UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**


**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**


**For
      the fiscal year ended December 31, 2006**





Commission
      File No. 333-36379





PACIFICHEALTH
      LABORATORIES, INC.


**(Name
      of Small Business Issuer in Its Charter)**





Delaware
              
              22-3367588**(State
                  or jurisdiction of**
              
              **(I.R.S.
                  Employer****incorporation
                  or organization)**
              
              **Identification
                  No.)**





100
      Matawan Road, Suite 420


Matawan,
      NJ 07747


**(Address
      of principal executive offices)**





732/739-2900


**(Issuer’s
      telephone number)**





Internet
      Website: www.pacifichealthlabs.com





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





Securities
      registered under Section 12(g) of the Exchange Act: Common Stock, par value
      $.0025 per share.





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





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 ý  No  ̈





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B 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.  ý





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





The
      issuer’s revenues for its most recent fiscal year were $6,209,846.





As
      of
      March 12, 2007, the aggregate market value of the common stock held by
      non-affiliates based on the closing sale price of Common Stock was
      $18,944,402.





As
      of
      March 12, 2007, the issuer had 13,273,098 shares of common stock outstanding.





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







**PACIFICHEALTH
      LABORATORIES, INC.**


FORM
      10-KSB


Fiscal
      Year Ended December 31, 2006











TABLE
      OF CONTENTS





Note
                  Concerning Forward Looking
                  Information
              3PART
                  IITEM
                  1.
              BUSINESS.
              4ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY
              10ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              10ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
              10PART
                  IIITEM
                  5.
              MARKET
                  FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
                  SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
              11ITEM
                  6.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF
                  FINANCIALCONDITION
                  AND RESULTS OF OPERATIONS
              12ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              15ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ONACCOUNTING
                  AND FINANCIAL DISCLOSURE
              15ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
              15ITEM
                  8B.
              OTHER
                  INFORMATION
              15PART
                  IIIITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS,CONTROL PERSONSAND
                  CORPORATE GOVERNANCE;
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
              15ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              18ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS
              23ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
                  INDEPENDENCE
              26ITEM
                  13.
              EXHIBITS
              28ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANTS’ FEES AND SERVICES
              28




2


**NOTE** **CONCERNING
      FORWARD-LOOKING STATEMENTS**





This
      Annual Report on Form 10-KSB contains forward-looking statements concerning
      our
      financial condition, results of operations and business, including, without
      limitation, statements pertaining to:





·
            The
                development of new products and the expansion of the market for our
                current products;


·
            Implementing
                aspects of our business plans;


·
            Financing
                goals and plans;


·
            Our
                existing cash and whether and how long these funds will be sufficient
                to
                fund our operations; and


·
            Our
                raising of additional capital through future equity financings.





These
      and
      other forward-looking statements are primarily in the sections entitled “Item 6
      - Management’s Discussion and Analysis of Financial Conditions and Results of
      Operations” and “Item 1 - Business.” Generally, you can identify these
      statements because they use phrases like “anticipates,” “believes,” “expects,”
“future,” “intends,” “plans,” and similar terms. These statements are only
      predictions. Although we do not make forward-looking statements unless we
      believe we have a reasonable basis for doing so, we cannot guarantee their
      accuracy, and actual results may differ materially from those we anticipated
      due
      to a number of uncertainties, many of which are unforeseen. You should not
      place
      undue reliance on these forward-looking statements, which apply only as of
      the
      date of this Report. Our actual results could differ materially from those
      anticipated in these forward-looking statements for many reasons, including
      those stated in this Report.





We
      believe it is important to communicate our expectations to our investors. There
      may be events in the future, however, that we are unable to predict accurately
      or over which we have no control. Cautionary language in this Report provides
      examples of risks, uncertainties and events that may cause our actual results
      to
      differ materially from the expectations we describe in our forward-looking
      statements. Such factors include, among other things, risks and uncertainties
      discussed throughout *Item
      1 - Business* and *Item
      6 - Management’s Discussion and Analysis of Financial Condition and Results of
      Operations* .





We
      are
      not obligated to publicly update or revise any forward-looking statement,
      whether as a result of new information, future events or otherwise, except
      as
      otherwise required by law. In light of these risks, uncertainties and
      assumptions, the forward-looking events discussed in this Report and other
      statements made from time to time from us or our representatives might not
      occur. For these statements, we claim the protection of the safe harbor for
      forward-looking statements contained in the Private Securities Litigation Reform
      Act of 1995.




3




**PART
      I**


**ITEM
      1.** **BUSINESS.**





**1(a)**
            **Business
                Development**





PacificHealth
      Laboratories (hereinafter referred to as “the Company”, “us”, or “we”) is a
      nutrition technology company that was incorporated in the state of Delaware
      in
      April 1995. Our mission is to develop and commercialize scientifically proven
      and patentable nutritional products to improve health, help manage chronic
      disease, and enhance existing therapies. Our products are substantiated by
      clinical trials conducted at leading university research centers. Our principal
      areas of focus include sports performance, weight loss, and management of Type
      II diabetes. Our products can be marketed without prior Food and Drug
      Administration (“FDA”) approval under current regulatory guidelines. We
      commercialize our technologies using multiple strategies including licensing
      and/or direct sales via targeted consumer channels. As detailed in Item 1(b)
      below, on February 22, 2006, we sold to Mott’s LLP the patents, trademarks, web
      sites and other intellectual property related to our *ACCELERADE* ® and
      ENDUROX ® sports
      nutrition product lines, and we entered into a license agreement with Mott’s
      that gives us the exclusive, royalty-free right to continue to sell these
      products in powder, gel and pill form.





**1(b)**
            **Business
                of the Issuer**





We
      are
      focused on developing patented protein-based nutrition products using two core
      technology platforms. One platform involves the activation of biochemical
      pathways by specific nutritional compositions to enhance muscle growth, energy,
      and transport pathways. Using this nutritional technology platform, our research
      efforts have been directed to product development for 1) improving exercise
      performance, 2) post-surgical muscle recovery, and 3) oral rehydration. The
      second technology platform involves stimulation of specific satiety peptides
      that are released in the stomach. Using this nutritional technology platform,
      our research efforts have been directed in product development for 1) appetite
      suppression and weight loss, and 2) management of Type II diabetes.





**Activation
      of Muscle Growth, Energy, and Transport Pathways**





**Exercise
      Performance**




Our
      research into factors influencing exercise performance and muscle growth and
      recovery has led to the development and commercialization of a new generation
      of
      sports and recovery drinks. The key to our technology is the specific ratio
      in
      which protein is combined with carbohydrate. We have two patents on this
      technology. Over 18 studies have been published demonstrating that products
      based on this technology can extend endurance, reduce muscle damage, improve
      rehydration, and accelerate muscle recovery. Based on this research, we have
      commercialized a number of products including:





·
            ENDUROX
                EXCEL®-
                Introduced in May 1996 and March
                1997




·
            ENDUROX
                R4®Recovery Drink –
                Introduced
                in February 1999




·
            *ACCELERADE*®Sports Drink – Introduced in June
                2001




·
            ACCEL
                GEL®Energy Gel – Introduced in February
                2004







On February
      22, 2006, pursuant
      to an Asset Purchase Agreement of the same date, we sold to Mott’s LLP
      (“Mott’s”), a division of Cadbury Schweppes, the patents, trademarks, web sites,
      and other intellectual property related to the our *ACCELERADE* and
      ENDUROX sports nutrition product lines for $4,000,000 in cash and potential
      future royalty payments. Simultaneously, we entered into a License Agreement
      with Mott’s giving us the exclusive, royalty-free right to continue to sell our
      sports nutrition products in powder, gel and pill form. Consequently, we will
      continue to sell our current sports nutrition products in the same manner as
      prior to the sale of the intellectual property assets.





I f
      Mott’s
      launches a product using the purchased assets, we will receive royalty payments
      for a finite period following such launch, subject to an annual limitation
      on
      the amount of the royalty. There are no minimum royalties, and there is no
      specific time by which Mott’s must launch a product, but we will have the option
      to repurchase the assets if a product is not launched within a time specified
      in
      the Asset Purchase Agreement. Recent pronouncements by Mott’s indicate that
      Mott’s will launch *ACCELERADE* in the
      second quarter of 2007.




4


**Post-Surgical
      Muscle Recovery**




Scientific
      insights emanating from our discoveries in sports nutrition have led to a
      potentially new and exciting medical application. Individuals undergoing
      orthopedic surgery, particularly involving the shoulder, hip or knee, experience
      muscle atrophy that occurs as a normal consequence of muscle immobilization
      in
      the post-surgical period. The degree of muscle atrophy a patient experiences
      significantly impacts health care costs and quality of life. We are currently
      evaluating a novel nutritional formulation that has the potential of slowing
      muscle atrophy following a period of forced immobilization. Such a product
      could
      have enormous benefit for the 1.6 million patients who undergo arthroscopy
      and
      muscle and knee replacement operations each year, and the 5 million patients
      who
      suffer a sports related injury. A clinical study to examine the effectiveness
      of
      this formulation is underway. We have filed one patent on this technology and
      plan to file additional patents in the future.





**Oral
      Rehydration**




Another
      scientific byproduct of our research on the effects of protein has been the
      identification of nutritional formulas that can enhance sodium transport. Such
      products would have widespread medical application in treating dehydration
      commonly associated with vomiting and diarrhea. We will continue our studies
      and
      may file patents for this indication in 2007.





**Activation
      of Satiety Peptides**





**Weight
      Loss** *.*




Satiety
      peptides have been shown to reduce food intake and suppress appetite in humans.
      Our research has specifically focused on developing nutritional formulations
      that can stimulate cholecystokin (CCK), one of the body’s primary satiety
      peptides. CCK is normally released after a meal, particularly one high in fat
      and protein. CCK is often called the “feel full” protein because when it is
      released it gives a feeling of fullness and signals the brain to terminate
      the
      meal. The objective of our research is to develop a nutritional composition
      that
      stimulates and extends the duration of action of CCK in a calorically efficient
      way, i.e. to cause a release of CCK with 45-50 calories of specific nutrients
      rather than 1,000 calories.




The
      first
      product we commercialized using this technology was SATIETROL ® that was
      released in April 2000. This was followed by the introduction of a meal
      replacement product called SATIETROL COMPLETE ® in
      January 2001. Clinical studies showed that both of these products could reduce
      hunger and reduce caloric intake. In June 2001, we signed an exclusive worldwide
      licensing agreement with GlaxoSmithKline (“GSK”) for our weight loss technology.
      Under the agreement, we received an initial payment of $1,000,000 and received
      a
      subsequent milestone payment of $250,000. GSK subsequently terminated the
      agreement in September 2002 with all rights reverting back to us.




We
      have
      continued research in this area in order to develop a more effective composition
      that could be incorporated into different forms (ready-to-drink beverage and
      chewable tablet) and also has the potential to be added to food and increase
      the
      satiation property of the food to which it was added. Starting in the third
      quarter of 2003, the Company funded a number of clinical studies on an improved
      formulation. The new formulation was shown to be significantly better than
      the
      previous product in reducing caloric intake, slowing gastric emptying, and
      extending a feeling of satiation following a meal. We have seven patents on
      our
      appetite suppressant technology with additional patents pending. We launched
      a
      ready-to-drink beverage using this improved technology under the trade name
      SATIATRIM ® in
      January 2007.




**Type
      II Diabetes**




Our
      appetite suppression technology may also have potential for the treatment of
      Type II diabetes, the fastest growing chronic condition in the U.S., affecting
      an estimated 46 million people. We have instituted clinical trials to measure
      the effectiveness of our formulation in controlling blood glucose.




All
      of
      our existing and proposed products are expected to be manufactured in the Untied
      States by third parties. See item 1(b)(i) below.




5


**1(b)(i)
      Principal Products and Markets**





**(a)**
            **ENDUROX
                EXCEL Dietary Supplement**





ENDUROX
      EXCEL is a dietary supplement of which the principal ingredient is the herb
      ciwujia. Laboratory studies funded by us during 1995 at the University of North
      Texas Health Science Center in Fort Worth, Texas and the Institute of Nutrition
      and Food in China, have demonstrated that ENDUROX EXCEL can have a beneficial
      effect on exercise performance. In December 1996, we were issued United States
      Patent No. 5,585,101 for our ENDUROX product.





**(b)
      ENDUROX R** **4** **Recovery Drink**





We
      launched ENDUROX **** R 4 Recovery
      Drink **** in
      March
      1999. Clinical trials funded by us during 1998 at the University of North Texas
      Health Science Center in Fort Worth, Texas and the Human Performance Lab at
      St.
      Cloud University in St. Cloud, Minnesota showed that when tested against the
      nation’s leading sports drink, ENDUROX R 4 delivered
      equal hydration effectiveness while enhancing performance and extending
      endurance by 55%, decreasing post-exercise muscle stress by 36%, reducing free
      radical build-up by 69%, and increasing the replenishment of muscle glycogen
      following exercise. These results have been published in a peer-reviewed
      journal. In April 2000, we were issued patent United States Patent No. 6,051,236
      for ENDUROX **** R 4 .
      Patent
      office acceptance of specific claims does not necessarily permit us to make
      any
      specific claims to the public regarding this product. Our ability to make those
      claims is governed by the FDA, Federal Trade Commission, and other federal
      government agency regulations and guidelines.





**(c)** ***ACCELERADE*** **Sports
      Drink**





In
      June
      2001, we introduced *ACCELERADE* Sports
      Drink. *ACCELERADE* Sports
      Drink is the first sports drink that contains protein. Studies sponsored by
      the
      Company and done independently by university researchers and published in
      peer-reviewed journals have demonstrated that, compared to a conventional sports
      drink such as Gatorade, *ACCELERADE* improves
      endurance by 29%, decreases muscle damage by 83%, improves muscle recovery
      by
      46%, and improves rehydration by 15%. To date, there are over 18 published
      studies on *ACCELERADE* .
      In
      January 2006, we received a specific patent on this formula.





**(d)
      ACCEL GEL Energy Gel**





In
      February 2004, we introduced ACCEL GEL. ACCEL GEL is an energy gel that contains
      the patented 4:1 ratio found in ENDUROX R4 and *ACCELERADE* .
      ACCEL
      GEL is designed to provide athletes in all sports with a quick and rapid source
      of carbohydrate energy. Studies sponsored by the Company and published in a
      peer-reviewed journal have shown that Accel Gel, compared to the leading
      carbohydrate gel, improves endurance performance by 13%.





ENDUROX
      R4, *ACCELERADE* ,
      and
      ACCEL GEL are distributed in health foods chains (GNC, Vitamin Shoppe, Vitamin
      World), sporting goods retailers (REI), cycling stores and catalogs (Performance
      Bike), running stores and catalogs (Road Runner Sports), and sports specialty
      stores.





**1(b)(ii)
      Distribution Methods**





We
      have
      pursued a “multi-channel” distribution strategy in marketing our endurance
      products. At the present time, these products are being sold in over 9,000
      retail outlets including GNC, sports specialty stores, independent health food
      retailers, independent bike retailers, health clubs, catalogs, and Internet
      sites. We now sell all of our products in various foreign countries through
      independent distributors.





To
      support our marketing efforts, we may use a variety of marketing methods
      including advertising in trade and consumer sports and health food magazines
      that are intended to reach our targeted consumer. In addition, we may attend
      trade shows and exhibitions, sponsor promotional programs/events and in-store
      promotions, and engage in public relations efforts that has resulted and may
      continue to result in articles in numerous sports, health, fitness, trade and
      natural product publications, newspaper coverage, and television spots.




6




In
      the
      years ended December 31, 2006 and December 31, 2005, our expenditures for
      product advertising and promotion were approximately
      $105,000 and
      $603,000, respectively. Expenditures for product advertising decreased due
      to
      the asset sale to Mott’s whereby Cadbury Schweppes, the parent of Mott’s, now
      pays for all advertising for our sports performance products. Advertising will
      increase in 2007 as we launch SATIATRIM, our natural appetite suppressant
      product.




**1(b)(iii)
      Status of Publicly Announced New Products**





The
      status of all products that have been the subject of or mentioned in public
      announcements by us in the past year are discussed above under the caption
      “1(b)(ii) - Principal Products and Markets”.





**1(b)(iv)
      Competition**





In
      the
      exercise performance market, following the asset sale of our sports drink
      intellectual property to Mott’s, we will only be manufacturing and distributing
      powder versions of *ACCELERADE* and
      ENDUROX R4 as well as ACCEL GEL. Our primary marketing focus will be the serious
      endurance athlete (cyclist, runner, triathlete and swimmer), as well as team
      sports. There are a number of companies that currently market products that
      compete with ENDUROX R4 and *ACCELERADE* .
      The
      major companies include Cytosport, PowerBar, EAS, and Clif Bar. Increased
      competitive activity from such companies could make it more difficult for us
      to
      establish market share since such companies have greater financial and other
      resources available to them and possess far more extensive manufacturing,
      distribution and marketing capabilities than we do.





The
      weight loss market in which SATIATRIM will compete is highly competitive. Weight
      loss products tend to fall into four categories including: herbal supplements,
      meal replacement products (e.g., Slim Fast), food plans (e.g., Weight Watchers)
      and prescription products (e.g., Xenical). Today,
      weight loss products are manufactured by dietary supplement manufacturers,
      pharmaceutical manufacturers, diet food companies, and over-the-counter drug
      companies. Intense competitive activity in this market could make it difficult
      for us to establish market share, a s
      most of
      the companies that have products in this category have greater financial,
      marketing, sales, manufacturing, and distribution resources than we
      have.





We
      believe that long-term success in the marketplace for any of our products will
      be dependent on the proprietary nature of our formulas, as well as such factors
      as distribution and marketing capabilities.





**1(b)(v)
      Suppliers of Raw Materials**





We
      do not
      have manufacturing facilities and have no present intention to manufacture
      any
      products ourselves. We fulfill product needs through relationships with
      independent manufacturers. We generally do not have long-term contracts with
      any
      of these manufacturers. Competitors that do their own manufacturing may have
      an
      advantage over us with respect to pricing, availability of product, and in
      other
      areas because of their control of the manufacturing process.




Generally,
      our contract manufacturers obtain raw materials necessary for the manufacture
      of
      our products from numerous sources. We generally do not have contracts with
      suppliers of materials required for the production of our products. All raw
      materials used in our existing products are available from multiple sources.





There
      is
      no assurance that suppliers will provide the raw materials needed by us in
      the
      quantities requested or at a price we are willing to pay. Because we do not
      control the source of these raw materials, we are also subject to delays caused
      by interruption in production of materials based on conditions outside of our
      control.





