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U.S. 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, 2002
Commission file number 000-33211

VITAL LIVING, INC.

(Exact name of small business issuer
as specified in its charter)

|                                                      |  |                                              
|----------------------------------------------------- |  | ---------------------------------------------
|Nevada
(State or other jurisdiction
of incorporation) |  | 88-04855
(I.R.S. Employer
Identification No.)

VITAL LIVING, INC.
5080 N. 40TH STREET, SUITE 105,
PHOENIX, ARIZONA 85018-2147
(Address of principal executive office)

Issuers telephone number: (602) 952-9909

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

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

YES [X] NO [   ]

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

State issuers revenue for the most recent fiscal year: $260,844.

As of March 27, 2003, the aggregate market value of the voting and non-voting
common stock held by non-affiliates of the issuer (based on the closing sales
price as reported by the OTC Bulletin Board) was $7,579,956 assuming all
officers and directors are deemed affiliates for this purpose).

As of March 27, 2003 the issuer had 17,842,616 shares of its common stock,
$0.001 par value, outstanding.

Transitional Small Business Disclosure Format (check one): Yes [   ] No [X]





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TABLE OF CONTENTS



|             |                                                                                                                         |  |  |  |  |  |  | 
|------------ | ----------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.     
|             | ITEM 1. DESCRIPTION OF BUSINESS                                                                                        
|             | ITEM 2. DESCRIPTION OF PROPERTIES                                                                                      
|             | ITEM 3. LEGAL PROCEEDINGS                                                                                              
|             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                            
|PART II.    
|             | ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                                       
|             | ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS                                                     
|             | ITEM 7. FINANCIAL STATEMENTS                                                                                           
|             | ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                           
|PART III    
|             | ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
|             | ITEM 10. EXECUTIVE COMPENSATION                                                                                        
|             | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                
|             | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                
|             | ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K.                                                                        
|             | ITEM 14. CONTROLS AND PROCEDURES                                                                                       
|SIGNATURES  
|Exhibit 11  
|Exhibit 23.1
|Exhibit 99.1
|Exhibit 99.2



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TABLE OF CONTENTS

|         |  |                                                                                                |  |  |    |      |  | 
|-------- |  | ---------------------------------------------------------------------------------------------- |  |  | -- | ---- |  | 
|         |  |                                                                                                |  |  |    | PAGE
|         |  |                                                                                                |  |  |    |     
|PART I  
|        
|ITEM 1.  |  | DESCRIPTION OF BUSINESS                                                                        |  |  | 3  |     
|ITEM 2.  |  | DESCRIPTION OF PROPERTY                                                                        |  |  | 20 |     
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                              |  |  | 20 |     
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |  |  | 20 |     
|        
|PART II 
|        
|ITEM 5.  |  | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                       |  |  | 20 |     
|ITEM 6.  |  | MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                                        |  |  | 23 |     
|ITEM 7.  |  | FINANCIAL STATEMENTS                                                                           |  |  | 27 |     
|ITEM 8.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE           |  |  | 27 |     
|        
|PART III
|        
|ITEM 9.  |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |  |  | 27 |     
|ITEM 10. |  | EXECUTIVE COMPENSATION                                                                         |  |  | 33 |     
|ITEM 11. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS |  |  | 36 |     
|ITEM 12. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |  |  | 37 |     
|ITEM 13. |  | EXHIBITS, LIST AND REPORTS ON FORM 8-K                                                         |  |  | 39 |     
|ITEM 14. |  | CONTROLS AND PROCEDURES                                                                        |  |  | 40 |     

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB, contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
reflect our current view with respect to future events and financial results.
Forward-looking statements usually include the verbs anticipates, believes,
estimates, expects, intends, plans, projects, understands and other
verbs suggesting uncertainty. We remind shareholders that forward-looking
statements are merely predictions and therefore are inherently subject to
uncertainties and other factors which could cause the actual results to differ
materially from the forward-looking statements. Potential factors that could
affect forward-looking statements include, among other things, our ability to
identify, produce and complete projects that are successful in the marketplace,
to arrange financing, distribution and marketing for these products on
favorable terms in various markets, and to attract and retain qualified
personnel.




PART I.




ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

We were incorporated in Nevada on January 22, 2001 under the name
Nutritional Systems, Inc. Effective May 7, 2001, we acquired substantially all
the assets of Vital Living, Inc., a Delaware corporation. After the
acquisition of the Vital Living, Inc., assets, and the subsequent name change
of Nutritional Systems, Inc. to Vital Living, Inc., pursuant to the terms of a
merger agreement, dated as of August 16, 2001, we merged with VCM Technology
Limited (VCM), a company reporting under the Securities and Exchange Act of
1934. As set forth in the merger agreement, we acquired all the outstanding
shares of common stock of VCM from its sole stockholder in an exchange for
5,062 shares of our restricted common stock. Vital Living, Inc., which was the
successor corporation in the merger, commenced reporting under the Securities
and Exchange Act of 1934 by assuming the reporting status of VCM, which in turn
provided us with the ability to file for quotation on the Over The Counter
Bulleting Board under the ticker symbol VTLV.

Our business plan is to market condition specific supplements formulated
by physicians for distribution through physicians, as an integral part of
patient treatment protocols. Specifically, we intend to market products,
including but not limited to, the medical foods category of nutritional
products in order to address the distinctive nutritional requirements of people
with particular diseases who are under medical supervision. Our strategy is to
target major health issues affecting large segments of the population, and with
our physician consultants, design and market food supplements which are
intended to be incorporated into prescribed and/or recommended health regimen
recommended by physicians, complementing and not contraindicated for existing
patient therapy. We signed a definitive agreement, effective as of August 21,
2001, with the Arizona Heart Institute (AHI). Pursuant to the definitive
agreement, AHI agreed to exclusively prescribe and/or recommend our product,
Essentum, which was developed to assist patients with cardiovascular disease
or at risk for cardiovascular disease, to their entire existing data base of
patients, approximately 150,000 patients, as well as to their new patients,
estimated to be approximately 22,000 to 25,000 per year. AHI began the limited
marketing of Essentum in August, 2002.

In November 2002, we completed the acquisition of all of the outstanding
equity of MAF BioNutritionals, LLC (MAF), a private limited liability company located
in Boonton, New Jersey , which formulates, markets and distributes
natural and organic food based preventative nutraceuticals and
therapeutic/functional food products designed for high efficacy to support
proactive human cell maintenance and rehabilitation, essential in the
prevention and treatment of disease, as well as overall optimal body
performance and metabolic function. The primary markets for MAF products are
health conscious consumers and nutritionists, chiropractors and trainers. The
MAF nutraceutical product line is marketed under the brand name Natures Dose,
which includes Anti-Inflammatory Complex, EPA Formula and Anti-Inflammatory
Complex, and Flax Formula. These products, which have patents pending,
represent all-natural and certified organic food based nutraceuticals
formulated using peer review published scientific research and clinical
experience. With respect to therapeutic/functional food products, MAFs
product line also includes Phils Bar, Phils Shake, and Alma bar. As the
result of MAFs previous acquisition of certain of the assets of Boulder
Endurance Co., Inc., (Boulder) of San Diego, CA, we also formulate and market
a certified vegan all-natural nutritional food bar in five flavors. The
addition of the Boulder Bar brand, which is marketed by three of the largest
national distribution chains and is sold in 36 of the 50 largest U. S. markets,
provides us with immediate, low-cost access to national retail distribution.

We have only a limited operating history, and our operations to date, even
after consolidating the results of MAF, have yet to generate a profit. During
the fiscal year ended December 31, 2002, we incurred a loss of
$3,949,895. We
have been hampered in our growth by working capital shortages and slower than
anticipated sales relating to the introduction of Essentum. Although revenue
from our MAF subsidiary will be helpful in
addressing our cash flow problems, MAF is not yet profitable as we continue to
invest revenue from its operations in the expansion of its own product base.
See Investment Considerations.

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BUSINESS

Introduction

Our business plan is to market condition specific supplements formulated
by physicians for distribution through physicians, as an integral part of
patient treatment protocols. Specifically, we intend to market products in the
medical foods category of nutritional products in order to address the
distinctive nutritional requirements of people with particular diseases under
medical supervision. Medical foods is defined in section 5(b) of the Orphan
Drug Act (21 U.S.C. 360ee(b)(S)) as a food which is formulated to be consumed
or administered internally under the supervision of a physician and which is
intended for the specific dietary management of a disease or condition for
which distinctive nutritional requirements, based on recognized scientific
principles, are established by medical evaluation. Our strategy is to target
major health issues affecting large segments of the population, and with our
physician partners, design and market medical food supplements which are
intended to be incorporated into a prescribed and/or recommended health regimen
recommended by physicians, complementing and not contraindicated for existing
pharmaceutical therapy. Our products do not currently require regulatory
approval.

Studies published in the Data Digest of the AARP Public Policy Institute
and the Nutrition Business Institute indicate that while American consumers
spend over $18.0 billion dollars a year on nutritional supplements, most of
that spending is self-directed and not specifically recommended by physicians.
Today, there is an increasingly persuasive body of evidence showing the
efficacy of nutritional supplements and how important they can be in promoting
better health. Our strategy is to develop optimal formulations of medical food
supplements based on the best scientific evidence available for condition
specific patient populations, so that physicians can recommend these products
to their patients with confidence that the products are evidence-based and
developed to work synergistically with their standard patient treatment
protocols.

Having medical food supplements prescribed and/or recommended by
physicians, we will be creating a new and distinct market and marketing
approach for medical food supplements. Our marketing strategy will be uniquely
distinct from current distribution patterns which largely consist of products
formulated to reach established retail price points rather than providing
functional levels of active ingredients. These products are formulated for the
general public and do not take into account condition specific diseases and may
contraindicate with physician prescribed and/or recommended pharmaceuticals.

Business Plan

Our business strategy capitalizes on the growing patient interest in and
use of nutritional supplements to augment their traditional health care
protocols. Physicians largely have been unable to respond to this trend, or to
their patients questions on the subject matter, due to the lack of education
about nutritional supplements and a lack of substantiation of nutritional
supplements safety and efficacy. We intend to provide nutritional products
that physicians can confidently recommend to their patients.

According to the Nutrition Business Journal Supplement Business Report
2001, the U.S. nutritional supplement market alone has grown from nearly $6.0
billion in 1990 to more than $18.0 billion in 2000. Including functional (or
health orientated) foods, personal care and organic foods total spending
increased to $48.2 billion. Most sales have occurred through independent
health food stores and health food chains, mail order and Internet sites and
mass-market food and drug outlets. Use of vitamins, minerals, herbs and other
supplements is at an all-time high as consumers seek nutritional products to
improve their general health, increase their longevity and enhance the overall
quality of their lives. Seventy percent of adult Americans use nutritional
supplements, with thirty four percent of the population identifying themselves
as regular consumers.

There is a substantial and growing body of evidence showing that specific
nutritional programs and properly formulated nutritional supplements have a
significant positive impact on patient health. For example, the large,
placebo-controlled, randomized GISSI Prevention trial (GISSI-Prevenzione
Investigators, 1999) demonstrated that at risk participants (i.e., patients
who have conditions such as obesity, high cholesterol or family history, which
would indicate that they have a high tendency to suffer from cardiovascular
disease) taking one gram daily of omega-3 fish oil supplements had, over a
three and one-half year period, a fourteen percent reduction in total deaths
and a seventeen percent reduction in cardiovascular deaths. Omega-3 fatty
acids are DHA & EPA (docosahexaenoic acid and eicosapentaenoic acid), which are
contained in fish oil and commonly sold as supplements. There are also
numerous supplements that have demonstrated healthful benefits in properly
designed and controlled clinical trials. Examples include:



|1. |  | Omega-3 fatty acid supplements reduce cardiovascular disease risk;
|-- |  | ------------------------------------------------------------------

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|2. |  | B vitamins for lowering elevated homocysteine and promoting cardiovascular health;                                                                                                  
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Plant sterols (phylochemeds which inhibit cholesterol formation) for lowering LDL
(1000 density lipoprotein, or so called bad cholesterol) cholesterol and total
blood lipids; and
|  
|4. |  | Niacin (or Vitamin B3) promotes healthy HDL (high density lipoprotein, or so
called good cholesterol ) cholesterol levels.                                                        

Despite such growth, one of the main areas of future growth of nutritional
supplements, and medical foods and one of the most coveted is the physician
market. The pharmaceutical model (i.e., where doctors write prescriptions
which are fulfilled by third party pharmacies) is not only the strongest and
most profitable segment treatment for drug therapies, it has also long been an
opponent of the nutrition model due to lack of knowledge and scientific
evidence.

Historically, traditional medical doctors have not embraced nutritional
supplements for three reasons. First, they have regarded them as unproven and
lacking in scientific support. Second, they have been dissatisfied by the
nutritional supplement industrys often-excessive hyperbole. Third, the
business model requiring physicians to carry inventory and to act as
salespersons has not been well received.

In the marketing and production of Essentum , we have addressed these concerns
by:



|1. |  | utilizing clinically proven ingredients in our condition-specific formulations;                                                                                           
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | assembling a panel of thought-leading physicians in cardiovascular treatment and prevention to
build consensus and endorse the creation of integrated treatment protocols;
|  
|3. |  | creating a business model similar to the established pharmaceutical industry distribution model; and                                                                      
|  
|4. |  | providing patient educational tools, logistical and fulfillment support, thereby removing the need
for physicians to stock inventory and act as salespersons.             

We also intend to provide a lifestyle program which will include a
persistence and compliance component addressing ongoing participation in the
comprehensive diet and activity program and behavior modification program. The
program will be packaged in an attractive, patient-friendly presentation that
will include an organizational planner outlining the program; a welcome message
from Edward B. Diethrich, M.D., founder of Arizona Heart Institute (AHI),
introducing the patient to the program; and collateral materials. The program
will also include, subject to an increase in our staffing, active outreach by
our staff, whereby nurse practitioners and other skilled staff will contact
participants by telephone to answer questions and provide motivational support.
It is also anticipated that an interactive website will be available for
patient questions, education and other activities that bond the patient to the
program.

Initial Product and Marketing Strategy

Our first target market is cardiovascular health. Cardiovascular disease
affects 60 million Americans and is the leading cause of death in the U.S. The
American Heart Association estimates that 100 million Americans could benefit
from improved dietary and exercise regimens to reduce their risk of heart
attack. To address this market, we signed an agreement with AHI, an affiliate
of MedCath Corporation, which is a publicly held company which engages in the
business of designing, developing and operating specialized heart hospitals in
partnership with cardiologists and cardiovascular surgeons.

Pursuant to the terms of our agreement with AHI, we intend to market
Essentum for cardiovascular health through AHI and its 15 affiliated heart
institutes. AHI and its affiliates serve between 22,000 and 25,000 new
patients a year and have a database of over 150,000 heart patients. Working
with Dr. Diethrich, we have developed a comprehensive program incorporating
medical food supplements that AHI physicians will recommend and or prescribe to
their new patients. The key to implementation of our business model will be
the introduction of a physician-directed medical food supplement regimen that
complements commonly prescribed pharmaceuticals used for cardiovascular
disease.

The efficacy of the product is being tested in a study being carried out
under the auspices of the Phoenix Fire Department with internal review being
conducted by Banner Health. We are paying for the study which is
schedule to be completed in the third quarter of 2003. This will be the first
double blind, clinical study to be initiated by us on any of the products we
currently market. In connection with our clinical trial, we are collaborating
with Michael Davidson, M.D., a board-certified cardiologist, who is the
Executive Medical Director of Protocare

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Trials, CEO of the Chicago Center for
Clinical Research and Director of the Preventive Cardiology Center at
Rush-Presbyterian-St. Lukes Medical Center. This collaboration is expected to
yield scientifically based, proprietary medical food supplement formulations
that will address cardiovascular health. Many of these medical food supplement
formulations will be subject to third party clinical trials to determine their
efficacy.

Under our agreement with AHI, which began in August 2001 and has a term of
three years, AHI has agreed to act in the capacity of a strategic partner in
the distribution of our nutraceutical products, and they have agreed not to
promote or endorse any other line of nutritional products. Additionally, AHI
will provide a marketing platform for the sale of our nutritional products by
assisting in clinical trials, providing the AHI logo on our products and
providing AHIs existing database, in addition to other assistance such as
introductions to competitive heart institutes.

AHI, in addition to certain options described below will receive a 12%
royalty on net revenue of sales to AHI patients, and 6% of net revenues from
competitive heart institutes. In addition to the royalty consideration, AHI
has received options to purchase 1,000,000 shares of our common stock at $0.35
per share. The options state as follows: 600,000 vest upon AHI agreeing to the
logo material; 200,000 options vest when gross aggregate sales to AHI and their
affiliated clinics equal $1.0 million; and 200,000 options vest when aggregate
gross aggregate sales equal $1.5 million. All shares issued upon exercise of
these options will be restricted securities under Rule 144 and may not be sold
until one year has passed from the exercise of the option.

