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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the quarter ended September 30, 2004



or



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



Commission File Number 001-16185



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GEOPHARMA, INC.

(Name of small business issuer as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|STATE OF FLORIDA                                               |  | 59-2600232                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|6950 Bryan Dairy Road, Largo, Florida    |  | 33777     
|(Address of principal executive offices) |  | (Zip Code)



Issuers
telephone number, including area code: (727) 544-8866



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Indicate by check mark whether the issuer (1) has 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.    x  Yes ̈No



The number of shares outstanding of the Issuers common stock at $.01
par value as of October 26, 2004 was 7,936,771.



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PART I  FINANCIAL
INFORMATION



|Item 1. | CONSOLIDATED FINANCIAL STATEMENTS.
|------- | ----------------------------------



GEOPHARMA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                    |  |                |             |   |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                                    |  | March 31, 2004 |             |   | September 30,2004 |  
|                                                                                                                                                                    |  | (Audited)      |             |   | (Unaudited)       |  
|ASSETS                                                                                                                                                              |  |                |             |   |                   |   |             |  
|Current assets:                                                                                                                                                     |  |                |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                                                                           |  | $              | 8,361,940   |   |                   | $ | 6,590,170   |  
|Cash, restricted                                                                                                                                                    |  |                | 4,805,825   |   |                   |   | 4,830,616   |  
|Certificate of deposit                                                                                                                                              |  |                | 418,991     |   |                   |   | 419,777     |  
|Accounts receivable, net                                                                                                                                            |  |                | 1,674,312   |   |                   |   | 1,797,783   |  
|Accounts receivable, other                                                                                                                                          |  |                | 376,000     |   |                   |   | 613,200     |  
|Inventories, net                                                                                                                                                    |  |                | 3,225,683   |   |                   |   | 4,439,415   |  
|Prepaid expenses and other current assets                                                                                                                           |  |                | 565,570     |   |                   |   | 614,090     |  
|Due from affiliates, net                                                                                                                                            |  |                | 1,188,663   |   |                   |   | 1,342,499   |  
|                                                                                                                                                                    |  |                |             |   |                   |   |             |  
|Total current assets                                                                                                                                                |  | $              | 20,616,984  |   |                   | $ | 20,647,550  |  
|Property, leaseholds and equipment, net                                                                                                                             |  |                | 1,813,430   |   |                   |   | 1,949,248   |  
|Goodwill, net                                                                                                                                                       |  |                | 728,896     |   |                   |   | 728,896     |  
|Intangible assets, net                                                                                                                                              |  |                | 510,974     |   |                   |   | 463,499     |  
|Other assets, net                                                                                                                                                   |  |                | 84,932      |   |                   |   | 78,114      |  
|                                                                                                                                                                    |  |                |             |   |                   |   |             |  
|Total assets                                                                                                                                                        |  | $              | 23,755,216  |   |                   | $ | 23,867,307  |  
|                                                                                                                                                                    |  |                |             |   |                   |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                |  |                |             |   |                   |   |             |  
|Current liabilities:                                                                                                                                                |  |                |             |   |                   |   |             |  
|Accounts payable                                                                                                                                                    |  | $              | 2,063,254   |   |                   | $ | 1,761,615   |  
|Current portion of long-term obligations                                                                                                                            |  |                | 1,527,335   |   |                   |   | 1,488,016   |  
|Accrued expenses                                                                                                                                                    |  |                | 486,960     |   |                   |   | 645,962     |  
|Obligations to affiliates                                                                                                                                           |  |                | 57,465      |   |                   |   | 678         |  
|Deferred tax liability                                                                                                                                              |  |                | 163,900     |   |                   |   | 178,342     |  
|                                                                                                                                                                    |  |                |             |   |                   |   |             |  
|Total current liabilities                                                                                                                                           |  | $              | 4,298,914   |   |                   | $ | 4,074,613   |  
|Long-term obligations, less current portion                                                                                                                         |  |                | 2,764,896   |   |                   |   | 2,659,900   |  
|                                                                                                                                                                    |  |                |             |   |                   |   |             |  
|Total liabilities                                                                                                                                                   |  | $              | 7,063,810   |   |                   | $ | 6,734,511   |  
|                                                                                                                                                                    |  |                |             |   |                   |   |             |  
|Commitments and contingencies                                                                                                                                       |  |                |             |   |                   |   |             |  
|Shareholders equity :                                                                                                                                              |  |                |             |   |                   |   |             |  
|6% convertible preferred stock, Series A, $.01 par value, 10,000,000 shares authorized; 5,000,000 shares issued and outstanding (liquidation
preference $5,000,000) |  | $              | 50,000      |   |                   | $ | 50,000      |  
|6% convertible preferred stock, Series B, $.01 par value, 5,000 shares authorized; 5,000 shares issued and outstanding (liquidation preference
$5,000,000)          |  |                | 50          |   |                   |   | 50          |  
|Common stock, $.01 par value; 24,000,000 shares authorized; 7,989,551 and 8,367,866 shares issued and outstanding                                                   |  |                | 79,896      |   |                   |   | 83,678      |  
|Treasury stock, $.01 par value; 960 and 340,960 shares, respectively                                                                                                |  |                | (10         | ) |                   |   | (3,410      | )
|Additional paid in capital                                                                                                                                          |  |                | 44,457,293  |   |                   |   | 45,472,430  |  
|Retained earnings (deficit)                                                                                                                                         |  |                | (27,895,823 | ) |                   |   | (28,466,754 | )
|                                                                                                                                                                    |  |                |             |   |                   |   |             |  
|Total shareholders equity                                                                                                                                          |  | $              | 16,691,406  |   |                   | $ | 17,132,794  |  
|                                                                                                                                                                    |  |                |             |   |                   |   |             |  
|Total liabilities and shareholders equity                                                                                                                          |  | $              | 23,755,216  |   |                   | $ | 23,867,307  |  
|                                                                                                                                                                    |  |                |             |   |                   |   |             |  



See accompanying notes
to condensed consolidated financial statements.



