniture and fixtures                         |  | $    | 7,684   |   |                | $ | 7,684   |  
|Equipment                                      |  |      | 103,289 |   |                |   | 89,669  |  
|Leasehold improvements                         |  |      | 6,298   |   |                |   | 8,885   |  
|                                               |  |      |         |   |                |   |         |  
|                                               |  |      | 117,271 |   |                |   | 106,238 |  
|Less accumulated depreciation and amortization |  |      | (58,604 | ) |                |   | (35,041 | )
|                                               |  |      |         |   |                |   |         |  
|Total                                          |  | $    | 58,667  |   |                | $ | 71,197  |  
|                                               |  |      |         |   |                |   |         |  

Depreciation expense charged to operations was $23,563 and $18,498 for the years ended
December 31, 2005 and 2004.

NOTE 6GOODWILL

Goodwill represents the excess value of the purchase price of Drug Depot (T&L) upon its acquisition in 2004. The company evaluated all intangible assets acquired and determined that no separate intangible assets
existed considering the criteria of SFAS 141. The Company retained the name of the pharmacy acquired but changed its name after the acquisition. The Company retained many of the customers. However, the Company considered the customer list to be
of insignificant value since the existing customers of Vitality Systems were to be used for distribution of this product. T&L did not have an in place work force. The Company acquired the company to add to its existing product mix to existing
customers. The acquisition resulted in goodwill of $430,000. Goodwill has an indefinite useful life and is being tested for impairment annually on December 31 or when an event occurs or if circumstances change that would indicate that the
carrying amount may be impaired. The impairment write-down would be the difference between the carrying amount and the fair value of this asset. Losses on impairment are recognized by a charge to earnings. As of December 31, 2005, the Company
has determined that no impairment exists based upon undiscounted future projected cash flows pertaining to the goodwill.

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.



F-15



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

NOTE 8INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 2005 and 2004 is as follows:



|                                      |  |      |          |   |                |   |        |  
|------------------------------------- |  | ---- | -------- | - | -------------- | - | ------ | -
|                                      |  | 2005 |          |   | 2004(Restated) |  
|Current income tax expense (benefit)  |  | $    | (164,000 | ) |                | $ | 4,800  |  
|Deferred income tax expense (benefit) |  |      | 164,000  |   |                |   | (4,800 | )
|                                      |  |      |          |   |                |   |        |  
|Income tax expense (benefit)          |  | $    |         |   |                | $ |       |  
|                                      |  |      |          |   |                |   |        |  

Income taxes for the years ended December 31, 2005 and 2004 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:



|                                                         |  |      |          |   |                |          |  
|-------------------------------------------------------- |  | ---- | -------- | - | -------------- | -------- | -
|                                                         |  | 2005 |          |   | 2004(Restated) |         
|Computed tax expense (benefit) at the statutory rate 34% |  | $    | (243,000 | ) |                | 109,000  |  
|Increase (decrease) in taxes resulting from:             |  |      |          |   |                |          |  
|Derivative Income (Expense)                              |  |      | 79,000   |   |                | (104,200 | )
|                                                         |  |      |          |   |                |          |  
|Current income tax expense (benefit)                     |  |      | (164,000 | ) |                | 4,800    |  
|                                                         |  |      |          |   |                |          |  

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



|                                |  |      |          |   |                |   |          |  
|------------------------------- |  | ---- | -------- | - | -------------- | - | -------- | -
|                                |  | 2005 |          |   | 2004(Restated) |  
|Deferred tax assets:            |  |      |          |   |                |   |          |  
|Net operating loss carryforward |  | $    | 602,000  |   |                | $ | 438,000  |  
|Less valuation allowance        |  |      | (602,000 | ) |                |   | (438,000 | )
|                                |  |      |          |   |                |   |          |  
|Gross deferred tax asset        |  |      |         |   |                |   |         |  
|Gross deferred tax liability    |  |      |         |   |                |   |         |  
|                                |  |      |          |   |                |   |          |  
|Net deferred tax asset          |  | $    |         |   |                | $ |         |  
|                                |  |      |          |   |                |   |          |  

The Company has available at December 31, 2005, approximately $1,724,000 of unused operating
loss carryforwards that may be applied against future taxable income and that expire in various years from 2020 to 2024.