**1(b)(vi)
      Dependence on Major Customers**





GNC
      and
      Performance, Inc. accounted for approximately 20% and 19%, respectively, of
      net
      sales in 2006 and 28% and 15%, respectively, of net accounts receivable at
      December 31, 2006. Deferred revenue  for
      consigned inventory at GNC was $244,197 as of December 31, 2006.  The
      loss
      of these customers, a significant reduction in purchase volume by these
      customers, or the financial difficulty of such customers, for any reason, could
      significantly reduce our revenues. We have no agreement with or commitment
      from
      either of these customers with respect to future purchases.




7




**1(b)(vii)
      Patents and Trademarks**





The
      following describes the patents and trademarks we have obtained related to
      our
      sports nutrition products and our weight loss technology. On February 22, 2006,
      we sold the patents and trademarks related to our *ACCELERADE* and
      ENDUROX line of sports nutrition products to Mott’s, subject to an exclusive
      license back to us to continue to market the powder, gel and pill form of these
      products.





We
      received a use patent, United States Patent No. 5,585,101, in December 1996
      covering the use of ciwujia, the principal active herb in ENDUROX and ENDUROX
      EXCEL caplets, entitled Method
      to
      Improve Performance During Exercise Using the Ciwujia Plant .
      This
      patent expires in December 2013.





We
      received a composition of matter patent, United States Patent No. 6,051,236,
      in
      April 2000 entitled Composition for Optimizing Muscle Performance During
      Exercise (see Item 1(b)(i)(b)). This patent expires in April 2017.





We
      received a composition of matter patent, United States Patent No. 6,207,638,
      in
      March 2001 entitled Nutritional Intervention Composition for Enhancing and
      Extending Satiety (see Item 1(b)(i)(c)). This patent expires in March
      2018.





We
      received a use patent, United States Patent No. 6,429,190, in August 2002
      entitled Method For Extending The Satiety Of Food By Adding A Nutritional
      Composition Designed To Stimulate Cholecystokinin (CCK). This patent expires
      in
      August 2019.





We
      received a composition of matter patent, United States Patent No. 6,436,899,
      in
      August 2002 entitled Nutritional Intervention Composition for Enhancing and
      Extending Satiety. This patent expires in August 2019.





We
      received a composition of matter patent, United States Patent No. 6,468,962,
      in
      October 2002 entitled Nutritional Intervention Composition for Enhancing and
      Extending Satiety. This patent expires in October 2019.





We
      received a composition of matter patent, United States Patent No. 6,558,690,
      in
      May 2003 entitled Nutritional Intervention Composition for Improving Efficacy
      of
      a Lipase Inhibitor. This patent expires in May 2020.





We
      received a composition of matter patent, United States Patent No. 6,716,815,
      in
      April 2004 entitled Nutritional Intervention Composition for Enhancing and
      Extending Satiety. This patent expires in April 2021.





We
      received a composition of matter patent, United States Patent No. 6,838,431,
      in
      January 2005 entitled Nutritional Intervention Composition Containing Protease
      Inhibitor Extending Post Meal Satiety. This patent expires in January
      2022.





We
      received a composition of matter patent, United States Patent No. 6,989,171,
      in
      January 2006 entitled Sports
      Drink Composition For Enhancing Glucose Uptake and Extending Endurance During
      Physical Exercise .
      This
      patent expires in January 2023.





We
      also
      have several patents pending on our technology. To the extent these are
      improvements on our existing sports drink patents, Mott’s will own these
      patents, but we will have an exclusive license to use them in powder, gel and
      pill products.





The
      patent holder for all patents is our CEO and President, Dr. Robert Portman.
      Our policy is to have all patents assigned
      to us upon filing. Patent Nos. 6,051,236
      and 6,989,171 above
      have been assigned to Mott’s .
      To the
      extent we do not have patents on our products, there can be no assurance that
      another company will not replicate one or more of our products. Nor is there
      any
      assurance that existing or future patents will provide meaningful protection
      or
      significant competitive advantages over competing products. For example, our
      use
      patent on ciwujia would not prevent the sale of a product containing that herb
      with a claim or for a use that was not covered by our patent.




8


We
      also
      obtained federal trademark registrations for ENDUROX EXCEL, ENDUROX
      R 4 , *ACCELERADE,* ACCEL
      GEL *,* and
      SATIATRIM among others. We also have filed our trademarks in most Western
      European countries, Canada, Mexico and Japan. Our policy is to pursue
      registrations for all of the trademarks associated with our key products, and
      to
      protect our legal rights concerning the use of our trademarks. We rely on common
      law trademark rights to protect our unregistered trademarks.





**1(b)(viii)
      and (ix) Governmental Regulation**





We
      have
      determined that all of our existing and proposed products, as described above,
      are nutritional or dietary supplements as defined under federal statutes and
      regulations of the FDA. Neither nutritional supplements nor dietary supplements
      require FDA or other governmental approval prior to their marketing in the
      United States. No governmental agency or other third party makes a determination
      as to whether our products qualify as nutritional supplements, dietary
      supplements, or neither. We make this determination based on the ingredients
      contained in the products and the claims made for the products. The processing,
      formulation, packaging, labeling and advertising of such products, however,
      are
      subject to regulation by one or more federal agencies, including the FDA, the
      Federal Trade Commission, the Consumer Products Safety Commission, the
      Department of Agriculture and the Environmental Protection Agency. Our
      activities also are subject to regulation by various agencies of the states
      and
      localities in which our products are sold.





We
      market
      products that are covered under two types of FDA regulations, Nutritional
      Supplements and Dietary Supplements. Nutritional Supplements contain food and
      GRAS (Generally Regarded as Safe) ingredients and do not require FDA approval
      or
      notification. Such products must follow labeling guidelines outlined by the
      FDA.





Dietary
      Supplements is a classification of products resulting from the enactment of
      the
      Dietary Supplement Health and Education Act of 1994 (the “DSHEA”) in October
      1994. The DSHEA amended and modified the application of certain provisions
      of
      the Federal Food, Drug and Cosmetics Act (the “FFDC Act”) as they relate to
      dietary supplements, and required the FDA to promulgate regulations consistent
      with the DSHEA.





The
      DSHEA
      defines a dietary supplement to include (i) any product intended to supplement
      the diet that bears or contains a vitamin, mineral, herb or other botanical,
      an
      amino acid, a substance to supplement the diet by increasing the total dietary
      intake, or any concentrate, constituent, extract, or combination of any such
      ingredient, provided that such product is either intended for ingestion in
      tablet, capsule, powder, softgel, gelcap, or liquid droplet form, (ii) or,
      if
      not intended to be ingested in such form, is not represented for use as a
      conventional food or as a sole item of a meal or the diet, and (iii) is labeled
      as a dietary supplement. The practical effect of such an expansive definition
      is
      to ensure that the new protections and requirements of the DSHEA will apply
      to a
      wide class of products.





Under
      the
      DSHEA, companies that manufacture and distribute dietary supplements are allowed
      to make any of the following four types of statements with regard to nutritional
      support on labeling without FDA approval: (i) a statement that claims a benefit
      related to a classical nutrient deficiency disease and discloses the prevalence
      of such disease in the United States; (ii) a statement that describes the role
      of a nutrient or dietary ingredient intended to affect structure or function
      in
      humans; (iii) a statement that characterizes the documented mechanism by which
      a
      nutrient or dietary ingredient acts to maintain or function; or (iv) a statement
      that “describes general well-being” from consumption of a nutrient or dietary
      ingredient. In addition to making sure that a statement meets one of these
      four
      criteria, a manufacturer of the dietary supplement must have substantiation that
      such statement is truthful and not misleading, must not claim to diagnose,
      mitigate, treat, cure, or prevent a specific disease or class of diseases,
      and
      must contain the following disclaimer, prominently displayed in boldface type:
      “This statement has not been evaluated by the Food and Drug Administration.
      This
      product is not intended to diagnose, treat, cure, or prevent any disease.”





In
      2000,
      the FDA issued new guidelines concerning statements made for dietary
      supplements. These regulations have important implications for the marketing
      of
      weight loss products, such as SATIATRIM. Previously the regulations made it
      clear that a product that made a claim for obesity must be treated as a drug.
      Under the regulations issued in 2000, the FDA makes a distinction between
      obesity and overweight. Overweight is no longer considered a disease but rather
      a natural life process. Overweight is considered a condition that affects the
      structure and function of the body. As now defined, dietary supplements can
      make
      a claim for ordinary weight loss rather than as a treatment for obesity.
      Furthermore, these regulations also permit the use of appetite suppressant
      as a
      structure/function claim under DSHEA. The issuance of these regulations will
      give us greater latitude in the types of claims that we can make for SATIATRIM
      as long as we can substantiate such claims by the necessary studies.





9




**1(b)(x)
      Expenditures for Research and Development**





Our
      research and development expenditures in the past two fiscal years, exclusive
      of
      market research and marketing related expenditures, were approximately as
      follows: 2006 - $196,000; 2005 - $195,000 . We
      anticipate R & D expenses will increase as we conduct additional clinical
      trials to seek out additional patents and claims for our products.





**1(b)(xi)
      Compliance with Environmental Laws**





Except
      as
      described above under Item 1(b)(viii) and (ix), we are not aware of any
      administrative or other costs that we may incur which are directly related
      to
      compliance with environmental laws, and we have not experienced any other
      significant effect from the impact of environmental laws.





**1(b)(xii)
      Employees**





At
      the
      present time, we have ten (10) full time employees and one (1) part time
      employee. Of these, two employees are executive, five are in sales and
      marketing, and four are in accounting, operations and
      administration. We
      employ a number of consultants who devote limited portions of their time to
      our
      business. None of our employees are represented by a union, and we believe
      that
      our employee relations are good.





**ITEM
            2.** **DESCRIPTION
            OF PROPERTY**





In
      July
      2003, we moved our headquarters from Woodbridge, NJ to larger facilities located
      in Matawan, NJ. At that time, we entered into a four-year (48-month) lease
      for
      approximately 5,500 square feet at a price of $22.50 per square foot, including
      utilities, for an annual rent expense of $123,750 for the first thirty-three
      (33) months. During the last fifteen (15) months of the lease, the rent
      increases to $25.50 per square foot, including utilities, for an aggregate
      annual rent expense of $140,250. In November 2006, we extended the lease for
      an
      additional 5 years (60 months). Under the lease extension which starts in
      January 2007, rent including utilities will be $96,000 annualized over the
      first
      6 months; $140,250 annually for the next 36 months; $145,750 annually for the
      next 12 months; and $151,250 annually for the last 12 months.





We
      do not
      intend to develop our own manufacturing capabilities, because management
      believes that the availability of manufacturing services from third parties
      on a
      contract basis is more than adequate to meet our needs in the foreseeable
      future.





We
      do not
      own any real property nor do we have any real estate investments.





**ITEM
        3.** **LEGAL
        PROCEEDINGS**





None.




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





We
      did
      not submit any matters to a vote of our security holders in the fourth quarter
      of the fiscal year ended December 31, 2006.




10





**PART** **II**




**ITEM
                  5.**
                **MARKET
                    FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS
                    ISSUER
                    PURCHASES OF EQUITY
                    SECURITIES.**





**5(a)**
            **Market
                Information.**





Our
      common stock is currently traded on the over-the-counter market on the OTC
      Bulletin Board, under the symbol “PHLI”.





The
      following table sets forth the high and low sales prices of our common stock
      since January 1, 2005, as reported by the OTC Bulletin Board. These quotations
      reflect inter-dealer prices, without retail mark up, mark down or commissions
      and may not represent actual transactions.




Year
                  ended December 31, 2006
              
              High
              
              LowFirst
                  Quarter
              
              $
              1.24
              
              $
              0.17Second
                  Quarter
              
              $
              2.75
              
              $
              0.84Third
                  Quarter
              
              $
              2.08
              
              $
              1.02Fourth
                  Quarter
              
              $
              1.49
              
              $
              0.99
 
 
 Year
                  ended December 31, 2005
              
              High
              
              LowFirst
                  Quarter
              
              $
              0.92
              
              $
              0.40Second
                  Quarter
              
              $
              0.63
              
              $
              0.21Third
                  Quarter
              
              $
              0.35
              
              $
              0.16Fourth
                  Quarter
              
              $
              0.40
              
              $
              0.08




On
      March
      12, 2007, the closing price of our common stock as reported by the OTC Bulletin
      Board was $1.89 per share.





**5(b)**
            **Holders**





As
      of
      March 12, 2007, there were approximately 107 holders of record of our common
      stock. However, we believe that there are significantly more beneficial holders
      of our stock as many beneficial holders have their stock in “street name”.





**5(c)**
            **Dividends**





We
      have
      never paid or declared dividends upon our common stock, and we do not
      contemplate or anticipate paying any dividends on our common stock in the
      foreseeable future.





**5(d)**
            **Recent
                Sales of Unregistered
                Securities**





**5(d)(i)**
            **Recent
                Sales of Unregistered
                Securities**





There
      were no sales of unregistered securities other than as reported in prior reports
      on Forms 10-KSB, 10-QSB or 8-K.





**Company
      Repurchases**





We
      did
      not repurchase any shares of our common stock in the fourth quarter of
      2006.




11


**ITEM
              6.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL********CONDITION
                AND RESULTS OF OPERATIONS**





The
      following discussion and analysis should be read in conjunction with our
      financial statements, including the notes thereto, appearing elsewhere in this
      Report.





**6(a)**
            **Introduction**





We
      were
      incorporated in April 1995 to discover, develop and commercialize nutritional
      products that are patentable and substantiated by well-controlled clinical
      trials conducted at leading university research centers. Our principal areas
      of
      focus include sports performance, weight loss, and management of Type II
      diabetes. We introduced our first product, ENDUROX, in March 1996. We extended
      our exercise performance products with the introduction of ENDUROX R4 Recovery
      Drink in March 1999, *ACCELERADE* Sports
      Drink in May 2001, and ACCEL GEL in February 2004. These products are based
      on
      our patented technology that involves the combination of carbohydrate and
      protein in a specific ratio. A number of studies, both funded by our company
      and
      also conducted independently, demonstrate that this technology can extend
      endurance, decrease post-exercise muscle damage, speed recovery and improve
      rehydration.





In
      April
      2000, we introduced our first product for weight loss that was based upon a
      novel mode of action - the stimulation of one of the body’s principal satiety
      peptides, cholecystokinin (CCK). This technology was launched under the brand
      name SATIETROL. In June 2001, we licensed this product to GSK and discontinued
      promotion of our brand. In September 2002, the license was returned to us and
      we
      initiated a program to improve both the efficacy and form versatility of the
      technology. We launched a new ready-to-drink beverage based on this enhanced
      technology under the brand name SATIATRIM in January 2007.





In
      February 2006, we entered into an asset sale with Mott’s, LLC, a division of
      Cadbury Schweppes, (see Item 1(b)). As part of the agreement, we will continue
      to sell the powder, gel and pill forms of *ACCELERADE* ,
      ENDUROX
      R4 and ACCEL GEL, both in the United States and in those countries where we
      are
      presently doing business.





**6(b)**
            **Results
                of Operations - Years Ended December 31, 2006 and 2005**





We
      generated net income applicable to common stockholders of $2,258,577, or $0.17
      per share diluted, for the year ended December 31, 2006, compared to a net
      loss
      applicable to common stockholders of ($652,410), or ($0.06) per share, for
      the
      year ended December 31, 2005. The net income for the year ended December 31,
      2006 versus a net loss for the year ended December 31, 2005 is due primarily
      to
      the Mott’s transaction, a 14% increase in revenues, and a decrease in selling,
      general, and administrative expenses as detailed below. See
      Item
      1(b) above for a
      description of the Mott’s transaction.





Revenues
      for the year ended December 31, 2006 were $6,209,846 compared to revenues of
      $5,444,558 for the same period in 2005. Revenues increased in 2006 as compared
      to 2005 because we paid significant promotional expenses to promote our products
      in 2005 that were deducted from revenues. No such promotional expenses were
      paid
      in 2006.





Our
      gross
      profit margin on product sales increased to 44.1% in 2006 from 35.7% in 2005.
      The increase in gross profit margin for 2006 as compared to the same period
      in
      2005 is due to the fact that we paid significant promotional expenses to promote
      our products in 2005 that were deducted from revenues. No such promotional
      expenses were paid in 2006. From time to time, we may incur additional
      promotional expenses in connection with the sale of our products. These
      promotional expenses should result in higher unit volumes of sales of these
      products. We anticipate that gross profit margin, as a percent of sales, may
      decrease as we move forward in 2007 due to increased costs of raw materials
      and
      manufacturing of our products. We are currently evaluating the costs of our
      products and we believe we may be able to better control these costs moving
      forward. We are also evaluating the possibility of increasing pricing to offset
      any potential decreases in gross margin.





Selling,
      general, and administrative (“SG&A”) expenses decreased to $2,917,450 for
      the year ended December 31, 2006 from $3,721,567 for the year ended December
      31,
      2005. SG&A expenses decreased due primarily to decreases in advertising and
      marketing expenses no longer necessary due to the aforementioned Mott’s
      transaction, as well as a decrease in personnel. We expect that advertising
      and
      marketing expenses will increase in 2007 due to the launch of
      SATIATRIM.




12


Research
      and development expenses were $196,020 for the year ended December 31, 2006
      compared to $195,242 for the year ended December 31, 2005. We anticipate R
&
D expenses will increase as we conduct additional clinical trials and seek
      out
      additional patents and claims for all of our products.





Interest
      expense decreased $70,718 to $31,416 for the year ended December 31, 2006 from
      $102,134 for the year ended December 31, 2005. Interest expense was incurred
      in
      connection with our accounts receivable funding from USA Funding described
      in
      the “Liquidity and Capital Resources” section below. Interest expense decreased
      for 2006 compared to 2005 because we discontinued the use of the accounts
      receivable funding when the Mott’s transaction closed.





**6(c)**
            **Liquidity
                and Capital Resources**





Our
      cash
      and liquidity position significantly improved with the sale on February 22,
      2006
      of our sports drink patents and trademarks to Mott’s for $4,000,000 cash plus
      future potential royalties. We used a portion of the cash proceeds of this
      transaction to repay $277,067 owed under our accounts receivable facility,
      to
      repay the $500,000 interest-bearing convertible note held by Hormel Health
      Labs,
      LLC, and approximately $611,981 owed to our exclusive contract manufacturer
      (an
      affiliate of Hormel). Prior to this transaction, we had experienced significant
      liquidity problems. There can be no assurance that we will not experience cash
      and liquidity problems again in the future.