AHI introduced Essentum in August 2002 to its patients, and we are
working with AHI to more effectively market and distribute our product among
its physician network. In an effort to broaden our marketing base, we entered
into an agreement with National Provider Network, a subsidiary of Medical
Resource, Inc., based in Marlton, N.J., effective September 30, 2002. National
Provider Network and its affiliates operate a preferred provider network, which
consists of approximately 300,000 physicians and 30,000 participating ancillary
facilities and hospitals. Pursuant to the terms of the agreement, National
Provider Network will actively market and distribute Essentum while we will be
solely responsible for manufacturing Essentum. The Agreement will continue
for three years from its effective date, and will automatically renew for
additional one-year terms unless either party gives notice of its intent not to
renew the agreement not less than sixty (60) days prior to the end of the then
current term. We are charging the National Provider Network a wholesale price,
which is changeable upon 180 days written notice. To date, there have been no
significant revenues as a result of this agreement.

We have also entered into an agreement effective as of February 3, 2003,
with CHG Allied, Inc. (CHGA), a discount health care provider. CHGA operates
a network of chiropractic, acupuncture, and physical therapy clinics, as well
as a full service general insurance agency. Pursuant to the terms of the
agreement, CHGA has agreed to market our products at a slight discount to the
suggested retail price. CHGA, at its own expense, will include a category and
description of our products in their catalogue and sales material. In return,
we will pay CHGA a 20% commission on all accepted orders.

We currently intend, subject to adequate financing and the commercial
acceptance of Essentum, to develop similar regimens with physicians to address
other major health concerns, such as menopause, cancer, diabetes and obesity.

Details of the AHI Program: Nationwide Launch

We have fulfilled our milestone marker contractual commitments with AHI
allowing us access to AHIs complete database, including both existing and new
patients. Our agreement with AHI provides that AHI will incorporate our
medical food supplements into its recommended healthy heart protocol and will
collaborate with us to ensure high penetration and compliance rates. It is our
intention, following the completion of the clinical trial in August 2003, that
we will introduce, on a nationwide basis, our medical food supplement regimen
for cardiovascular health at the 18th International Congress on Endovascular
Interventions, hosted by Dr. Diethrich and AHI in Phoenix in February 2004.
This event is one of the most highly regarded and well-attended symposia of its
kind, attracting more than 2,500 cardiovascular specialists, including
cardiologists, cardiovascular surgeons, cardiovascular institutes and others
from around the world. This event has also been a venue for the introduction
of many scientific and medical breakthroughs in the treatment and prevention of
cardiovascular disease that have been successfully launched.

International Launch of the Cardiovascular Health Regimen

We have also entered into a five-year distribution agreement (the AHIHK
Agreement) with AHI Hong Kong, Ltd. (AHIHK), an affiliate of AHI, to market
our cardiovascular medical food supplements regimen in China. According to an
article published by the Wall Street Journal, 30% of adult Chinese are at risk
of having

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cardiovascular disease through either high blood pressure or elevated
cholesterol levels, and an additional four million new cases are reported each
year. AHIHK currently supplies products and equipment to treat cardiovascular
disease to Chinese physicians, hospitals and clinics, and is collaborating with
the Chinese government to build the first American-style heart hospital, which
is scheduled to open in 2003 in Beijing.

Under the terms of the AHIHK Agreement, AHIHK is to act in the capacity of
an exclusive distributor of our products in China, Taiwan, and Hong Kong. The
products will be purchased by AHIHK for a price 30% over our cost. In
consideration for acting as the exclusive distributor in the above territories,
AHIHK has received options to purchase 1,000,000 shares of our common stock at
$0.35 per share, which options vest as follows: 300,000 vested on August 21,
2001, however the options are subject to recall by us if gross aggregate sales
of the products do not equal or exceed $2.0 million within the first 30 months;
100,000 will vest when gross aggregate sales equal or exceed $5.0 million;
200,000 will vest when gross aggregate sales equal or exceed $8.0 million;
200,000 will vest when gross aggregate sales equal or exceed $12.0 million; and
the remaining 200,000 will vest when gross aggregate sales reach or exceed
$15.0 million. All shares that are issued under the options vesting above will
be restricted securities and may not be sold for a one year period after the
issuance.

Although we are not actively pursuing other distribution arrangements, in
the future we intend to evaluate the regulatory and distribution structures in
Europe, Asia and other major countries to determine the best way to distribute
our cardiovascular health regimen in those markets.

Manufacturing and Inventory of Essentum.

The principal raw materials used in the manufacture of our medical food
supplements are natural ingredients purchased from manufacturers primarily in
the U.S., with certain materials imported from other countries. These raw
materials are purchased by us directly, which together with our suppliers,
maintain the responsibility for documenting all certificates of analysis for
the materials in accordance with Good Manufacturing Practices (GMP) and
guidelines. The raw materials are sent directly to our manufacturers for
milling and other fabrication. We believe that the materials purchased from
suppliers are readily available from numerous sources and that the loss of
these suppliers would not adversely affect our operations.

Our Essentum products are manufactured by Arizona Nutrional Supplements
(ANS) of Chandler, Arizona. Should they prove inadequate, we believe that
other manufacturers can be located either locally or in other parts of the
country. We continually receive a majority of the raw materials for this
product from Deguse BioAction, located in Champaign, Illinois. Other raw
ingredients necessary for the formulation of Essentum are currently secured
for us by ANS.

MAF Marketing and Sales

Our November 2002 acquisition of MAF has brought us a number of new,
complimentary products. MAFs current products, and the status of their
development, are as follows:



| |  | Nutraceuticals:Containing all-natural and certified organic food based
ingredients designed for high efficacy to support proactive human cell
maintenance and rehabilitation, essential in the prevention and treatment of
disease, our products have been formulated under the brand name Natures Dose.
The first two products in this line are Anti-Inflammatory Complex, EPA Formula
and Anti-Inflammatory Complex, Flax Formula, both of which have received
patent-pending status and are currently being marketed.          
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Functional foods and beverages:All-natural nutrition bars are unlike virtually
every other nutrition or energy bar on the market, based on the combination of
four unique and discriminating characteristics: (1) their all-natural
ingredient profile, (2) their all-natural nutritional profile, (3) their
macronutrient balance (the ratio of carbohydrate, protein and healthy dietary
fat) and (4) their specific and effective therapeutic purpose. MAFs
all-natural protein beverage powders demonstrate similar uniqueness.

In early 2002, MAF acquired certain assets of Boulder Endurance Co., Inc.
(Boulder) of San Diego, CA, a functional food company with sales of $866,000
in 2001. Boulder formulates and markets a certified vegan all-natural
nutritional food bar in five flavors. The addition of the Boulder Bar brand
to our current product line of
all-natural and organic nutritional food bars provides us with immediate,
low-cost access to national retail distribution through an extensive and
well-established distribution network. This network consists of 15 of the top

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distribution companies and approximately 35 brokers representing nine of the
leading national natural-product brokerage firms.

Over the past three years, MAF has developed three channels of
distribution, including national retail, (shelf presence in all major natural
product food stores and some grocery), consumer direct, (Internet and inbound
telephone sales) and direct to health care practitioners. In so doing, MAF has
developed brand awareness among consumers and healthcare professionals.

MAF products are distributed by most nutritional distributors, including
United Natural Foods and Tree of Life, companies we believe are the two largest
distribution entities in the nutraceutical industry. We do not have written
agreements with any of these entities, each of which acquires products from us
on a purchase order basis.

Manufacturing and Inventory

Similar to Essentum, the principal raw materials used in the manufacture
of MAF products are purchased from manufacturers primarily in the U.S.,
following the same GMP procedures. Similar to Essentum, we are not party to
any long term production agreement for any MAF products and are utilizing a
variety of manufacturers. Dr. Phils Bars and Alma Bars are manufactured by
Creative Energy Foods, LLC of Oakland, California, while Phils Sticks are
manufactured by Boristron International of Burlington, Vermont. Boulder Bars
are manufactured by The Hain Celestial Group of Hartford, Connecticut. Our
Infla-min supplements are manufactured by Captek Softgel International of
Cerritos, California and our Road Runner Power is manufactured by Nutri Sport
Pharmacal Inc., of Franklin, New Jersey.

Products In Development

We currently are not developing any new products for distribution through
the medical channel. With respect to the complimentary and alternative
medicine market (CAM), MAF will be introducing Infla-min, an inflammatory
dietary supplement (an existing product which is being re-marketed under this
name for the CAM), at the beginning of the second quarter of 2003. With
respect to the MAF health foods distributed at retail, MAF is developing an
organic Boulder Bar which will be released in the second quarter of 2003, as
well as a new line of supplements launched under the Boulder Bar Organic and
Natures Dose labels. The new line of supplements is proposed to include the
following:



| |  | Phase II Releases (Preventative Therapeutic class): Certified Organic Vitamin C
Complex, Certified Organic Vitamin E Complex, Certified Organic Immune
Deficiency Formula, Certified Organic Symbiotic Plus (digestive), Certified
Organic Diet Support (multi-vitamin), Certified Organic Heart Support Formula,
and Certified Organic Skin Support Formula. These will be marketed under both
the Boulder Bar label for retail, and under Natures Dose for the CAM and
direct market.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

None of the products described above are subject to regulatory review by
the FDA or require clinical trials. Approximately $100,000 to $150,000 will be
spent for research and development on these products. Additional amounts may
be spent for clinical trials, although these trials are not required for
certification.

Scientific Advisory Board

All products are formulated under the direction of our Scientific Advisory
Board, which was established in 2001, and includes, among others, PhDs and MDs.
The Scientific Advisory Board reviews all formulations and insures that only
credible, clinically proven ingredients at the dosage levels proven to work and
accredited via credible clinical trials are used in our products.

Included on the Scientific Advisory Board are Michael Davidson, M.D.,
Chairman, Thomas G. Allison, Ph.D., Edward B. Diethrich, M.D., Ronald Krauss,
M.D., David J. Maron, M.D., Dennis Sprecher, M.D., Harold A. Stein, M.D., John
Sutherland, M.D., and Howard B. Wernick, M.D. The Scientific Advisory Board
meets on an as needed basis, however generally not less than every six months.
The backgrounds of the members of the Scientific Advisory Board are set forth
below.

Michael Davidson, M.D., a board-certified cardiologist and Chairman of our
Scientific Advisory Board, is the Executive Medical Director of Protocare
Trials and CEO of the Chicago Center for Clinical Research. He is also an
associate professor in the Department of Medicine and Director of the
Preventive Cardiology Center at Rush-Presbyterian-St. Lukes Medical Center,
where he directs the multiple risk factor reduction lipid clinic. As a
prolific author and lecturer on lipid disorders, nutrition, and
arteriosclerosis, Dr. Davidson has coordinated over 500 clinical trials in
areas of preventive cardiology and has published more than 100 articles in
medical journals, including the
Journal of the American Medical Association, the Journal of the American
College of Cardiology, Circulation, and Arteriosclerosis. Dr. Davidson is a
fellow of the American College of Cardiology and the American College of
8Table of Contents

Chest Physicians. He holds a medical degree from Ohio State University in Columbus
and has completed a cardiology fellowship at Rush-Presbyterian-St. Lukes
Medical Center in Chicago.

Thomas G. Allison, Ph.D., an Associate Professor in Medicine at the Mayo
Medical School, and Consultant in Cardiovascular Diseases and Internal Medicine
at the Mayo Clinic, has more than 30 years experience in cardiac health and
sports medicine. A graduate of Princeton University, Dr. Allison received his
Ph.D. in Exercise Physiology from the University of Pittsburgh. He is a member
of the American Heart Associations Council on Nutrition, Physical Activity,
and Metabolism, and a member of the American College of Sports Medicine, where
he is certified as a Preventative/ Rehabilitative Program Director. Prior to
joining the Mayo Medical School, Dr. Allison served in various positions at the
Wheeling Hospital, Wheeling, WV, including Director of the Cardiac Center,
Director of the Wellness Center, and Executive Director of Corporate Health
Services. Previously, Dr. Allison served in various teaching positions,
including the University of Pittsburgh and the Diocese of Pittsburgh.
Additionally, Dr. Allison has previously won the Secretarys Award for Health
Promotion, U.S. Department of Health and Human Services, and published many
articles on cardiovascular health and rehabilitation.

Edward B. Diethrich, M.D., an internationally renowned cardiovascular
surgeon who has been practicing for more than 30 years in Phoenix, AZ, is
regarded as one of the worlds pioneers in noninvasive heart disease diagnosis
and innovative cardiovascular and intraluminal treatment modalities. In 1971,
Dr. Diethrich founded the Arizona Heart Institute (AHI), the nations first
freestanding outpatient clinic devoted solely to the prevention, detection, and
treatment of heart and blood vessel diseases. As Medical Director and Chief of
Cardiovascular Surgery for AHI, Dr. Diethrich has drawn on his foresight and
dynamic pioneering spirit to lead both AHI and its research foundation to
levels of prominence in the international medical community. Dr. Diethrich also
heads Cardiovascular Services at the Arizona Heart Hospital (AHH) where he is
Medical Director and Chief of Cardiovascular Surgery. At AHH, Dr. Diethrich
performs state-of-the-art endovascular procedures using the very latest in
intraluminal devices, many of which he helped design and test in clinical
trials.

Ronald M. Krauss, M.D., is Senior Scientist and Head of the Department of
Molecular Medicine at the Lawrence Berkeley National Laboratory, and Adjunct
Professor in the Department of Nutritional Sciences, University of California
at Berkeley. He received his undergraduate and medical degrees from Harvard
University with honors and served his internship and residency on the Harvard
Medical Service of Boston City Hospital. Dr. Krauss then joined the staff of
the National Heart and Lung Institute in Bethesda, Maryland, first as Clinical
Associate and then as Senior Investigator in the Molecular Disease Branch. He
has since held numerous appointments as Director or Head of various research
programs, primarily at the Lawrence Berkeley National Laboratory of the
University of California, Berkeley, and has received numerous research awards.
His research involves studies of genetic, dietary, and hormonal effects on
plasma lipoproteins and coronary disease risk. Dr. Krauss is board-certified
in internal medicine, endocrinology and metabolism, and is a member of several
societies, including the American Society for Clinical Investigation, the
American Federation for Clinical Research, and the Federation of American
Societies for Experimental Biology. He is on the editorial board of Current
Opinion in Lipidology, Current Opinion in Endocrinology and Metabolism, the
Journal of Lipid Research, Preventive Cardiology, and other journals, and has
provided reviews for numerous journals. Dr. Krauss is actively involved with
the American Heart Association, having served as Chairman of the Nutrition
Committee and presiding on various boards and committees.

David J. Maron, M.D., a board-certified cardiologist, is an assistant
professor of Medicine at Vanderbilt University School of Medicine. He founded
the Vanderbilt Heart Disease Prevention Program, a multiple risk factor
reduction clinic and is also Co-Founder and Chief Medical Officer of
Cardiovascular Services of America, Inc. Dr. Maron holds a medical degree from
the University of Southern California. He completed internal medicine training
at UCLA and completed a cardiology fellowship at Stanford University. Dr.
Maron was a research fellow in cardiovascular disease prevention at the
Stanford Center for Research in Disease Prevention, and was a Robert Wood
Johnson Clinical Scholar. He served as director of the Preventive Medicine and
Preventive Cardiology Clinics at Stanford University Medical Center prior to
joining the faculty at Vanderbilt University to become Director of Preventive
Cardiology. Dr. Marons clinical research background encompasses
pharmaceutical, nutraceutical, and lifestyle clinical trials. His research
interest is in cholesterol and the prevention of heart disease. He has written
numerous original research articles, review articles and book chapters. His
work has been published in the Journal of the American Medical Association,
Circulation, and the American Journal of Cardiology. Dr. Maron is a member of
the Alpha Omega Alpha society and is a fellow of the American Heart Association
Council on Epidemiology and the American College of Cardiology.

Dennis Sprecher, M.D., joined the Cleveland Clinic Heart Center in 1995 as
section head of the Preventive Cardiology Program. Prior to coming to the
Cleveland Clinic, his most recent positions included section head of
preventive cardiology at the University of Cincinnati Hospital and director of
the Childrens Hospital Lipid Clinic in Cincinnati. Dr. Sprecher is
board-certified in internal medicine and in the subspecialty of cardiovascular
disease.

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He is a Fellow of the American College of Physicians, and is a member
of the American Society of Human Genetics, the American Association for the
Advancement of Science, and the American Heart Association, among others. Dr.
Sprecher is a prolific lecturer and author, and has received support grants and
contracts for many research projects. His specialty and research interests
include lipid disorders and cardiovascular genetic analysis. He spent five
years at the National Institutes of Health as a senior research fellow where he
received his formal training in lipoprotein metabolism and biochemical/genetic
research. Dr. Sprecher graduated from the Boston University School of Medicine
in 1978. He completed his internship and residency in internal medicine at the
Michael Reese Hospital, Chicago, Illinois, and his cardiology fellowship at
Duke University, Durham, North Carolina.

Harold A. Stein, M.D., graduated from medical school in 1953. After
completing an internship at Mount Sinai Hospital in Toronto, he received a
fellowship to study ophthalmology and ophthalmic surgery at the Mayo Clinic in
Rochester, Minnesota. Dr. Stein is the author and/or co-author of several
textbooks. He is on the editorial board of several international ophthalmic
journals.

John A. Sutherland, M.D., Noninvasive Cardiologist, Medical Director of
ECP Program at the Arizona Heart Institute. Dr. Sutherland joined the Arizona
Heart Institute in 1998 after practicing cardiology for 20 years in Augusta,
Maine. Dr. Sutherland earned his undergraduate degree from Harvard College in
Massachusetts and received his medical degree from the University of Michigan
Medical School. He went on to complete his internal medicine residency at
Miriam Hospital in Providence, Rhode Island and his cardiology fellowship at
Miriam Hospital. Dr. Sutherland is a member of the American College of
Cardiology. He is board-certified in internal medicine and cardiology. Dr.
Sutherland offers outpatient and inpatient services at the main Arizona Heart
Institute located in central Phoenix, Arizona.