F-16



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

NOTE 9LONG-TERM OBLIGATIONS

Long-term obligations consist of the following at December 31, 2005 and 2004:



|                                                                                                                                                                                                                                                                |  |      |         |                |   |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | -------------- | - | -------
|                                                                                                                                                                                                                                                                |  | 2005 |         | 2004(Restated)
|Promissory note payable to a financial institution, bearing interest at 6.75% per annum, due in monthly principal and interest payments
of approximately $6,400 through June 2006. The note is collateralized by a shareholders stock and corporate assets.     |  | $    | -0-     |                | $ | 109,023
|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. |  | $    | 396,446 |                | $ | 0      
|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.       |  | $    | 4,059   |                | $ | 9,157  
|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.                                                             |  | $    | 6,485   |                | $ | 8,608  
|Promissory note payable to T & L Pharmacies, Inc., bearing interest at 7% per annum, due in monthly principal and interest payments
of approximately $6,638.58 through November, 2007 collateralized by accounts receivable and inventory.                      |  |      | 152,919 |                |   | 226,594
|                                                                                                                                                                                                                                                                |  |      |         |                |   |        
|                                                                                                                                                                                                                                                                |  |      | 559,909 |                |   | 336,403
|Less current maturities                                                                                                                                                                                                                                         |  |      | 176,943 |                |   | 145,961
|                                                                                                                                                                                                                                                                |  |      |         |                |   |        
|Total                                                                                                                                                                                                                                                           |  | $    | 382,966 |                | $ | 190,442
|                                                                                                                                                                                                                                                                |  |      |         |                |   |        

The current maturities are presented in the balance sheet as $104,975  Current portion of
long-term liabilities, $71,968 as the notes payable to related parties as of December 31, 2005. The Current portion of long-term liabilities at December 31, 2004 were $78,845, $ 67,116 included in the notes payable to related parties.

At December 31, 2005, aggregate maturities of long-term obligations are as follows:



|                         |  |   |        
|------------------------ |  | - | -------
|Year ending December 31, |  |  
|2006                     |  | $ | 176,943
|2007                     |  |   | 189,004
|2008                     |  |   | 114,003
|2009                     |  |   | 79,959 
|                         |  |   |        
|Total                    |  | $ | 559,909
|                         |  |   |        



F-17



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

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

NOTE 10COMMITMENTS AND CONTINGENCIES

Capital Leases

The Company is the lessee of warehouse and office equipment under capital leases expiring in 2006. The assets and liabilities under
capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the lower of their related lease terms or their estimated productive lives. Depreciation of
assets under capital leases is included in depreciation expense for 2005 and 2004. The cost of the property under capital leases included in property and equipment, net was $5,900 and $5,900 at December 31, 2005 and 2004. The accumulated
depreciation on these assets was $3,343 and $2,163 at December 31, 2005 and 2004.

Minimum future lease payments under capital leases
as of December 31, 2005 for each of the next five years and in aggregate are:



|                                  |  |   |       |  
|--------------------------------- |  | - | ----- | -
|Year ending December 31,          |  |   |      
|2006                              |  | $ | 7,816 |  
|2007                              |  |   | -0-   |  
|2008                              |  |   | -0-   |  
|2009                              |  |   | -0-   |  
|2010                              |  |   | -0-   |  
|                                  |  |   |       |  
|                                  |  |   | 7,816 |  
|Less amount representing interest |  |   | (140  | )
|                                  |  |   |       |  
|Total                             |  | $ | 7,676 |  
|                                  |  |   |       |  

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



F-18



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

Operating Leases

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

Future minimum lease payments, by year and in aggregate under non-cancelable operating leases, consist of the following at
December 31, 2005:



|                         |  |   |       
|------------------------ |  | - | ------
|Year ending December 31, |  |  
|2006                     |  | $ | 35,411
|2007                     |  |   | -0-   
|2008                     |  |   | -0-   
|2009                     |  |   | -0-   
|2010                     |  |   | -0-   
|Thereafter               |  |   | -0-   
|                         |  |   |       
|                         |  | $ | 35,411
|                         |  |   |       

Total rent expense for the year ended December 31, 2005 and 2004 was approximately $42,164
and $47,923.