At
      December 31, 2006, our current assets exceeded our current liabilities by
      approximately $3,874,000 with a ratio of current assets to current liabilities
      of approximately 4.1 to 1. At December 31, 2006, cash on hand was $2,564,038,
      an
      increase of $2,425,551 from December 31, 2005, primarily as the result of the
      Mott’s transaction (see Item 1(b) above). Accounts receivable increased at
      December 31, 2006 from December 31, 2005 due to higher revenues in the fourth
      quarter of 2006 as compared to the fourth quarter of 2005. Inventory increased
      at December 31, 2006 from December 31, 2005 in anticipation of the launch of
      SATIATRIM in January 2007. Deferred tax assets decreased due to our recognition
      of net operating loss in connection with the Mott’s transaction. Accounts
      payable and accrued expenses decreased primarily as a result of the Mott’s
      transaction that enabled us to become current with our trade obligations.
      Deferred revenue decreased as our major customer increased its sell-through
      to
      the end-user consumers in 2006.





Notes
      payable (other than the long-term convertible note discussed below) decreased
      $85,617 to $44,327 from December 31, 2005 primarily as a result of repaying
      our
      accounts receivable funding from USA Funding. The amount of available credit
      was
      based on the value of our eligible receivables from time to time up to
      $1,000,000. This credit facility bore interest at a rate of prime plus 1.75%
      as
      well as a 0.75% discount rate on all advances. At December 31, 2005, we had
      approximately $74,000 outstanding under this facility. On February 22, 2006,
      with the proceeds of the sale of our sports drink assets to Mott’s, we repaid
      this facility in full and terminated it.





On
      January 28, 2005, we entered into a Series A Preferred Stock Purchase Agreement
      and related agreements with Hormel Health Labs pursuant to which we issued
      and
      sold 90,909 shares of Series A Preferred Stock for an aggregate purchase price
      of $1,000,000 or $11.00 per share. The Series A Preferred Stock issued to Hormel
      was converted into an aggregate 909,091 shares of common stock on June 23,
      2006.





On
      August
      24, 2005, we entered into another securities purchase agreement with Hormel
      Health Labs. Pursuant to this purchase agreement, Hormel Health Labs loaned
      us
      the principal amount of $500,000 in exchange for the convertible note, which
      amount would accrue interest at a rate of 8% per annum. The outstanding
      principal balance under the note and any accrued but unpaid interest thereon
      was
      due and payable on August 24, 2007. On February 22, 2006, we repaid the
      principal and accrued interest of this note in full with the proceeds of the
      sale of assets to Mott’s.





We
      have
      no material commitments for capital expenditures.




13


**6(d)**
            **Impact
                of Inflation**





We
      expect
      to be able to pass inflationary increases for raw materials and other costs
      on
      to our customers through price increases, as required, and do not expect
      inflation to be a significant factor in our business. However, our operating
      history is very limited, and this expectation is based more on observations
      of
      our competitors’ historic operations than our own experience.





**6(e)**
            **Seasonality**





Sports
      nutrition products tend to be seasonal, especially in the colder climates.
      Lower
      sales are typically realized during the first and fourth quarters and higher
      sales are typically realized during the second and third fiscal quarters. We
      also plan our advertising and promotional campaigns for the ENDUROX
      R 4 and *ACCELERADE* products
      around these seasonal demands. Weight loss products also have seasonality with
      greater sales seen in the first and second quarters as a result of consumers’
New Year’s resolutions and desire to “get into shape” for the summer. Similarly,
      we have planned advertising and promotional expenditures for SATIATRIM to take
      advantage of this seasonality. We believe that the impact of new product
      introductions and marketing expenses associated with the introduction of new
      products will have a far greater impact on our operations than industry and
      product seasonality.




**6(f)**
            **Impact
                of Recently Issued Financial Accounting Standards**





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”), which
      clarifies the accounting and disclosure for uncertain tax positions, as defined.
      FIN 48 seeks to reduce the diversity in practice associated with certain aspects
      of the recognition and measurement related to accounting for income taxes.
      We
      have determined that the impact of the adoption of FIN 48 has no material effect
      on our results of operations or financial position.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,
      establishes a framework for measuring fair value, and expands disclosure
      requirements regarding fair value measurement. Where applicable, this statement
      simplifies and codifies fair value related guidance previously issued within
      U.S. generally accepted accounting principles. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. We are currently reviewing SFAS
      157 to determine its impact and any material effect of its
      adoption.





**6(g)**
            **Off-Balance
                Sheet Arrangements**





There
      are
      no off-balance sheet arrangements between us and any other entity that have,
      or
      are reasonably likely to have, a current or future effect on our financial
      condition, changes in financial condition, revenues or expenses, results of
      operations, liquidity, capital expenditures, or capital resources that is
      material to investors.





**6(h)**
            **Critical
                Accounting Policies**





Our
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America. Certain accounting policies
      have a significant impact on amounts reported in financial statements. A summary
      of those significant accounting policies can be found in Note A to our financial
      statements. We have not adopted any significant new accounting policies during
      the period ended December 31, 2006.




In
      preparing financial statements in conformity with generally accepted accounting
      principles in the United States of America, we are required to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      the disclosure of contingent assets and liabilities at the date of the financial
      statements and revenues and expenses for the reporting period covered thereby.
      Actual results could differ from those estimates.




14


Among
      such estimates made by management in the preparation of our financial statements
      are the determinations of the allowance for doubtful accounts, inventory
      valuation, and revenue recognition as it relates to customer returns. The
      allowance for doubtful accounts is determined by assessing the realizability
      of
      accounts receivable by taking into consideration the value of past due accounts
      and collectability based on credit worthiness of such customers. We assess
      the
      realizability of inventories by reviewing inventory to determine the value
      of
      items that are slow moving, lack marketability, and by analysis of the shelf
      life of products. Estimates are made for sales returns based on historical
      experience with actual returns. Starting in 2004, certain of our products were
      subject to minimum sales thresholds by a significant retail customer. These
      sales thresholds are based on quantities sold- through at the retail level.
      We
      record revenue with respect to these products at the time the goods are
      sold-through to the end user as reported to us by the customer. We analyze
      retail sell-through data provided by the customer and our expectations of future
      customer sell-through trends. Based upon this information, we determine if
      any
      reserves for returns are necessary. Our financial statements have been prepared
      in accordance with accounting principles generally accepted in the United States
      of America. Certain accounting policies have a significant impact on amounts
      reported in financial statements. A summary of those significant accounting
      policies can be found in Note A to our financial statements.





**ITEM
              7.**
            **FINANCIAL
                STATEMENTS**





Financial
      information required in response to this Item of Form 10-KSB is set forth at
      pages F-1 through F-17 of this Report.




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





Our
      Current Report on Form 8-K filed June 28, 2005 reported that on June 17, 2005,
      Eisner, LLP resigned as our auditor and that effective June 28, 2005, we engaged
      Weiser, LLP to serve as the independent public accountants to audit our
      financial statements for the fiscal year ending December 31, 2005.





**ITEM
              8A**
            **CONTROLS
                AND PROCEDURES**





**(a)**
            **Evaluation
                of Disclosure Controls and
                Procedures**





Based
      on
      their evaluation of our disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
      as amended (the “Exchange Act”)) as of December 31, 2006, our chief executive
      officer and chief financial officer have concluded that our disclosure controls
      and procedures are designed to ensure that information required to be disclosed
      by us in the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized, and reported within the time periods specified in the
      SEC’s rules and forms and is accumulated and communicated to the company’s
      management, as appropriate, to allow timely decisions regarding required
      disclosure, and are operating in an effective manner.




**(b)**
            **Changes
                in Internal Controls****Over
                Financial Reporting**





During
      the fiscal quarter ended December 31, 2006, there were no changes in our
      internal control over financial reporting that have materially affected, or
      are
      reasonably likely to materially affect, our internal control over financial
      reporting.





**ITEM
              8B**
            **OTHER
                INFORMATION**





None.





**PART
      III**


**ITEM
                9.**
              **DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS****,
                  CONTROL PERSONS****,****AND
                  CORPORATE GOVERNANCE****;
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
                  ACT**


**9(a)**
            **Directors
                and Executive Officers**




15


Our
      directors and executive officers as of the date of this Report are as follows:




**Name**
                
                **Position**Robert
                    Portman, Ph.D.
                
                Chairman
                    of the Board of Directors, Chief Executive Officer, President,
                    and Chief
                    Scientific OfficerStephen
                    P. Kuchen
                
                Chief
                    Financial Officer, Chief Operating Officer, Treasurer, Secretary,and
                    DirectorDavid
                    Portman
                  Michael
                    Cahr
                  Adam
                    Mizel
                  Marc
                    Particelli
                
                Director
                  Director1,2
                  Director1,2
                  Director2


1
                Member
                    of Audit Committee


2
                Member
                    of Compensation
                    Committee





Two
      of
      our directors resigned during fiscal year 2006: Gary Jamison, who resigned
      on
      September 12, 2006 due to a change in his area of responsibility within Hormel
      Foods Corporation; and Robert Rowbal, who resigned on December 7, 2006. Both
      had
      been elected to our Board at the suggestion of Hormel Health Labs, LLC, an
      affiliate of Hormel Foods Corporation. Previously, Hormel Health Labs had the
      right by agreement to designate an individual to be nominated to our Board.
      This
      right lapsed, however, when Hormel Health Labs converted its shares of our
      Series A Preferred Stock into shares of our common stock.





On
      February 16, 2007, Messrs. Mizel and Particelli were appointed to our Board
      of Directors to fill vacancies following the resignations of
      Messrs. Jamison and Rowbal.





**MANAGEMENT
      AND DIRECTORS**





**DR.
      ROBERT PORTMAN** ,
      age 62, has
      served as our President and Chief Executive Officer since June 2005 and our
      Chairman of the Board of Directors and Chief Scientific Officer since September
      2004. From our inception to September 2004, Dr. Portman served as our
      President, Chief Executive Officer, and Chairman of the Board of Directors.
      Dr. Portman has a Ph.D. in Biochemistry and worked as a senior scientist at
      Schering Laboratories before co-founding M.E.D. Communications in 1974. In
      1987,
      Dr. Portman started a consumer agency and, in 1993, he merged both agencies
      to form C&M Advertising with billings in excess of $100 million.
      Dr. Portman is coauthor of two books, Nutrient Timing and The Performance
      Zone. He has authored hundreds of articles on the role of nutrition in improving
      sports performance. He is a frequent guest on TV and radio and has been a
      keynote speaker at national coaches meetings on how nutritional intervention
      during and after exercise can improve athletic performance and speed muscle
      recovery. As Chief Scientific Officer of PacificHealth Laboratories, he holds
      12
      patents for nutritional inventions to improve sports performance as well as
      to
      control appetite and help in the management of Type II diabetes.





**STEPHEN
      P. KUCHEN** ,
      age 46,
      has served as our Chief Financial Officer, Chief Operating Officer, Treasurer,
      Secretary and a Director, since September 2004. Prior to that, Mr. Kuchen
      served as our Vice President - Finance, Chief Financial Officer, Treasurer,
      Assistant Secretary and a Director, since June 2000. Mr. Kuchen initially
      joined us in February of 2000 as Controller. Prior to joining us,
      Mr. Kuchen was employed from 1996 to 1999 as the Controller of Able
      Laboratories, a public company located in South Plainfield, New Jersey that
      manufactures and sells generic pharmaceuticals. Prior to his employment by
      Able
      Laboratories, Mr. Kuchen was the Controller of Jerhel Plastics, a privately
      owned manufacturer of women’s compact cases from 1993 to 1996. Mr. Kuchen
      is a graduate of Seton Hall University in South Orange, NJ, and is a Certified
      Management Accountant.





**DAVID
      I. PORTMAN** ,
      age 66,
      has served as a Director from our inception. Mr. Portman has a BS in
      Pharmacy and an MBA. He worked as a sales representative and marketing manager
      for Eli Lilly, Beecham-Massengill, Winthrop Laboratories and Sandoz
      Pharmaceuticals before co-founding M.E.D. Communications in 1974. Currently,
      Mr. Portman is President of TRIAD Development, a real estate Company that
      has numerous commercial and rental properties in New Jersey.




16


**MICHAEL
      CAHR** ,
      age 67,
      was appointed to the Board of Directors in April 2002. Since September 2004,
      Mr. Cahr has been a General Partner at Focus Equity Partners, a private
      equity investment and management firm that acquires middle market companies
      and
      assists them in reaching their performance potential. Prior to Focus, he was
      President of Saxony Consultants, a company that provides financial and marketing
      expertise to organizations in the United States and abroad. From February 2000
      to March 2002, Mr. Cahr served as President and Chief Executive Officer of
      Ikadega, Inc., a Northbrook, Illinois server technology company developing
      products and services for the healthcare, data storage and hospitality fields.
      Mr. Cahr was Chairman of Allscripts, Inc., the leading developer of
      hand-held devices that provide physicians with real-time access to health,
      drug
      and other critical information from September 1997 through March 1999 and
      President, CEO and Chairman from June 1994 to September 1997. Prior to
      Allscripts, Mr. Cahr was Venture Group Manager for Allstate Venture Capital
      where he oversaw investments in technology, healthcare services, biotech and
      medical services from October 1987 to June 1994. Mr. Cahr serves as a
      director of Lifecell Corporation, a Branchburg, NJ-based, publicly-traded tissue
      engineering company where he has been a board member since 1991.




**ADAM
      MIZEL** ,
      age 37,
      was appointed to the Board of Directors in February 2007. Since September 2005,
      Mr. Mizel has been the Managing Principal of the General Partner of the
      Aquifer Opportunity Fund, L.P., an investment fund that takes a private equity
      approach to investing in small capitalization public companies. Mr. Mizel
      previously was Managing Director and Chief Operating Officer of Azimuth Trust,
      LLC., an alternative asset management firm from 2001 until 2005. Earlier,
      Mr. Mizel was a partner at Capital Z Partners, L.P., a private equity and
      alternative investment firm, and Managing Director at Zurich Centre Investments,
      Inc., the North American private equity unit of Zurich Financial Services Group.
      Mr. Mizel began his investment career at Morgan Stanley Capital Partners in
      1991.





**MARC
      PARTICELLI** ,
      age 61,
      was appointed to the Board of Directors in February 2007. Since July 2006,
      Mr. Particelli has been Chairman of the Board of Coactive Marketing Group
      (NASDAQ: CMKG), an integrated marketing communications agency. Mr Particelli
      served as interim President and Chief Executive Officer of Coactive from July
      2006 through October 2006. From August 2005 until March 2006,
      Mr. Particelli was the Chief Executive Officer of TSM Corporation, a
      telecommunications company serving the Hispanic market. Mr. Particelli was
      Chairman of the Board, President and Chief Executive Officer of Modem Media,
      an
      interactive marketing services firm, from January 1991 until its acquisition
      by
      Digitas Inc. in October 2004. Earlier, Mr. Particelli was a partner at Oak
      Hill Capital Management, a private equity investment firm, and managing director
      at Odyssey Partners L.P., a hedge fund. Prior to entering the private equity
      business, Mr. Particelli spent 20 years with Booz Allen where he helped
      create the Marketing Industries Practice and led its expansion across Europe,
      Asia and South America. Mr. Particelli also currently serves as a director
      of, and investor in, several private companies and as an advisor to several
      private equity firms.





All
      directors hold office until the next annual meeting of stockholders and until
      their successors have been elected and qualified. Officers serve at the
      discretion of the Board of Directors.





**9(b)**
            **Scientific
                Advisory Boards**





We
      have
      established a Scientific Advisory Board to provide us with on-going advice
      and
      counsel regarding research direction, product development, analysis of data,
      and
      general counseling. As the need arises, we consult with individual members
      of
      this board on a non-scheduled basis.





**9(c)**
            **Family
                Relationships**





Robert
      Portman and David Portman are brothers. There are no other family relationships
      among our directors, executive officers or persons nominated or chosen to become
      directors or executive officers of ours.





**9(d)**
            **Involvement
                in Certain Legal
                Proceedings**





No
      events
      have occurred during the past five years that are required to be disclosed
      pursuant to Item 401(d) of Regulation S-B.




17




**CORPORATE
      GOVERNANCE**




**9(e)**
              **Audit
                  Committee**
 
 The
        Board
        of Directors has established a separately designated, standing Audit Committee
        that performs the role described in section 3(a)(58)(A) of the Exchange
        Act. During the fiscal year ended December 31, 2006, the Audit Committee
        consisted of Michael Cahr and Gary Jamison. Messrs. Cahr and Jamison
        met the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange
        Act. Mr. Jamison resigned from the Board and Audit Committee on September 12,
        2006. Mr. Mizel was named to the Audit Committee on February 16, 2007.
        Mr. Mizel meets the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange
        Act. The Audit Committee now consists of Messrs. Cahr and Mizel.
  **9(f)**
              **Audit
                  Committee Financial Expert**
 
 Michael Cahr, a
        member of the Audit Committee of our Board of Directors, is the Audit Committee
        Financial Expert, as that term is defined in Item 407 of
        Regulation S-B. Mr. Cahr is “independent” as that term is defined in Item
        7(d)(3)(iv) of Schedule 14A under the Exchange Act .


**9(g)**
            **Section
                16(a) Beneficial Ownership Reporting
                Compliance**





Section
      16(a) of the Exchange Act requires that our directors and executive officers,
      and any persons who own more than ten percent of our common stock, file with
      the
      Securities and Exchange Commission, or SEC, initial reports of ownership and
      reports of changes in ownership of our common stock and other equity securities.
      Such persons are required by SEC regulations to furnish us with copies of all
      such reports that they file. To our knowledge, based upon our review of these
      reports, all Section 16 reports required to be filed by our directors, executive
      officers and beneficial owners during the fiscal year ended December 31, 2006
      were filed on a timely basis.




**9(i)**
            **Code
                of Ethics**





Our
      Board
      of Directors has adopted a code of ethics, which applies to all our directors,
      officers and employees. Our code of ethics is intended to comply with the
      requirements of Item 406 of Regulation S-B.





Our
      code
      of ethics is posted on our Internet website at www.pacifichealthlabs.com. We
      will provide our code of ethics in print without charge to any stockholder
      who
      makes a written request to: Corporate Secretary, PacificHealth Laboratories,
      Inc., 100 Matawan Road, Suite 420, Matawan, NJ 07747. Any waivers of the
      application, and any amendments to, our code of ethics must be made by our
      Board
      of Directors. Any waivers of, and any amendments to, our code of ethics will
      be
      disclosed promptly on our Internet website,
      www.pacifichealthlabs.com.