Howard B. Wernick, M.D., graduated from the University of Toronto Medical
School in 1958 and has been a family practice doctor for the past 40 years.
Dr. Wernick was the former Chief of Staff of the Tempe St. Luke Hospital. Dr.
Wernick is a member of the American Academy of Anti-Aging Medicine, Arizona
Medical Association, Maricopa County Medical Society, Ontario Medical
Association and the American Medical Association. Dr. Wernick is also author
of Seven Silver Bullets, A Consumers Guide to Vital Health & Longevity.

For a description of the compensation arrangements with the members of the
Scientific Advisory Board, see Options and warrants granted to Consultants and
members of the Scientific Advisory Board located elsewhere in this Annual
Report.

Insurance

We maintain insurance with General Southwest Insurance, insuring us under
a General Liability policy of insurance. We maintain a liability insurance
program through F.S. Morgan & Company Insurance Services, Inc., with policy
limits of $1.0 million per occurrence and $2.0 million in the aggregate for
both MAF and us, combined. Additionally, we maintain a Directors and Officers
liability policy.

Quality Control

Finished products will be produced and delivered from our manufacturers,
which maintain modern quality control laboratories and testing facilities. It
is our intent to pay only for the actual milling of the product and its
subsequent packaging. When products are ready for packaging, automated
equipment counts the tablets and capsules, inserts them into packets which are
packed in a convenient dispensing box, which is protected by a tamper-resistant
outer safety seal. All of this is done by our manufacturers according to
current GMP.

Government Regulation

The processing, formulation, packaging, labeling and advertising of our
products are subject to regulation by one or more federal agencies, including
the FDA, the Federal Trade Commission, the Consumer Product Safety Commission,
the U.S. Department of Agriculture and the U.S. Environmental Protection
Agency. These activities may also regulated by various agencies of the states
and localities in which our products are sold. Other than with respect to the
AHIHK Agreement, we are not currently marketing our products outside of the
U.S.

Depending on the type of product, our nutraceuticals will be classified as
either medical foods or food supplements, both of which are regulated as
described above. Medical foods provide nutrients for specific needs, while
food supplements address support functions but not specific diseases.

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The Dietary Supplemental Health and Education Act (DSHEA) recognizes the
importance of good nutrition and the availability of safe dietary supplements
in preventive health care. DSHEA amends the Federal Food, Drug and Cosmetic
Act by defining dietary supplements, which include vitamins, minerals,
nutritional supplements and herbs, as a new category of food, separate from
conventional food. Under DSHEA, the FDA is generally prohibited from
regulating such dietary supplements as food additives or drugs. It requires
the FDA to regulate dietary supplements so as to guarantee consumer access to
beneficial dietary supplements, allowing truthful and proven claims.
Generally, dietary ingredients that were on the market before October 15, 1994
may be sold without FDA pre-approval and without notifying the FDA. However,
new dietary ingredients (those not used in dietary supplements marketed before
October 15, 1994) require pre-market submission to the FDA of evidence of a
history of their safe use, or other evidence establishing that they are
reasonably expected to be safe. There can be no assurance that the FDA will
accept the evidence of safety for any new dietary ingredient that we may decide
to use, and the FDAs refusal to accept such evidence could result in
regulation of such dietary ingredients as food additives, requiring FDA
pre-approval based on newly conducted, costly safety testing. Also, while DSHEA
authorizes the use of statements of nutritional support in the labeling of
dietary supplements, the FDA is required to be notified of such statements, and
there can be no assurance that the FDA will not consider particular labeling
statements used by us to be drug claims rather than acceptable statements of
nutritional support, necessitating approval of a costly new drug application,
or re-labeling to delete such statements.

DSHEA also authorizes the FDA to promulgate the GMP guidelines for dietary
supplements, which would require special quality controls for the manufacture,
packaging, storage and distribution of supplements. We will contractually
require that any independent third party manufacturers doing business with us
comply with all existing or to be promulgated regulations. DSHEA further
authorizes the FDA to promulgate regulations governing the labeling of dietary
supplements, including claims for supplements pursuant to recommendations made
by the Presidential Commission on Dietary Supplement Labels. Such rules, which
were issued on September 23, 1997, entail specific requirements relative to the
labeling of our dietary supplements. The rules also require additional record
keeping and claim substantiation, reformulation, or discontinuance of certain
products, which would be a material expense to the Company.

This governmental oversight is fundamentally important to the overall
growth and longevity of the dietary supplement market. Not only does
regulation increase product quality, efficacy and safety, it also protects
consumers against unscrupulous manufactures that cut corners by failing to meet
label claims for active ingredients, substitute inferior and dated raw
materials and manufacture in facilities that can put public health at risk. We
cannot predict whether new legislation or regulations governing our activities
will be enacted by legislative bodies or promulgated by agencies regulating our
business activities, or what the effect of any such legislation or regulations
on our business would be.

Trademarks and Patents

We own numerous trademarks registered with the U.S. Patent and Trademark
Office and with agencies in certain other major jurisdictions of the world.
Federally registered trademarks have a perpetual life, as long as they are
renewed on a timely basis and used properly as trademarks, subject to the
rights of third parties to seek cancellation of the marks. We believe that our
registered and unregistered trademarks and other proprietary rights are
valuable assets and we believe that they have significant value in the
marketing of our products. We intend to vigorously protect our trademarks
against infringement.

Of equal importance to us are our anticipated distribution channels,
including the existing agreement with AHI. By partnering with physician
groups, we hope to distinguish our products and approach from other competitors
who are not currently accessing the traditional medical distribution channel.

Research and Development

Our efforts are focused primarily on developing, testing and
scientifically substantiating the efficacy of new products in response to what
we perceive is a need in the traditional medical distribution channel to
complement existing disease specific states that are currently treated
surgically and or with medications. Since inception, we have expended
approximately $548,000 on research and development for our products. Our staff
also intends to continually reformulate existing products in response to new
clinical and or scientific literature. Our existing retail supplements are
proven products that require no further testing to be saleable. New condition
specific products that we are producing are assembled by designated
manufactures utilizing proven ingredients that were not developed by us and are
uniquely blended to our specifications.

We believe that flexibility and innovation with respect to new products
are crucial factors in being able to produce the most effective and efficacious
products that physicians will be willing to prescribe for their patients for

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specific disease specific conditions, and remaining competitive for market
share in the field of nutritional supplements. By monitoring market trends and
by avoiding short-lived fad items, we will attempt to anticipate significant
physician demand for certain types of products. Assuming the successful
launching of our first cardiovascular product, we intend, subject to sufficient
financing and the willingness of strategic partners, to develop high-quality
new products on an ongoing basis. Maintaining flexibility is intended to
enable us to capitalize on emerging sciences relative to nutritional products,
as well as shifts in patient needs.

Competition

Although we believe that we are the first company to explore the medial
distribution channel for the distribution of nutraceuticals and other medical
foods as part of a patient protocol, we may, in the future, compete with more
heavily advertised national brands, which are manufactured by large
pharmaceutical companies. Although all of these competitors are substantially
larger than us and have greater financial resources, we believe that we will be
able to compete favorably with the vitamin and nutritional supplement companies
primarily based upon our first to market, direct distribution approach through
physicians desirable of having a nutritional line of products to supplement the
medical aspects of their practice. See Investment Considerations- If We Are
Unable to Compete Effectively with Existing or New Competitors, Our Existing
Business will Decline and Our Anticipated Business Plan Will Not Be
Successfully Implemented.

In the future, we may also experience competition from direct mail vitamin
companies, as well as national vitamin and health store chains like General
Nutrition or Great Earth Vitamins.

Employees

We currently have five full time employees located at our headquarters in
Phoenix, Arizona and seven at our offices in Boonton, New Jersey. We do not
anticipate any material increase in our number of employees unless (i) we
effectuate a material acquisition or (ii) there is a significant increase in
sales. None of our employees are subject to any collective bargaining
agreements and we believe our relationship with our employees is satisfactory,
and we do not anticipate any significant changes in the overall number of our
employees with our key management. We have entered into employment agreements
with a number of our key executives. See Executive Compensation.

Our personnel structure can be divided into three broad categories:
management/professional, administrative, and project personnel. As in most
small companies, the divisions between these three categories are somewhat
indistinct, as employees are engaged in various functions as projects and work
load demands. Our Chief Executive Officer handles our overall business
strategies and long-range operational strategies, strategic planning, financial
functions, and sales and strategic initiatives. Additionally, we have an
administrative assistant who assists our officers in day-to-day activities, and
we have one sales person involved in establishing our sales contacts. It is
anticipated that as our business grows, we will hire additional executives.

INVESTMENT CONSIDERATIONS

Holders of our common stock should note the following items which are
relevant to an investment decision in our securities. If any of the following
risks actually occur, our business, financial condition or operating results
will suffer. Moreover, the price of our common stock could decline and you
could lose all of your investment.

Our Financial Statements Are Qualified Which May Adversely Effect Our
Ability To Obtain Additional Capital Which We Anticipate Needing; Even If
Capital Is Available, It May Be Obtained On Terms Which Are Not Advantageous
And Are Dilutive To Our Shareholders

Our financial statements have been prepared on a going concern basis,
which assumes a certain level of Essentum sales, the continued growth of MAFs
business and the payment of our obligations as they come due. We have suffered
losses from operations since inception and our ability to continue as a going
concern is dependent upon obtaining future profitable operations. Although
management believes that the aggregate net proceeds of approximately $4.8
million from our two private offerings in 2002 ($3.6 million relative to the
sale of the Series A Preferred in early 2002, and $1.2 million relative to the
sale of units sold concurrently with the closing of the MAF transaction),
together with funds from operations, will be sufficient to cover our
anticipated cash requirements for at least six months, we will be required to
seek additional capital to (i) retire the indebtedness assumed in the MAF
acquisition, which indebtedness, as of March 27, 2003, totaled
$756,298 and
(ii) fund operations at current levels and future growth and expansion if sales
of Essentum and the existing MAF product do not increase. No assurance can be
given that such financing will be available or, if available, that it will be
on commercially favorable

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terms. Moreover, available financing may be dilutive to investors. See
Managements Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources.

We Have Suffered Historical Losses and We May Incur Such Losses in the Future.
Accordingly, We Anticipate Needing Additional Capital Which, Even if Available,
May Be Obtained On Terms Which Are Not Advantageous And Are Dilutive To Our
Shareholders

We have only a limited operating history and our business model has not
yet been thoroughly tested in the market place. Our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered in establishing a business in the medical food or nutraceutical
industry, which are characterized by a large number of market entrants, intense
competition and a high failure rate. To date, exclusive of MAFs operations,
we have been engaged primarily in start-up and business development activities
and have generated little revenue from product sales. Accordingly, our limited
operating history makes it difficult to evaluate us. To achieve profitable
operations, we, alone or with others, must successfully introduce and market
our existing products, and develop, introduce and market new products. No
assurance can be given that our product development efforts will be
successfully completed, or that any product, if introduced, will be
successfully marketed or will achieve customer acceptance. Exclusive of MAFs
operations, we have generated limited revenue, including $122,713 in sales for
the fiscal year ended December 31, 2002. Consequently, we have incurred a net
loss from operating activities of approximately $3.8 million for the same
period. Future operating results will depend on many factors, including the
demand for our products, the level of competition and our ability to cause the
cost effective manufacture of our products while maintaining quality.

While MAF, which we recently acquired, has a more extensive operating
history, it has not achieved profitability. During the fiscal year ended
December 31, 2002, MAF had revenue of approximately $1.4 million, but incurred
a net loss from operations of approximately $596,000. Consequently, on a
combined basis, we are experiencing negative cash flow from operations.

Management expects that this negative cash flow will continue until sales
of Essentum products increase. As indicated above, in the event such sales
are not achieved, we will need to quickly reformulate our business plan, and
attempt to market Essentum through more conventional distribution channels
including retail and other health care practitioners, including chiropractors,
nutritionists and trainers.

We May Not Have Sufficient Cash Resources for Needed Research and Development,
Further Hindering Our Growth

Although we are not a pharmaceutical development company, we have been
engaged in research and development (R&D) in connection with our products.
Through December 31, 2002, we have spent approximately $548,000 on R&D
activities. Although R&D may be required in the future, we continue to evaluate
other markets for our existing products and expand the product lines that we
offer. Any R&D, by its very nature, precludes definitive statements as to the
time required and costs involved in reaching certain objectives. Although our
R&D will be relatively limited, actual R&D costs may exceed budgeted amounts
and estimated time frames may require extension. Cost overruns due to
unanticipated clinical or regulatory delays or demands, unexpected adverse side
effects, insufficient therapeutic efficacy or competitive or technological
developments would prevent or substantially deter development efforts and
ultimately could have a material adverse effect on us. Our existing product
candidates, and any potential additional products that may be developed, may,
in certain instances, require significant additional possible regulatory
approval and commitments of resources prior to commercialization. There can be
no assurance that any such potential products will be successfully developed or
capable of being produced in commercial quantities at acceptable costs, or that
any product will prove to be safe and effective in clinical trials or
otherwise, or meet applicable regulatory standards.

Servicing Existing Debt Obligations Will Negatively Impact Our Cash Flow During
The Next 18 to 24 Months

In April 2002, MAF acquired certain assets of Boulder Endurance Co., Inc.
(Boulder). The purchase price consisted of a $75,000 cash payment at closing
and a promissory note for $275,000 (the Boulder Debt) with an interest rate
of 7%, of which $150,000 is to be paid in the first year and the
balance paid in 12 equal payments in year two and an additional promissory note
of $40,935 paid in 12 payments. As of December 31, 2002, unpaid principal of
$225,000 remains on the $275,000 note and unpaid principle of $13,645 remains
on the $40,935 note. Additionally, in December 2001, MAF received from the
Commerce Bank NA of Flemington, New Jersey, a $650,000, 6.75% seven year loan,
75% of which is guaranteed by the U.S. Small Business Administration (SBA).
The proceeds of this loan were used to repay the outstanding balance of a line
of credit of approximately $450,000 and a $50,000 promissory note held by an
officer of MAF. The balance of the $650,000 loan has been used for working
capital purposes. Principal and interest payments to the Commerce Bank
commenced one month from the

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date of the loan. In fiscal 2003, we will pay $210,937 in principal and
interest on the Boulder Debt and $119,638 in principal and interest for the
Commerce Bank loan. At the end of 2003, $42,000 of principal debt will remain
owing in respect of the Boulder Debt and, $480,000 will remain owing to
Commerce Bank. The Commerce Bank obligation matures on December 14, 2008. The
Boulder Debt is guaranteed by Mr. William Coppel. The Commerce Bank debt is
guaranteed by Mr. Coppel and and Dr. Phillip B. Maffetone, a founder of MAF and
member of the Nutritional Advisory Board, and is further secured by second and
third mortgages on certain real estate in New Jersey and New York. In
connection with the MAF Acquisition, we assumed both the Boulder debt and the
Commerce Bank debt, and indemnified certain MAF shareholders against any
obligations thereunder. Our ability to service these obligations is uncertain
without additional financing or an increase in revenue and the existing terms
of these obligations may make further financing difficult to obtain.

If We Are Unable To Compete Effectively With Existing or New Competitors, Our
Existing Business Will Decline and Our Anticipated Business Plan Will Not Be
Successfully Implemented

We believe the market for nutritional products is continually evolving,
and is highly dependent upon changes in the demographic and social trends that
have resulted in tremendous growth for the nutrition industry in the past few
years. We will encounter aggressive competition from numerous competitors,
many of whom have significantly greater financial resources than we do.
Competitors with greater resources than ours may be able to enter into similar
medical distribution channel relationships. Our competitors vary by the nature
of the distribution channel. With respect to the medical channel, which is
where our Essentum line is marketed, only a few supplemental companies are in
this market, including, Douglas Labs, Integration Therapeutics, Phyto
Pharmicia, Metagenics, Standard Process, and Allergy Research. MAF markets
certain of its supplements, as well as Phils Bar and Alma Bars, in the CAM and
faces numerous competitors, including Power Bar, Cliff Bar, Balance Bar and
Odwalla. In addition to the foregoing, there are literally hundreds of small
companies who market herbal, nutritional and other homeopathic therapies,
supplements and remedies. We believe we can compete by reacting quickly to
expected and perceived customer requirements and desires, and by maintaining
relationships with our existing strategic partners and identifying and reaching
exclusive distribution agreements with new partners. However, there can be no
assurance that our assessment of the market place is correct, or that our
products will be accepted now or in the future.

The introduction of new products and the enhancement and extension of
existing products are critical to our future sales growth. In making decisions
regarding the development of new products and the enhancement and extension of
our current products we will be competing with our competitors, who will also
be attempting to anticipate the needs and preferences of consumers, physicians
and nutritionists. Consumer preferences, particularly in the health and
nutraceutical market, are continuously changing and are difficult to predict.
Without the continued evolution of our product base and distribution model, it
is likely that our future business operations will be negatively impacted.