Employment Agreements

Effective November 1, 2003 the Company entered into an Employment Agreement with Stephen M. Watters, the Companys Chief Executive Officer, for a term of three years. The annual base salary payable under the agreement is $165,000,
payable in bi-weekly payments of approximately $6,346, plus a monthly auto allowance of $600. The amount of base salary payable is subject to periodic review and adjustment. Under the terms of the agreement, Mr. Watters is eligible for certain
fringe benefits and participation in any executive bonus plan created at the discretion of the Compensation Committee of the Board of Directors of the Company. On January 4, 2006, as part of the sale of the Label Click, Inc. sale,
Mr. Watters resigned his position as the Companys Chief Executive Officer.



F-19



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

Effective November 1, 2003, based on mutual agreement between the
parties, the Company entered into a new Employment Agreement with Brian T. Nugent, the Companys President and Chief Operating Officer, for a term of three years, and the previous Employment Agreement between the parties was cancelled. The
annual base salary payable under the new agreement is $165,000, payable in bi-weekly payments of approximately $6,346, plus a monthly auto allowance of $600. The amount of base salary payable is subject to periodic review and adjustment. Under the
terms of the agreement, Mr. Nugent is also eligible for certain fringe benefits and participation in any executive bonus plan created at the discretion of the Compensation Committee of the Board of Directors of the Company. On January 4,
2006, as part of the sale of the Label Click, Inc. sale, Mr. Nugent resigned his position as the Companys President and Chief Operating Officer.

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

Consulting Agreement

Effective November 1, 2003, the Company entered into a Consulting Agreement with Jugal K. Taneja, for a term of three years. Mr. Taneja has
served as a Director of the Company since its inception. Annual base compensation payable under the agreement is $110,000, payable in monthly payments of approximately $9,167. The agreement contains termination for disability, for cause, and for
good reason, and it also contains confidentiality and non-competition provisions that prohibit Mr. Taneja from competing with the Company under certain circumstances. The period covered by the non-competition provisions will end three years
after the termination of the consultants consulting agreement with the Company. On January 4, 2006, as part of the sale of the Label Click, Inc. sale, Mr. Taneja resigned his position as a consultant to the Company.

Litigation

During 2005, the Company was involved in
a lawsuit concerning patent rights issues. The suit was settled in 2006, the obligation for payment will be borne by Labelclick, Inc., the subsidiary that was sold, effectively on January 18, 2006. 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.



F-20



---

VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

NOTE 11  STOCK OPTIONS

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

The following summarizes information about the aggregate stock option activity for the year ended December 31, 2005:

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 and warrants are exercisable at $1.02 and $1.25 respectively per share. Each unit consisted 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. The employees terminated before year-end so the
options were forfeited by December 31, 2004.

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 $1.02 per share.

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



|                        |  |         |   |  |                 |  
|----------------------- |  | ------- | - |  | --------------- | -
|                        |  | 2005    |   |  | 2004 (Restated) |  
|Risk-free interest rate |  | 3.81    | % |  | 3.81            | %
|Dividend yield          |  | 0       | % |  | 0               | %
|Volatility              |  | 222.10  | % |  | 222.10          | %
|Average expected term   |  | 4 years |   |  | 5 years         |  



|                                               |  |                  |  |                              |      |                  |           |   |                              |   |       |  
|---------------------------------------------- |  | ---------------- |  | ---------------------------- | ---- | ---------------- | --------- | - | ---------------------------- | - | ----- | -
|                                               |  | 2005             |  | 2004 (Restated)              |     
|                                               |  | Number of Shares |  | WeightedAverageExercisePrice |      | Number of Shares |           |   | WeightedAverageExercisePrice |  
|Outstanding at January 1,                      |  | 1,200,000        |  | $                            | 1.02 |                  | 650,000   |   |                              | $ | 1.02  |  
|Granted                                        |  |                  |  |                              |      |                  | 650,000   |   |                              |   | 1.05  |  
|Exercised                                      |  |                 |  |                              |     |                  |          |   |                              |   |      |  
|Forfeited                                      |  |                 |  |                              |     |                  | (100,000  | ) |                              |   | (1.02 | )
|                                               |  |                  |  |                              |      |                  |           |   |                              |   |       |  
|Outstanding at December 31,                    |  | 1,200,000        |  | $                            | 1.02 |                  | 1,200,000 |   |                              |   | 1.02  |  
|                                               |  |                  |  |                              |      |                  |           |   |                              |   |       |  
|Options exercisable at December 31,            |  | 1,200,000        |  | $                            | 1.02 |                  | 1,200,000 |   |                              |   | 1.02  |  
|                                               |  |                  |  |                              |      |                  |           |   |                              |   |       |  
|Weighted average fair value of options granted |  |                  |  | $                            | 1.02 |                  |           |   |                              | $ | 1.02  |  
|                                               |  |                  |  |                              |      |                  |           |   |                              |   |       |  