2



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GEOPHARMA, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------ |  | ------------------------------- | --------- | - | ------------------------------ | - | --------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                             |  | Three Months EndedSeptember 30, |           |   | Six Months Ended September 30, |  
|                                                             |  | 2003                            |           |   | 2004                           |   |           | 2003 |  |   | 2004       |  
|Revenues:                                                    |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|PBM (a related party activity)                               |  | $                               | 1,244,265 |   |                                | $ | 2,479,638 |      |  | $ | 2,446,127  |   |  | $ | 4,619,526  |  
|Distribution                                                 |  |                                 | 980,760   |   |                                |   | 719,317   |      |  |   | 1,262,002  |   |  |   | 2,282,131  |  
|Manufacturing (excluding depreciation and amortization)      |  |                                 | 3,873,175 |   |                                |   | 2,798,737 |      |  |   | 6,496,276  |   |  |   | 6,101,270  |  
|Pharmaceutical                                               |  |                                 |          |   |                                |   | 41,660    |      |  |   |           |   |  |   | 90,466     |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Total revenues                                               |  | $                               | 6,098,200 |   |                                | $ | 6,039,352 |      |  | $ | 10,204,405 |   |  | $ | 13,093,393 |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Cost of goods sold:                                          |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|PBM                                                          |  |                                 | 1,164,103 |   |                                |   | 2,254,214 |      |  |   | 2,287,359  |   |  |   | 4,363,828  |  
|Distribution                                                 |  |                                 | 562,474   |   |                                |   | 575,133   |      |  |   | 687,801    |   |  |   | 1,540,427  |  
|Manufacturing                                                |  |                                 | 2,555,023 |   |                                |   | 1,830,050 |      |  |   | 4,443,755  |   |  |   | 4,019,187  |  
|Pharmaceutical                                               |  |                                 |          |   |                                |   | 28,500    |      |  |   |           |   |  |   | 50,696     |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Total cost of goods sold                                     |  | $                               | 4,281,600 |   |                                | $ | 4,687,897 |      |  | $ | 7,418,915  |   |  | $ | 9,974,138  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Gross profit:                                                |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|PBM                                                          |  |                                 | 80,162    |   |                                |   | 225,424   |      |  |   | 158,768    |   |  |   | 255,698    |  
|Distribution                                                 |  |                                 | 418,286   |   |                                |   | 144,184   |      |  |   | 574,201    |   |  |   | 741,704    |  
|Manufacturing                                                |  |                                 | 1,318,152 |   |                                |   | 968,687   |      |  |   | 2,052,521  |   |  |   | 2,082,083  |  
|Pharmaceutical                                               |  |                                 |          |   |                                |   | 13,160    |      |  |   |           |   |  |   | 39,770     |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Total gross profit                                           |  | $                               | 1,816,600 |   |                                | $ | 1,351,455 |      |  | $ | 2,785,490  |   |  | $ | 3,119,255  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Selling, general and administrative expenses:                |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Selling, general and administrative expenses                 |  |                                 | 1,079,756 |   |                                |   | 1,321,911 |      |  |   | 1,901,685  |   |  |   | 2,660,251  |  
|Depreciation and amortization                                |  |                                 | 103,463   |   |                                |   | 147,230   |      |  |   | 206,540    |   |  |   | 292,205    |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Selling, general and Administrative expenses                 |  |                                 | 1,183,219 |   |                                |   | 1,469,141 |      |  |   | 2,108,225  |   |  |   | 2,952,456  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Operating income (loss) before Other income and expense      |  | $                               | 633,381   |   |                                | $ | (117,686  | )    |  | $ | 677,265    |   |  | $ | 166,799    |  
|Other income (expense), net:                                 |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Other income (expense), net                                  |  |                                 | 64,993    |   |                                |   | 196,529   |      |  |   | 75,137     |   |  |   | 215,688    |  
|Interest expense, net                                        |  |                                 | (15,962   | ) |                                |   | (119,796  | )    |  |   | (37,632    | ) |  |   | (242,089   | )
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Total other income (expense), net                            |  | $                               | 49,031    |   |                                | $ | 76,733    |      |  | $ | 37,505     |   |  | $ | (26,401    | )
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                            |  | $                               | 682,412   |   |                                | $ | (40,953   | )    |  | $ | 714,770    |   |  | $ | 140,398    |  
|Income tax expense                                           |  |                                 |          |   |                                |   |          |      |  |   |           |   |  |   | 14,440     |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Net income (loss)                                            |  | $                               | 682,412   |   |                                | $ | (40,953   | )    |  | $ | 714,770    |   |  | $ | 125,958    |  
|Preferred stock dividends                                    |  |                                 | 26,070    |   |                                |   | 170,095   |      |  |   | 52,140     |   |  |   | 320,929    |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Net income (loss) available To common shareholders           |  | $                               | 656,342   |   |                                | $ | (211,048  | )    |  | $ | 662,630    |   |  | $ | (194,971   | )
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Basic income (loss) per share                                |  | $                               | .09       |   |                                | $ | (.03      | )    |  | $ | .09        |   |  | $ | (.02       | )
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Basic weighted average Number of common shares outstanding   |  |                                 | 7,572,681 |   |                                |   | 7,724,475 |      |  |   | 7,571,186  |   |  |   | 7,719,216  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Diluted income (loss) per share                              |  | $                               | .07       |   |                                | $ | (.02      | )    |  | $ | .07        |   |  | $ | (.02       | )
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Diluted weighted average number of common shares outstanding |  |                                 | 9,194,546 |   |                                |   | 8,946,458 |      |  |   | 9,193,051  |   |  |   | 8,333,546  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  



See accompanying notes
to condensed consolidated financial statements.