Our Business Plan Is Heavily Dependent Upon The Support Of The Medical
Community And A Lack of Such Support Would Significantly Reduce Anticipated
Sales

We are marketing ourselves as the Physicians Nutraceutical Company, and
have built our business model around the anticipated endorsement of doctors who
actually prescribe and/our recommend our products. If the medical community
does not embrace this concept, we will need to completely re-evaluate our
business model and consider other ways to market our products. While we can use
existing distribution channels which MAF operates in, such a change would
require a modification of our existing plans.

Although we believe there is a significant market for our proposed medical
food and nutraceutical products, our success will depend significantly on the
initial and continued acceptance by the medical community of the efficacy of
such products. In the U.S., herbal dietary supplements have been available for
many years, but many physicians have shown reluctance to recommend them to
their patients, and there has been controversy about their efficacy and
concerns about their interactions with pharmaceutical products. Accordingly, no
assurance can be given that our products will achieve and/or sustain market
acceptance by either patients or the medical community. While MAF products
have obtained some market acceptance, there is no assurance that Essentum will
be accepted nor that any other products can be successfully developed or
marketed. The initial results since the August 2002 introduction of our
Essentum product by AHI have been lower than anticipated. We have, however,
signed a new agreement with National Provider Network, LLC (NPN) a national
preferred provider network of over 300,000 doctors, as well as with CHG Allied,
Inc. (CHGA) a discount health care provider and an operator of chiropractic,
acupuncture and physical therapy clinics. We have also expanded our direct
efforts to reach other medical clinics and facilities. See Business for a
description of these arrangements.

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Other Than on Our Website, We Do Not Directly Market Our Own Products, and
Instead We Rely On Third Party Sales Agents, Representatives And Distributors
To Sell Our Products

We utilize third parties to assist in marketing, selling and/or
distributing our products. To date, we have entered into an agreement with AHI
relating to our line of cardiovascular disease supplements and we have several
other arrangements relative to the sale of these products. However, we have
not previously marketed these products in a significant fashion, and the
introduction of these products, even under the imprimatur of the arrangement
with AHI, is subject to all of the market risks associated with the
introduction of a product in a new distribution channel, including AHIs lack
of experience in endorsing and recommending products of this type.
Accordingly, although we intend to enter into other third party arrangements
for this product line in the future, and for other products which we may
develop or acquire in the future, no assurance can be given that our current or
future partners will purchase, recommend or market our products at sufficient
levels or provide our products with adequate support. If our third-party
partners do not effectively market our products, we will not generate
significant revenues or profits. However, we believe that the establishment of
a network of third-party partners, with extensive and specific knowledge of the
various benefits of our products, will in the long-term be beneficial to us.

MAF has developed three channels of distribution, including national
retail, (shelf presence in all major natural product food stores and some
grocery stores), consumer direct, (internet and inbound telephone sales) and
direct to health care practitioners, such as chiropractors, physical
therapists, nutritionists, dietitians and traditional doctors. National retail
sales are supported by a national sales management team of three experienced
operatives in the retail natural products industry, overseeing nine regional
brokerage firms supporting fifteen national distributors. These efforts are
supported by national trade advertising and in-store merchandising. No
assurance can be given that these channels will continue to grow as we attempt
to expand our operations, and attempt to have Essentum exploited through these
channels.

While our MAF products are marketed by leading distributors (See
Business) we are not party to any long term output arrangements, and our
agreements with these distributors are on an as needed, purchase order basis.

Until Sales Increase We Are Not Likely To Receive Favorable Terms In Either The
Acquisition of Raw Materials For Our Products, or The Manufacture of our
Inventory; Risk of Price Changes In Raw Materials

Until we achieve sufficient sales volume across all our product lines, it
is unlikely that we will obtain favorable payment terms from our vendors, and
it is not anticipated that we will be able to use factors for the financing of
any receivables. Accordingly, we will be forced to use our cash resources to
finance our inventory, and, at least during the preliminary role out of
Essentum products, we will have to make certain assumptions about the level of
inventory which we must maintain. For MAF products, which have historical
sales levels which management can analyze, anticipated inventory levels can be
maintained with less speculation. If management does not correctly maintain
inventory levels, we could be faced with either inadequate levels of product
for new sales or, alternatively, levels of inventory which are too large; tying
up critical capital and forcing a mark-down of prices for our products.

Many of the ingredients contained in our products are not commodities, so
price risk cannot be hedged with traditional futures contracts. In addition,
some of these ingredients are picked in the wild, rather than farm cultivated,
resulting in a highly unstable supply. A shortage of these ingredients, when
coupled with the possibility of continued increases in demand, could result in
significant increases in the price of the raw materials used in our products.
In addition, if due to supply shortages we are unable to meet the demands of
our customers, even if for only a short time, the result could be a long-term
decrease in the anticipated sales of our products. Our ability to increase the
price of our licensed products to adjust for increases in raw material costs is
limited and there can be no assurance that an adequate supply of ingredients
will be available to us and on terms commercially reasonable in order for us to
meet the supply obligations to our customers.

Our Business Operations Are Subject To Governmental Regulations, Which May
Change In A Manner Which Adversely Affects Our Business

To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to
particular statutory and regulatory provisions currently in effect. Any change
in applicable laws or regulations may have a material adverse effect on our
business, financial condition and results of operations. In the U.S., the
manufacturing, processing, formulation, packaging, labeling, advertising and
sale of dietary supplements are regulated primarily by the Federal Food, Drug
and Cosmetic Act, as amended, inter alia, by the Dietary Supplemental Health
and Education Act (DSHEA) and by various federal agencies, including the Food
& Drug Agency (the FDA) and the U.S. Federal Trade Commission (the FTC).
DSHEA (i) defines dietary supplements, (ii) permits structure/function
statements under certain conditions and (iii) permits under certain

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conditions the use of published literature in connection with the sale of
herbal products Dietary supplements do not require approval by the FDA prior to
marketing but are nevertheless subject to various regulatory requirements
concerning their composition, permissible claims (including substantiation of
any claims), manufacturing procedures and other elements. DSHEA prohibits
marketing dietary supplements through claims for, or with intended uses in, the
treatment or prevention of diseases. There can be no assurance that our
dietary supplement products can be identified and differentiated from competing
products sufficiently enough on the basis of permissible claims regarding
composition to compete successfully.

We currently are in compliance with all applicable regulations, and no
governmental approval is necessary for the production, distribution or
marketing of any current or anticipated product. We cannot determine what
effect current or future regulations will have on our business, financial
condition or results of operations. Our failure to comply with applicable
regulatory requirements can, among other things, result in fines, suspension of
regulatory approvals, product recalls, seizure of products, operating
restrictions or criminal prosecution.

We cannot predict whether new legislation or regulations governing our
activities will be enacted by legislative bodies or promulgated by agencies
regulating our products, or what the effect of any such legislation or
regulation on our operations would be. There can be no assurance that new
legislation or regulation, including changes to existing laws or regulations,
will not materially adversely affect our business, financial condition and
results of operations. To the extent that we market our products in other
countries, we will be subject to the laws applicable to such jurisdictions.
Currently, we market Essentum only in China, and we are advised by our
distributor in China, AHI Hong Kong, Ltd., that we are in compliance with
applicable Chinese laws.

The Board of Directors and Scientific Advisory Board Consist of Some New
Members Who May Be Either Unable to Spend Adequate Time Or Who Are Unfamiliar
With Our Operations So That They May Be Unsuitable For Addressing Our Evolving
Business Strategy

Many of the members of our Board of Directors and our Scientific Advisory
Board have been newly elected or appointed to their positions. Accordingly,
although we believe each of these newly appointed members are extremely
qualified for their respective positions and will contribute to our future
growth, as these individuals are newly appointed, it is not possible to gauge
whether their long term contributions will be significant. In the event that
any of these individuals resign or do not stand for re-election, we may be
negatively perceived by third parties or investors.

Our Risk Management Insurance May Be Inadequate

We maintain liability insurance through F.S. Morgan & Company Insurance
Services, Inc., with policy limits of $1.0 million per occurrence and $2.0
million in the aggregate which covers us and MAF. Our insurance program
includes property, casualty, comprehensive general liability and products
liability coverage. Management believes that our insurance coverage is
adequate. The testing, marketing and sale of health care products entail an
inherent risk of product liability. There can be no assurance that product
liability claims, relating to dietary supplement products, will not be asserted
against us or our collaborators or licensees. There can be no assurance that
we will be able to maintain such product liability insurance pursuant to
assignments from our various manufacturers and suppliers, or obtain additional
insurance, during clinical trials or upon commercialization of any product, on
acceptable terms, if at all, or that such insurance will provide adequate
coverage against any potential dietary supplement claims. A product liability
claim or product recall, relating to dietary supplement products, could have a
material adverse effect on our business, financial condition or results of
operations.

We Are Highly Dependent on Key Personnel To Manage Our Growth And The
Integration of Acquired Business

The acquisition of MAF, and the anticipated increased sales of the
Essentum products, will require the full utilization of our management,
financial, and other resources in both managing the expenses caused by the
acquisition and internal sales growth. Our ability to manage growth effectively
will depend on (i) our ability to integrate and effectively manage MAF within
our existing operations, and (ii) our ability to improve and expand our
operations, including our financial and management information systems, and to
recruit, train and manage executive staff and employees. To date, we have not
been adversely affected by any failure to recruit or retain personnel, although
we did streamline operations by eliminating one senior executive. There can be
no assurance that our management will be able to manage our growth effectively,
and the failure to effectively manage growth may have a materially adverse
effect on our results of operations.

We are dependent upon Bradley D. Edson, Chief Executive Officer, William
Coppel, President and Stuart A. Benson, Executive Vice President and Vice
President of Business Development. We have entered into

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employment agreements with Mr. Edson, Mr. Coppel, and Mr. Benson. The loss of
Mr. Edson, Mr. Coppel and Mr. Benson and the other individuals involved in key
management positions, or our inability to attract and retain other qualified
employees could have a material adverse effect on us. Under the terms of their
employment agreements we are required to apply to obtain, and have made
application with respect thereto, for key-man insurance policies for Mr.
Edson, Mr. Coppel and Mr. Benson in the amount of $1,000,000 each. We will be
the beneficiary of such policies when and if such the insurance is obtained.

We Have Incurred Significant Costs By Virtue of Issuing Securities to
Consultants And Directors And In The Future We May Continue to Issue Securities
In This Manner To Preserve Cash

In an effort to preserve cash resources, we have issued our common stock,
options and warrants to purchase our common stock, to various financial
consultants and certain directors rather than hire internal staff. To the
extent option and warrant grants are below the current market price, we must
record this as an additional expense in our general and administrative expense,
even though no cost has been expended. These transactions are dilutive to
existing shareholders, and for fiscal year 2002, include a consulting and R&D
expense of approximately $800,426. We believe that this non-cash expense is
preferable to expending cash for business development, marketing and other
financial services.

Through A Voting Agreement, Certain Officers and Directors Can Dominate the
Board of Directors, Making It Unlikely That Other Shareholders Will Impact our
Direction

Assuming the conversion of 3,712,000 shares of Series A Preferred Stock
outstanding as of the date hereof into a like number of shares of common stock,
together with the issuances of the Series B Shares and Series C Shares of
common stock issuable upon the exercise of the Series B and Series C Warrants,
we would have 24,289,616 shares outstanding. Such amount excludes any other
shares issuable upon the exercise of options or warrants. Mr. Edson, Mr.
Coppel and Mr. Benson will own, assuming the exercise of warrants and options
held by them, 14.78%, 3.18% and 5.23%, respectively, of our outstanding common
stock. As part of the MAF acquisition, Mr. Edson, Mr. Coppel, Mr. Gerst (the
latter of whom owns 13.06% of our outstanding common stock), Leslie Quick (who
owns 2.04% of our outstanding common stock), and Thomas Quick (who owns 0.82%
of our outstanding common stock), among others, entered into a voting agreement
(the Voting Agreement) pursuant to which they have agreed to vote for the
appointment of Messrs. Edson, Coppel, Benson, Eide, Hannah and Leslie Quick to
the board of directors. As a result, Mr. Edson, Mr. Coppel, and Mr. Benson,
individually and through the Voting Agreement, will be able to influence the
election of a majority of our Board of Directors, and effect all other
decisions regarding shareholder actions, such as decisions to dissolve, merge
or sell our assets, as well as influence our operations, policies and business
decisions.

An Active Public Market May Not Develop; Investors Should Note That The Price
of Our Stock May Be Affected By Trading Volatility and The Market Where It Is
Quoted; Investors Should Note That The Possibility of The Delisting of Our
Securities From The Over-the-Counter System

Our common stock has been quoted on the Over the Counter Bulletin Board
(OTC:BB) since March 28, 2002. Although we have applied for listing on the
American Stock Exchange (the Amex) on June 14, 2002, we have not yet
responded to the comments of the Amex. Unless our application is accepted, we
will remain quoted on the OTC:BB (or any proposed successor). If our common
stock were to no longer be quoted on the OTC:BB, we would be forced to file a
Form 15c2-11 with the NASDAQ and request to be listed on the Pink Sheets.

The market prices for securities of companies with limited operating
history, including us, have historically been highly volatile on the OTC:BB.
Since our common stock began quotation on the OTC:BB, it has traded in a range
of between $0.68 and $4.05. Significant volatility in the market price of our
common stock may arise due to factors such as:



| |  |  | our developing business;                                     
| | - |  | -------------------------------------------------------------
|
| |  |  | a continued negative cash flow;                              
|
| |  |  | relatively low price per share;                              
|
| |  |  | relatively low public float;                                 
|
| |  |  | variations in quarterly operating results;                   
|
| |  |  | general trends in the nutraceutical and health care industry;

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| |  |  | the number of holders of our common stock; and                                  
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | the interest of securities dealers in maintaining a market for our common stock.

As long as there is only a limited public market for our common stock, the
sale of a significant number of shares of our common stock at any particular
time could be difficult to achieve at the market prices prevailing immediately
before such shares are offered, and could cause a severe decline in the price
of our common stock.

Our Common Stock is Subject to Additional Risks By Virtue of Being a Low Priced
or Penny Stock

Our securities are currently subject to (or in the future may become
subject to) Rule 15g-9 under the Securities Exchange Act of 1934, which imposes
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and institutional
accredited investors (generally institutions with assets in excess of
$5,000,000 or individuals who have a net worth in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by Rule15g-9, broker-dealers must furnish to all investors
in penny stocks, a risk disclosure document required by such rule, make a
special suitability determination of the purchaser and have received the
purchasers written agreement to the transaction prior to the sale. In order
to approve a persons account for transactions in penny stocks, the broker or
dealer must (i) obtain information concerning the persons financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on the information required by paragraph (i) that transactions in penny
stocks are suitable for the person and that the person has sufficient knowledge
and experience in financial matters that the person reasonably may be expected
to be capable of evaluating the rights of transactions in penny stocks: and
(iii) deliver to the person a written statement setting forth the basis on
which the broker or dealer made the determination required by paragraph (ii) in
this section, stating in a highlighted format that it is unlawful for the
broker or dealer to effect a transaction in a designated security subject to
the provisions of paragraph (ii) of this section unless the broker or dealer
has received, prior to the transaction, a written agreement to the transaction
from the person; and stating in a highlighted format immediately preceding the
customer signature line that the broker or dealer is required to provide the
person with the written statement and the person should not sign and return the
written statement to the broker or dealer if it does not accurately reflect the
persons financial situation, investment experience and investment objectives
and obtain from the person a manually signed and dated copy of the written
statement. A penny stock is defined as any equity security other than a
security (i) registered, or approved for registration upon notice of issuance
on a national securities exchange that makes transaction reports available
pursuant to 17 CFR 11Aa3-1; (ii) authorized or approved for authorization upon
notice of issuance, for quotation in the NASDAQ system; (iii) that has a price
of five dollars or more; or (iv) whose issuer has net tangible assets in excess
of $2,000,000 demonstrated by financial statements dated less than fifteen
months previously that the broker or dealer has reviewed and has a reasonable
basis to believe are true and complete in relation to the date of the
transaction with the person. Consequently, Rule 15g-9 will affect the ability
of broker-dealers to sell our securities and also may affect the ability of
shareholders to sell their shares in the secondary market.

It Is Highly Unlikely That We Will Pay A Dividend; Investors Are Most Likely To
Have A Return Of Their Investment Through An Appreciation In The Share Price Of
The Common Stock

We have not paid cash dividends in the past and do not anticipate paying
cash dividends on our common stock in the foreseeable future. Management
believes the best use of retained earnings is to fund internal growth and for
general corporate purposes.

Accordingly, investors should note that any return on their investment in
our securities will come as a result of any appreciation in the value of our
common stock.

The Possible Sale Of Restricted Shares Pursuant to Rule 144 Could Have A
Depressing Impact On the Price Of Our Common Stock

No prediction can be made as to the effect, if any, that sales of shares
of common stock or the availability of shares of common stock for sale will
have on the market price of our common stock from time to time. The sale of a
substantial number of shares of common stock held by existing shareholders,
whether pursuant to subsequent public offerings or otherwise, or the perception
that such sales could occur, could adversely affect the market price of our
common stock and could materially impair our future ability to raise capital
through an offering of our equity securities.