**ITEM
                10.**
              **EXECUTIVE
                  COMPENSATION**





The
      table
      below sets forth information concerning compensation paid to Dr. Robert
      Portman and Stephen Kuchen in 2006. None of our executive officers other than
      Dr. Portman and Mr. Kuchen received compensation of $100,000 or more
      in fiscal 2006. As set forth below, our compensation program for our executive
      officers consists of base salary and discretionary option awards.





18




**Summary
        Compensation Table**
 
 Name
                  and Principal Position
              
              Year
              
              Salary
                ($)
              
              Bonus
                ($)
              
              Stock
                  Awards
                ($)
              
              Option
                  Awards
                ($)
              
              Non-Equity
                  Incentive Plan Compen-sation
                ($)
              
              Nonqualified
                  Deferred Compensa-tion Earnings
                ($)
              
              All
                  Other Compensa-tion ($)
              
              Total
                  ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)
              
              (i)
              
              (j)Robert
                  Portman,
                Chairman
                  of the Board, Chief Executive Officer, President and Chief Scientific
                  Officer
              
              
              2006
              
              $
              275,000
              (1)
              
              —
              
              
              —
              
              $
              103,282
              (2)
              
              —
              
              
              —
              
              $
              0
              (3)
              $
              378,282Stephen
                  P. Kuchen,
                Chief
                  Financial Officer, Chief Operating Officer, Treasurer, Secretary
                  and
                  Director
              
              
              2006
              
              $
              137,500
              (4)
              $
              2,000
              
              
              —
              
              $
              32,451
              (2)
              
              —
              
              
              —
              
              
              —
              
              $
              171,951
 
 (1)
        Under
        the terms of his employment agreement in effect during 2006, Dr. Portman
        received an annual base salary of $225,000 and received a payment of the
        accrued
        amount $50,000 following the February 22, 2006 closing of our sale to Mott’s LLP
        of patents, trademarks, web sites and other intellectual property related
        to our
        ACCELERADE and ENDUROX sports nutrition product lines. Effective as of January
        1, 2007, Dr. Portman’s annual base salary was increased to
        $295,000.
 
 (2)
        The
        amounts in column (f) reflect the dollar amount recognized for financial
        statement reporting purposes for the fiscal year ended December 31, 2006,
        in
        accordance with SFAS 123(R) of awards of stock options and thus include amounts
        from awards granted in and prior to 2006. Assumptions used in the calculation
        of
        this amount are included in Note B[10] of our audited financial statements
        for
        the fiscal year ended December 31, 2006 included in Part II - Item 7, Financial
        Statements of this Annual Report on Form 10-KSB [and
        in
        Note B[10] of our audited financial statements for the year ended December
        31,
        2005 included in our Annual Report on Form 10-KSB filed with the SEC on March
        31, 2006.]
 
 (3)
        Perquisites and other personal benefits received by Dr. Portman in the aggregate
        were less than $10,000.
 
 (4)
        Effective as of January 1, 2007, Mr. Kuchen’s base salary was increased to
        $150,000.
 
 **Employment
        Agreements**
 
 The
        annual base salary reflected in the Summary Compensation Table for Dr. Portman
        is fixed in his employment agreement, which is described below. We do not
        have a
        written or unwritten employment agreement with Mr. Kuchen. His annual base
        salary is determined by our Compensation Committee and is adjusted periodically.
 
 During
        2006, we employed Dr. Portman under an extension of his employment agreement.
        This agreement provided that Dr. Portman was entitled to receive salary
        compensation of $275,000 per year, but that he would receive $225,000 as
        an
        annual base salary until our financial condition significantly improved.
        When
        our financial condition improved, he would receive the accrued difference
        of
        $50,000. Following the closing of our sale of intellectual property assets
        to
        Mott’s in February 2006, Dr. Portman received $50,000 pursuant to this provision
        of the extension employment agreement. In addition, the extension employment
        agreement provided that Dr. Portman was entitled to an annual bonus not to
        exceed 100% of his base salary. Dr. Portman’s eligibility for, and the amount
        of, this bonus, was to be based upon attainment of milestones by the company
        and/or Dr. Portman. No milestones for this bonus were established during
        2006,
        and no bonus was paid in 2006.
  19
 
 Under
        the
        extension employment agreement, Dr. Portman received options to purchase
        up to
        450,000 shares of our common stock pursuant to our 2000 Stock Option Plan.
        The
        exercise price of the options was set at $0.65 per share, which was the
        prevailing market price of our common stock at September 1, 2004. One-third
        of
        the options vested on September 1, 2004, one-third on September 1, 2005,
        and the
        remaining one-third on September 1, 2006.
 
 Under
        the
        extension employment agreement, Dr. Portman was also entitled to payments
        upon
        his termination or upon a change-in-control of the company as described below
        under the heading “Post-Termination or Change-In-Control Payments.” The term of
        the extension employment agreement terminated on December 31, 2006.
  On
        December 13, 2006, our Compensation Committee recommended, and our full Board
        of
        Directors approved, the terms of a new employment agreement with Dr. Portman,
        effective January 1, 2007. Under the new employment agreement, Dr. Portman
        will
        receive a salary of $295,000 per year, as well as a car allowance in the
 amount
        of
        $975 per month. In addition, Dr. Portman will be entitled to an annual bonus
        not
        to exceed 100% of his base salary. Dr. Portman’s eligibility for, and the amount
        of, this bonus will be based upon attainment of milestones by the company
        and/or
        Dr. Portman. The milestones will be agreed upon by Dr. Portman and our
        Compensation Committee. No milestones have been determined at this time.
        The
        term of Dr. Portman’s employment agreement will terminate on December 31, 2008,
        unless terminated earlier by either Dr. Portman or the company. Dr. Portman
        has
        the right to terminate the employment agreement without cause on thirty days’
prior written notice, or with cause. The company also has the right to terminate
        Dr. Portman’s employment agreement with or without cause. In addition, if Dr.
        Portman’s employment is terminated by us without cause, or by Dr. Portman for
        cause, any stock options granted to Dr. Portman, to the extent not already
        vested, will vest. Under the new employment agreement, Dr. Portman also will
        be
        entitled to payments upon his termination or upon a change-in-control of
        the
        company as described below under the heading “Post-Termination or
        Change-In-Control Payments.”
 
 **Equity
        Awards in 2006**
  During
        2006, our Compensation Committee recommended, and our full Board of Directors
        approved, stock option awards to our executive officers as follows:
 
 **Executive
                  Officer**
              ****
              **Number
                  of Shares of Common Stock Underlying Options**
              ****
              **Exercise
                  Price**
              ****
              **Grant
                  Date**Dr.
                  Robert Portman
              
              
              300,000
              
              $
              0.60
              
              
              February
                  13, 2006275,000
              
              $
              1.13
              
              
              December
                  13, 2006Stephen
                  Kuchen
              
              
              100,000
              
              $
              0.60
              
              
              February
                  13, 200650,000
              
              $
              1.13
              
              
              December
                  13, 2006
 
 Each
        of
        the options listed above vests over a three-year period in equal, annual
        installments beginning on the first anniversary of the date of grant. The
        exercise price per share of the options is equal to the closing price, on
        the
        date of the grant, of our common stock on the Over-the-Counter Bulletin Board.
 
 The
        stock
        option awards granted to Dr. Portman in 2006 were not issued under any of
        our
        stock option plan, but the terms and conditions of Dr. Portman’s awards are
        similar to those of our 2000 Incentive Stock Option Plan. The
        2006
        stock option awards to Stephen Kuchen were granted under our 1995 Incentive
        Stock Option Plan. The material terms of the 1995 Incentive Stock Plan and
        the
        2000 Incentive Stock Option Plan are described in Note I to
        our
        audited financial statements for the fiscal year ended December 31, 2006
        included in Part II - Item 7, Financial Statements of this Annual Report
        on Form
        10-KSB.
  20
 
 **Outstanding
        Equity Awards at Fiscal Year-End**
 
 The
        following table sets forth information with respect to the value of all
        unexercised options previously awarded to the executive officers named above
        at
        the fiscal year end, December 31, 2006.
 
 Option
                  Awards
              
              Stock
                  AwardsName
              
              Number
                of
                Securities
                  Underlying Unexercised Options
                (#)
                Exercisable
              
              Number
                  of Securities Underlying Unexercised Options
                (#)
                Unexercisable
              
              Equity
                  Incentive Plan Awards: Number of Securities Underlying Unexercised
                  Unearned Options
                (#)
              
              Option
                  Exercise Price
                ($)
              
              Option
                  Expiration Date
              
              Number
                  of Shares or Units of Stock That Have Not Vested
                (#)
              
              Market
                  Value of Shares or Units of Stock That Have Not Vested
                ($)
              
              Equity
                  Incentive Plan Awards: Number of Unearned Shares, Units or Other
                  Rights
                  That Have Not Vested
                (#)
              
              Equity
                  Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                  Units or
                  Other Rights That Have Not Vested
                ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)
              
              (i)
              
              (j)Robert
                  Portman,
              
              
              —
              
              
              275,000
              (1)
              
              —
              
              $
              1.13
              
              
              12/12/2011
              
              
              —
              
              
              —
              
              
              —
              
              
              —Chairman
                  of the Board,
              
              
              —
              
              
              300,000
              (2)
              
              —
              
              $
              0.60
              
              
              02/13/2011Chief
                Executive Officer, President and
              
              
              450,000
              (3)
              
              —
              
              
              —
              
              $
              0.65
              
              
              08/21/2009Chief
                Scientific Officer
              
              
              300,000
              (4)
              
              —
              
              
              —
              
              $
              2.79
              
              
              12/31/2007Stephen
                  P. Kuchen,
              
              
              —
              
              
              50,000
              (1)
              
              —
              
              $
              1.13
              
              
              12/12/2011
              
              
              —
              
              
              —
              
              
              —
              
              
              —Chief
                  Financial Officer, Chief Operating Officer, Treasure, Secretary
                  and
                  Director
              
              
              —
                
                90,000
                
                20,000
              (5)
                
                (6)
              
              100,000
                
                30,000
                
                —
              (2)
                (5)
              
              —
                
                —
                
                —
              
              $
                
                $
                
                $
              0.60
                
                0.70
                
                1.92
              
              
              02/13/2011
                
                10/01/2009
                
                03/06/2008
 
 (1)
        These
        options vest in three equal annual installments beginning on December 13,
        2007.
 
 (2)
        These
        options vest in three equal annual installments beginning on February 13,
        2007.
 
 (3)
        These
        options vested in three equal annual installments beginning on September
        1,
        2004.
 
 (4)
        These
        options vested in three equal annual installments beginning on January 1,
        2003.
 
 (5)
        These
        options began to vest in four equal annual installments on October 1, 2004.
        The
        last 30,000 shares will vest on October 1, 2007.
 
 (6)
        These
        options vested in two equal annual installments beginning on March 6,
        2004.
 
 **Post-Termination
        or Change-In-Control Payments**
 
 Under
        his
        employment agreement with us, Dr. Portman has the right to receive payments
        upon
        his termination in certain circumstances and in the event of a change-in-control
        of the company. The terms relating to post-termination and change-in-control
        payments in Dr. Portman’s new employment agreement that became effective January
        1, 2007 are identical to those in the extension employment agreement that
        was
        effective during 2006.
  21
 
 If
        Dr.
        Portman’s employment is terminated for any reason whatsoever (except by us with
        cause), Dr. Portman will be entitled to receive a lump sum payment of an
        amount
        equal to the base salary which would have been paid during the period beginning
        on the date of termination of employment and ending on the earlier of (1)
        the
        scheduled termination date, or (2) the first anniversary date of the termination
        date. Upon Dr. Portman’s termination for any reason, including his voluntary
        termination, Dr. Portman will not be bound by any non-competition agreement
        unless we continue to pay his salary, in which case he will be subject to
        a
        one-year non-competition agreement. In addition, if Dr. Portman’s employment is
        terminated by us without cause or by Dr. Portman for cause, any stock options
        granted to Dr. Portman, to the extent not already vested, will vest.
 
 In
        the
        event of a change-in-control of the company, Dr. Portman will be entitled
        to be
        paid, as additional compensation, a lump sum equal to his annual base salary
        in
        effect immediately prior to the change-in-control, payable at closing or
        completion of the change-in-control, or otherwise as required under Section
        409A
        of the Internal Revenue Code. At the same time, all of his unvested options
        will
        vest. A change-in-control means:
 
 ·
              the
                  acquisition of beneficial ownership, by any stockholder or group
                  of
                  stockholders, not including stockholders who are our officers or
                  directors
                  on the date of the employment agreement or any affiliate of such
                  officer
                  or director, of shares of our capital stock entitled to cast at
                  least 50%
                  of all votes which may be cast in the election of our directors,
                  or
 
 ·
              any
                  sale of the company, including
 
 ·
              any
                  merger or consolidation involving the company if the stockholders
                  of the
                  company prior to the merger hold less than 50% of the shares of
                  the
                  combined entity after the merger,
                  or
 
 ·
              the
                  transfer or sale of all or substantially all of the assets of the
                  company.
 
 Under
        our
        arrangement with Mr. Kuchen, in the event of a sale, merger or change in
        control
        of the company, Mr. Kuchen will receive one-half of his annual salary and
        all of
        his options would become immediately vested. If Mr. Kuchen were subsequently
        terminated, Mr. Kuchen would receive one-half of his annual salary as severance.
 
 **DIRECTOR
        COMPENSATION**
 
 In
        the
        past, we have compensated our non-employee Directors with awards of options
        to
        purchase shares of our common stock at an exercise price equal to the closing
        trading price of our common stock on the Over-the-Counter Bulletin Board
        on the
        date of grant. In the past, we have not granted option awards to our
        non-employee Directors who are associated with Hormel Health Labs, LLC or
        Hormel
        Foods Corporation.
 
 Dr.
        Robert Portman, our Chairman of the Board, Chief Executive Officer, President
        and Chief Scientific Officer, and Stephen Kuchen, our Chief Financial Officer,
        Chief Operating Officer, Treasurer and Secretary, receive no compensation
        for
        their services as Directors because they are employees of the company. The
        compensation received by Dr. Portman and Mr. Kuchen as employees of the company
        is shown in the Summary Compensation Table on page 18.
 
 **Director
        Compensation Table**
 
 The
        table
        below summarizes the compensation that we paid to non-employee Directors
        for the
        fiscal year ended December 31, 2006.
 
 22
  Name
              
              Fees
                  Earned or
                Paid
                  in
                Cash
                ($)
              
              Stock
                Awards
                ($)
              
              Option
                Awards
                ($)
              
              Non-Equity
                Incentive
                  Plan
                Compensation
                ($)
              
              Nonqualified
                Deferred
                Compensation
                Earnings
                ($)
              
              All
                  Other
                Compensation
                ($)
              
              Total
                ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (g)
              
              (h)David
                  I. Portman
              
              
              —
              
              
              —
              
              $15,333
                  (1)
              
              
              —
              
              
              —
              
              
              —
              
              $15,333Michael
                  Cahr
              
              
              —
              
              
              —
              
              $15,333(1)
              
              
              —
              
              
              —
              
              
              —
              
              $15,333Gary
                  Jamison (2)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Robert
                  R. Rowbal (3)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
  (1)
        The
        amounts in column (d) reflect the dollar amount recognized for financial
        statement reporting purposes for the fiscal year ended December 31, 2006,
        in
        accordance with SFAS 123(R) of awards of stock options and thus include amounts
        from awards granted in and prior to 2006. Assumptions used in the calculation
        of
        this amount are included in Note B[10] of our audited financial statements
        for
        the fiscal year ended December 31, 2006 included in *Part
        II - Item 7. Financial Statements* of this
        Annual Report on Form 10-KSB [and in Note B[10] of our audited financial
        statements for the year ended December 31, 2005 included in our Annual Report
        on
        Form 10-KSB filed with the SEC on March 31, 2006] As of December 31, 2006,
        each
        Director had the following number of options outstanding: David I. Portman
        -
        85,000; and Michael Cahr - 80,000.
 
 (2)
        Mr.
        Jamison resigned as a director on September 12, 2006. Mr. Jamison was elected
        to
        our Board of Directors pursuant to the Amended and Restated Investor Rights
        Agreement between us and Hormel Health Labs, LLC as the holder of all of
        our
        outstanding Series A Preferred Stock. That agreement gave the holders of
        the
        Series A Preferred Stock the right to designate an individual to be nominated
        to
        our Board, provided that such designee would be considered an independent
        director. Mr. Jamison resigned from our Board in connection with a change
        in his
        area of responsibility within Hormel.
 
 (3)
        Mr.
        Rowbal was elected as director on September 25, 2006 by our Board of Directors.
        Mr. Rowbal is Business Unit Controller for the Specialty Foods Group of Hormel
        Foods Corporation and was elected to our Board of Director at the suggestion
        of
        Hormel Health Labs. Mr. Rowbal was not elected pursuant to any arrangement
        or
        understanding. Previously, Hormel Health Labs had the right by agreement
        to
        designate an individual to be nominated to our Board of Directors. This right
        lapsed, however, when Hormel Health Labs converted its shares of our Series
        A
        Preferred Stock to common stock. Mr. Rowbal resigned on December 7, 2006.
 
 **ITEM
                  11.**
                **SECURITY
                    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT****AND RELATED STOCKHOLDER
                    MATTERS**
 
 As
        of
        March 12, 2007, we had 13,273,098 shares
        of common stock outstanding. The following table sets forth information
        concerning the present ownership of our common stock by our directors, executive
        officers and each person known to us to be the beneficial owner of more than
        five percent of the outstanding shares of our common stock.
 