3



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GEOPHARMA, INC. AND
SUBSIDIARIES

STATEMENTS OF CASH FLOWS



|                                                                           |  |                                |            |   |             |   |            |  
|-------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ----------- | - | ---------- | -
|                                                                           |  | Six Months Ended September 30, |           
|                                                                           |  | 2003                           |            |   | 2004        |  
|                                                                           |  | (Unaudited)                    |            |   | (Unaudited) |  
|Cash flows from operating activities:                                      |  |                                |            |   |             |   |            |  
|Net income                                                                 |  | $                              | 714,770    |   |             | $ | 125,958    |  
|Adjustments to reconcile net income to net cash from operating activities: |  |                                |            |   |             |   |            |  
|Depreciation and amortization                                              |  |                                | 206,540    |   |             |   | 292,205    |  
|Gain on sale of equipment                                                  |  |                                | (2,857     | ) |             |   |           |  
|Amortization of stock option deferred compensation                         |  |                                |           |   |             |   | 36,006     |  
|Amortization of debt discount to interest expense                          |  |                                |           |   |             |   | 154,227    |  
|Change in net deferred taxes                                               |  |                                |           |   |             |   | 14,442     |  
|Changes in operating assets and liabilities:                               |  |                                |            |   |             |   |            |  
|Accounts receivable, net                                                   |  |                                | (1,846,238 | ) |             |   | (81,346    | )
|Accounts receivable, other                                                 |  |                                | 39,718     |   |             |   | (237,200   | )
|Inventory, net                                                             |  |                                | (1,214,264 | ) |             |   | (1,305,857 | )
|Prepaid expenses and other current assets                                  |  |                                | 68,201     |   |             |   | (48,520    | )
|Other assets                                                               |  |                                |           |   |             |   | (4,361     | )
|Accounts payable                                                           |  |                                | 2,127,909  |   |             |   | (301,639   | )
|Accrued expenses                                                           |  |                                | 172,065    |   |             |   | 207,693    |  
|Due from affiliates, net                                                   |  |                                | (218,460   | ) |             |   | (210,623   | )
|                                                                           |  |                                |            |   |             |   |            |  
|Net cash provided by (used in) operating activities                        |  | $                              | 47,384     |   |             | $ | (1,359,015 | )
|                                                                           |  |                                |            |   |             |   |            |  
|Cash flows from investing activities:                                      |  |                                |            |   |             |   |            |  
|Purchases of property, leaseholds and equipment                            |  | $                              | (229,528   | ) |             | $ | (394,584   | )
|Proceeds from sale of equipment                                            |  |                                | 20,000     |   |             |   |           |  
|                                                                           |  |                                |            |   |             |   |            |  
|Net cash used in investing activities                                      |  | $                              | (209,528   | ) |             | $ | (394,584   | )
|                                                                           |  |                                |            |   |             |   |            |  
|Cash flows from financing activities:                                      |  |                                |            |   |             |   |            |  
|Net change in credit lines payable                                         |  | $                              | 50,000     |   |             | $ |           |  
|Payments of long-term obligations                                          |  |                                | (237,149   | ) |             |   | (173,365   | )
|Payments of preferred stock dividends                                      |  |                                | (52,140    | ) |             |   | (76,666    | )
|Purchase of treasury shares                                                |  |                                | (5,000     | ) |             |   |           |  
|Payments for private placement fees                                        |  |                                |           |   |             |   | (6,000     | )
|Proceeds from stock option exercise                                        |  |                                | 17,041     |   |             |   | 204,551    |  
|Redemption of a certificate of deposit                                     |  |                                | 294,883    |   |             |   |           |  
|                                                                           |  |                                |            |   |             |   |            |  
|Net cash provided by (used in) financing activities                        |  | $                              | 67,635     |   |             | $ | (51,480    | )
|                                                                           |  |                                |            |   |             |   |            |  
|Net increase (decrease) in cash                                            |  |                                | (60,655    | ) |             |   | (1,747,765 | )
|Cash at beginning of period                                                |  |                                | 474,033    |   |             |   | 13,167,765 |  
|                                                                           |  |                                |            |   |             |   |            |  
|Cash at end of period                                                      |  | $                              | 413,378    |   |             | $ | 11,420,786 |  
|                                                                           |  |                                |            |   |             |   |            |  
|SUPPLEMENTAL INFORMATION:                                                  |  |                                |            |   |             |   |            |  
|Cash paid during the period for interest                                   |  | $                              | 38,869     |   |             | $ | 71,534     |  
|                                                                           |  |                                |            |   |             |   |            |  
|Cash paid during the period for income taxes                               |  | $                              |           |   |             | $ | 40,000     |  
|                                                                           |  |                                |            |   |             |   |            |  



4



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|                                                               |  |                                  |   |                                  |   |        
|-------------------------------------------------------------- |  | -------------------------------- | - | -------------------------------- | - | -------
|                                                               |  | Six monthsendedSeptember 30,2003 |   | Six monthsendedSeptember 30,2004
|NON-CASH INVESTING AND FINANCING ACTIVITIES:                   |  |                                  |   |                                  |   |        
|Value of common stock issued to pay preferred stock dividend   |  | $                                |  |                                  | $ | 194,262
|Value of common stock issued to pay convertible debt interest  |  | $                                |  |                                  | $ | 49,477 
|Value of common stock issued to pay convertible debt principle |  | $                                |  |                                  | $ | 262,500



See accompanying notes
to condensed consolidated financial statements.



5



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GEOPHARMA, INC. AND
SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2004



NOTE 1-BASIS OF PRESENTATION



The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instruction to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six month period ended September 30, 2003 and 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2005. For further information, refer
to the consolidated financial statements and footnotes included in the Companys Form-10KSB as of and for the years ended March 31, 2003 and 2004 as filed with the Securities and Exchange Commission on June 29, 2004.



NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



a. Principles of Consolidation



The condensed consolidated financial statements as of March 31, and
September 30, 2004 and for the three and six months ended September 30, 2003 and 2004 include the accounts of GeoPharma, Inc. (the Company), (GeoPharma), which is continuing to do manufacturing business as Innovative Health
Products, Inc. (Innovative), and its Florida wholly-owned subsidiaries Breakthrough Engineered Nutrition, Inc. (Breakthrough), Belcher Pharmaceuticals, Inc., (Belcher) and Go2PBM Services, Inc. (PBM)
and its Delaware wholly-owned subsidiary, Belcher Capital Corporation, (Belcher Capital). Significant intercompany balances and transactions have been eliminated in consolidation.



b. Industry Segment



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 March 31, 2004 and September 30, 2004, the Company had four
industry segments: manufacturing, distribution, pharmacy benefit management and pharmaceutical. The $23,755,216 of total assets as of March 31, 2004 were comprised of $13,093,519 attributable to corporate, $7,632,992 attributable to manufacturing,
$1,909,822 attributable to distribution, $1,118,883 attributable to pharmacy benefit management and $65,268 attributable to pharmaceutical. The $23,867,307 of total assets as of September 30, 2004 were comprised of $11,615,713 attributable to
corporate, $7,711,639 attributable to manufacturing, $2,976,068 attributable to distribution, $1,443,600 attributable to pharmacy benefit management and $120,287 attributable to pharmaceutical.



c. Cash and Cash Equivalents



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



d. Restricted Cash



Restricted cash is comprised of $4,830,616
serving as collateral for the $5 million, Series A, 6% convertible preferred stock.



e. Inventories



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



f.
Property, Leasehold Improvements 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 (asset categories range 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, whichever is shorter, for those leases that substantially transfer ownership. Accelerated depreciation methods are used for tax purposes.