As of March 27, 2003, we have 21,554,616 shares of common stock issued and
outstanding which assumes the conversion of 3,712,000 shares of Series A
Preferred shares into a like number of shares of common stock. In

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addition, upon the exercise of options and warrants, we will issue (i)
4,500,000 shares of common stock under our two stock option plans, (ii)
4,240,000 shares of common stock under previously issued warrants, (iii)
742,400 shares which may be issued upon exercise of the Series A Warrants; (iv)
1,367,500 shares of common stock may be issued upon exercise of the Series B
Warrants and (v) 1,367,500 shares of common stock may be issued upon exercise
of the Series C Warrants. If all of the foregoing shares of common stock were
issued, we would have 33,772,016 shares of common stock issued and outstanding.
Excluding options and warrants, but including shares of common stock issuable
upon conversion of the Series A Preferred Stock, substantially all of our
shares of our common stock not currently in the public market will be eligible
for sale in the public market within the next 12 months.

The Possible Issuance of Preferred Stock May Make An Acquisition of the Company
Less Likely, May Cause Management to Become Entrenched and May Also Reduce The
Value of The Common Stock

We are authorized to issue up to 50,000,000 shares of preferred sock, par
value $0.001 per share (Preferred Stock). Preferred Stock may be issued in
one or more series, the terms of which may be determined at the time of
issuance by the board of directors, without further action by shareholders, and
may include voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and liquidation, conversion
and redemption rights and sinking fund provisions. We have outstanding
3,712,000 shares of 10% Series A Preferred Stock as of March 27, 2003,
excluding 371,200 additional shares of Series A Preferred Stock to be issued as
a dividend in respect thereto. The issuance of any other Preferred Stock could
adversely affect the rights of the holders of common stock, and therefore
reduce the market value per share of our common stock and make it less likely
that holders of our common stock would receive a premium on the sale of their
shares. In particular, specific rights granted to future holders of Preferred
Stock could be issued to restrict our ability to merge with or sell our assets
to a third party, thereby preserving current managements control. In
addition, the Nevada General Corporation Law prohibits any sizable merger,
consolidation, sale of assets or similar transaction between us on the one hand
and another company which is, or is an affiliate of, a beneficial holder of ten
percent or more of our voting power (defined as an interested stockholder),
for three years after the acquisition of the voting power, unless the
acquisition of the voting power was approved beforehand by our Board of
Directors or the transaction is approved by a majority of our shareholders,
excluding the interested stockholder. Another provision of the Nevada General
Corporation Law would limit the voting rights of shares acquired in a control
share acquisition (as such term is defined in the Nevada General Corporation
Law) in the event we have more than 100 shareholders of record in Nevada and we
do business in Nevada. The application of the Nevada control share acquisition
statute, and the provisions prohibiting interested stockholder transactions,
could also preserve control of the Company by management.

Investors Should Be Aware of The General Uncertainty Regarding Future Business
Operations

Marketing and product development activities, by their nature, preclude
definitive statements as to the time required and costs involved in reaching
certain objectives. Actual costs could exceed budgeted amounts and estimated
time frames may require extension. Cost overruns due to unanticipated delays
or competitive or technological developments would prevent or substantially
deter development efforts and ultimately could have a material adverse effect
on us. Our existing product/service candidates, and any potential additional
products or services that may be developed, require significant commitments of
resources prior to commercialization. There can be no assurance that any such
potential products or services will be successfully developed or capable of
being produced in commercial quantities at acceptable costs, or that any
product or service will be received well by consumers.

The Problems Associated With Future Acquisitions May Adversely Effect Our
Results

We may acquire certain businesses that we believe are complimentary to our
operations in the future. Our first such acquisition was our purchase of MAF.
While we believe we will be able to effectively integrate such businesses with
our own, we may be unable to successfully do so without losing key employees or
business relationships. Although our integration with MAF has occurred without
the loss of any MAF personnel, in the future, we may not be able to smoothly
integrate any acquired companies and their related marketing, production,
development, distribution and management systems. Our gross margins could be
adversely affected by any problems arising during or from such process or the
inability to effectively integrate any future acquisitions.

We have recently entered into an arrangement with Dr. Christophers
Original Formula, Inc. (COF), a privately held Nevada company, pursuant to
which we advanced COF approximately $40,000 for operational expenses, which
advance was made on a fully secured basis. Subject to the completion of due
diligence and board approval, the agreement gives us the right to acquire COF
for 2,600,000 shares of our common stock. We have not commenced due diligence
and we may elect not to proceed with the acquisition. Accordingly, no
assurance can be given that the acquisition will be consummated.

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ITEM 2. DESCRIPTION OF PROPERTIES

MAFs corporate headquarters, administration and shipping operations are
located in approximately 3,500 square feet of leased office space in a
commercial building in Boonton, NJ. The current lease was set to expire in
February 2003, but has been extended for an additional six months on the same
terms and conditions. MAF anticipates that at the expiration of the lease it
will move to larger facilities in the same vicinity. The current lease
payments are $2,100 per month. The current facility has shipping and receiving
capabilities, including the capacity for large tractor-trailer deliveries of
MAF products.

We maintain our executive offices at 5080 North 40th Street, Suite 105,
Phoenix, Arizona 85018-2147 where we have approximately 4,722 square feet of
leased office space consisting of executive offices, storage space, mailroom
space, and a kitchen. Included in the lease is miscellaneous office equipment
such as telephone equipment, copiers and office furniture. The
current lease payments are $9,033 per month and expires during October
2003.

The products are not shipped from this facility but instead are warehoused
at local facilities, while pending shipment to customers from third party
fulfillment houses that are contracted out by us. In managements opinion, the
offices and related facilities are more than adequate for our current
operations and should provide enough space through fiscal year 2003.




ITEM 3. LEGAL PROCEEDINGS

None.




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

No matters were submitted to our security holders during the fourth quarter of
the fiscal year ended December 31, 2002.




PART II.




ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Effective as of March 28, 2002, our common stock has been quoted on the Over
the Counter Bulletin Board under the symbol VTLV. Prior to that date, our
common stock did not trade. The following table sets forth the high and low
closing sales prices per share of our common stock for the periods indicated.

|                                                 |  |      |      |     |  |   |      | 
|------------------------------------------------ |  | ---- | ---- | --- |  | - | ---- | 
|FISCAL YEAR 2002                                 |  | HIGH |      | LOW
|                                                 |  |      |      |    
|First Quarter (From March 28, 2002)              |  | $    | 1.40 |     |  | $ | 0.82 | 
|Second Quarter                                   |  | $    | 4.05 |     |  | $ | 1.50 | 
|Third Quarter                                    |  | $    | 2.99 |     |  | $ | 0.91 | 
|Fourth Quarter                                   |  | $    | 2.01 |     |  | $ | 0.70 | 
|First Quarter Year 2003 (Through March 27, 2003) |  | $    | 1.01 |     |  | $ | 0.68 | 

The high and low bid price during the foregoing periods reflect prices between
dealers in securities and do not include any retail markup, markdown or
commission and may not necessarily represent actual transactions.

As of March 27, 2003, we had approximately 276 holders of record of our common
stock, excluding shares of common stock held by brokerage firms and other
nominees who hold shares of common stock for multiple
investors.

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DIVIDEND POLICY

We have not paid any dividends on our outstanding common stock since our
inception and do not anticipate doing so in the foreseeable future.

SALES OF UNREGISTERED SECURITIES.

1. Options and warrants granted to Consultants and members of the
Scientific Advisory Board.On March 25, 2002 we entered into a 2 year
Consulting Agreement with Leslie D. Michelson. Under the terms of the
agreement, Mr. Michelson, in addition to monthly payments of $2,000, received
warrants to purchase 500,000 shares of our common stock at a price of $1.00 per
share. The warrants vest over 17 months.

On March 25, 2002, we entered into a two year Consulting Agreement with
Brian C. Smith. Under the terms of the agreement, Mr. Smith, in addition to
monthly payments of $2,000, received warrants to purchase 150,000 shares of our
common stock at a price of $1.00 per share. The warrants vest over 17 months.

On May 19, 2002, we entered into a two year Consulting Agreement with
Stephen Songsheng Cheng. Under the terms of the agreement, Mr. Chen received
options to purchase 200,000 shares of our common stock at a price of $3.00 per
share. The options vest over 24 months.

On March 25, 2002, we entered into a two year Consulting Agreement with
Michael H. Davidson. Under the terms of the agreement Dr. Davidson, in
addition to monthly payments of $4,200, received options to purchase 200,000
shares of our common stock at a price of $1.00 per share. The options vest
over 17 months.

On May 15, 2000, we entered into a three year Scientific Advisory Board
Agreement with Dr. Dennis Sprecher. Under the terms of the agreement, Dr.
Sprecher will assist in developing, manufacturing and testing of nutraceutical
formulations, assist in the design and development of compliance and lifestyle
programs intended to enhance patient compliance with our nutraceuticals, and
advise on the needs of potential clients, partners, and other users. Dr.
Sprecher, in addition to payments of $1,250 per Scientific Advisory Board
meeting, received options to purchase 15,000 shares of our common stock at a
price of $2.80 per share. The options vest 1,250 on August 1, 2002, and an
additional 1,250 will vest on the 1st day of every third month for the term of
his agreement.

On May 7, 2002, we entered into a three year Scientific Advisory Board
Agreement with David Maron, MD. Under the terms of the agreement Dr. Maron, in
addition to payments of $1,250 per Scientific Advisory Board meeting, received
options to purchase 15,000 shares of our common stock at a price of $2.80 per
share. The options vest 1,250 on August 1, 2002, and an additional 1,250 will
vest on the 1st day of every third month for the term of his agreement.

Effective as of August 12, 2002, we issued 48,000 shares of our common
stock to HCFP/Brenner Securities pursuant to the terms of the agreement between
us and Brenner Securities relating to certain investment banking services.

Effective September 20, 2002, Martin Wallace was granted the right to
receive nonqualified stock options to acquire up to 500,000 shares of our
common stock at an exercise price equal to $1.50 per share. Mr. Wallaces
options vest at a rate equal to 2 times the number of units of paid in full
orders for the products from Conforming Contracts during the 12 month period
extending through September 30, 2003. A Conforming Contract is a contract with
a medical service provider which, among other conditions, agrees to actively
endorse and promote our products and who contractually agrees that the products
will be the exclusive products endorsed and promoted by them relative to the
particular disease for which it is intended.

Effective as of November 7, 2002, we authorized the issuance of 68,000
shares of our common stock to Mark Behringer, 32,000 shares of our common stock
to Robert A. Cooke, and 33,000 shares of our common stock to Weil Consulting
Corporation in respect of consulting agreements.

Each of the foregoing grants were exempt under Section 4(2) of the
Securities Act as they did not constitute public offerings.

2. Series A Preferred Private Placement.Between February and June
2002, we sold, for $3,172,000, in an exempt private placement to accredited
investors under Rule 506 under Regulation D, 3,172,000 shares of our 10%
Series A Preferred Stock. The holders of the preferred stock are entitled to a
preferred dividend at the rate of 10% per annum. Dividends on the preferred
stock will be cumulative and shall be paid in additional shares of preferred

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stock at a price equal to $1.00 per share and will contain all the rights and
privileges and be subject to all the terms and conditions as set
forth herein. Total offering costs were $118,193.

3. Grants to Directors.Effective as of August 12, 2002, we issued
30,000 shares of our common stock to Robert Eide and 30,000 shares of our
common stock to Donald C. Hannah for their respective services as members of
our board of directors. These shares vest 10,000 upon grant and 10,000 per year for the next two years.

These issuances were exempt under Section 4(2) of the Securities Act.

4. MAF Acquisition.On November 20, 2002, we completed the
acquisition (the MAF Acquisition) of privately-held MAF BioNutritionals
(MAF) of Boonton, New Jersey. The purchase price was 2,500,000 restricted
shares of our common stock, with no registration rights. The issuance of
securities in the acquisition was not a public offering, and thus was an exempt
offering under Section 4(2) of the Securities Act. Concurrently with the
closing of the MAF Acquisition, we authorized the issuance of 50,000 shares of
common stock to Aegis Capital Corp in connection with investment banking
activities rendered in connection with the transaction.

5. MAF Private Placement.Concurrently with the closing of the MAF
Acquisition, we completed an initial placement of units to 12 accredited
investors, each unit consisting of 70,000 shares of our common stock, five year
warrants to acquire 70,000 shares of our common stock, such warrants
exercisable at $1.65 per share (the Series B Warrants) and five year warrants
to acquire 70,000 shares of our common stock at an exercise price of $2.14 per
share (the Series C Warrants). We raised a total of $1,197,115, net of
offering costs of $170,385. The aggregate number of shares of our common stock
issued from the offering was 1,367,500 shares at $1.00 per share. The units were sold to Sam
Leslie, Basil J. Asciutto, Janet Grove, Crescent International, Carolyn Geer
Gigli, Charles Labella, Thomas Quick, Leslie Quick, Triton West Group, Inc.,
Cranshire Capital LP, B.E. Geduild, Ellis A.G., and the Mark S. Smith Living
Trust . This offering was exempt pursuant to Rule 506 of Regulation D, under
the Securities Act.

No underwriters were involved in connection with the sales of securities referred to in Item 5.

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ITEM 6. MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the Companys financial statements and the notes thereto contained elsewhere
in this Annual Report on From 10-KSB.

This discussion contains forward looking statements that involve risks
and uncertainties. When used in this prospectus, the words expect,
anticipate, intend, believe, estimate, plan and similar expressions
as they relate to us are included to identify forward looking statements.
Actual results could differ materially from the results discussed in the
forward looking statements as a result of many factors, including those
described below, in the various risk factors set forth under Investment
Consideration in this Annual Report on From 10-KSB.

Background Overview

The Company was formed on January 22, 2001 under the name Nutritional
Systems, Inc. Effective May 7, 2001, the Company acquired substantially all
the assets of Vital Living, Inc., a Delaware corporation. After the
acquisition of Vital Living, Inc. assets, and the subsequent name change of
Nutritional Systems, Inc. to Vital Living, Inc., pursuant to the terms of the
merger agreement dated as of August 16, 2001, the Company merged with VCM
Technology Limited (VCM), a company reporting under the Securities and
Exchange Act of 1934. As set forth in the terms of the merger agreement, the
Company acquired all the outstanding shares of common stock of VCM from its
sole stockholder in an exchange for 5,062 shares the Companys restricted
common stock. Vital Living, Inc. which was the successor corporation in the
merger, commenced reporting under the Securities and Exchange Act of 1934 by
assuming the reporting status of VCM, which in turn provided us with the
ability to file for quotation on the OTC:BB.

The Company develops and markets evidence-based nutraceuticals formulated
by physicians for distribution through physicians. The Company is developing
and testing nutraceuticals in collaboration with leading medical experts based
on the best available scientific evidence. Vital Living nutraceuticals are
designed to be incorporated by physicians into a standard physician/patient
program, supported by a specially designed compliance regimen. The Companys
initial area of focus is cardiovascular health, the leading health concern in
America affecting 60 million consumers.

In November 2002, the Company completed the acquisition of all of the
outstanding equity of MAF by the issuance of 2,500,000 share of the Companys
common stock. MAF was a private company located in Boonton, NJ, which
formulates, markets and distributes natural and organic food based
preventative nutraceuticals and therapeutic/functional food products designed
for high efficacy to support proactive human cell maintenance and
rehabilitation, essential in the prevention and treatment of disease, as well
as overall optimal body performance and metabolic function.

The Company acquired MAF in an attempt to both broaden its product lines,
and gain a distribution network other than the physician script method which
is being used for Essentum.

The negotiations were conducted on an arms length basis, and each party
was represented by separate counsel and separate investing banking and
financial advisors. Pursuant to the transaction, which was a stock
acquisition, the Company acquired all of the intellectual property comprising
the MAF product lines. At the closing, MAF had negative working capital of
$(64,758) (before current maturities of long-term debt), office furniture and
equipment of $8,232, intellectual property of $327,520 and notes payable and
long-term debt of $864,133.

Results of Operations For the Year Ended December 31, 2002 Compared to the
Period from Inception (January 22, 2001) through December 31, 2001

Revenue.Revenue is generated from the sale of nutritional products. Total
revenue for the year ended December 31, 2002 was $260,844, an increase of
$170,553, or 189%, from $90,291 in 2001. The majority of the increase in
revenue was due to acquisition of MAF in November 2002 which contributed
approximately $138,000 to total revenue. A portion of the increase for the
year ended December 31, 2002 compared to 2001 was due to the introduction of
the Companys new product, Essentum, which commenced in August of 2002. Total
sales of Essentum were approximately $29,000 from the date that it was
introduced through December 31, 2002. There were no such sales of this product
during 2001. The remainder of the increase was due to the Company having a
full year of operation in 2002 compared to only eight months in 2001.

Cost of Goods Sold and Gross Profit.Cost of goods sold for the year ended
December 31, 2002 was $193,032, a decrease of $112,996, or 37%, compared to
$306,028 for 2001. The majority of the decrease was due to a write-off

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of inventory of $262,626 to reflect inventory at its net realizable value.
All of the products that the Company sells have a limited life span and at
that time a write-off was necessary due to an oversupply of certain retail
products that more than likely would have exceeded their expiration dates
before they could be sold. There was no such write down of inventory in 2002.
The acquisition of MAF increased cost of sales by approximately $67,000 in
2002 and cost of sales of existing products increased by $82,000 in 2001
primarily due to higher than expected costs of shipping and product storage.

Gross profit increased significantly for the year ended December 31, 2002 to
26% compared to 2001. The increase in gross profit percentage reflects the
write-off of inventory during 2001, as referenced above, offset by a lower
profit margin in 2002 due to higher costs of shipping and storage as
referenced to above. Excluding this one time write-off of inventory gross
profit margins would have been 52% for the year ended December 31, 2001.