F-21



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

Stock options outstanding and exercisable under the plan as of
December 31, 2005, were:



|                     |  |                   |  |                              |      |                                              |      |                   |           |                              |   |     
|-------------------- |  | ----------------- |  | ---------------------------- | ---- | -------------------------------------------- | ---- | ----------------- | --------- | ---------------------------- | - | ----
|                     |  | Outstanding       |  | Exercisable                 
|                     |  | Number of Options |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractedLife (yrs) |      | Number of Options |           | WeightedAverageExercisePrice
|Exercise price $1.02 |  | 1,200,000         |  | $                            | 1.02 |                                              | 3.25 |                   | 1,200,000 |                              | $ | 1.02

NOTE 12SHAREHOLDERS DEFICIT



F-22



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VERTICAL HEALTH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

DECEMBER 31, 2005 AND 2004

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

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

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

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

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

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

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

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



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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 Company will complete the transaction by payment of the funds, approximately ($3,827,631), currently held in the restricted cash account at North
Fork Bank and the issuance of 640,000 shares of the Companys common stock. The common stock will not be registered under the Securities Act of 1933 at the time of initial issue. The common stock may be registered in the future when the Company
files for registration of other securities.

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.

NOTE 13EARNINGS (LOSS) PER SHARE

Earnings
(loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earnings (loss) per share are calculated by dividing net income (loss) available to common shareholders by the weighted average
number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the
dilutive effect of common stock equivalents, using the treasury stock method. Convertible debt and preferred stock warrants, officer, employee and non-employee stock options that are considered potentially dilutive are included in the fully diluted
share calculation at December 31, 2005.



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



|                                                   |  |      |            |   |                |   |            |  
|-------------------------------------------------- |  | ---- | ---------- | - | -------------- | - | ---------- | -
|                                                   |  | 2005 |            |   | 2004(Restated) |  
|Numerator:                                         |  |      |            |   |                |   |            |  
|Net income (loss)                                  |  | $    | (715,088   | ) |                | $ | 320,738    |  
|Less preferred stock dividend                      |  |      | (743,655   | ) |                |   | (487,943   | )
|                                                   |  |      |            |   |                |   |            |  
|Net income (loss) available to common stockholders |  | $    | (1,438,743 | ) |                | $ | (167,205   | )
|                                                   |  |      |            |   |                |   |            |  
|Denominator:                                       |  |      |            |   |                |   |            |  
|Weighted average basic shares outstanding          |  | $    | 14,672,839 |   |                | $ | 13,717,069 |  
|Stock options                                      |  |      |           |   |                |   |            |  
|Warrants                                           |  |      |           |   |                |   |            |  
|Convertible note                                   |  |      |            |   |                |   |           |  
|                                                   |  |      |            |   |                |   |            |  
|Weighted average fully diluted shares outstanding  |  | $    | 14,672,839 |   |                | $ | 13,717,069 |  
|                                                   |  |      |            |   |                |   |            |  
|Net earnings per common shareBasic and diluted    |  | $    | (.10       | ) |                | $ | (.01       | )
|                                                   |  |      |            |   |                |   |            |  

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

NOTE 14CONCENTRATION OF CREDIT RISK

Concentrations of credit risk with respect to trade receivables are limited due to the distribution of sales over a large customer base. For the year ended December 31, 20054, two customers represented 34.9%

NOTE 15SUBSEQUENT EVENT

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 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,



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

On February 10, 2005, the Company entered
into a Business Loan Agreement for a one-year business line of credit with Patriot Bank of Trinity, Florida. The total amount available on the loan is $500,000. The loan has provision for an interest rate of 6.5% per annum on the outstanding
balance. The loan is required to be repaid in full on February 10, 2006. The Company borrowed $200,000 under the line of credit on February 16, 2005 and an additional $200,000 throughout 2005. The Bank obligations were all assumed by
Vitality Systems, Inc. as part of the sale of Labelclick, Inc. effective January 4, 2006. The owners of Vitality Systems, Inc. have guaranteed the debt.

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

On February 16, 2006, the Company cancelled all outstanding options and warrants issued to employees, consultants and board members in exchange for
approximately 650,000 shares of common stock.