 23
  Name
                  and Address (1)
              
              Common
                  Stock (2)
                Amount
                  Beneficially Owned
              
              Common
                  Stock (2)
                Percentage
                  of ClassRobert
                  Portman (3)
                Chairman
                  of the Board and Chief Executive Officer
              
              
              3,211,051
              
              
              22.5
              %Stephen
                  P. Kuchen (4)
                Vice
                  President, Chief Financial Officer and a Director
              
              
              169,378
              
              
              1.3
              %David
                  I. Portman (5)
                Secretary
                  and a Director
              
              
              518,928
              
              
              3.9
              %Michael
                  Cahr (6)
                Director
              
              
              242,500
              
              
              1.8
              %Adam
                  Mizel (7)
                Director
              
              
              371,280
              
              
              2.8
              %Marc
                  Particelli
                Director
              
              
              54,054
              
              
              *Executive
                  Officers and Directors as a group (6 persons)
              
              
              4,567,191
              
              
              31.3
              %Matthew
                  Smith (8)
                241
                  Central Park West
                New
                  York, NY 10024
              
              
              1,081,644
              
              
              7.9
              %Diker
                  Management, LLC (9)
                745
                  Fifth Ave., Suite 1409
                New
                  York, NY 10151
              
              
              908,859
              
              
              6.8
              %
 
 *
              Less
                  than one percent
 
 (1)
              Except
                  as otherwise indicated, the address of each person named in the
                  abovetable
                  is c/o PacificHealth Laboratories, Inc., 100 Matawan Road, Suite
                  420,
                  Matawan, NJ 07747.  (2)
              Common
                  Stock which is issuable upon the exercise of a stock option which
                  is
                  presently exercisable or which becomes exercisable within sixty
                  days is
                  considered outstanding for the purpose of computing the percentage
                  ownership (x) of persons holding such options, and (y) of officers
                  and
                  directors as a group with respect to all options held by officers
                  and
                  directors.
  (3)
              Includes
                  550,000 shares issuable upon the exercise of options granted under
                  our
                  2000 Incentive Stock Option Plan (“2000 Plan”); 300,000 shares issuable
                  upon the exercise of options granted under his 2004 Employment
                  Contract
                  Amendment not under any Incentive Stock plan (“NON-ISO”); and 160,428
                  shares issuable upon the exercise of warrants issued pursuant to
                  a 2003
                  Private Placement. Does not include 200,000 shares of Common Stock
                  owned
                  by Jennifer Portman, Dr. Portman’s wife, individually and as Trustee for
                  his and her minor children, as to which Dr. Portman disclaims beneficial
                  ownership.
 
 (4)
                  Includes
                      53,334 shares issuable upon the exercise of options granted
                      under our 1995
                      Plan; 90,000 shares issuable upon the exercise of options granted
                      not
                      covered under any Plan (“NON-ISO”) and 5,348 shares issuable upon the
                      exercise of warrants issued pursuant to a 2003 Private
                      Placement.
  24
  (5)
              Includes
                  45,000 shares issuable upon the exercise of options granted under
                  our 1995
                  Plan; 15,000 shares issuable upon the exercise of options granted
                  under
                  our 2000 Plan; and 53,476 shares issuable upon the exercise of
                  warrants
                  granted pursuant to a 2003 Private
                  Placement.
 
 (6)
              Includes
                  40,000 shares issuable upon the exercise of options granted under
                  our 1995
                  Plan.
 
 (7)
              Includes
                  371,280 shares that are owned by Acquifer Opportunity Fund, L.P.,
                  of which
                  Mr. Mizel is the managing principal of the general partner. Mr.
                  Mizel
                  disclaims beneficial ownership of the shares owned by Acquifer
                  Opportunity
                  Fund, L.P. except to the extent of his pecuniary interest
                  therein.
 
 (8)
              Includes
                  318,048 shares issuable upon the exercise of warrants granted pursuant
                  to
                  a 2003 Private Placement and 127,500 shares issuable upon the exercise
                  of
                  warrants granted pursuant to consulting services pursuant to a
                  2003
                  Private Placement.
 
 (9)
              As
                  reported in a Schedule 13G filed with the SEC on February 12, 2007,
                  Diker
                  GP, LLC, a Delaware limited liability company (“Diker
                  GP”),
                  is the general partner of the Diker Value Tech Fund, LP, Diker
                  Value Tech
                  QP Fund, LP, Diker Micro-Value Fund, LP, the Diker Micro-Value
                  QP Fund,
                  LP, Diker Micro & Small Cap Fund LP, and Diker M&S Cap Master Ltd,
                  each of which is a Delaware limited partnership (collectively,
                  the “Diker
                  Funds”). As the sole general partner of the Diker Funds, Diker GP, has
                  the
                  power to vote and dispose of the shares of our common stock owned
                  by the
                  Diker Funds and, accordingly, may be deemed the beneficial owner
                  of such
                  shares. Pursuant to investment advisory agreements, Diker Management,
                  LLC,
                  a Delaware limited liability company (“Diker Management”), serves as the
                  investment manager of the Diker Funds. Accordingly, Diker Management
                  may
                  be deemed the beneficial owner of shares held by the Diker Funds.
                  Charles
                  M. Diker and Mark N. Diker are the managing members of each of
                  Diker GP
                  and Diker Management, and in that capacity direct their operations.
                  Therefore, Charles M. Diker and Mark N. Diker may be beneficial
                  owners of
                  shares beneficially owned by Diker GP and Diker Management. Diker
                  GP,
                  Diker Management, Charles M. Diker and Mark N. Diker disclaim all
                  beneficial ownership as affiliates of a Registered Investment Adviser,
                  and
                  in any case disclaim beneficial ownership except to the extent
                  of their
                  pecuniary interest in the shares.
  **Securities
        Authorized For Issuance Under Equity Compensation Plans**
 
 The
        following table sets forth information regarding our existing compensation
        plans
        and individual compensation arrangements pursuant to which our equity securities
        are authorized for issuance to employees or non-employees (such as directors,
        consultants and advisors) in exchange for consideration in the form of
        services:
 
 Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))**(a)**
              ****
              **(b)**
              ****
              **(c)**Equity
                  compensation plans approved by security holders
              
              
              957,000
              
              $
              1.58
              
              
              527,375Equity
                  compensation plans not approved by security holders
              
              
              1,145,000
              
              $
              0.76
              
              
              N/ATotal
              
              
              2,102,000
              
              $
              1.13
              
              
              527,375
 
 25
  Pursuant
        to the terms of Dr. Portman’s employment agreement with us and pursuant to Mr.
        Kuchen’s arrangement with us, each of our named executive officers hold options
        to purchase shares of our common stock. These options have not been approved
        by
        our stockholders. Specifically, Mr. Kuchen holds options to purchase 120,000
        shares of our common stock and Dr. Portman holds options to purchase an
        aggregate of 1,025,000 shares of our common stock. The terms of the options
        granted to Mr. Kuchen are similar to those of our 1995 Incentive Stock Plan.
        The
        terms of the options granted to Dr. Portman are similar to those of our 2000
        Incentive Stock Option Plan. The material terms of the 1995 Incentive Stock
        Plan
        and the 2000 Incentive Stock Option Plan are described in Note I to
        our
        audited financial statements for the fiscal year ended December 31, 2006
        included in “Part II - Item 7, Financial Statements” of this Annual Report on
        Form 10-KSB. For information about the vesting schedule and exercise prices
        of
        these options, see the entries corresponding to footnotes (1), (2), (4) and
        (5)
        in the above table captioned “Outstanding Equity Awards at Fiscal
        Year-End.”
 
 **ITEM
                12.**
              **CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS****AND DIRECTOR INDEPENDENCE**
 
 **Related
        Transactions**
 
 During
        the last two fiscal years, we have not entered into any material transactions
        or
        series of transactions which, in the aggregate, would be considered material
        in
        which any officer, director or beneficial owner of 5% or more of any class
        of
        our capital stock, or any immediate family member of any of the preceding
        persons, had a direct or indirect material interest, nor are any such
        transactions presently proposed, except as follows:
 
 (a)  On
        January 12, 2005, six of the directors then serving on our Board of Directors
        loaned us an aggregate amount of $60,000, which amount was intended to be
        a
        bridge loan pending financing. This amount was repaid with the proceeds of
        the
        sale of preferred stock described below.
 
 (b)  On
        January 28, 2005, we entered into a Series A Preferred Stock Purchase Agreement
        and related agreements with Hormel Health Labs, LLC pursuant to which we
        issued
        and sold 90,909 shares of Series A Preferred Stock for an aggregate purchase
        price of $1,000,000 or $11.00 per share. The shares of Series A Preferred
        Stock
        issued to Hormel were convertible into an aggregate 909,091 shares of common
        stock, subject to adjustment. In connection with the Series A Stock Purchase
        Agreement, we entered into an Investors Rights Agreement with Hormel on the
        same
        date. Under the Investors Rights Agreement, we agreed, upon request by the
        holders of the Series A Preferred Stock, and subject to customary terms and
        conditions, to file a registration statement with the SEC registering for
        resale
        the shares of common stock issuable upon conversion of the Series A Preferred
        Stock. Under the Investors Rights Agreement, we also agreed to include the
        common stock issuable upon conversion of the Series A Preferred Stock in
        any
        other registration statement we filed with the SEC. As long as at least 50%
        of
        the original shares of the Series A Preferred Stock remained outstanding,
        the
        holders had the right to designate an individual to be nominated to our Board
        of
        Directors, provided that such designee would be considered an independent
        director under the Exchange Act. We and Hormel later amended and restated
        the
        Investors Rights Agreement in connection with Hormel’s $500,000 loan to us in
        exchange for our secured convertible promissory note. *See* Item
        12(d) below. Also in connection with the Series A Preferred Stock Purchase
        Agreement, we entered into a Right of First Refusal and Co-Sale Agreement
        with
        Hormel and Dr. Robert Portman, the Chairman of our Board of Directors and
        Chief
        Executive Officer. Under this agreement, we and Hormel had the right of first
        refusal to purchase shares of our common stock, which were held by Dr. Portman
        and which he wished to sell, at the price and terms offered by a third party.
        In
        addition, if the right of first refusal was not exercised in connection with
        any
        sale by Dr. Portman, Hormel would have the right to require a portion of
        its
        shares to be included with Dr. Portman’s sale to a third party. Certain sales by
        Dr. Portman were exempt from these restrictions, including public sales by
        Dr.
        Portman pursuant to Rule 144. We terminated the Investors Rights Agreement
        and
        the Co-Sale Agreement in January 2007. *See* Item
        12(f) below.
 
 (c)  On
        January 28, 2005, we entered into an Exclusive Custom Manufacturing Agreement
        with an affiliate of Hormel. The agreement provides for the exclusive
        manufacturing and processing of our powered sports drinks at fixed prices.
        The
        initial term of the agreement is one year. This was extended to two years
        under
        a new Securities Purchase Agreement. (See Item 12(d) below.)
  26
 
 (d)  On
        August
        24, 2005, we entered into a Securities Purchase Agreement with Hormel. Pursuant
        to the Securities Purchase Agreement, Hormel loaned us the principal amount
        of
        $500,000 in exchange for our secured convertible promissory note, which amount
        accrued interest at a rate of 8% per annum. The outstanding principal balance
        under the note and any accrued but unpaid interest thereon was due and payable
        on August 24, 2007 to the extent that Hormel had not exercised certain
        conversion rights under the note. On February 22, 2006, we repaid the principal
        and accrued interest on the note in full.
 
 (e)  On
        February 22, 2006, we sold to Mott’s LLP the patents, trademarks, web sites and
        other intellectual property related to our ACCELERADE® and ENDUROX® sports
        nutrition product lines, and we entered into a license agreement with Mott’s
        that gives us the exclusive, royalty free right to continue to sell these
        products in powder, gel and pill form. In connection with these transactions,
        Dr. Robert Portman, our Chairman, CEO, President and Chief Scientific Officer,
        entered into a Consulting, License and Non-Competition Agreement for a period
        ending on the later of the second anniversary of launch of a product by Mott’s
        or February 22, 2009. Under the consulting agreement, Dr. Portman will consult
        with Mott’s with respect to research, development, enhancement, testing,
        marketing and sale of products related to the transferred intellectual property.
        Dr. Portman will not receive any compensation for these services, other than
        for
        personal appearances at certain speaking engagements and media opportunities.
        Dr. Portman is significantly limited in his ability to engage in the research,
        development, testing, marketing, sale or distribution of sports drinks, except
        with respect to our activities under the License Agreement or on behalf of
        Mott’s. Under the consulting agreement, Dr. Portman has licensed, for no
        additional compensation, the non-exclusive right to use his name, in connection
        with the packaging, marketing and sale of any products by Mott’s under the
        ACCELERADE and ENDUROX brands. In the license agreement between the company
        and
        Mott’s, we granted Mott’s similar rights to use the company’s name. The breach
        of certain covenants by Dr. Portman in the consulting agreement may give
        Mott’s
        the right to terminate the company’s rights under the license agreement or the
        royalty payments under the asset purchase agreement.
 
 (f)  Effective
        January 5, 2007, we terminated the amended and restated Investors Rights
        Agreement that we initially entered in with Hormel on January 28, 2005.
        ( *See* Item
        12(b) above.) The other party to this transaction was Diamond Crystal Sales,
        LLC, which acted in its capacity as successor to Hormel following Hormel’s
        merger with and into Diamond effective October 31, 2006. In addition, effective
        as of January 5, 2007, we, Diamond and Dr. Robert Portman, our Chief Executive
        Officer, President, Chief Scientific Officer and Chairman of the Board,
        terminated the Right of First Refusal and Co-Sale Agreement into which we,
        Hormel and Dr. Portman had previously entered on January 28, 2005. ( *See* Item
        12(b) above.) The termination of the Investors Rights Agreement and the Co-Sale
        Agreement occurred in connection with Diamond’s sale of the 909,091 shares of
        our common shares previously held by Hormel in a private transaction to certain
        purchasers effective January 5, 2007. Hormel had acquired the 909,091 shares
        of
        our common stock upon its conversion of the 90,909 shares of our Series A
        Convertible Preferred Stock that it purchased pursuant to the Series A Preferred
        Stock Purchase Agreement. ( *See* Item
        12(b) above.) Upon the closing of Diamond’s sale of the common stock, the
        Investor Rights Agreement and the Co-Sale Agreement, and all rights, duties,
        obligations and liabilities of the parties under the agreements, terminated.
        This included termination of any liability for breach or non-fulfillment
        of
        either agreement prior to the sale of the common stock. The purchasers of
        the
        shares of common stock sold by Diamond included Dr. Robert Portman, David
        Portman and Michael Cahr, each of whom purchased 100,000 shares at $0.95
        per
        share. Messrs. The purchasers also included the Aquifer Opportunity Fund
        of
        which Adam Mizel, a new Director, is the Managing Principal. At the time
        of the
        transaction, Mr. Mizel was not yet one of our Directors.
 
 **Director
        Independence**
 
 During
        2006, the following members of our Board of Directors were independent under
        the
        relevant Marketplace Rules of The NASDAQ Stock Market LLC: Michael Cahr,
        Gary
        Jamison and Robert R. Rowbal. During 2006, Mr. Cahr served on the Audit
        Committee, the Compensation Committee and the Nominating Committee. During
        2006
        until his resignation from the Board of Directors, Mr. Jamison served on
        the
        Audit Committee and the Nominating Committee. Messrs. Cahr and Jamison satisfied
        the criteria set forth under the Marketplace Rules of The NASDAQ Stock Market
        LLC relating to the independence standards for members of the Audit Committee.
        The Board of Directors did not consider any transaction, relationship or
        arrangement not otherwise disclosed above in this *Item
        12* under
        the heading *Related
        Transactions* in
        determining the independence of Messrs. Cahr, Jamison or Rowbal.
  27
 
 **ITEM
                13.**
              **EXHIBITS**
 
 (a)  A
        list of
        the exhibits filed as a part of this report is set forth in the Exhibit Index
        starting after page 29 hereof.
 
 **ITEM
                14.**
              **PRINCIPAL
                  ACCOUNTANTS’ FEES AND
                  SERVICES**
 
 Eisner
        LLP served as our independent auditors through June 17, 2005. Weiser LLP
        served
        as our independent auditors for the balance of the year ended December 31,
        2005
        and for the year ended December 31, 2006. We have been billed the fees set
        forth
        below in connection with services rendered by the independent auditors to
        us:
 
 **Fee
                  Category**
              ****
              **Fiscal
                  2006**
              ****
              **Fiscal
                  2005**Audit
                  Fees1
              
              $
              109,575
              
              $
              85,062Audit-Related
                  Fees2
              
              $
              -
                  0 -
              
              $
              -
                  0 -Tax
                  Fees3
              
              $
              6,500
              
              $
              7,000All
                  Other Fees4
              
              $
              16,500
              
              $
              6,000TOTAL
              
              $
              132,575
              
              $
              98,062
 
 1Audit
        fees consisted of fees for the audit of our annual financial statements and
        review of quarterly financial statements as well as services normally provided
        in connection with statutory and regulatory filings or engagements, comfort
        letters, consents and assistance with and review of company documents filed
        with
        the SEC.
 
 2 Audit-related
        fees consisted of fees for assurance and related services, including primarily
        employee benefit plan audits, due diligence related to acquisitions, accounting
        consultations in connection with acquisitions, consultation concerning financial
        accounting and reporting standards and consultation concerning matters related
        to Section 404 of the Sarbanes Oxley Act of 2002.
 
 3 Tax
        fees
        consisted primarily of fees for tax compliance, tax advice and tax planning
        services.
 
 4 Other
        fees consisted of prior auditors consents in conjunction with 1933 Act
        filings.
 
 **Policy
        for Pre-Approval of Audit and Non-Audit Services**
 
 The
        Audit
        Committee’s policy is to pre-approve all audit services and all non-audit
        services that our independent auditor is permitted to perform for us under
        applicable federal securities regulations. As permitted by the applicable
        regulations, the Audit Committee’s policy utilizes a combination of specific
        pre-approval on a case-by-case basis of individual engagements of the
        independent auditor and general pre-approval of certain categories of
        engagements up to predetermined dollar thresholds that are reviewed annually
        by
        the Audit Committee. Specific pre-approval is mandatory for the annual financial
        statement audit engagement, among others.
 
 The
        pre-approval policy was implemented effective as of March 16, 2004. All
        engagements of the independent auditor to perform any audit services and
        non-audit services since that date have been pre-approved by the Audit Committee
        in accordance with the pre-approval policy. The policy has not been waived
        in
        any instance. All engagements of the independent auditor to perform any audit
        services and non-audit services prior to the date the pre-approval policy
        was
        implemented were approved by the Audit Committee in accordance its normal
        functions.
 
 **SUPPLEMENTAL
        INFORMATION**
 
 We
        have
        not sent an annual report or proxy statement to security holders in respect
        of
        the fiscal year ending December 31, 2006. Such report and proxy statement
        will
        be furnished to security holders in connection with our Annual Meeting scheduled
        to be held in the second quarter of 2007. Copies of such material will be
        furnished to the Commission when it is sent to security holders.
 
 28
  **SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
 
 PacificHealth
        Laboratories, Inc.
 By:
/s/
                Robert PortmanRobert
                  Portman, President and Chief Executive
                  OfficerDate:
                  March 12, 2007
 
 In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
 
 /s/
                  Robert Portman
              
              Chairman
                  of the Board and
              
              March
                  12, 2007Robert
                  Portman
              
              Chief
                  Executive Officer (Principal Executive Officer)/s/
                  Stephen P. Kuchen
              
              Director,
                  Principal
              
              March
                  12, 2007Stephen
                  P. Kuchen
              
              Financial
                  and Accounting Officer,
                  Secretary/s/
                  David I. Portman
              
              Director
              
              March
                  12, 2007David
                  I. Portman/s/
                  Michael Cahr
              
              Director
              
              March
                  12, 2007Michael
                  Cahr/s/
                  Adam Mizel
              
              Director
              
              March
                  12, 2007Adam
                  Mizel/s/
                  Marc Particelli
              
              Director
              
              March
                  12, 2007Marc
                  Particelli
  29
  **EXHIBIT
        INDEX**
 
 Exhibit
                  No.
              