6



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NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



g. Intangible Assets



Intangible assets consist primarily of goodwill and intellectual property. FAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The Company has selected January 1 as the annual date to test these assets for impairment. FAS 142 also requires the intangible assets with
definite useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.



For the year ended March 31, 2004 and for the three and six months ended
September 30, 2004, amortization expense associated with goodwill was $0. The unamortized balance of goodwill at March 31, and September 30, 2004 was $728,896 with the unamortized balance of intellectual property for the same periods was $228,305.
Based on the required analysis performed as of that annual date, no impairment loss was required to be recorded for the fiscal year ended March 31, 2004 or for the three and six months ended September 30, 2004.



h. Impairment of Assets



In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived 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 the
remaining unamortized 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. There have been no impairment losses
recorded for the fiscal year ended March 31,2004 or for the three and six months ended September 30, 2004.



i. Income Taxes



The Company utilizes
the guidance provided by Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. 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 basis 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.



7



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j. Earnings (Loss) Per Common 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 stockholders 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 (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 nonemployee stock options that are considered potentially dilutive are included in the fully diluted share calculation at September 30, 2004. The reconciliation between basic and fully diluted shares are as follows:



|                                              |  |                                             |           |                                             |   |           |                                             |  |                                             |           |  |   |           |  
|--------------------------------------------- |  | ------------------------------------------- | --------- | ------------------------------------------- | - | --------- | ------------------------------------------- |  | ------------------------------------------- | --------- |  | - | --------- | -
|                                              |  | For the ThreeMonths EndedSeptember 30, 2003 |           | For the ThreeMonths EndedSeptember 30, 2004 |   |           | For the Six Months Ended September 30, 2003 |  | For the Six Months Ended September 30, 2004 |          
|Net income (loss) per share  basic:          |  |                                             |           |                                             |   |           |                                             |  |                                             |           |  |   |           |  
|Net income (loss)                             |  | $                                           | 656,342   |                                             | $ | (211,048  | )                                           |  | $                                           | 662,630   |  | $ | (194,971  | )
|Weighted average shares - basic               |  |                                             | 7,572,681 |                                             |   | 7,724,475 |                                             |  |                                             | 7,571,186 |  |   | 7,719,216 |  
|Net income (loss) per share - basic           |  | $                                           | .09       |                                             | $ | (.03      | )                                           |  | $                                           | .09       |  | $ | (.02      | )
|Net income (loss) per share  diluted:        |  |                                             |           |                                             |   |           |                                             |  |                                             |           |  |   |           |  
|Net income (loss)                             |  | $                                           | 656,342   |                                             | $ | (211,048  | )                                           |  | $                                           | 662,630   |  | $ | (194,971  | )
|Weighted average shares - basic               |  |                                             | 7,572,681 |                                             |   | 7,724,475 |                                             |  |                                             | 7,571,186 |  |   | 7,719,216 |  
|Effect of preferred stock prior to conversion |  |                                             |          |                                             |   |          |                                             |  |                                             |          |  |   |          |  
|Effect of warrants prior to conversion        |  |                                             |          |                                             |   |          |                                             |  |                                             |          |  |   |          |  
|Effect of stock options                       |  |                                             | 1,621,865 |                                             |   | 1,221,983 |                                             |  |                                             | 1,621,865 |  |   | 614,330   |  
|Effect of convertible term note               |  |                                             |          |                                             |   |          |                                             |  |                                             |          |  |   |          |  
|Weighted average shares-diluted               |  |                                             | 9,194,546 |                                             |   | 8,946,458 |                                             |  |                                             | 9,193,051 |  |   | 8,333,546 |  
|Net income (loss) per share  diluted         |  | $                                           | .07       |                                             | $ | (.02      | )                                           |  | $                                           | .07       |  | $ | (.02      | )
|Antidilutive items not included               |  |                                             | 50,000    |                                             |   | 2,565,833 |                                             |  |                                             | 50,000    |  |   | 2,565,833 |  



k. Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at March 31, and September 30, 2004, as well as the reported amounts of
revenues and expenses for the three and six months ended September 30, 2003 and 2004. The actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements.



l. Concentration of Credit and Sales Risk



Concentrations of credit risk with respect to trade accounts receivable are limited due to
the distribution of sales over a large customer base as of March 31, and September 30, 2004. As related to consolidated sales revenues for the three months ended September 30, 2003, two customers accounted for 31.6%, Metabolife International, and
20.4%, CarePlus, a related party, with three customers that accounted for 24%, CarePlus, a related party, and 24%, Metabolife International and one customer for 5.7% for the six-month period ended September 30, 2003.



For the three and six months ended September 30, 2004 as related to consolidated sales
revenues, two customers accounted for 41.1%, CarePlus, a related party, and 8.8%, Spectrum Group with two customers that accounted for 35.3%, CarePlus, a related party, and 12.7%, Spectrum Group for the corresponding six-month period ended September
30, 2004.



The Company has no concentration of customers within specific
geographic areas outside the United States that would give rise to significant geographic credit risk.



m. Revenue Recognition



In accordance
with SAB 101, Revenue Recognition, revenues are recognized by the Company when the merchandise is shipped to the customer which is when title and risk of loss has passed to the customer. Revenues from sales of inventory on consignment are recognized
when consigned inventory is sold with title and risk of loss passing to the ultimate customer.



n. Advertising Costs



The Company
charges advertising costs to expense as incurred. Advertising expense was $25,959 and $76,858 for the three months ended September 30, 2003 and 2004 and $64,706 and $111,239 for the six months ended September 30, 2003 and 2004, respectively.