Administrative Expense. For the year ended December 31, 2002, administrative
expense was $4,022,132, an increase of $3,197,571, or 388% compared to
$824,561 for the same period last year. The increase for the year ended
December 31, 2002 versus the same period in 2001 is primarily due to increased
support and infrastructure costs, including personnel, consultants and other
professionals associated with the development and launch of the Companys new
product Essentum. Additionally, the purchase of MAF increased administrative
expenses by $189,000 for the year ended December 31, 2002.

Payroll and other labor costs increased to $1,341,103 for the year ended
December 31, 2002 compared to $232,173 for 2001. The current year amount is
comprised of $947,000 of salaries and benefits and $394,000 of contract labor
costs. Since acquiring Vital Living Inc. (an Arizona Corporation) during May
2001, a portion of the increase in payroll and other labor costs is
attributable to having a full year of operations in 2002 compared to only
eight months in 2001. Additionally, two new executives were added in October
of 2001 and one executive was added in April of 2002. A signing bonus of
$150,000 was paid to the new executive who joined the Company in 2002 and
$67,500 was paid to the former President upon termination of his employment
agreement.

Consulting and professional fees increased to $1,607,621 compared to $184,428
for the same period a year ago. This increase was the result of entering into
various consulting agreements with individuals to provide strategic business
planning, product branding and marketing and product development services.
These consultants were generally paid a portion of their services in cash with
the majority of their compensation tied to performance which was paid for by
the issuance of common stock, common stock options or warrants. Included
within 2002 consulting and professional expense is $459,000 of expenses that
was paid from the issuance of common stock, options and warrants.

Office and equipment rent increased to $151,148 compared to $48,624 for 2001.
This increase was partially due to a full year of office and equipment rent in
2002 compared to only eight months in 2001 which contributed approximately
$24,000 of the overall increase. To accommodated anticipated growth and
needed office space, the Company relocated its corporate office in Phoenix
during June 2002 which has higher monthly rentals which contributed
approximately $55,000 of the increase in rent expense in 2002. Since the acquisition of
MAF, its headquarters have been moved to Boonton, New Jersey.

Selling and general and administrative expensed increased due to a general
increase in selling and marketing activity. It is expected the administrative
expenses will continue to be significant as the Company continues to expand
its marking efforts of its Essentum product and explore other channels to
market its other existing products.

Research and development (R&D) costs are expensed as they are incurred and
totaled $510,436 for the year ended December 31, 2002 compared to $37,500 for
2001. Prior to 2002, the Company had not conducted a significant amount of R&D
activities. During 2002, several consultants were engaged to assist in
formulating and branding the new product Essentum. R&D expenses primarily
consist of a portion of the salary of an employee, consulting and R&D related
travel expenses. Included within R&D consulting is $274,000 of expenses that
were paid by the issuance of common stock, options and warrants. The Company
expects that R&D activities will continue to be incurred in the future and
will include an anticipated clinical trial of its new product Essentum during
mid 2003 which is estimated to cost between $100,000 and $150,000.

Net loss.The Companys net loss from operations for the year ended December
31, 2002 was $3,949,895 compared to a net loss of $1,042,912 during 2001, an
increase of $2,096,983 or 279%. The increase in net loss was primarily the
result of increased support and infrastructure costs, including personnel,
consultants and other professionals associated with the anticipated launch of
the Companys new product Essentum, as referenced above. During the year
ended December 31, 2002, the Company continued to sell it existing retail
product lines but sales are not sufficient to cover existing overhead and fund
new product marketing efforts. It is expected that the Company will continue
to incur losses while it transitions its product lines from its existing
retail inventory of traditional

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supplements to its condition specific supplements (such as Essentum) and they
gain acceptance in the market and become more widely distributed throughout
the Companys distribution network. There is no assurance that the sales of
the Companys products will achieve volumes in quantities sufficient to
sustain ongoing operations. Accordingly, the Company will continue to raise
capital through the issuance of its common and/or preferred stock or debt
instruments in order to maintain its existing business strategy.

Period from Inception (January 22, 2001) through December 31, 2001

Revenues.Revenues for the year ended December 31, 2001 were $90,291, which
were the first revenues received by the Company since inception.

Cost of Sales.Cost of sales was $43,401, with a one-time inventory write down
of $262,626, providing a gross loss of $215,737. All of the products that the
Company sells have a limited life span thus a write-down was necessary due to
an oversupply of certain retail products that more than likely would have
exceeded their expiration dates before they could be sold. At December 31,
2001 the Company wrote its inventory down to the market value of the overall
inventory. This was done because the volume of sales of products were not as
expected and the products were within six months of expiration.

Administrative Expenses.General and administrative expenses for the year
ended December 31, 2001 were $824,561. General and administrative expenses
were comprised of payroll and other labor costs of $232,173, consulting and
professional expenses of $184,428 utilized to expand and support its
infrastructure as well as selling and general and administrative expenses of
$171,836 attributable to primarily normal administrative costs of conducting
its operations and costs of maintaining its corporate office and related
office equipment. The company also incurred $150,000 of organization expense
when the Company was originally acquired and the organizational structure was
put in place. This cost was expensed as incurred. R & D expenses were
approximately $37,500 and were largely comprised of third party consulting
expenses.

Net Loss.Net loss for the Company was $1,042,912 for the Period from
Inception (January 22, 2001) through December 31, 2001. The net loss was
primarily the result of support and infrastructure costs, including personnel,
consultants and other professionals needed to exploit the Companys business
strategy, primarily the development and eventual launch of its new product
Essentum. During 2001 the Company continued to sell it existing retail
product lines but sales were not sufficient to cover existing overhead and
fund new product development and marketing efforts. It is expected that the
Company will continue to incur losses while it transitions its product lines
from its existing retail inventory of traditional supplements to its condition
specific supplements offered through physicians. There is no assurance that
the sales of products will achieve volumes in quantities sufficient to sustain
ongoing operations. Accordingly, we will continue to raise capital through the
issuance of Common Stock, preferred stock, or debt instruments in order to
maintain its existing business strategy.

Liquidity and Capital Reserves

The accompanying consolidated financial statements have been prepared
assuming the Company will continue on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has suffered recurring losses from operations
during its operating history. Although management believes that the aggregate
net proceeds of approximately $4.8 million from the two private offerings in
2002, together with funds from operations, will be sufficient to cover
anticipated cash requirements for the near term, management will be required to
raise additional capital through an offering of securities to fund the
Companys operations, and will attempt to continue raising capital resources
until such time as the Company generates revenues sufficient to maintain itself
as a viable entity. Management is in the process of acquiring and developing
products for sale which would generate revenue to sustain the operations of the
Company. If successful, these actions will serve to mitigate the factors which
have raised substantial doubt about the Companys ability to continue as a
going concern and increase the availability of resources for funding of the
Companys current operations and future market development. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. No assurance can be given that such financing will be
available or, if available, that it will be on commercially favorable terms.
Moreover, available financing may be dilutive to investors.

Over the next few quarters the Company anticipates making several
material capital expenditures to be made. The first is an upgrade of its
database management/business software and hardware. As of December 31, 2002,
the Company has expended approximately $80,000 on upgrades of its
management/business information software and computer hardware and expects
future expenditures to be $25,000 to upgrade existing hardware. Additionally,
the Company has expressed an interest in conducting a double blinded, placebo,
multi arm study to validate and publish

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the results of the Essentum product as it reduces cardiovascular disease risk
factors. Management currently estimates the cost of clinical trials to be
between $100,000 and $150,000, however, anticipated clinical costs are
extremely hard to estimate and are variable based upon numerous conditions.
There can be no assurance that the clinical trials will fall within this
range, will be successful or that the Company will conduct such tests. If the
Company does conduct clinical trials, funds will come from a combination of
cash on hand and anticipated funds received from the private placement of its
securities.

In connection with the MAF Acquisition, the Company
assumed its outstanding debt obligations and provided a guaranty
of approximately (i) $242,000 of MAF debt which was incurred in connection
with MAFs acquisition in early 2002 of Boulder Endurance Co., Inc. The
Company also guaranteed a loan obligation of MAF of $582,000, which amount
relates to a loan facility from Commerce Bank NA of Flemington, NJ. This
obligation, which bears interest at the prime rate plus 1.5% and matures in 2008, is
75% guaranteed by the U.S. Small Business Administration.

To the extent that there are cash flow shortages, the Company intends to
finance its operations through the sale of equity securities, which would
include the private sales of common and preferred stock. On June 21, 2002,
Vital Living completed a private placement offering of 3,712,000 shares of 10%
Series A Preferred Stock at $1.00 per share resulting in cash proceeds of
$3,593,807, net of expenses of $118,193. The Preferred Stock was sold directly
by the Company to accredited investors and no commissions were paid on any
funds raised. It is anticipated that the Company will, from time to time, seek
financing from the private placement of common and /or preferred stock until
such time as the Company generates sufficient revenues from its operations to
cover operating expenses. The Company has suffered losses from operations
during its operating history and its ability to continue as a going concern is
dependent upon obtaining future profitable operations. Accordingly, no
assurance can be given that such financing will be available or, if available,
that it will be on commercially favorable terms. Moreover, favorable financing
may be dilutive to the shareholders.

Concurrently with the closing of the MAF Acquisition, the Company
completed the initial placement of 18.678 Units, each Unit consisting of
70,000 shares of Common Stock, five year warrants to acquire a 70,000 shares
of Common Stock, such warrants at an exercise price of $1.65 per share (the
Series B Warrants) and five year warrants to acquire 70,000 shares of Common
Stock at an exercise price of $2.14 per share (the Series C Warrants). The
total proceeds raised in the initial closing of the offering, was $1,307,500,
and $50,000 was raised in a subsequent closing, or an additional .858 units.
Offering expenses were $170,385 which has been netted against the proceeds
collected as presented within the statement of stockholders equity for the
year ended December 31, 2002.

The aggregate number of shares of Common Stock issued in all of the
closings was 1,367,500 shares. A like number of Series B Warrants and Series C
Warrants were also issued. The Company has an obligation to register the
shares of Common Stock issued in connection with the private placement, as
well as the shares which may be issued upon exercise of the Series B Warrants
and Series C Warrants, within 90 days from the closing, subject to extension
in certain events.

In the event that the Company doesnt achieve a positive cash flow, which
it anticipates accomplishing in, and in the event the Company is unable to
generate capital from loans, the sales of the its common or preferred stock,
or revenues, the Company will be forced to curtail or cease operations until
additional capital is available.

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under
that guarantee. The disclosure provisions of FIN 45 are effective for financial
statements of interim or annual periods that end after December 15, 2002. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantors year end. The adoption of FIN 45 by the
Company during the quarter ended March 31, 2003 will not have a material impact
on its current financial position and results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure, an Amendment of FAS No.
123.SFAS No. 148 provides additional transition guidance for those entities
that elect to voluntarily adopt the accounting provisions of SFAS No. 123. SFAS
No. 148 also requires that entities that continue to account for stock-based
compensation awards using the intrinsic value method of APB No. 25 will be
required to provide more prominent disclosures than currently required by SFAS
No. 123, including disclosures in interim financial statements. The transition
and annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The new interim disclosure provisions are
effective for the first interim

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period beginning after December 15, 2002. The Company will continue to account
for employee stock-based compensation under APB No. 25 and related
interpretations. The Company will adopt the annual disclosure requirements in
its financial statements for the year ending December 31, 2003, and the interim
disclosure requirements beginning in its financial statements for the quarter
ending March 31, 2003.




ITEM 7. FINANCIAL STATEMENTS

See index to Financial Statements and Financial Statements Schedules beginning
on page F-1 of this Form 10-KSB.






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

As originally reported in a Form 8-K filed on August 14, 2002, and amended on
September 30, 2002, our board of directors appointed Pannell Kerr Forster of
Texas, P.C., effective as of July 31, 2002, as our independent accountants for
the fiscal year ending December 31, 2002. This is a change in accountants
recommended by our executive management and approved by our Board of Directors.
The firm of Weaver & Martin (the Prior Auditors) was not retained by us on a
go forward basis, and thus should be considered to have been dismissed pursuant
to Item 304(a)(1)(i)of Regulation S-B.

The audit report issued by the Prior Auditors with respect to our
financial statements for the period since inception (January 22, 2001) through
December 31, 2001 (the conclusion of our first fiscal year of operations) was
qualified due to uncertainty of our ability to sustain ourselves as a going
concern.

Auditors

From inception (January 22, 2001) through July 31, 2002, when the Prior
Auditors were dismissed as our independent accountant, there were no
disagreements between us and the Prior Auditors as to any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of the
Prior Auditors, would have caused it to make a reference to the subject matter
of the disagreement in connection with its audit report.

The change in accountants does not result from any dissatisfaction with
the quality of professional services rendered by Weaver and Martin, LLC, as our
independent accountants.




PART III






|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
|------- | ---------------------------------------------------------------------------------------------------------------

MANAGEMENT

Directors and Executive Officers

As a condition to closing the MAF Acquisition, which effected as of
November 20, 2002, we entered into a new three year employment agreement with
William Coppel, who will serve as President and COO. We also amended and
restated Stuart Bensons employment agreement, who also serves as our Vice
Chairman of the board of directors in addition to serving as Executive Vice
President, Secretary and Treasury. Bradley D. Edson, our Chairman also entered
into an amendment to his employment contract providing for an additional year
of service. We also entered into a Voting Agreement with Bradley D. Edson,
Leslie Quick, Thomas Quick, William Coppel and certain other shareholders which
obligates these individuals to vote for certain members to be elected to the
board of directors.

Our directors and executive officers, together with their respective ages
and positions, are as follows:

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|                     |  |                                                                               |  |     |    | 
|-------------------- |  | ----------------------------------------------------------------------------- |  | --- | -- | 
|Name                 |  | Position                                                                      |  | Age
|                     |  |                                                                               |  |    
|Bradley D. Edson     |  | Chief Executive Officer and Chairman of the
Board                             |  |     | 43 | 
|William Coppel       |  | President and Chief Operating Officer,
Director                               |  |     | 47 | 
|Stuart A. Benson     |  | Executive Vice President, Secretary and
Treasurer; Vice Chairman of the Board |  |     | 49 | 
|William Vreeland     |  | Chief Financial Officer                                                       |  |     |    | 
|Eric Anderson        |  | Vice President  Business Development                                         |  |     | 35 | 
|Donald C. Hannah     |  | Director                                                                      |  |     | 67 | 
|Leslie C. Quick, III |  | Director                                                                      |  |     | 49 | 
|Robert Eide          |  | Director                                                                      |  |     | 50 | 
|Carson Beadle        |  | Director                                                                      |  |     | 69 | 

Directors are elected for a one year term at our annual meeting of
shareholders and serve until the due election and qualification of their
successors. Officers are appointed by and serve at the discretion of the board
of directors. The board of directors has established Audit and Compensation
Committees as follows: Messrs. Eide, Quick and Hannah are serving on the Audit
Committee and Messrs. Beadle, Quick and Hannah are serving on the Compensation
Committee.

The following is a brief summary of the background of our directors and
executive officers.

Bradley D. Edson, CEO and Chairman of the Board

Mr. Edson has been a director and Chief Executive Officer of the Company
since January 2001, and was president of our predecessor company, which
participated in the merger which resulted in our establishment, from its
inception until October 1, 2001, when Mr. Lind was appointed to that position.
Mr. Edson is an entrepreneur who created an ongoing nationwide specialty
property and casualty business and holds individual insurance licenses in over
35 states. In the past, he has been a principal in a NASD member firm and
member of the International Association of Financial Planners, and is a
longstanding member of the Young Entrepreneurs Organization and the World
Entrepreneurs Organization. Mr. Edson holds a Bachelor of Science degree in
Finance from Arizona State University.

William A. Coppel, President and Chief Operating Officer and Director

Mr. Coppel has spent virtually his entire business career as an executive
officer primarily in marketing and strategic planning for Quick & Reilly, Inc.
After serving as a branch manager for Quick & Reilly, he became Vice President,
Director of Marketing, in 1988 managing a $10.0 million marketing budget,
including strategic planning, market research and development of marketing
communications strategies for print, broadcast, merchandising and brand
marketing. In 1994, Mr. Coppel was appointed as Vice President, Director of
National Business Development and Sales, where he designed and implemented firm
wide sales training and professional development programs. From 1996 until
1999, he was responsible for developing new strategic direction for the firm to
combat the increasing competitive nature of the securities discount business by
developing a consultative role for the brokers from just that of order takers.
During this period he was responsible for strategic planning, product
development and e-commerce brokerage strategy for U.S. Clearing, Inc., a
subsidiary of Quick and Reilly Group, one of the nations largest clearing
firms. From 1999 until 2001, Mr. Coppel was Senior Vice President for
Strategic Planning, Marketing and Advertising. In this position he was
responsible for the integration of Quick & Reillys retail brokerage unit with
Fleet Bank after the acquisition and was responsible for all Marketing and
Advertising with a staff of 25 and a budget of $50.0 million. In 1998, Mr.
Coppel joined MAF, but only devoted a limited time to that business due to his
responsibilities with Quick & Reilly. In February 2001, he resigned from Quick
& Reilly to devote his full efforts to MAF.