              
              
              Description
              
              Incorporated
                  by Reference3.1
              
              —
              
              Certificate
                  of Incorporation of PacificHealth Laboratories, Inc. and all amendments
                  thereto
              
              A3.2
              
              —
              
              Amended
                  and Restated Bylaws of PacificHealth Laboratories, Inc.
              
              C3.3
              
              —
              
              Certificate
                  of Amendment of Certificate of Incorporation of PacificHealth
                  Laboratories, Inc.
              
              H3.4
              
              
              
              Certificate
                  of Designations For Series A Preferred Stock
              
              I4.1
              
              —
              
              Specimen
                  Common Stock Certificate
              
              C4.2
              
              —
              
              Stock
                  Purchase Agreement dated June 1, 2001 between Pacific Health
                  Laboratories, Inc. and Glaxo Wellcome International B.V.
              
              E10.1†
              
              —
              
              Incentive
                  Stock Option Plan of 1995
              
              A10.2
              
              —
              
              Strategic
                  Alliance Agreement between the Company and the Institute of Nutrition
                  and
                  Food Hygiene
              
              A10.3
              
              —
              
              Exclusive
                  Licensing Agreement between the Company and the INFH
              
              A10.4
              
              —
              
              Shareholders
                  Agreement
              
              A10.5†
              
              —
              
              2000
                  Incentive Stock Option Plan
              
              D10.6†
              
              
              
              Employment
                  Extension Agreement between PacificHealth Laboratories, Inc. and
                  Robert
                  Portman effective September 1, 2004, executed February 28,
                  2006
              
              J10.7
              
              
              
              Exclusive
                  Custom Manufacturing Agreement dated January 28, 2005 between
                  PacificHealth Laboratories, Inc. and an affiliate of Hormel Health
                  Labs,
                  LLC (redacted, subject to request for confidential
                  treatment).
              
              K10.8
              
              
              
              Asset
                  Purchase Agreement dated February 22, 2006 between PacificHealth
                  Laboratories, Inc. and Mott’s LLP (redacted, subject to request for
                  confidential treatment)
              
              L10.9
              
              
              
              License
                  Agreement dated February 22, 2006 between PacificHealth Laboratories,
                  Inc.
                  and Mott’s LLP (redacted, subject to request for confidential
                  treatment)
              
              L10.10
              
              
              
              Consulting,
                  License and Noncompetition Agreement dated February 22, 2006 among
                  PacificHealth Laboratories, Inc., Mott’s LLP, and Robert Portman
                  (redacted, subject to request for confidential treatment)
              
              L
  30
  10.11†
              
              
              
              Option
                  Certificate for grant to Robert Portman
              
              M10.12†
              
              
              
              Option
                  Certificate for grant to Stephen Kuchen under the PacificHealth
                  Laboratories, Inc. 1995 Incentive Stock Option Plan.
              
              M10.13†
              
              
              
              Summary
                  of Compensation for Executive Officers of PacificHealth Laboratories,
                  Inc.
              
              M23.1
              
              —
              
              Consent
                  of Weiser LLP
              
              *31.1
              
              —
              
              Rule
                  13a-14(a) Certification of Chief Executive Officer.
              
              *31.2
              
              —
              
              Rule
                  13a-14(a) Certification of Chief Financial Officer.
              
              *32
              
              —
              
              Certifications
                  of Chief Executive Officer and Chief Financial Officer pursuant
                  to Section
                  906 of the Sarbanes-Oxley Act of 2002.
              
              *
 
 *
                Filed
                    herewith
 †
              Management
                  contract or management compensatory plan or arrangement.
 
 A
              Filed
                  with Registration Statement on Form SB-2 (Registration No. 333-36379)
                  (the
                  “1997 SB-2”) on September 25, 1997.
 
 B
              Filed
                  with Amendment No. 1 to the 1997 SB-2 on October 23,
                  1997.
 
 C
              Filed
                  with Amendment No. 3 to the 1997 SB-2 on December 17,
                  1997.
 
 D
              Filed
                  with Definitive Proxy Statement (Schedule 14A) for annual meeting
                  held on
                  August 16, 2000, filed on July 11,
                  2000.
 
 E
              Filed
                  with Current Report on Form 8-K dated June 1, 2001, filed on
                  June 14, 2001.
 
 F
              Filed
                  with Annual Report on Form 10-KSB for the year ended December 31,
                  2001.
 
 G
              Filed
                  with Amendment to Current Report on Form 8-K dated June 1, 2001,
                  filed July 5, 2001.
 
 H
              Filed
                  with Annual Report on Form 10-KSB for the year ended December 31,
                  2002.
 
 I
              Filed
                  as Exhibit 3.1 to Current Report on Form 8-K, dated January 24,
                  2005,
                  filed on January 28, 2005.
 
 J
              Filed
                  as Exhibit 10.1 to Current Report on Form 8-K, dated and filed
                  on
                  September 9, 2004.
 
 K
              Filed
                  with Annual Report on Form 10-KSB for the year ended December 31,
                  2004.
 
 L
              Filed
                  with Annual Report on Form 10-KSB for the year ended December 31,
                  2005.
 
 M
              Filed
                  as Exhibit to Current Report on Form 8-K, dated December 13, 2006
                  and
                  filed on December 19,2006.
 
 Note:
        In
        the case of incorporation by reference to documents filed by the Registrant
        under the Exchange Act, the Registrant’s file number under the Exchange Act is
        0-23495.
   31
 **PACIFICHEALTH
            LABORATORIES, INC.**
 
 **FINANCIAL
            STATEMENTS**
 
 **DECEMBER
            31, 2006 and 2005**
     
  **PACIFICHEALTH
            LABORATORIES, INC.**
 
 **Contents**
 
 **Page****Financial
                      Statements**Report
                      of independent registered public accounting
                      firm
                  F-1Balance
                      sheets as of December 31, 2006 and
                      2005
                  F-2Statements
                      of operations for the years ended December 31,
                      2006 and 2005
                  F-3Statements
                      of changes in stockholders’ equity for the years
                      ended December 31, 2006 and 2005
                  F-4Statements
                      of cash flows for the years ended December 31,
                      2006 and 2005
                  F-5Notes
                      to financial statements
                  F-6
  
  **REPORT
            OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
            FIRM**
 
 To
            the
            Board of Directors and
 Stockholders
            of PacificHealth Laboratories, Inc.
 
 We
            have
            audited the accompanying balance sheets of PacificHealth Laboratories,
            Inc. as
            of December 31, 2006 and 2005 and the related statements of operations,
            changes
            in stockholders’ equity and cash flows for the years then ended. These financial
            statements are the responsibility of the Company’s management. Our
            responsibility is to express an opinion on these financial statements
            based on
            our audits.
 
 We
            conducted our audits in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audits to obtain reasonable assurance about whether the
            financial statements are free of material misstatement. An audit includes
            examining, on a test basis, evidence supporting the amounts and disclosures
            in
            the financial statements. An audit also includes assessing the accounting
            principles used and significant estimates made by management, as well
            as
            evaluating the overall financial statement presentation. We believe that
            our
            audits provide a reasonable basis for our opinion.
 
 In
            our
            opinion, the financial statements referred to above present fairly, in
            all
            material respects, the financial position of PacificHealth Laboratories,
            Inc. as
            of December 31, 2006 and 2005, and the results of its operations and
            its cash
            flows for the years then ended in conformity with U.S. generally accepted
            accounting principles.
 
 Weiser
            LLP
 New
            York,
            New York
 March
            12,
            2007
  F-1
 **PACIFICHEALTH
              LABORATORIES, INC.**
 
 **Balance
            Sheets**
 
 **December
                      31,****2006**
                  
                  **2005****ASSETS**Current
                      assets:Cash
                      and cash equivalents
                  
                  **$**
                  **2,564,038**
                  
                  $
                  138,487Accounts
                      receivable, net of allowances of $31,000 and $19,000,
                      respectively
                  
                  
                  **502,234**
                  
                  
                  187,835Inventories
                      (including consigned inventory of approximately $97,000 and
                    $162,000,
                      respectively)
                  
                  
                  **1,913,275**
                  
                  
                  1,309,779Prepaid
                      expenses
                  
                  
                  **144,059**
                  
                  
                  119,002Deferred
                      tax asset
                  
                  
                  **—**
                  
                  
                  1,278,000Total
                      current assets
                  
                  
                  **5,123,606**
                  
                  
                  3,033,103Property
                      and equipment, net
                  
                  
                  **74,163**
                  
                  
                  65,357Deposits
                  
                  
                  **10,895**
                  
                  
                  20,393**TOTAL
                      ASSETS**
                  
                  **$**
                  **5,208,664**
                  
                  $
                  3,118,853**LIABILITIES**Current
                      liabilities:Notes
                      payable
                  
                  **$**
                  **44,327**
                  
                  $
                  129,944Accounts
                      payable and accrued expenses
                  
                  
                  **960,757**
                  
                  
                  1,546,958Deferred
                      revenue
                  
                  
                  **244,197**
                  
                  
                  369,068**1,249,281**
                  
                  
                  2,045,970Long-term
                      liabilities:Convertible
                      notes payable - subordinated
                  
                  
                  **—**
                  
                  
                  500,000Commitments**STOCKHOLDERS’
                      EQUITY**Preferred
                      stock:Series
                      A, convertible, no par value; 90,909 shares authorized;0
                      shares issued and outstanding at December 31, 2006 and90,909
                      issued and outstanding at December 31, 2005
                  
                  
                  **—**
                  
                  
                  966,387Common
                      stock, $0.0025 par value, authorized 50,000,000 shares;issued
                      and outstanding 12,776,690 shares at December 31, 2006 and10,267,045
                      shares at December 31, 2005
                  
                  
                  **31,942**
                  
                  
                  25,667Additional
                      paid-in capital
                  
                  
                  **17,867,945**
                  
                  
                  15,790,335Accumulated
                      deficit
                  
                  
                  **(13,940,504**
                  **)**
                  
                  (16,209,506
                  )**3,959,383**
                  
                  
                  572,883**TOTAL
                      LIABILITIES AND STOCKHOLDERS’ EQUITY**
                  
                  **$**
                  **5,208,664**
                  
                  $
                  3,118,853
 
 *See
              notes to financial statements*
 F-2
 **PACIFICHEALTH
          LABORATORIES, INC.**
 
 **Statements
          of Operations**
 
 **Years
                        Ended**
                      **December
                        31,****2006**
                
                **2005**Revenue:Net
                    product sales
                
                **$**
                **6,209,846**
                
                $
                5,444,558Cost
                    of goods sold:Product
                    sales
                
                
                **3,472,955**
                
                
                3,409,664Write-down
                    of inventory
                
                
                **—**
                
                
                93,255**3,472,955**
                
                
                3,502,919Gross
                    profit
                
                
                **2,736,891**
                
                
                1,941,639Operating
                    expenses:Selling,
                    general and administrative
                
                
                **2,917,450**
                
                
                3,721,567Research
                    and development
                
                
                **196,020**
                
                
                195,242Depreciation
                
                
                **50,905**
                
                
                64,638**3,164,375**
                
                
                3,981,447Loss
                    before other income (expense) and income taxes
                
                
                **(427,484**
                **)**
                
                (2,039,808
                )Other
                    income (expense):Gain
                    on sale of patents/technology, net of expenses of $90,795
                
                
                **3,909,205**
                
                
                —Interest
                    income
                
                
                **96,697**
                
                
                4,456Interest
                    expense
                
                
                **(31,416**
                **)**
                
                (102,134
                )**3,974,486**
                
                
                (97,678
                )Income
                    (loss) before income taxes
                
                
                **3,547,002**
                
                
                (2,137,486
                )Provision
                    (benefit) for income taxes
                
                
                **1,278,000**
                
                
                (1,503,410
                )Net
                    income (loss)
                
                
                **2,269,002**
                
                
                (634,076
                )Less
                    preferred dividends
                
                
                **(10,425**
                **)**
                
                (18,334
                )**Net
                    income (loss) applicable to common stockholders**
                
                **$**
                **2,258,577**
                
                $
                (652,410
                )**Net
                    income (loss) per common share - basic**
                
                **$**
                **0.19**
                
                $
                (0.06
                )**Net
                    income (loss) per common share - diluted**
                
                **$**
                **0.17**
                
                $
                (0.06
                )**Weighted
                    average shares outstanding - basic**
                
                
                **11,906,777**
                
                
                10,242,141**Weighted
                    average shares outstanding - diluted**
                
                
                **13,397,154**
                
                
                10,242,141
 
 *See
          notes to financial statements*
 
 F-3
 
  **PACIFICHEALTH
          LABORATORIES, INC.**
 
 **Statements
          of Changes in Stockholders’
Equity**
 **Years
          Ended December 31, 2006 and 2005**
  **Preferred
                    Stock**
                
                **Common
                    Stock**
                
                **Additional**
                  **Paid
                      In**
                
                **Accumulated****Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Capital**
                
                **Deficit**
                
                **Total****Balance,
                    January 1, 2005**
                
                
                
                
                
                
                
                
                10,237,045
                
                $
                25,592
                
                $
                15,778,865
                
                $
                (15,557,096
                )
                $
                247,361Fair
                    value of stock options issued to non-employees
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,945
                
                
                
                
                
                4,945Fair
                    value of stock issued to non-employees
                
                
                
                
                
                
                
                
                30,000
                
                
                75
                
                
                6,525
                
                
                
                
                
                6,600Preferred
                    stock issued
                
                
                90,909
                
                $
                1,000,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,000,000Issuance
                    costs related to preferred stock issuance
                
                
                
                
                
                (51,947
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (51,947
                )Accrued
                    dividends on preferred stock
                
                
                
                
                
                18,334
                
                
                
                
                
                
                
                
                
                
                
                (18,334
                )
                
                —Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (634,076
                )
                
                (634,076
                )**Balance,
                    December 31, 2005**
                
                
                **90,909**
                
                
                **966,387**
                
                
                **10,267,045**
                
                
                **25,667**
                
                
                **15,790,335**
                
                
                **(16,209,506**
                **)**
                
                **572,883**Fair
                    value of stock options issued
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                189,880
                
                
                
                
                
                189,880Preferred
                    stock converted into common stock
                
                
                (90,909
                )
                
                (966,387
                )
                
                909,091
                
                
                2,273
                
                
                964,114
                
                
                
                
                
                —Stock
                    options/warrants exercised
                
                
                
                
                
                
                
                
                1,600,554
                
                
                4,002
                
                
                923,616
                
                
                
                
                
                927,618Net
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,269,002
                
                
                2,269,002**Balance,
                    December 31, 2006**
                
                
                **—**
                
                **$**
                **—**
                
                
                **12,776,690**
                
                **$**
                **31,942**
                
                **$**
                **17,867,945**
                
                **$**
                **(13,940,504**
                **)**
                **$**
                **3,959,383**
 
 *See
          notes to financial statements*
 
 F-4
  **PACIFICHEALTH
            LABORATORIES, INC.**
 **Statements
          of Cash Flows**
 
 **Years
                    Ended December 31,****2006**
                
                **2005****Cash
                    flows from operating activities:**Net
                    income (loss)
                
                **$**
                **2,269,002**
                
                $
                (634,076
                )Adjustments
                    to reconcile net income (loss) to net cash used in operating
                    activities:Deferred
                    tax benefit
                
                
                **1,278,000**
                
                
                (1,278,000
                )Depreciation
                
                
                **50,905**
                
                
                64,638Allowance
                    for doubtful accounts
                
                
                **12,000**
                
                
                12,000Equity
                    instrument-based consulting expense
                
                
                **189,880**
                
                
                11,545Write-off
                    of inventory
                
                
                **—**
                
                
                93,255Gain
                    on sale of patents/technology, net of expenses of $90,795
                
                
                **(3,909,205**
                **)**
                
                —Changes
                    in:Accounts
                    receivable
                
                
                **(326,399**
                **)**
                
                230,745Prepaid
                    expenses
                
                
                **(25,057**
                **)**
                
                96,089Inventories
                
                
                **(603,496**
                **)**
                
                357,030Deposits
                
                
                **9,498**
                
                
                14,003Accounts
                    payable and accrued expenses
                
                
                **(586,201**
                **)**
                
                (33,136
                )Deferred
                    revenue
                
                
                **(124,871**
                **)**
                
                (6,932
                )Net
                    cash used in operating activities
                
                
                **(1,765,944**
                **)**
                
                (1,072,839
                )**Cash
                    flows from investing activities:**Purchase
                    of property and equipment
                
                
                **(59,711**
                **)**
                
                (18,722
                )Proceeds
                    from sale of patents and technology, net of expenses of
                    $90,795
                
                
                **3,909,205**
                
                
                —Net
                    cash provided by (used in) investing activities
                
                
                **3,849,494**
                
                
                (18,722
                )**Cash
                    flows from financing activities:**Issuance
                    of preferred stock
                
                
                **—**
                
                
                1,000,000Fees
                    in connection with issuance of preferred stock
                
                
                **—**
                
                
                (51,947
                )Proceeds
                    from common stock options/warrants exercised
                
                
                **927,618**
                
                
                —Proceeds
                    from issuance of convertible notes payable
                
                
                **—**
                
                
                500,000Repayments
                    of convertible notes payable
                
                
                **(500,000**
                **)**
                
                —Proceeds
                    of note payable
                
                
                **861,200**
                
                
                5,235,927Repayment
                    of note payable
                
                
                **(946,817**
                **)**
                
                (5,479,764
                )Net
                    cash provided by financing activities
                
                
                **342,001**
                
                
                1,204,216**Net
                    increase in cash and cash equivalents**
                
                
                **2,425,551**
                
                
                112,655Cash
                    and cash equivalents at beginning of year
                
                
                **138,487**
                
                
                25,832**Cash
                    and cash equivalents at end of year**
                
                **$**
                **2,564,038**
                
                $
                138,487**Supplemental
                    disclosures of cash flow information:**Cash
                    paid for interest
                
                **$**
                **48,082**
                
                $
                85,468Cash
                    paid for income taxes
                
                **$**
                **2,609**
                
                $
                2,115Noncash
                    investing activity:**Schedule
                    of non-cash financing activity:**Conversion
                    of 90,909 shares of Series A Preferred Stock into 909,091 shares
                    of common
                    stock
                
                **$**
                **966,387**
                
                $
                —Accrued
                    dividends on preferred stock
                
                $
                —
                
                $
                18,334
 
 *See
          notes to financial statements*
 
 F-5
 
  **PACIFICHEALTH
          LABORATORIES, INC.**
 
 **Notesto
          Financial Statements**
 **December
          31, 2006 and 2005**
 
 NOTEA -
            THECOMPANYANDSIGNIFICANTACCOUNTINGPOLICIES
 
 **[1]**
                **The
                    Company**:
 
 The
          Company was incorporated in April 1995 to discover, develop, and commercialize
          nutritional products that are patentable and substantiated by well-controlled
          clinical trials conducted at leading university research centers. The Company’s
          principal areas of focus include sports performance, weight loss, and management
          of type II diabetes. The Company utilizes third-party contractors to manufacture
          all products.
 