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o. Research and Development Costs



Costs incurred to develop our generic pharmaceutical products are expensed as incurred and charged to research and development
(R&D). R&D expensed for the three and six months ended September 30, 2004 were $122,767 and $206,834, respectively.



p. 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 March 31, and September 30, 2004, the fair value of the Companys long-term obligations approximated its carrying value.



Credit Lines Payable: The carrying amount of the Companys credit lines
payable approximates fair market value since the interest rate on these instruments corresponds to market interest rates.



q. Reclassifications



Certain reclassifications have been made to the financial statements for the three and six months ended September 30, 2003 to conform to the presentation for the three months ended September 30, 2004.



NOTE 3-STOCK OPTION PLAN



Employee Stock Option Plan



On September 1, 2004, the Board of Directors approved the granting of a total of 900,000 options to the officers and employees
of the Company, at an exercise price of $4.55, the Nasdaq common stock closing price as of that date. All of the stock options vest under a three-year vesting schedule with the first year of vesting being attained one year from the date of grant.



The following represents the officers and employees common stock
options outstanding as of September 30, 2004:



|                                               |  |                 |  |                                |     
|---------------------------------------------- |  | --------------- |  | ------------------------------ | ----
|                                               |  | Numberof Shares |  | Weighted AverageExercise Price
|OFFICER STOCK OPTIONS                          |  |                 |  |                                |     
|Option balance outstanding, June 30, 2004      |  | 323,333         |  | $                              | 1.62
|Granted                                        |  | 700,000         |  |                                | 4.55
|Exercised                                      |  |                |  |                                |    
|                                               |  |                 |  |                                |     
|Option balance outstanding, September 30, 2004 |  | 1,023,333       |  | $                              | 3.62
|                                               |  |                 |  |                                |     



|                                               |  |                 |   |  |                                |       |  
|---------------------------------------------- |  | --------------- | - |  | ------------------------------ | ----- | -
|                                               |  | Numberof Shares |   |  | Weighted AverageExercise Price |      
|EMPLOYEE STOCK OPTIONS                         |  |                 |   |  |                                |       |  
|Option balance outstanding, June 30, 2004      |  | 507,219         |   |  | $                              | 1.71  |  
|Granted                                        |  | 200,000         |   |  |                                | 4.55  |  
|Exercised                                      |  | (17,100         | ) |  |                                | (0.85 | )
|                                               |  |                 |   |  |                                |       |  
|Option balance outstanding, September 30, 2004 |  | 690,119         |   |  | $                              | 2.56  |  
|                                               |  |                 |   |  |                                |       |  



As of September 30, 2004, of the
1,023,333 officer common stock options outstanding, 256,666 of those options were vested with 766,667 options being nonvested and as of September 30, 2004, of the 690,110 employee common stock options outstanding, 350,119 of those options were
vested with 340,000 options being nonvested.



NOTE 4-RELATED PARTY
TRANSACTIONS



Revenues: For the three months ended September 30, 2003 and
2004, manufacturing revenues of approximately $116,667 and $181,257 respectively, were recorded from sales by the Company to subsidiaries of Dynamic Health Products, an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the
Board of the Company, is a principal shareholder. For the three months ended September 30, 2003 and 2004, manufacturing revenues of $0 and $41,660, respectively, were recorded from sales by the



9



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Company to DrugMax, Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder.
For the three months ended September 30, 2003 and 2004, manufacturing revenues of $204,052 and $127,334, respectively, were recorded from sales by the Company to VerticalHealth Inc., an affiliate of the Company, and of which Jugal K. Taneja, the
Chairman of the Board of the Company, is a shareholder.



For the three months
ended September 30, 2003 and 2004, pharmacy benefit management revenues of approximately $1,244,265 and $2,479,638 respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the Companys board member Mssr.
Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract.



Revenues: For the six months ended September 30, 2003 and 2004, manufacturing revenues of approximately $171,037 and $318,944 respectively, were recorded from sales by the Company to subsidiaries of Dynamic Health
Products, an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the six months ended September 30, 2003 and 2004, manufacturing revenues of $41,393 and $90,466,
respectively, were recorded from sales by the Company to DrugMax, Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the six months ended September 30, 2003 and
2004, manufacturing revenues of $425,055 and $215,937, respectively, were recorded from sales by the Company to VerticalHealth Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a
shareholder.



For the six months ended September 30, 2003 and 2004, pharmacy
benefit management revenues of approximately $2,446,127 and $4,619,526 respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the Companys board member Mssr. Zappala. Our wholly-owned subsidiary,
Go2PBMServices, Inc., derives 100% of its revenues from this contract.



Trade
Accounts Receivable/ Trade Accounts Payable: Amounts due to affiliates and amounts due from affiliates represent balances owed by or amounts owed to the Company for sales occurring in the normal course of business. Amounts due to and amounts due
from these affiliates are in the nature of trade payables or receivables and fluctuate based on sales volume and payments received.



As of March 31, and September 30, 2004, for the manufacturing segment, $50,024 and $213,713 was due from subsidiaries of Dynamic Health Products. $57,700 and $0,
respectively, was due to DrugMax., $151,812 and $114,822 was due from VerticalHealth, Inc.



As of March 31, and September 30, 2004, for the pharmacy benefit management segment, $377,149 and $1,013,964 was due from CarePlus Health.



|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------



The statements contained in this Report that are not historical are forward-looking statements, including statements regarding the
Companys expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include the Companys statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All
forward-looking statements included in this Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. 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 Financial Statements and notes thereto appearing
elsewhere in this Report. The discussion is based upon such financial statements that have been prepared in accordance with U.S. Generally Accepted Accounting Principles.