Over the years, Mr. Coppel had been actively interested in nutrition and
health and fitness. Among his activities was becoming an accomplished
triathlon athlete competing in various Ironman competitions across the U.S.
Mr. Coppel has a B.A. degree in Political Science from Fairfield University
1977 and completed securities executive education programs at the Wharton
School of Business of the University of Pennsylvania. He is a member of the
U.S. Triathlon Federation and the Presidents Circle of Fairfield University.

Stuart A. Benson, Executive Vice President, Secretary and Treasurer and Vice
Chairman of the Board

Stuart Benson has served as our Executive Vice President since June 1,
2002. From 1997 through 2001, Mr. Benson served as Chairman of Custom Food
Concepts, Inc., a privately held company which operated a chain of restaurants
in southern California. The chain was sold to a publicly held company in 2001.
Mr. Benson has served in both public and private companies as chief executive
officer and chairman of the board, including such companies as The Great Earth
Vitamin Store chain and Nathans Famous, Inc. (NFI), a NASDAQ-listed fast
food

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restaurant chain, where he was responsible for significant growth of gross
revenues and locations. NFI, where Mr. Benson served as Chairman of the
Executive Committee, Chairman of the Board, President and CEO, is the oldest
hot dog chain in the U.S. During his tenure at Nathans Famous, Inc., that
entity expanded from 14 units to more than 300, including locations at
interstate highways and airports. During Mr. Bensons tenure as Chief
Executive Officer and Chairman of The Great Earth Vitamin Stores, the company
grew to approximately 150 full service vitamin retail stores throughout the
U.S. and became the second largest vitamin store in the U.S.

In May 2002, Mr. Benson filed for personal bankruptcy, primarily as a
result of federal tax liens relating to certain real estate syndication
activities in the 1980s. These liens relate to approximately $900 million of
recaptured phantom income attributable to Mr. Benson and his affiliates, as the
general partner, of various real estate syndication programs and partnerships,
as well as $900,000 of other claims and judgments. In 1995, other IRS liens,
relating to similar real estate syndication activities, were discharged by Mr.
Benson in a prior personal filing under Chapter 7. The current bankruptcy
filing is unrelated to Mr. Bensons activities at the Company, and the Company
does not believe that this filing will impact Mr. Bensons ability to perform
his duties as an officer in any material fashion.

Eric Anderson

Eric Anderson, 35, is Vice-President Business Development. Mr. Anderson
joined the Company after first consulting for Vital Living, Inc., of Arizona in
1999-2000. From 1998 through 2000 Mr. Anderson served as managing partner of
Ignite Marketing Group, which provides public relations, sales and marketing
programs for the nutraceutical industry. From 1994 through 1998 Mr. Anderson
served as Vice President Sales & Marketing for Pharmanutrients, Inc., a
manufacturer and marketer of patented nutritional technologies.

William Vreeland, Chief Financial Officer

William Vreeland has held a number of senior accounting and financial
management positions, as well as a variety of information management positions.
Mr. Vreeland has served as the Chief Financial Officer of MAF since February
2002. From 1998 through February 2002, Mr. Vreeland served as a consultant for
several companies, including Vitaquest International, Inc. and United Steel
Products. Prior to that time, Mr. Vreeland was the controller for
Bindagraphics. Mr. Vreeland began his accounting career in a public
accounting firm, and has served as the chief financial officer for numerous
companies with controllership responsibilities; including: Datascope
Corporation, Looseleaf Industries and Hafnia Ham Company. He also was
Assistant Controller at John Wood Company, and the Chief Accountant for Ayerst
Laboratories-International, a division of American Home Products Corporation.

Mr. Vreeland extended his career into information management as a regional
manager for Xerox, overseeing the design and implementation of enterprise
systems for a variety of client companies. He also held the Senior Systems
Planner position at American Cyanamid; where he was responsible for developing
and publishing the Chemicals Group Annual Long Range Systems Plan and also
responsible for managing the implementation of the first fully integrated
enterprise-wide system. At the FDIC/Resolution Trust Corporation; Mr. Vreeland
was a major contributor to the first comprehensive Information Resources
Management Plan, with responsibilities for developing the Information and
Systems Architecture for this large financial agency of the United States
government.

Mr. Vreelands academic achievements include the pursuit of leading edge
technology offered through professional societies and research groups; as well
as undergraduate study in accounting; and graduate level seminars and
professional programs in information management and strategic planning
methodologies.

Leslie C. Quick, III, Director

Leslie C. Quick III is Chairman and Chief Executive Officer of Fleet
Securities, Inc. and President and Chief Executive Officer of U.S. Clearing, a
division of Fleet Securities, Inc. Mr. Quick was appointed President of U.S.
Clearing in 1994, a position he has held since that time. Previously, he had
been President and Chief Operating Officer of The Quick & Reilly Group, Inc. in
1998, U.S. Clearing became part of Fleet Financial Group, now Fleet Boston
Financial Corporation, one of the nations largest and most successful
financial services firms.

Mr. Quick is a current member of the Board of Governors of the Chicago
Stock Exchange, a member of the Hearing Board of the New York Stock Exchange, a
trustee of Oak Knoll School in Summit, NJ and he is on the Bishops Financial
Council for the Diocese of Metuchen. He is a former member of the Board of
Directors for the Securities Industry Regulatory Council on Continuing
Education, a former Chairman of the Board of Trustees of St. Bonaventure
University, and a former Trustee of St. Vincents Hospital & Medical Center of
New York. Mr. Quick is the recipient of the Ellis Island Medal of Honor and
holds an honorary degree from St. Bonaventure University.

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Donald C. Hannah, Director

Mr. Hannah, 67, joined our Board of Directors in June 2002. Mr. Hannah
for over three decades has conceptualized and built more than 20 successful
companies in a variety of different businesses. He is recognized as a pioneer
in international marketing programs and was a finalist for Inc. Magazines
Entrepreneur of the Year Award. In 1957 he assumed control of a small local
tugboat and barge operation based in Chicago and built the company into a
worldwide marine shipping organization. Hannah Marine Company (HMC) is
currently the largest tugboat and barge company operating on the Great Lakes.
Mr. Hannah founded US Auction, Inc., which subsequently became affiliated with
Merrill Lynch Realty in 1988. Mr. Hannah was President and CEO of the Merrill
Lynch Realty Auction Division. In 1989 The Prudential Insurance Company of
America acquired Merrill Lynch Realty along with the Auction Division. Mr.
Hannah moved the offices of the company to Phoenix, Arizona in 1992 to focus on
government owned properties and changed the name of the company to US
Properties, Inc. (USP). Mr. Hannah is Chairman and CEO of US Properties, and
presently conducts real estate auctions and often assists in structuring
financing of real estate projects. From 1998 through the present, Mr. Hannah
continues to be a director and stockholder of HMC and USP, as well as serving
as a director of Windsor Gateway Housing LLC and Campers Club of America.
During this time, Mr. Hannah has also served as a director of Franchise Finance
Corporation (NYSE), Precision Standard Corporation (NASDAQ) and Semoth Capital
Corporation (Toronto Stock Exchange).

Robert Eide, Director

Mr. Eide, 49, who joined the board in June 2002, has served as the
Chairman and Chief Executive Officer of Aegis Capital Corp., a registered
broker-dealer since 1984. Since 1993, he has also served as a director of the
Vector Group Ltd. (VGR), a public company traded on the New York Stock
Exchange, and is a member of its Audit and Compensation Committees, as well as
serving as a director of VGR Holding. Mr. Eide serves as a director of
Nathans Famous Inc. (NFI), and is Chairman of NFIs Audit and Compensation
Committees. Mr. Eide also serves as a member of the Board of Directors of
Ladenburg Thalmann Financial Services Inc. (LTS), which is traded on the
American Stock Exchange. See Certain Transactions for a discussion of the
fees received by Mr. Eide in connection with certain investment banking
services being provided in connection with the MAF Acquisition

Carson E. Beadle, Director

Mr. Beadle has been the President of Carson E. Beadle, Inc., a
strategic-planning consulting firm in New York, since 1998. Prior to that time,
Mr. Beadle spent nearly 40 years with Marsh & McLennan, Companies where he
served on the Board of Director of William M. Mercer, a subsidiary, for 25 of
those years. As a senior partner of the William M. Mercer division, he was
responsible for the New York and Eastern Canada consulting practices and
various corporate functions, with a focus on employee benefits for large
employers and strategic decision-making. Over the years, Mr. Beadle has been
actively involved in a number of for-profit and non-profit organizations,
notably many in the field of public health. He is Chairman and Co-founder of
The Health Project, the White House-supported organization that presents the
annual C. Everett Koop National Health awards; Past-Chair and currently a
member of the Business Forum On Aging of the American Society On Aging; and one
of the Founding Directors of the Health Enhancement Research Organization of
Birmingham, among many other member and advisory positions held within
prominent management and healthcare organizations. Mr. Beadle currently serves
on the Board of Directors of Security Mutual Life Insurance Company of New York
of Binghamton, NY and National Security Life Insurance Company of Cincinnati,
OH. These company are mutual companies.

Mr. Beadle originated the flexible benefits concept in Canada and the
total benefits strategic decision-making concept in the United States. A
recognized benefits expert, he has given testimony before Senate Finance, House
Ways & Means and other government committees. He is also the author of over
100 articles appearing in The Wall Street Journal, the New England Journal of
Medicine, Fortune, the New York Timesand many other management and health
publications in the United States and Canada. Mr. Beadle studied economics and
human relations at the University of Toronto and industrial relations at
Queens University, Canada.

No executive officer or director has been the subject of any order,
judgment, or decree of any court of competent jurisdiction, or any regulatory
agency permanently or temporarily enjoining, barring suspending or otherwise
limiting him from acting as an investment advisor, underwriter, broker or
dealer in the securities industry, or as an affiliated person, director or
employee of an investment company, bank, savings and loan association, or
insurance company or from engaging in or continuing any conduct or practice in
connection with any such activity or in connection with the purchase or sale of
any securities. None of our executive officers or directors has been convicted
in any criminal proceeding (excluding traffic violations) or is the subject of
a criminal proceeding which is currently pending.

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No executive officers or directors are the subject of any pending legal
proceedings. Section 16(a) Beneficial Ownership Reporting Compliance, of the
Securities Exchange Act of 1934, as amended, requires our executive officers
and directors, and persons who beneficially own more than ten percent of our
common stock, to file initial reports of ownership and reports of changes in
ownership with the Commission. Executive officers, directors and greater than
ten percent beneficial owners are required by the Commission regulations to
furnish us with copies of all Section 16(a) forms that they file. Based upon a
review of the copies of such forms furnished to us and written representations
from our executive officers and directors, we believe that during the year
ended 2002, all Forms 3, 4 and 5 were filed on a timely basis for our executive
officers and directors, except for Mr. Bradley D. Edson, whose Form 4 for
warrant grants was not timely filed, and whose Form 4 for the purchase of 5,000
shares of common stock in the public markets was not timely filed; Mr. Donald
C. Hannah, whose Form 3 was not timely filed, and whose Form 4 for the purchase
of 6,900 shares of common stock in the public markets was not timely filed; Mr.
William Coppel whose Form 4 for the purchase of 2,000 shares of common stock in
the public markets was not timely filed; Mr. Carson Beadle, whose Form 4 for
the purchase of 2,000 shares of common stock in the public markets was not
timely filed; Mr. Robert Eide, whose Form 3 was not timely filed; Mr. Stuart A.
Benson, whose Form 3 was not timely filed, and whose Form 4 for the purchase of
5,000 shares of common stock in the public markets was not timely filed; and
Mr. Martin Gerst, whose Form 4 for the transfer of 100,000 shares of common
stock was not timely filed, and whose Form 5 for warrant grants was not timely
filed.

In addition to the Scientific Advisory Board described above, MAF has a
Nutrititional Advisory Board (NAB) which was formed in 1999. The members of
the NAB who serve without compensation, have met infrequently since the
inception of the board. MAF consults with NAB on an independent basis regarding
specific product formalities or endorsements.

Philip B. Maffetoneis the founder of MAF and has spent his entire career
involved with diet, nutrition, stress management and athletic training as a
teacher, writer and in the private practice of complementary medicine.
Commencing in 1977, he has been an author and lecturer on health and fitness,
diet and nutrition, lifestyle and stress management along with the following:
as a consultant to athletic teams, corporations and athletes specializing in
coaching, nutrition and exercise; as a consultant to various nutrition
companies responsible for product development, scientific writing and marketing
materials; as Chairman and CEO from 1989-1994 of the International College of
Applied Kinesiology; and in 1993-1999 as the founding trustee of the Foundation
for Allied Conservative Therapies Research. Throughout these activities, Dr.
Maffetones major contributions have been in the multifaceted area of human
performance as follows: insight into its physical, biochemical, and
mental/emotional aspects; probing research in diet and nutrition in relation to
disease prevention; an understanding of neuromuscular function and its relation
to healthcare and performance; and breakthroughs in complementary medicine and
its relationship to conventional healthcare. Dr. Maffetone has published 16
publications dealing with these areas in addition to over twenty professional
paper presentations in his field of expertise. Dr. Maffetone attended the
State University of New York and Rochester Institute of Technology, received a
BS Degree in Human Biology 1974 and a Doctor of Chiropractic Degree from the
National College of Chiropractic, Lombard, IL, 1977 along with post-doctoral
certifications in Meridian Therapy (Acupuncture), Physiotherapy and Applied
Kinesiology. He is a member of the International College of Applied
Kinesiology (1980-present), the National Athletic Trainers Association
(1987-present) and received in 1994 the honor of being named Coach of the Year
by Triathlete Magazine.

Dr. Michael H. Cardonehas spent his career to date as a scientist specializing
in cell biology and the regulation of Transcytosis. From 1986 until 1988, Dr.
Cardone was a regional associate at the University of California-San Francisco.
From 1988 until the present, he has maintained various teaching fellowships at
the University of California-San Francisco, the Burnham Institute and MIT with
whom he was until recently associated. From 1995 until 1996, Dr. Cardone was a
post Doctoral Associate with the Chiron Corporation. In 2000, he became a
founder and director of Cell Biology at Merrimac Pharmaceuticals in Cambridge,
MA. He has authored over 14 publications a number of these in conjunction with
various other scientists and has lectured on various nutrition matters across
the country. Dr. Cardone has a BA Degree in Biology from California State
University 1981, an MA Degree in Biology from that same institution 1985 and a
Ph.D. in Cell Biology from the University of California-San Francisco 1995. He
received the National Research Service Award in 1991-93 from the National
Heart, Lung and Blood Institute.

Dr. Gerry Leismanhas an extremely strong scientific background in a university
education environment in the United States and Israel specializing in
psychology, health sciences and neuroscience. From 1972 until 1982, Dr.
Leisman was Chairperson, Biomedical Computer science, Associate Professor,
Health Sciences, Associate Professor, Psychiatry, Neurology and Ophthalmology
and Director, Clinical Neurosciences Laboratories for the City University in
New York, College of Medicine and Dentistry of NJ and the Eye Institute of NJ,
Newark. From 1982-1986, he was Vice President, Research and Development, for
American Electromedics Corp and the CEO for Matura Research & Development Corp.
From 1986 until 1990, he was Dean of Research and Professor of Neurology, Life
Science and Electrical Engineering at the NY Institute of Technology in Old
Westbury, NY. From

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1990 until 2000, Dr. Leisman was Chair of the Department of Psychology, and
Associate Dean and Director of the Institute for Biomedical Engineering
Rehabilitation Services for Touro University, located in Bayshore, NY and
Jerusalem, ISR. Touro is a multinational university with 10,000 students
worldwide from Associates to Doctoral levels and professional programs in
medicine, law and the health sciences. From 1997-2000, he was also the Acting
President for American International University in Israel, a new university for
liberal arts and professional studies. From 2000 to the present, Dr. Leisman
has been professor of Cognitive Neuroscience and Human Factors at Rensselaer
Polytechnic Institute in Troy, NY. Dr. Leisman has published himself and with
others numerous publications and technical manuscripts and is the author of a
number of patents and technological innovations. He has a BA Degree in
Biology/Psychology from Queens College CUNY 1968, a Master of Scientific
Neuropsychology from the University of Manchester 1972 and a Ph.D. in
Neuropsychology from Union University in Cincinnati, OH 1979. Dr. Leisman is
Board Certified in Forensic Medicine and Forensic Neuropsychology among others,
is a member of various learned societies and has received numerous honors and
awards including a Life Fellow, American College of Forensic Examiners 1994.

Dr. Thomas M. Motykahas had to date a career in medicine encompassing
academics corporate and private practice. After residency at the Cambridge
Hospital affiliated with the Harvard Medical School of Internal Medicine
1994-96, Dr. Motyka from 1996 until 1999 until an instructor, Division of
General Internal Medicine and Clinical Epidemiology at the University of North
Carolina at Chapel Hill, NC. From 1999 until 2000, he was Director of
Corporate Compliance for Medigy, Inc. From 1999 until the present, Dr. Motyka
has been Clinical Assistant Professor, Division of General Internal Medicine
and Clinical Epidemiology and Adjunct Assistant Professor, Department of Family
Medicine at the University of North Carolina at Chapel Hill, NC. During the
period 1998 until the present, he has also been in private practice in
Carrburo, Chapel Hill and Durham, NC. Dr. Motyka has a BS Degree in Chemistry
from Cornell University 1988 and a Medical Degree in Osteopathic Medicine from
the Philadelphia College of Osteopathic Medicine 1993. He has made numerous
presentations in Osteopathic therapy and the sale of herbal and nutritive
supplements for disease, among the latest being Arthritis, Clinical Relevance
of Medical Herbs and Nutritional Supplements in the Management of Major Medical
Problems at the UNC School of Medicine CME Conference 8/21/01 and the Update
on Nutritional Supplements, Nourishing Our Patients: What Nurses Need to Know
About Nutrition at the UNC School of Nursing continuing education program
10/15/01. He is also the author with others of several medical publications
relating to neurological matters and has taught a variety of courses in herbal
and nutritional supplements and other principles and practices of alternative
and complementary medicine.