 On
          February 22, 2006, the Company sold the trademarks, technology, and patents
          for
          its sports nutrition brands, Accelerade ® and
          Endurox ® R 4
          ® to
          Mott’s LLP (“Mott’s”). Such patents were held by the Company’s CEO, Robert
          Portman, and assigned to the Company when such patents were issued. Under
          the
          terms of the agreement, the Company received a $4 million upfront payment
          and
          will receive a royalty based on future sales for a defined period.
          Simultaneously, the Company and Mott’s entered into a License Agreement giving
          the Company the exclusive, royalty-free right to continue to sell these
          products
          in powder, gel and pill form. Consequently, the Company will continue to
          market
          its current sports nutrition products in the same manner as prior to the
          sale of
          the intellectual property assets. The Company’s CEO is required to provide
          consulting services to Mott’s on an as-needed basis not to exceed 130 hours per
          year.
 
 Under
          the
          Asset Purchase Agreement, the Company received $4,000,000 at closing and,
          if
          Mott’s launches a product using the purchased assets, the Company will receive
          royalty payments for a finite period following such launch, subject to
          an annual
          limitation on the amount of the royalty. There are no minimum royalties
          and
          there is no specific time by which Mott’s must launch a product, but the Company
          will have the option to repurchase the assets if a product is not launched
          within a time specified in the Asset Purchase Agreement.
 
 The
          Company used a portion of the cash proceeds of this transaction to repay
          $277,067 owed under our accounts receivable facility, the $500,000 Convertible
          Note with interest held by Hormel, and $611,981 owed to our exclusive contract
          manufacturer, an affiliate of Hormel.
 
 **[2]**
                **Cash
                    and cash equivalents:**
 
 The
          Company considers all highly liquid investments with original maturities
          of
          three months or less at the date of purchase to be cash
          equivalents.
 
 **[3]**
                **Allowance
                    for doubtful accounts:**
 
 Accounts
          receivable consist of trade receivables recorded at original invoice amount,
          less an estimated allowance for uncollectible accounts. Trade credit is
          generally extended on a short-term basis; thus trade receivables do not
          bear
          interest. Trade receivables are periodically evaluated for collectibility
          by
          considering a number of factors including the length of time an invoice
          is past
          due, the customers' credit worthiness and historical bad debt experience.
          Changes in the estimated collectibility of trade receivables are recorded
          in the
          results of operations for the period in which the estimate is revised.
          Trade
          receivables that are deemed uncollectible are offset against the allowance
          for
          uncollectible accounts. The Company generally does not require collateral
          for
          trade receivables.
 
 **[4]**
                **Inventories:**
 
 Inventories
          are recorded at the lower of cost or market using the first-in, first-out
          (“FIFO”)
          method. The
          Company determines its reserve for obsolete inventory by considering a
          number of
          factors, including product shelf life, marketability, and
          obsolescence.
 
 **[5]**
                **Property
                    and equipment:**
 
 Property
          and equipment are stated at cost and are depreciated using the straight-line
          method over their estimated useful lives ranging from 2 to 5 years.
  F-6
 
  **PACIFICHEALTH
              LABORATORIES, INC.**
 
 **Notes
              to Financial Statements**
 **December
              31, 2006 and 2005**
 **[6]**
                **Earnings
                    (loss) per share:**
 
 Basic
          earnings (loss) per common share are computed by dividing net income (loss)
          applicable to common shareholders by the weighted average number of common
          shares outstanding during the year. Diluted earnings per share gives effect
          to
          all dilutive potential common shares outstanding during the year. The dilutive
          effect of the outstanding stock warrants and options is computed using
          the
          treasury stock method. For the year ended December 31, 2006, diluted income
          per
          share did not include the effect of 779,500 options outstanding as their
          effect
          would be anti-dilutive. For
          the
          year ended December 31, 2005, diluted loss per share did not include the
          effect of 2,125,500 options outstanding and 2,271,275 warrants outstanding,
          respectively, as their effect would be anti-dilutive. In addition, for
          the year
          ended December 31, 2005, shares for convertible preferred stock (909,091)
          and
          convertible notes payable (1,960,784) are not included in weighted average
          number of common shares as their effect would be anti-dilutive.
 
 **[7]**
                **Revenue
                    recognition:**
 
 Sales
          are
          recognized when all of the following criteria are met: (1) persuasive
          evidence that an arrangement exists; (2) delivery has occurred or services
          have been rendered; (3) the seller’s price to the buyer is fixed and
          determinable; and, (4) collectibility is reasonably assured. Sales are
          recorded net of incentives paid to customers.
 
 In
          December 2003, the Company entered into a purchasing agreement with a
          significant customer for its strength training products whereby all unsold
          product is subject to a right of return provision if certain minimum levels
          of
          retail sales in a 12-month period of time from the date of initial sale
          are not
          achieved. In March 2005, its major customer informed the Company that they
          would
          discontinue carrying the Company’s strength training products. The Company and
          the customer agreed to a significant discount program in the second quarter
          of
          2005 to transfer these products to the customer with no further recourse
          to the
          Company. Given the ongoing significant business relationship between the
          Company
          and the customer, the Company discounted product to the customer even though
          it
          was not contractually obligated to so.
 
 In
          April
          2004, the Company entered into a purchasing agreement with the same significant
          customer for all other products sold to this customer whereby all unsold
          product
          is subject to return provisions identical or similar to the one disclosed
          above.
          Through December 31, 2004, in addition to the four criteria described above,
          the
          Company recognized revenue related to these products after analyzing retail
          sell-through data provided by the customer and the Company’s expectation of
          future customer sell-through trends. A new agreement was signed in April
          2005
          that increased minimum levels of retail sell-through requirements. Since
          January
          1, 2005, the Company recognizes revenue when its major customer sells through
          its products to the consumer. This change was made due to the inability
          to
          accurately estimate future returns from this customer as the Company has
          previously agreed to accept returns/discounts of product from this customer
          that
          it was not contractually obligated to do so as well as because the Company
          entered into a new purchasing agreement with this customer that increased
          certain sell-through minimums. As of December 31, 2006 and 2005, shipments
          to
          this customer amounting to $244,197 and $369,068, respectively, have been
          reflected as deferred revenue in the Company’s balance sheet.
 
 In
          the
          second quarter of 2005, we entered into an agreement with our major customer
          to
          resolve the status of certain products previously sold to this customer
          amounting to $597,781 and previously recorded as deferred revenue. In connection
          with this settlement, the customer agreed to accept $257,957 of inventory
          as
          final product purchases from us with no future obligations on behalf of
          the
          Company. As a result, $257,957 previously recorded as deferred was taken
          into
          revenue in 2005. In addition as of December 31, 2005, the Company has paid
          back
          $179,334 to this customer. The balance of $179,335, which is included in
          accounts payable and accrued expenses in the December 31, 2005 balance
          sheet,
          was repaid to the customer in equal monthly installments through June
          2006.
 
 **[8]**
                **Research
                    and development:**
 
 Costs
          of
          research and development activities are expensed as incurred.
 
 F-7
 
  **PACIFICHEALTH
              LABORATORIES, INC.**
 
 **Notes
              to Financial Statements**
 **December
              31, 2006 and 2005**
 **[9]**
                  **Advertising
                      costs:**
 
 Advertising
          costs are expensed as incurred. During 2006 and 2005, the Company recorded
          advertising expense of $104,705 and $603,376, respectively.
 
 **[10]**
                **Stock-based
                    compensation:**
 
 Effective
          January 1, 2006, the Company adopted Statement of Financial Accounting
          Standards
          (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”) which establishes
          standards for transactions in which an entity exchanges its equity instruments
          for goods or services. SFAS 123R focuses primarily on accounting for
          transactions in which an entity obtains employee services in share-based
          payment
          transactions, including issuances of stock options to employees. As a result
          of
          the adoption of SFAS 123R utilizing the Modified Prospective method, the
          Company
          recorded a charge of $176,261 in the year ended December 31, 2006, representing
          the effect on income from continuing operations, income before income taxes,
          and
          net income. The impact of the adoption of 123R was to reduce basic and
          diluted
          earnings per share by $0.02 and $0.01, respectively, in the year ended
          December
          31, 2006.
 
 For
          fiscal year 2005, the Company applied the intrinsic value method pursuant
          to APB
          Opinion No. 25 in accounting for its employee stock option plans and,
          accordingly, no compensation cost had been recognized in the financial
          statements in fiscal year 2005 for employee stock options, all of which
          had an
          exercise price equal to the fair value of the stock on the date of the
          grant.
          Had the Company determined compensation cost based on the fair value at
          the
          grant date for its stock options under SFAS No. 123R, and amortized such
          costs
          over the vesting period, the Company's net loss for the year ended December
          31,
          2005 on a pro forma basis would have been increased as indicated
          below:
 
 **Year
                        Ended**
                      **December
                        31,**
                      **2005**Reported
                    net loss applicable to common stockholders
                
                **$**
                **(652,410**
                **)**Stock-based
                    employee compensation determined underthe
                    fair value-based method
                
                
                **(143,113**
                **)**Pro
                    forma net loss
                
                **$**
                **(795,523**
                **)**Basic
                    and diluted net loss per share:As
                    reported
                
                **$**
                **(0.06**
                **)**Pro
                    forma
                
                **$**
                **(0.08**
                **)**
 
 The
          fair
          value of each option grant on the date of grant is estimated using the
          Black-Scholes option-pricing model with a volatility ranging from 102%
          to 117%
          for 2006 and from 100% to 103% for 2005, expected life of the options of
          5
          years, risk-free interest rate of approximately 5% in 2006 and 3% in 2005
          and a
          dividend yield of 0%. The weighted average fair values of options granted
          during
          the years ended December 31, 2006 and 2005 were $0.80 and $0.19,
          respectively.
 
 **[11]**
                **Segment
                    information:**
 
 The
          Company operates in one business segment: the design, development and marketing
          of dietary and nutritional supplements that enhance health and
          well-being.
  F-8
  **PACIFICHEALTH
              LABORATORIES, INC.**
 
 **Notes
              to Financial Statements**
 **December
              31, 2006 and 2005**
 **[12]**
                **Income
                    taxes:**
 
 The
          Company recognizes deferred tax liabilities and assets for the expected
          future
          tax consequences of events that have been included in the financial statements
          or tax returns. Under this method, deferred tax liabilities and assets
          are
          determined on the basis of the differences between the tax basis of assets
          and
          liabilities and their respective financial reporting amounts (“temporary
          differences”) at enacted tax rates in effect for the years in which the
          differences are expected to reverse. Any resulting deferred tax asset is
          reduced, if necessary, by a valuation allowance for any tax benefits that
          are
          not expected to be realized.
 
 **[13]**
                **Impairment
                    of long-lived assets:**
 
 Long-lived
          assets, to be held and used, are reviewed for impairment whenever events
          or
          changes in circumstances indicate that the related carrying amounts may
          not be
          recoverable using expected future undiscounted cash flows. When required,
          impairment losses on assets to be held and used are recognized based on
          the
          excess of the assets' carrying amount over their fair values as determined
          by
          selling prices for similar assets or application of other appropriate valuation
          techniques. Long-lived assets to be disposed of are reported at the lower
          of
          their carrying amounts or fair values less disposal costs.
 
 **[14]**
                **Comprehensive
                    income (loss):**
 
 The
          Company does not have any comprehensive income (loss) items at December 31,
          2006 and 2005.
 
 **[15]**
                **Recent
                    accounting pronouncements:**
 
 In
          July
          2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
          Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”), which
          clarifies the accounting and disclosure for uncertain tax positions, as
          defined.
          FIN 48 seeks to reduce the diversity in practice associated with certain
          aspects
          of the recognition and measurement related to accounting for income taxes.
          The
          Company has determined that the impact of the adoption of FIN 48 has no
          material
          effect on the results of operations or financial position.
 
 In
          September 2006, the FASB issued Statement of Financial Accounting Standards
          No.
          157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,
          establishes a framework for measuring fair value, and expands disclosure
          requirements regarding fair value measurement. Where applicable, this statement
          simplifies and codifies fair value related guidance previously issued within
          U.S. generally accepted accounting principles. SFAS 157 is effective for
          financial statements issued for fiscal years beginning after November 15,
          2007,
          and interim periods within those fiscal years. The Company is currently
          reviewing SFAS 157 to determine its impact and any material effect of its
          adoption.
 
 **[16]**
                **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
          certain estimates and assumptions that affect the reported amounts of assets,
          liabilities and disclosure of contingent assets and liabilities at the
          date of
          the financial statements and the reported amount of revenue and expenses
          during
          the reporting period. Actual results may differ from these estimates. The
          significant estimates and assumptions made by the Company are in the areas
          of
          revenue recognition, inventory obsolescence, allowance for doubtful accounts,
          and valuation allowances for deferred tax assets.
 
  F-9
 **PACIFICHEALTH
            LABORATORIES, INC.**
 
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 NOTEB -
            INVENTORIES
 
 Inventories,
          which are held at third-party warehouses and on consignment with customers,
          consist of the following and include obsolescence reserves of $545,648
          at
          December 31, 2006 and $723,972 at December 31, 2005 which are netted against
          finished goods at third party warehouse:
 
 **2006**
                
                **2005**Raw
                    materials (at contract manufacturer)
                
                **$**
                **531,995**
                
                $
                102,587Work
                    in process (at contract manufacturer)
                
                
                **77,771**
                
                
                8,847Packaging
                    supplies (at third party warehouse)
                
                
                **41,378**
                
                
                46,880Finished
                    goods (at third party warehouse)
                
                
                **1,165,188**
                
                
                989,814Finished
                    goods (on consignment)
                
                
                **96,943**
                
                
                161,651**$**
                **1,913,275**
                
                $
                1,309,779
 
 NOTEC -
            PROPERTYANDEQUIPMENT
 
 Property
          and equipment consist of the following:
 
 **2006**
                  
                  **2005**Furniture
                      and equipment
                  
                  **$**
                  **431,624**
                  
                  $
                  388,414Molds
                      and dies
                  
                  
                  **137,327**
                  
                  
                  120,826**568,951**
                  
                  
                  509,240Less
                      accumulated depreciation
                  
                  
                  **494,788**
                  
                  
                  443,883**$**
                  **74,163**
                  
                  $
                  65,357
 
 Depreciation
          expense aggregated $50,905 and $64,638 for the years ended December 31,
          2006 and 2005, respectively.
 
 NOTED -
                NOTESP **AYABLE**
 
 Included
          in notes payable at December 31, 2006 and 2005 is $-0- and $74,000 pursuant
          to the Company's $1,000,000 asset based credit facility. This facility
          was
          collateralized by substantially all of the assets of the Company. The amount
          of
          available credit was based on the value of the Company’s eligible receivables
          from time to time. Eligible receivables included those receivables that
          had
          payment terms equal to or less than 45 days or had been outstanding for
          less
          than 90 days. This credit facility bore interest at a rate of prime plus
          1.75%
          as well as a 0.75% discount rate on all advances. The receivables were
          financed
          with recourse. On February 22, 2006, with the proceeds of the sale of our
          sports
          drink assets to Mott’s, we repaid this facility in full and terminated it (see
          Note A [1] - The Company and Significant Accounting Policies).
  In
          addition, the Company has notes payable as follows:
 
 **2006**
                  
                  **2005**Installment
                      note payable to insurance finance companydue
                      in monthly installments of $7,104, includinginterest
                      at 6.50% through February 2007
                  
                  **$**
                  **7,104**
                  
                  $
                  **—**Installment
                      note payable to insurance finance companydue
                      in monthly installments of $3,722, includinginterest
                      at 7.53% through October 2007
                  
                  
                  **37,223**
                  
                  
                  **—**Installment
                      note payable to insurance finance companydue
                      in monthly installments of $8,235, includinginterest
                      at 5.57% through January 2006
                  
                  
                  **—**
                  
                  
                  8,197Installment
                      note payable to insurance finance companydue
                      in monthly installments of $4,913, includinginterest
                      at 6.50% through September 2006
                  
                  
                  **—**
                  
                  
                  47,649**$**
                  **44,327**
                  
                  **$**
                  **55,846**
 
  F-10
  **PACIFICHEALTH
            LABORATORIES, INC.**
 
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 NOTEE -
            CONVERTIBLENOTESPAYABLE
 
 On
          August
          24, 2005, the Company entered into a Securities Purchase Agreement (the
          “Purchase Agreement”) with Hormel. Pursuant to the Purchase Agreement, Hormel
          loaned the Company the principal amount of $500,000 in exchange for a Secured
          Convertible Promissory Note, which amount would accrue interest at a rate
          of 8%
          per annum (the “Note”). The outstanding principal balance under the Note and any
          accrued but unpaid interest thereon was due and payable on August 24, 2007
          to
          the extent that Hormel had not exercised certain conversion rights under
          the
          Note. In the event we defaulted, interest on the outstanding principal
          balance
          would accrue at the rate of 10% per annum. The Note was collateralized
          by a
          subordinated lien on and security interest on the Company’s assets pursuant to
          the terms of a Security Agreement between the Company and Hormel dated
          August
          24, 2005. As additional consideration for the loan, Hormel had the right
          at
          Hormel’s option to convert the outstanding principal amount and accrued and
          unpaid interest of the Note into shares of the common stock of the Company
          (the
“Common Stock”), at a price per share equal to the product of (x) the weighted
          average closing price of the Common Stock for the five trading days preceding
          the notice of conversion of the Note and (y) 0.85. Hormel agreed that it
          would
          not convert the Note if such conversion would cause Hormel, together with
          its
          affiliates, to beneficially own, on an as-converted basis, more than 9.9%
          of the
          shares of Common Stock then outstanding. However, Hormel had the ability
          to
          waive this limitation by providing written notice of such waiver to the
          Company
          with the waiver to be effective seventy-five days after receipt.  On
          February 22, 2006, the Company repaid the principal and accrued interest
          of this
          Note in full. (See Note A [1] - The Company and Significant Accounting
          Policies.)
 