Overview



We derive our revenues from developing, manufacturing, and wholesaling a wide variety of non-prescription dietary supplements, and health and beauty care
products. We also derive revenues from the distribution of pharmaceutical drugs and from the distribution of our branded product lines, CarbSlim, Lean Protein and Thermo ZXE. In addition, we derive revenues from the services provided in connection
with pharmacy benefit management. Revenues derived from our manufacturing and distribution segments are billed and recognized as product is produced and shipped, net of discounts, allowances, returns and credits. Service revenues are billed and
recognized once the service has been provided. The PBMs revenues are comprised of amounts billed and recognized based on the number of eligible plan revenues enrolled in the HMO insurance programs, plan member claims caused by the fulfillment
of an eligible HMO members drug prescription and related administration costs for pharmacys fulfilling drug prescriptions for the number of members and the number of claims for the period.



Cost of goods sold is comprised of direct manufacturing and manufacturing and
distribution material product costs, contracted service fees, direct personnel compensation and other statutory benefits and indirect costs relating to labor to support product manufacture and distribution and the warehousing of production and other
manufacturing overhead. The PBM cost of sales amounts



10



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recognized represent the direct and indirect costs of the prescription drug claims and claim-related costs arising from the pharmacys fulfillment of a
drug prescription that were filled, completed and received by eligible HMO insurance plan members for the period. Research and development expenses are charged against cost of goods sold as incurred. Selling, general and administrative costs include
management and general office salaries, advertising and promotional expenses, depreciation and amortization, insurances, legal and accounting costs, sales and marketing and other indirect operating costs.



Interest expense, net consists primarily of interest expense associated with
borrowings to finance capital equipment expenditures and other working capital needs as partially offset by interest income earned on our funds held at banks.



Three Months Ended September 30, 2004 Compared To Three Months Ended September 30, 2003



Revenues. Total revenues decreased approximately $59,000, or 1.0%, to approximately $6,039,000 for the three months ended September
30, 2004, as compared to approximately $6,098,000 for the three months ended September 30, 2003. Pharmacy benefit management revenues increased approximately $1,235,000, or 99.3%, to approximately $2,480,000 for the three months ended September 30,
2004, as compared to $1,244,000 for the three months ended September 30, 2003. Pharmacy benefit management revenues increased for the three months ended September 30, 2004 due to the increase of participating plan members and related pharmacy claims
based on the PBM activity derived from two HMO health plans. Distribution revenues decreased approximately $261,000, or 26.7%, to approximately $719,000 for the three months ended September 30, 2004, as compared to $981,000 for the three months
ended September 30, 2003. For the three months ended September 30, 2004, revenues were derived from sales volume from three product lines that included 11,207 cases of CarbSlim, 1,173 cases of Lean Protein Bites and 21,673 bottles of dietary
supplements sold under our branded label as compared to revenues from three product lines that included 11,737 cases of CarbSlim, 8,501 cases of Lean Protein Bites and 1,620 cases of Thermo ZXE sold in the corresponding period in 2003. Manufacturing
revenues decreased approximately $1,074,000, or 27.7%, to approximately $2,799,000 for the three months ended September 30, 2004, as compared to approximately $3,873,000 for the corresponding period. Decreases in manufacturing segment revenues in
the current period as compared to the corresponding period in 2003 was primarily caused by the 2003 period included our customers ephedra-based private-label orders versus the current 2004 three-month period that omitted such product due to
its ban by the Food and Drug Administration effective April 2004 as partially offset by the Companys change in customer profile related to a change in strategic business plan that is to focus on more profitable sales mix. Pharmaceutical
revenues increased $42,000 in the current three month period ended September 30, 2004 as compared to the prior corresponding period in 2003.



Gross profit. Total gross profit decreased approximately $465,000, or 25.6%, to approximately $1,351,000 for the three months ended September 30,
2004, as compared to approximately $1,817,000 for the three months ended September 30, 2003. Total consolidated gross margins declined to 22.4% for the three month period ended September 30, 2004 as compared to 29.8% for the corresponding three
month in 2003. Pharmacy benefit management gross profits increased approximately $145,000, or 181.2%, to approximately $225,000 for the three months ended September 30, 2004, as compared to $80,000 for the three months ended September 30, 2003.
Pharmacy benefit management gross margin increased to 9.1% for the three months ended September 30, 2004 as compared to 6.4% for the three months ended September 30, 2003. Gross profit dollars and gross margins increased due to a one-time contract
renewal payment for PBM consulting services rendered as partially offset by declines in gross profit dollars and margins due to the continuing increases in costs of prescriptions and increases in the costs to administer pharmacy claims which
translate into higher net claims dollars incurred and paid per member as compared to the corresponding three-month period. The PBM consulting services provided included detailed analysis of benefit-provider services, drug formulary evaluation and
other related analysis. Distribution gross profit decreased approximately $274,000, or 65.5%, to approximately $144,000 for the three months ended September 30, 2004, as compared to $418,000 for the three months ended September 30, 2003.
Distribution gross margins decreased to 20.0% for the three months ended September 30, 2004 as compared to 42.7% in the corresponding period in 2003. Sales revenues, gross profit dollars and gross margins decreased due to the change in the mix of
sales in the current three month period as influenced by CarbSlim sales to national mass chains that have a lower gross margin due to required outside broker fees, initial free-product fills and volume discounts in addition to slower sales due to
the decline in the low carb convenience food lines in the United States. Manufacturing gross profit decreased approximately $349,000, or 26.5%, to approximately $969,000 for the three months ended September 30, 2004, as compared to approximately
$1,318,000 in the corresponding three-month period in 2003. For the three months ended September 30, 2004, manufacturing gross margin increased to 34.6%, from 34% in the corresponding three-month period in 2003. The increases in gross margins
although gross profit dollars declined are primarily attributable to a current change in our private-label and OTC contract manufacturing sales portfolio that is yielding a higher gross margin as partially offset by research and development efforts
being employed as based on our plans to gain FDA approval via ANDA applications in process for the formulation and manufacture of generic drugs in the future.



Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of advertising and promotional
expenses; personnel costs related to general management functions, finance, accounting and information systems, payroll expenses and sales commissions; professional fees related to legal, audit and tax matters; and depreciation and leasehold
amortization expense. Selling, general and administrative expenses increased approximately $286,000, or 24.2%, to approximately $1,469,000 for the three months ended September 30, 2004, as compared to approximately $1,183,000 in the corresponding
period. The increase is



11



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primarily attributable to research and development expenses, rising insurance expenses in addition to increases in advertising and promotional expenses
associated with our distribution segment, rents, as well as payroll expenses and costs associated with fringe benefits to support our distribution, manufacturing and pharmacy benefit management growth. As a percentage of sales, selling, general and
administrative expenses increased to 24.3% for the three months ended September 30, 2004 from 19.4% in the corresponding three-month period in 2003.



Interest income (expense), net. Interest expense, net of interest income, increased approximately $103,000 to approximately $(120,000) for the
three months ended September 30, 2004, from approximately $(16,000) for the three months ended September 30, 2003. The increase in net interest expense is primarily attributable to the increase in long-term obligations outstanding due to the
issuance of $5 million of 6% convertible debt outstanding in addition to the noncash interest expense incurred resulting from the amortization of the convertible debt warrants issued as compared to the corresponding period in 2003.



Income taxes. As of and for the three months ended September 30, 2004,
there was no change in deferred income tax expense and the Company has $178,000 recorded as a deferred tax liability based on current net taxable income and the utilization of the net operating loss carryforwards.



Six Months Ended September 30, 2004 Compared To Six Months Ended September 30, 2003



Revenues. Total revenues increased approximately $2,889,000, or
28.3%, to approximately $13,093,000 for the six months ended September 30, 2004, as compared to approximately $10,204,000 for the six months ended September 30, 2003. Pharmacy benefit management revenues increased approximately $2,173,000, or 88.9%,
to approximately $4,620,000 for the six months ended September 30, 2004, as compared to $2,446,000 for the six months ended September 30, 2003. Pharmacy benefit management revenues increased for the six months ended September 30, 2004 due to the
increase of participating plan members and related pharmacy claims based on the PBM activity derived from two HMO health plans in addition to the one-time contract renewal fee received. Distribution revenues increased approximately $1,020,000, or
80.8%, to approximately $2,282,000 for the six months ended September 30, 2004, as compared to $981,000 for the three months ended September 30, 2003. For the six months ended September 30, 2004, revenues were derived from sales volume from three
product lines that included 43,783 cases of CarbSlim, 3,409 cases of Lean Protein Bites and 21,673 bottles of dietary supplements sold under our branded label as compared to revenues from three product lines that included 11,737 cases of CarbSlim,
14,406 cases of Lean Protein Bites and 2,985 cases of Thermo ZXE sold in the corresponding period in 2003. Manufacturing revenues decreased approximately $395,000, or 6.1%, to approximately $6,101,000 for the six months ended September 30, 2004, as
compared to approximately $6,496,000 for the corresponding period. Decreases in manufacturing segment revenues in the current period as compared to the corresponding period in 2003 was primarily caused by the 2003 period included our customers
ephedra-based private-label orders versus the current 2004 six-month period that omitted such product due to its ban by the Food and Drug Administration effective April 2004 as partially offset by the Companys change in customer profile
related to a change in strategic business plan that is to focus on more profitable sales mix. Pharmaceutical revenues increased $90,000 in the current three month period ended September 30, 2004 as compared to the prior corresponding period in 2003.



Gross profit. Total gross profit increased
approximately $334,000, or 12%, to approximately $3,119,000 for the six months ended September 30, 2004, as compared to approximately $2,785,000 for the six months ended September 30, 2003. Total consolidated gross margins declined to 23.8% for the
six month period ended September 30, 2004 as compared to 27.3% for the corresponding six month period in 2003. Pharmacy benefit management gross profits increased approximately $97,000, or 61.1%, to approximately $256,000 for the six months ended
September 30, 2004, as compared to $159,000 for the six months ended September 30, 2003. Pharmacy benefit management gross margin decreased to 5.5% for the six months ended September 30, 2004 as compared to 6.5% for the six months ended September
30, 2003. Gross profit dollars increased although gross margins decreased due to a one-time contract renewal payment for PBM consulting services rendered as partially offset by declines in gross profit dollars and margins due to the continuing
increases in costs of prescriptions and increases in the costs to administer pharmacy claims which translate into higher net claims dollars incurred and paid per member as compared to the corresponding six-month period. The PBM consulting services
provided included detailed analysis of benefit-provider services, drug formulary evaluation and other related analysis. Distribution gross profit increased approximately $168,000, or 29.2%, to approximately $742,000 for the six months ended
September 30, 2004, as compared to $574,000 for the six months ended September 30, 2003. Distribution gross margins decreased to 32.5% for the six months ended September 30, 2004 as compared to 45.5% in the corresponding period in 2003. Although
sales revenues and gross profit dollars increased, gross margins decreased due to the change in the mix of sales in the current six month period as influenced by CarbSlim sales to national mass chains that have a lower gross margin due to required
outside broker fees, initial free-product fills and volume discounts in addition to slower sales due to the decline in the low carb convenience food lines in the United States. Manufacturing gross profit increased approximately $30,000, or 1%, to
approximately $2,082,000 for the six months ended September 30, 2004, as compared to approximately $2,053,000 in the corresponding six month period in 2003. For the six months ended September 30, 2004, manufacturing gross margin increased to 34.1%,
from 31.6% in the corresponding six-month period in 2003. The increases in gross margins and gross profit dollars are primarily attributable to a current change in our private-label and OTC contract manufacturing sales portfolio that is yielding a
higher gross margin as partially offset by research and development



12



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efforts being employed as based on our plans to gain FDA approval via ANDA applications in process for the formulation and manufacture of generic drugs in
the future.



Selling, general and administrative
expenses. Selling, general and administrative expenses consist primarily of advertising and promotional expenses; personnel costs related to general management functions, finance, accounting and information systems, payroll expenses and sales
commissions; professional fees related to legal, audit and tax matters; and depreciation and leasehold amortization expense. Selling, general and administrative expenses increased approximately $552,000, or 26.2%, to approximately $2,660,000 for the
six months ended September 30, 2004, as compared to approximately $2,108,000 in the corresponding period. The increase is primarily attributable to research and development expenses, rising insurance expenses in addition to increases in advertising
and promotional expenses associated with our distribution segment, rents, as well as payroll expenses and costs associated with fringe benefits to support our distribution, manufacturing and pharmacy benefit management growth. As a percentage of
sales, selling, general and administrative expenses decreased to 20.3% for the six months ended September 30, 2004 from 20.7% in the corresponding six-month period in 2003.



Interest income (expense), net. Interest expense, net of interest income, increased approximately $204,000 to
approximately $(242,000) for the six months ended September 30, 2004, from approximately $(38,000) for the six months ended September 30, 2003. The increase in net interest expense is primarily attributable to the increase in long-term obligations
outstanding due to the issuance of $5 million of 6% convertible debt outstanding in addition to the noncash interest expense incurred resulting from the amortization of the convertible debt warrants issued as compared to the corresponding period in
2003.



Income taxes. As of and for the six months ended
September 30, 2004, there was a $14,000 increase in deferred income tax expense, with $178,000 recorded as a deferred tax liability based on current net taxable income and the utilization of the net operating loss carryforwards.



Financial Condition, Liquidity and Capital Resources



The Company has financed its operations through available borrowings under
its credit line facilities, cash provided from operations and cash provided from the proceeds received from our private placement consummated during January through Marhc 2004. The Company had working capital of approximately $16,572,937 at
September 30, 2004, inclusive of current portion of long-term obligations and credit facilities, as compared to working capital of approximately $16,318,000 at March 31, 2004.



Net cash used in operating activities was approximately ($1,359,000) for the six months ended September 30, 2004, as
compared to net cash provided by operating activities of approximately $47,000 for the six months ended September 30, 2003. Cash used is primarily attributable to increases in inventories of $1.3 million in anticipation of branded distribution and
customers private label shipments due for upcoming retail planograms, increases in trade accounts receivable and due from affiliates of approximately $300,000 based on net increases in credit sales, increases in accounts receivable-other of
$237,000 primarily based on insured expense-reimbursements related to our Belcher fire claim, increases in accounts payable of $301,000 due to planned production increases to meet open mass and national chain orders, all of which are partially
offset by net income before preferred dividends of $126,000, depreciation and amortization of $292,000, $154,000 amortization of debt discount in addition to $36,000 amortization of deferred compensation related to options granted to nonemployee
consultants.



Net cash used in investing activities of
approximately $(395,000) for the six months ended September 30, 2004 was used primarily to purchase manufacturing equipment, lab equipment and related upgrades to leasehold improvements in order to continue to meet our business plans surrounding our
ability and belief in the future to receive FDA approval to formulate and manufacture our own generic drug brands.



Net cash used by financing activities was approximately ($51,000) for the six months ended September 30, 2004, represented payments on long-term
obligations of approximately $173,000, preferred stock dividend payments of approximately $77,000 all of which is partially offset by net proceeds received from vested stock option exercises of $205,000.



Management believes that cash expected to be generated from operations,
current cash reserves, and existing financial arrangements 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, continued expansion of existing capacities and capabilities, the publics acceptance as evidenced through sales of our own branded
distribution product lines CarbSlim, Lean Protein Bites, the successful completion of and the FDAs acceptance of our ANDAs for generic drug formulation and manufacture currently in process, and possible acquisitions. In particular, if cash flows
from operations and available credit facilities are not sufficient, it will be necessary for the Company to seek additional financing. There can be no assurance that such financing will be available in amounts and on terms acceptable to the Company.



13



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|Item 3. | 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, or CEO, and the chief financial officer, or CFO, of the effectiveness of the design and operation of our disclosure procedures. Based on managements evaluation as of November 12, 2004, our principal executive officer and
principal financial officer has 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.



Part II - OTHER
INFORMATION



|Item 1. | LEGAL PROCEEDINGS.
|------- | ------------------



From time to time the Company is subject to litigation incidental to its business. Such claims, if successful, could exceed applicable insurance coverage.
The Company is not currently a party to any material legal proceedings other than what is currently disclosed herein.



|Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------



None.



|Item 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------



Not applicable.



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



Not applicable.



|Item 5. | OTHER INFORMATION.
|------- | ------------------



Not applicable.



|Item 6. | EXHIBITS AND REPORTS ON FORM 8-K.
|------- | ---------------------------------



(a) Exhibits.

|              |  |                                                                        
|------------- |  | -----------------------------------------------------------------------
|              | 
|Exhibit 10.32 |  | Pharmacy Benefit Direct Service Agreement                              
|              | 
|Exhibit 10.33 |  | CarePlus Pharmacy Benefit Management and Services Agreement            
|              | 
|Exhibit 10.34 |  | Amendment to CarePlus Pharmacy Benefit Management and Service Agreement
|              | 
|Exhibit 10.35 |  | Fee for Service Agreement                                              
|              | 
|Exhibit 31.1  |  | Certification of Principal Executive Officer                           
|              | 
|Exhibit 31.2  |  | Certification of Principal Financial Officer                           
|              | 
|Exhibit 32.1  |  | Certification Pursuant to 18 U.S.C. Section 1350                       
|              | 
|Exhibit 32.2  |  | Certification Pursuant to 18 U.S.C. Section 1350                       



(b) Reports on Form
8-K.



Form 8-K filed on October 29, 2004 as related to an
asset acquisition.



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SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



| |  |                         |  |                 |  |     |  |                                                                
| |  | ----------------------- |  | --------------- |  | --- |  | ---------------------------------------------------------------
| |  |                         |  | GeoPharma, Inc.
| |  |                         |  |                
| |  | Date: November 15, 2004 |  |                 |  | By: |  | /s/ Mihir K. Taneja                                            
| |  |                         |  |                 |  |     |  | Mihir K. Taneja Chief Executive Officer, Secretary and Director



| |  |                         |  |  |  |     |  |                                                              
| |  | ----------------------- |  |  |  | --- |  | -------------------------------------------------------------
| |  |                         |  | 
| |  | Date: November 15, 2004 |  |  |  | By: |  | /s/ Carol Dore-Falcone                                       
| |  |                         |  |  |  |     |  | Carol Dore-Falcone Vice President and Chief Financial Officer



15