 NOTEF -
            STOCKHOLDERS’EQUITY
 
 The
          total
          number of shares of all classes of stock which the Company has authority
          to
          issue is 51,000,000 shares, consisting of (a) fifty million (50,000,000)
          shares of common stock, par value $.0025 per share, and (b) one million
          (1,000,000) shares of preferred stock, par value $.01 per share. The preferred
          stock may be issued in one or more series, and may have such voting powers,
          full
          or limited, or no voting powers, and such designations and preferences
          as shall
          be stated in the resolution or resolutions providing for the issue thereof
          adopted by the Board of Directors of the Company, from time to time.
 
 On
          January 28, 2005, the Company entered into a Series A Preferred Stock Purchase
          Agreement and related agreements with Hormel HealthLabs, LLC (“Hormel”) pursuant
          to which the Company issued and sold 90,909 shares of Series A Preferred Stock
          for an aggregate purchase price of $1,000,000 or $11.00 per share. The
          Series A
          Preferred Stock issued to Hormel was convertible into an aggregate 909,091
          shares of common stock, subject to adjustment. The Series A Preferred Stock
          was
          converted on June 23, 2006.
 
 NOTEG -
            COMMITMENTS
 
 **[1]**
                **Employment
                    agreement:**
 
 The
          Company entered into an employment extension agreement on September 1,
          2004, with the CEO of the Company that provides for minimum annual compensation
          of $275,000 which expired on December 31, 2006 and renewed as of January
          1, 2007
          for minimum annual compenstion of $295,000. As of December 31, 2005, $50,000
          of
          this annual compensation was accrued and the Company paid this amount in
          2006.
          In the event of a change in control, as defined in the employment agreement,
          the
          CEO shall be paid, as additional compensation, a lump sum equal to his
          annual
          base salary in effect immediately prior to the change in control. If the
          CEO is
          terminated without cause, as defined in the employment agreement, the Company
          shall pay the CEO, at the time of termination, an amount equal to the base
          salary which would have been paid during a period beginning on the date
          of
          termination of employment and ending on the later of the scheduled termination
          date, as defined in the employment agreement, or the first anniversary
          of the
          termination date.
  F-11
 
  **PACIFICHEALTH
              LABORATORIES, INC.**
 
 **Notes
              to Financial Statements**
 **December
              31, 2006 and 2005**
  
 **[2]**
                **Lease:**
 
 The
          Company had a lease agreement for office space that was set to expire June
          2007.
          The lease provided for the rental of 5,500 square feet. This lease was
          renewed
          in November 2006 for an additional 5 years, expiring June 2012.
 
 The
          future minimum lease payments due under the lease is as follows:
  **Years
                          Ending**
                        **December
                          31,**2007
                  
                  $
                  118,1252008
                  
                  
                  140,2502009
                  
                  
                  140,2502010
                  
                  
                  143,0002011
                  
                  
                  148,5002012
                  
                  
                  75,625$
                  765,750
 Rent
          expense amounted to $136,125 and $129,965 in 2006 and 2005,
          respectively.
 
 NOTEH -
            STOCKOPTIONPLANSANDWARRANTS
 
 The
          Company has two stock option plans (the “Plans”) under which 957,000 shares of
          common stock are reserved for issuance under the Plans. In 1995, the Company
          established an incentive stock option plan (the “Plan”) in which options to
          purchase the common stock of the Company may be awarded to employees. In
          2000,
          the Company established another stock option plan to increase the number
          of
          options under the Plans.
 
 Stock
          options may be granted as either incentive stock options intended to qualify
          under Section 422 of the Internal Revenue Code of 1986, as amended (the
“Code”), or as options not qualified under Section 422 of the Code. All
          options are issued with an exercise price at or above 100% of the fair
          market
          value of the common stock on the date of grant. Incentive stock option
          plan
          awards of restricted stock are intended to qualify as deductible
          performance-based compensation under Section 162(m) of the Code. Incentive
          stock option awards of unrestricted stock are not designed to be deductible
          by
          the Company under Section 162(m). The Board of Directors determines the
          option price (not to be less than fair market value for incentive options)
          at
          the date of grant. The options have a maximum term of 5 years and outstanding
          options expire at various times through December 2011. Vesting ranges from
          immediate to over five years.
 
  F-12
 
 **PACIFICHEALTH
              LABORATORIES, INC.**
 
 **Notes
              to Financial Statements**
 **December
              31, 2006 and 2005**
 
 Stock
          option transactions for employees during 2006 and 2005 were as
          follows:
 
 **Option**
                        **Shares**
                  
                  **Vested**
                        **Shares**
                  
                  **Exercise**
                            **Price
                              Per**
                            **Common**
                            **Share**
                  
                  **Weighted**
                              **Average**
                              **Exercise
                                Price**
                              **Per
                                Share**
                              **Outstanding**Balance,
                      January 1, 2005
                  
                  
                  2,832,500
                  
                  
                  1,801,500
                  
                  $0.313
                      - $4.34
                  
                  $1.20Granted/vested
                      during the year
                  
                  
                  —
                  
                  
                  395,500
                  
                  $0.65
                      - $2.79
                  
                  $1.25Expired
                      during the year
                  
                  
                  (862,500
                  )
                  
                  (450,000
                  )
                  $0.65
                      - $3.77
                  
                  $1.33Balance,
                      December 31, 2005
                  
                  
                  1,970,000
                  
                  
                  1,747,000
                  
                  $0.313
                      - $4.34
                  
                  $1.11Granted/vested
                      during the year
                  
                  
                  913,000
                  
                  
                  193,000
                  
                  $0.20
                      - $1.13
                  
                  $0.81Exercised
                      during the year
                  
                  
                  (648,000
                  )
                  
                  (648,000
                  )
                  $0.313
                      - $1.00
                  
                  $0.46Expired
                      during the year
                  
                  
                  (223,500
                  )
                  
                  (222,500
                  )
                  $0.20
                      - $4.34
                  
                  $1.63**Balance,
                      December 31, 2006**
                  
                  
                  **2,011,500**
                  
                  
                  **1,069,500**
                  
                  **$****0.20
                      - $3.80**
                  
                  **$****1.12****Aggregate
                      Intrinsic Value, December 31, 2006**
                  
                  **$**
                  **647,655**
                  
                  **$**
                  **330,125**
  The
          market value of the Company’s common stock as of December 31, 2006 was $1.15 per
          share.
 
 As
          of
          December 31, 2006, the total fair value of non-vested awards amounted to
          $515,151. The weighted average remaining period over which such options
          are
          expected to be recognized is 2.39 years.
 
 Information
          with respect to employee stock options outstanding and employee stock options
          exercisable at December 31, 2006 is as follows:
 
 **Range
                        of**
                      **Exercise
                        Prices**
                
                **Number**
                      **Outstanding**
                
                **Weighted**
                            **Average**
                            **Remaining**
                            **Contractual**
                            **Life
                              (in Years)**
                
                **Weighted**
                          **Average**
                          **Exercise**
                          **Price**
                
                **Number**
                      **Exercisable**
                
                **Weighted**
                          **Average**
                          **Exercise**
                          **Price**$0.31
                    - $2.00
                
                
                1,678,500
                
                
                3.59
                
                $0.77
                
                
                736,500
                
                $0.73$2.01
                    - $4.00
                
                
                333,000
                
                
                0.94
                
                $2.89
                
                
                333,000
                
                $2.892,011,500
                
                
                3.15
                
                $1.12
                
                
                1,069,500
                
                $1.40
 
 In
          addition to options granted to employees under the Plans, the Company issued
          stock and stock options pursuant to contractual agreements to non-employees.
          Stock and stock options granted under these agreements are expensed when
          the
          related service or product is provided. The Company used the Black-Scholes
          method of valuing stock options to recognize an expense of $13,619 and
          $11,545
          for such stock and stock options issued in 2006 and 2005, respectively.
   F-13
 **PACIFICHEALTH
            LABORATORIES, INC.**
 
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 Stock
          option transactions for non-employees during 2006 and 2005 were as
          follows:
 **Option**
                    **Shares**
                  
                  **Vested**
                    **Shares**
                  
                  **Exercise**
                    **Price
                      Per**
                    **Common**
                    **Share**
                  
                  **Weighted**
                    **Average**
                    **Exercise
                      Price**
                    **Per
                      Share**
                    **Outstanding**Balance,
                      January 1, 2005
                  
                  
                  217,375
                  
                  
                  217,375
                  
                  $0.31
                      - $6.30
                  
                  $2.01Granted/vested
                      during the year
                  
                  
                  25,500
                  
                  
                  25,500
                  
                  $0.20
                      - $0.28
                  
                  $0.26Expired
                      during the year
                  
                  
                  (87,375
                  )
                  
                  (87,375
                  )
                  $1.06
                      - $3.50
                  
                  $2.29Balance,
                      December 31, 2005
                  
                  
                  155,500
                  
                  
                  155,500
                  
                  $0.20
                      - $6.30
                  
                  $1.57Granted/vested
                      during the year
                  
                  
                  90,500
                  
                  
                  90,500
                  
                  $0.20
                      - $1.23
                  
                  $0.23Exercised
                      during the year
                  
                  
                  (58,000
                  )
                  
                  (58,000
                  )
                  $0.20
                  
                  $0.20Expired
                      during the year
                  
                  
                  (97,500
                  )
                  
                  (97,500
                  )
                  $0.89
                      - $6.30
                  
                  $1.34**Balance,
                      December 31, 2006**
                  
                  
                  **90,500**
                  
                  
                  **90,500**
                  
                  ****$**0.20
                      - $4.88**
                  
                  **$****1.35**
 
 Information
          with respect to non-employee stock options outstanding and non-employee
          stock
          options exercisable at December 31, 2006 is as follows:
 
 **Range
                        of**
                      **Exercise
                        Prices**
                
                **Number**
                          **Outstanding**
                          **and**
                          **Exercisable**
                
                **Weighted**
                            **Average**
                            **Remaining**
                            **Contractual**
                            **Life
                              (in Years)**
                
                **Weighted**
                          **Average**
                          **Exercise**
                          **Price**$0.20
                    - $2.00
                
                
                70,000
                
                
                2.45
                
                $
                0.38$4.01
                    - $6.30
                
                
                20,500
                
                
                0.29
                
                $
                4.6790,500
                
                
                1.96
                
                $
                1.35
 
 Stock
          warrant transactions during 2006 and 2005 were as follows:
 
 ****
                    **Warrants**
                
                **Exercise**
                            **Price**
                            **Per**
                            **Common**
                            **Share**
                
                **Weighted**
                            **Average**
                            **Exercise
                              Price**
                            **Per**
                            **Common
                              Share**Balance,
                    January 1, 2005
                
                
                2,293,275
                
                $0.63
                    - $3.44
                
                $0.70Expired
                    during the year
                
                
                (22,000
                )
                $3.44
                
                $3.44Balance,
                    December 31, 2005
                
                
                2,271,275
                
                $0.63
                    - $0.88
                
                $0.67Exercised
                    during the year
                
                
                (919,565
                )
                $0.63
                    - $0.85
                
                $0.72**Balance,
                    December 31, 2006**
                
                
                **1,351,710**
                
                **$****0.63
                    - $0.88**
                
                **$****0.64**
   F-14
 **PACIFICHEALTH
          LABORATORIES, INC.**
 
 **Notes
          to Financial Statements**
 **December
          31, 2006 and 2005**
 **N** **OTE** **I - I** **NCOME** **T** **AXES**
 The
            difference between the statutory federal income tax rate on the Company’s
            pre-tax income
            (loss) and the Company’s effective income tax rate is summarized as
            follows:
  **2006**
                
                **2005****Amount**
                
                **Percent**
                
                **Amount**
                
                **Percent**U.S.
                    federal income tax provision(benefit)
                    at federal statutory rate
                
                **$**
                **1,241,450**
                
                
                **35**
                **%**
                $
                (748,120
                )
                
                35
                %Effect
                    of state taxes, net offederal
                    benefit
                
                
                **212,820**
                
                
                **6**
                **%**
                
                (128,249
                )
                
                6
                %Change
                    in valuation allowance
                
                
                **(11,000**
                **)**
                
                **0**
                **%**
                
                (597,000
                )
                
                28
                %Other
                
                
                **(165,270**
                **)**
                
                **(5**
                **%)**
                
                (30,041
                )
                
                1
                %**$**
                **1,278,000**
                
                
                **36**
                **%**
                $
                (1,503,410
                )
                
                70
                %
 
 Included
            in the other component is the utilization of net operating losses in
            excess of
            the expected amount as recorded as of December 31, 2005.
  At
          December 31, 2006, the Company has approximately $12,398,000 in federal and
          $671,000 in state net operating loss carryovers that can be used to offset
          future taxable income. The net operating loss carryforwards begin to expire
          in
          the year 2015 through the year 2026.
 
 The
          components of the Company’s deferred tax assets are as follows:
 
 **2006**
                
                
                **2005**Net
                    operating loss carryforwards
                
                **$**
                **4,380,000**
                
                $
                5,653,000Inventory
                    reserve
                
                
                **224,000**
                
                
                289,000Other
                
                
                **49,000**
                
                
                —Valuation
                    allowance
                
                
                **(4,653,000**
                **)**
                
                (4,664,000
                )Deferred
                    tax asset
                
                **$**
                **-0-**
                
                $
                1,278,000
 
 During
          2005, the Company sold $2,939,596 of its New Jersey net operating losses.
          The
          amount received from this sale was approximately $225,000.
 
 
 **N** **OTE** **J - C** **ONCENTRATIONS** **** **OF** **C** **REDIT** **R** **ISKS** **,
          M** **AJOR** **C** **USTOMERS** **,** **AND** **M** **AJOR** **V** **ENDORS**
 
 **[1]**
                **Concentrations
                    of credit risk:**
 
 Financial
          instruments, which potentially subject the Company to concentrations of
          credit
          risk, consist primarily of cash, cash equivalents and trade accounts
          receivable.
 
 The
          Company has concentrated its credit risk for cash by maintaining substantially
          all of its depository accounts in a single financial institution. Accounts
          at
          the institution are insured by the Federal Deposit Insurance Corporation
          up to
          $100,000. Uninsured balances aggregated approximately $2,500,000 at December
          31,
          2006 that exceeded the Federal Deposit Insurance Corporation (“FDIC”)
          limit. The
          financial institution has a strong credit rating, and management believes
          that
          credit risk relating to these deposits is minimal.
 
 The
          Company does not require collateral on its trade accounts receivable.
          Historically, the Company has not suffered significant losses with respect
          to
          trade accounts receivable.
 
 **[2]**
                **Fair
                    value of financial
                    instruments:**
 
 Cash,
          cash equivalents, accounts receivable, accounts payable and notes payable
          approximate their fair values due to the short-term maturity of these
          instruments.
  F-15
 
  **PACIFICHEALTH
              LABORATORIES, INC.**
 
 **Notes
              to Financial Statements**
 **December
              31, 2006 and 2005**
  **[3]**
                    **Major
                          customers:**
 For
          the
          years ended December 31, the Company had revenue from two customers that
          accounted for approximately 20% and 19% in 2006 and 30% and 20% in 2005,
          of net
          revenue. Accounts receivable outstanding related to these customers at
          December 31, 2006 and 2005 were $207,235 and $0, respectively. Deferred
          revenue from one of these customers was $244,197 as of December 31, 2006
          and $369,069 as of December 31, 2005. Such amounts are included in the
          accompanying balance sheet. The loss of these customers, a significant
          reduction
          in purchase volume by these customers, or the financial difficulty of such
          customers, for any reason, could significantly reduce our revenues. We
          have no
          agreement with or commitment from either of these customers with respect
          to
          future purchases.
 
 **[4]**
                    
                    **Major
                        vendors:**
 
 Two
          suppliers accounted for approximately 54% and 18%, respectively, of total
          inventory purchases for the year ended December 31, 2006 and three suppliers
          accounted for 52%, 26%, and 13%, respectively, of total inventory purchases
          for
          the year ended December 31, 2005. At December 31, 2006, amounts due to
          two
          vendors represented approximately 25% and 20%, respectively, of accounts
          payable
          and accrued expenses. At December 31, 2005, amounts due to one vendor
          represented approximately 42% of accounts payable and accrued
          expenses.
 
 NOTEK -
            SEGMENTANDRELATEDINFORMATION
 
 At
          2006
          and 2005, the Company has one reportable segment:
 
 Dietary
          and nutritional supplements.
 
 The
          following table presents revenues by region:
 
 **2006**
                
                **2005**United
                    States
                
                **$**
                **5,751,148**
                
                $
                5,005,765Canada
                
                
                **178,556**
                
                
                201,359Other
                
                
                **280,142**
                
                
                237,434Total
                
                **$**
                **6,209,846**
                
                $
                5,444,558
 
 Product
          sales for the years ended December 31, 2006 and 2005 are net of credits of
          $216,177 and
          $499,202, respectively, for marketing promotions, customer rebates, and
          returns
          of certain products. These credits primarily relate to the sports performance
          product line.
 
 **N** **OTE** **L - R** **ELATED** **P** **ARTY** **T** **RANSACTIONS**
 
 In
          connection with the Hormel preferred stock agreement, the Company entered
          into
          an Exclusive Manufacturing Agreement with a subsidiary of Hormel. The initial
          term of the agreement was for one year commencing on January 28, 2005 and
          was
          extended until January 28, 2007 as part of the convertible note transaction.
          During the years 2006 and 2005, the Company purchased approximately $1,991,000
          and $1,194,000, respectively, of finished goods from this Hormel subsidiary.
          At
          December 31, 2006 and December 31, 2005, the Company owed this Hormel subsidiary
          approximately $195,000 and $645,000, respectively, that has been included
          on the
          balance sheet in accounts payable and accrued expenses.
  F-16
  **PACIFICHEALTH
            LABORATORIES, INC.**
 
 **Notes
            to Financial Statements**
 **December
            31, 2006 and 2005**
 **N** **OTE** **M - S** **UBSEQUENT** **E** **VENTS**
  **[1]**
                  **Common
                      Stock:**
 
 Between
          January 1, 2007 and March 12, 2007, the Company issued an additional 253,165
          shares of its common stock as a result of the exercise of options and warrants,
          resulting in proceeds of approximately $162,000.
 
 Between
          January 1, 2007 and March 12, 2007, the Company issued an additional 243,243
          shares of its common stock as a result of private sale of stock to two
          new
          directors of the Company resulting in proceeds of $450,000.
 
 F-17