Dr. Walter H. Schmitt, Jr.has been involved in the private practice of
kinesiology in Chapel Hill, NC. Dr. Schmitt has authored innumerable articles
on kinesiology procedures and clinical nutritional products. He received a BA
Degree in Economics from Duke University 1970 and a BS in Human Biology from
the National College of Chiropractic 1974. From 1993-1999 he was a Trustee of
the Foundation for Alternative Conservative Therapies Research and from 1996 to
the present has been on the Editorial review Board of Alternative Medicine
Review.

Consultants

In addition to the board of directors and the Scientific Advisory Board,
we have established relationships with four individuals who serve as
consultants. Other than with respect to Dr. Maffetone, whose background is
described above, their backgrounds are set forth below.

Leslie D. Michelson, Healthcare Industry Investor and Consultant

Leslie D. Michelson is an independent healthcare industry investor and
consultant to emerging healthcare companies. Mr. Michelson is the founder and
former chief executive officer of Acurian, a leading provider of clinical trial
patient and investigator recruitment solutions for the pharmaceutical and
biotechnology industries. Prior to founding Acurian, Mr. Michelson served as
chairman and chief executive officer of Value Health Sciences, a leading
disease management company he founded in 1987. Prior to founding Value Health
Sciences, Mr. Michelson was an associate and partner with SDG Enterprises, a
private equity firm, where he specialized in real estate and early-stage
healthcare investing.

An attorney by training, Mr. Michelson began his career practicing law.
He served as a law clerk for Caleb Wright, emeritus Chief Justice of the U.S.
District Court in Washington, D.C., worked as an associate at the law firm of
Wald, Harkrader & Ross and served as a special assistant to the General Counsel
of the U.S. Department of Health and Human Services.

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Mr. Michelson is a director and former chairman of the compensation
committee of Catellus Development Corporation, a $2.5 billion NYSE-listed real
estate development company, and serves as a director of G&L Realty, an
NYSE-listed health care real estate investment trust.

Stephen S. Chen, Senior Advisor for China

Mr. Chen is an international executive who provides consulting services in
assisting major U.S. corporations in entering markets in China and the Far
East. He is responsible for supervising the introduction of our product in
China and seeking financing and other opportunities in the Far East. Mr. Chen,
the founder of Amerihua International Enterprises, Inc., a
consulting/management company started in 1981, pioneered the initial
development of China International Trust & Investment Corp., which has become
Chinas largest investment group and holding company. Mr. Chen negotiated,
concluded and implemented many significantly large trading transactions and
cooperative programs between China and western companies such as United
Technologies Corp., General Motors, Beatrice Foods, Xerox, Siemens, SAAB,
Lockheed, Renault, Terex, Fiat, and many Hong Kong Companies, and also has also
served as an interpreter for Chinas state leaders.




ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table provides certain summary information concerning the
compensation earned for services rendered in all capacities to us for the
fiscal years ended December 31, 2002 and December 31, 2001 by our chief
executive officer and certain executive officers (collectively, the Named
Officers):

|                  |                     |      |                     |            |                        |       |         |                  |     |          |         |          |     |              |              |   |      |  |          |   |           |  |          |           |     |   |         |     |    
|----------------- | ------------------- | ---- | ------------------- | ---------- | ---------------------- | ----- | ------- | ---------------- | --- | -------- | ------- | -------- | --- | ------------ | ------------ | - | ---- |  | -------- | - | --------- |  | -------- | --------- | --- | - | ------- | --- | ---
|                  |                     |      | Annual Compensation |            | Long-Term Compensation |       |         |                  |    
|                  |                     |      |                     |            |                        |       |         |                  |    
|                  |                     |      |                     |            |                        |       |         |                  |     |          |         |          |     |              |              |   |      |  |          |   |           |  | Stock    |           |     |   |        
|                  |                     |      |                     |            |                        |       |         |                  |     |          |         |          |     |              |              |   |      |  |          |   |           |  | Options/ |           |     |   |        
|                  |                     |      |                     |            |                        |       |         |                  |     |          |         |          |     |              | Other Annual |   | SARs |  | Warrants |   | All Other
|Name and Position |                     | Year |                     | Salary ($) |                        | Bonus |         | Compensation ($) |     | (Shares) |         | (Shares) |     | Compensation
|                  |                     |      |                     |            |                        |       |         |                  |     |          |         |          |     |             
|Bradley D. Edson  |                     |      | 2002                |            |                        | $     | 179,468 |                  |     |          | 0       |          |     |              | 0            |   |      |  | 0        |   |           |  | 0        |           |     | $ | 26,500  | (3)
|                  | CEO, Director       |      |                     | 2001       |                        |       | $       | 45,000           | (1) |          |         | 0        |     |              |              | 0 |      |  |          | 0 |           |  |          | 1,000,000 | (4) |   |         | 0   | (4)
|Kenneth F. Lind,  |                     |      | 2002                |            |                        | $     | 97,500  |                  |     |          | 0       |          |     |              | 0            |   |      |  | 0        |   |           |  | 0        |           |     | $ | 67,500  | (5)
|                  | President           |      |                     | 2001       |                        |       | $       | 37,500           | (1) |          | $       | 54,000   | (2) |              |              | 0 |      |  |          | 0 |           |  |          | 250,000   | (6) |   |         | 0   | (6)
|Eric Anderson     |                     |      | 2002                |            |                        | $     | 103,500 |                  |     |          | 0       |          |     |              | 0            |   |      |  | 0        |   |           |  | 0        |           |     |   | 0       |    
|                  | Vice President      |      |                     | 2001       |                        |       | $       | 25,500           | (1) |          |         | 0        |     |              |              | 0 |      |  |          | 0 |           |  |          | 200,000   | (9) |   |         | 0   | (9)
|Stuart Benson     |                     |      | 2002                |            |                        | $     | 51,667  |                  |     | $        | 150,000 | (2)      |     |              | 0            |   |      |  | 0        |   |           |  | 0        |           |     | $ | 207,180 | (7)
|                  | Vice President      |      |                     | 2001       |                        |       |         | 0                |     |          |         | 0        |     |              |              | 0 |      |  |          | 0 |           |  |          | 0         |     |   |         | 0   |    
|Martin J. Gerst   |                     |      | 2002                |            |                        |       | 0       |                  |     |          | 0       |          |     |              | 0            |   |      |  | 0        |   |           |  | 500,000  | (8)       |     | $ | 151,188 | (8)
|                  | Secretary/Treasurer |      |                     | 2001       |                        |       |         | 0                |     |          |         | 0        |     |              |              | 0 |      |  |          | 0 |           |  |          | 0         |     |   |         | 0   |    
|                  | Director            |      |                     |            |                        |       |         |                  |     |          |         |          |     |              |              |   |      |  |          |   |           |  |          |           |     |   |         |     |    



---

|(1) |  | Represents accrued salary, which has subsequently been paid in 2002.                                                                                                                                                                                                                                                                       
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Represents signing bonuses paid to Mr. Lind and Mr. Benson executed as a part of their employment agreements.
For Mr. Lind, half of his bonus was paid in 2001 and the other half was paid in 2002.                                                                                                                                        
|   
|   
|   
|   
|(3) |  | This amount represents amounts that were paid by us for the benefit of entities controlled by Bradley D. Edson.
These amounts were not repaid and were written off as compensation to Mr. Edson.                                                                                                                                           
|   
|   
|   
|   
|(4) |  | Represents the fair value of warrants using the Black-Scholes option pricing model to purchase 1,000,000 shares
of our common stock at an exercise price of $0.35 per share that Mr. Edson received as a component of his
employment agreement effective October 1, 2001. These warrants expire on September 30, 2004 and are fully
vested.
|   
|   
|   
|   
|(5) |  | Represents the amount of severance paid as of December 31, 2002. Mr. Lind was terminated as
President on December 1, 2002.                                                                                                                                                                                                                 

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|(6) |  | Represents the fair value of warrants using the Black-Scholes option pricing model to purchase 250,000 shares of
common stock at an exercise price of $0.35 per share that Mr. Lind received as a component of his employment
agreement effective October 1, 2001. These warrants expire on September 30, 2004 and are fully vested.                                                                                                                                                                                                                                                
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(7) |  | Represents other compensation for Mr. Benson for the year ended December 31, 2002. It is comprised of $37,000
paid to him for consulting services and $170,180 representing the fair value of warrants using the Black-Scholes
option pricing model to purchase 1,340,000 shares of our common stock an exercise price of $1.50 per share that
Mr. Benson received as a component of his employment agreement. These warrants expire on March 31, 2007 and are
fully vested.                                                                                                        
|   
|   
|   
|   
|(8) |  | Represents other compensation for Mr. Gerst for the year ended December 31, 2002. It is comprised of $87,688
paid to him for consulting services and $63,500 representing the fair value of warrants using the Black-Scholes
option pricing model to purchase 500,000 shares of our common stock an exercise price of $1.50 per share that Mr.
Gerst received as a component of his three year consulting agreement. These warrants expire on March 31, 2007
and are fully vested. Mr. Gerst resigned as an officer and director effective as of the closing of the MAF
Acquisition.
|   
|   
|   
|   
|(9) |  | Represents the fair value of warrants using the Black-Scholes option pricing model to purchase 200,000 shares of
our common stock at an exercise price of $0.35 per share that Mr. Anderson received as a component of his
employment agreement effective October 1, 2001. These warrants expire on September 30, 2004 and are fully
vested.                                                                                                                                                                                                                                        

STOCK OPTION AND STOCK APPRECIATION RIGHTS GRANTS

The following table sets forth the individual grants of stock options and stock
appreciation rights made during the fiscal year ended December 31, 2002 to the
Named Officers:

|                 |  |            |           |                |  |             |    |            |  |   |      |     |  |  |           | 
|---------------- |  | ---------- | --------- | -------------- |  | ----------- | -- | ---------- |  | - | ---- | --- |  |  | --------- | 
|                 |  | Number of  |           |                |  |             |    |            |  |   |      |     |  | 
|                 |  | Securities |           | % of Total     |  |             |    |            |  |   |      |    
|                 |  | Underlying |           | Options/SARs   |  |             |    |            |  |   |      |    
|                 |  | Options/   |           | Granted to     |  | Exercise    |    |            |  |  
|                 |  | SARs       |           | Employees      |  | Or Base     |    | Expiration
|Name             |  | Granted    |           | in Fiscal Year |  | Price($/Sh) |    | Date      
|                 |  |            |           |                |  |             |    |           
|Stuart Benson(1) |  |            | 1,340,000 |                |  |             | 89 | %(3)       |  | $ | 1.50 | (2) |  |  | 3/31/2007 | 



---

|(1) |  | Mr. Bensons grants were made independent of the Companys Stock Option Plans, and represents
warrants which were issued to him pursuant to the terms of his Employment Agreement. They are presented
here as if they were stock options.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Upon exercise, the Company is required to pay 50% of the exercise price.                                                                                                                                                                 
|   
|   
|   
|   
|(3) |  | Percentage assumes a total of 1,495,000 warrants and options granted to employees during 2002.                                                                                                                                           

STOCK OPTION AND STOCK APPRECIATION RIGHTS EXERCISES AND YEAR-END VALUES

Shown below is information for the Named Officers with respect to the exercise
of stock options and the ownership of stock options and stock appreciation
rights and their values as of December 31, 2002.

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|                 |  |             |   |              |  |             |   |               |  |                                   |           |                              |  |  |   |  |  |   |         |  |  |   |   | 
|---------------- |  | ----------- | - | ------------ |  | ----------- | - | ------------- |  | --------------------------------- | --------- | ---------------------------- |  |  | - |  |  | - | ------- |  |  | - | - | 
|                 |  |             |   |              |  |             |   |               |  | Number of Securities              |           | Value of Unexercised        
|                 |  |             |   |              |  |             |   |               |  | Underlying Unexercised            |           | In-the-Money Options/       
|                 |  |             |   |              |  |             |   |               |  | Options/SARs at December 31, 2002 |           | SARs at December 31, 2002(1)
|                 |  | Shares      |   |              |  |             |   |               |  |                                  
|                 |  | Acquired    |   | Value        |  | Exercisable |   | Unexercisable |  | Exercisable                       |           | Unexercisable               
|Name             |  | On Exercise |   | Realized ($) |  | (Shares)    |   | (Shares)      |  | ($)                               |           | ($)                         
|                 |  |             |   |              |  |             |   |               |  |                                   |           |                             
|Bradley Edson(1) |  |             |  |              |  | $           |  |               |  |                                   | 1,000,000 |                              |  |  |  |  |  | $ | 450,000 |  |  | $ |  | 
|Kenneth Lind(1)  |  |             |  |              |  | $           |  |               |  |                                   | 250,000   |                              |  |  |  |  |  | $ | 112,500 |  |  | $ |  | 
|Stuart Benson(1) |  |             |  |              |  | $           |  |               |  |                                   | 1,340,000 |                              |  |  |  |  |  | $ |        |  |  | $ |  | 
|Martin Gerst(1)  |  |             |  |              |  | $           |  |               |  |                                   | 500,000   |                              |  |  |  |  |  | $ |        |  |  | $ |  | 



---

|(1) |  | Each individual named received warrants independent of the Companys Stock Option Plans. These warrants are reflected in the table as if they were
stock options.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

DIRECTOR COMPENSATION

We have agreed that non-management directors will each receive a one-time
grant of 30,000 shares of restricted common stock, 10,000 shares which vest
immediately upon election to the board of directors, and the balance of which
vest over the first two years of service on the board of directors at the rate
of 10,000 shares per year. In addition, non-management directors will receive
a fee of $24,000 per annum for each year of service on the board of directors,
plus reimbursement for expenses.

EMPLOYMENT AGREEMENTS

Prior to October 1, 2001, none of our officers or directors had received
monetary compensation for their services as an officer or director. Kenneth
Lind and Eric Anderson were appointed as officers by the board of directors on
September 17, 2001. Prior to such date, all officers were previously employed
by us on a month to month basis.

On October 1, 2001, we entered into an employment agreement with Bradley
D. Edson. The term of the agreement is three (3) years Mr. Edson serves as
Chief Executive Officer and receives a base salary of $180,000 per annum for
the first year of employment, increasing to $204,000 per annum on the first
anniversary of the signing of the agreement, and increasing to $228,000 on the
second anniversary of the signing of the agreement. As an inducement for Mr.
Edson to begin his employment with us, we issued to Mr. Edson 1,000,000
warrants to purchase our common stock at $0.35 per share. The warrants are
exercisable at any time and expire on the third anniversary of issuance. In
connection with the closing of the MAF acquisition, we entered into an
amendment to Mr. Edsons employment agreement. The amendment provides for an
extension of his employment agreement through November 2005, and provides that
Mr. Edson may participate in a profit sharing plan to be established for
shareholders/executives which plan will be funded by up to 6% of our net
profits, as may be determined by our board of directors.

On October 1, 2001, we entered into an employment agreement with Eric
Anderson. The term of the agreement is three (3) years. Mr. Anderson serves
as Executive Vice-President of Business Development. Mr. Anderson receives a
base salary of $102,000 per annum. As an inducement for Mr. Anderson to begin
his employment, we issued to Mr. Anderson 200,000 warrants to purchase our
Common Stock at $0.35 per share. The warrants are exercisable at any time and
expire on the third anniversary of issuance.

On October 1, 2001, we entered into a three year employment agreement with
Kenneth F. Lind. Mr. Lind served as President until December 2002. Mr. Lind
received a base salary of $150,000 per annum. As an inducement for Mr. Lind to
begin his employment, we paid Mr. Lind a cash signing bonus of $54,000. As an
additional incentive for Mr. Lind to begin his employment, we issued to Mr.
Lind 250,000 warrants to purchase our common stock at $0.35 per share. The
warrants are exercisable at any time and expire on the third anniversary of
issuance. Effective as of December 1, 2002, the employment agreement with Mr.
Lind was terminated, and he was
terminated as President. The parties entered into a mutually acceptable
settlement agreement in respect of the compensation owing under his agreement.

As required under the terms of the MAF acquisition agreement, effective as
of November 20, 2002, we entered into a three year employment agreement with
William Coppel. Pursuant to the terms of the agreement, Mr. Coppel agreed to
serve as our President and Chief Operating Officer for a base salary of at the
rate of $ 140,000 per annum during the first year of the agreement, $160,000
during the second year of the employment agreement, and $180,000 during the
last year of the agreement.

On April 1, 2002, we entered into a three year employment agreement with
Stuart Benson. Pursuant to the terms of the agreement, which was effective on
June 1, 2002, Mr. Benson agreed to serve as our Executive Vice President for a
base salary of $80,000 per annum, increasing to $120,000 on the first
anniversary of the effective

35



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date of his agreement. As an inducement for Mr.
Benson to begin his employment with us, we issued Mr. Benson 1,340,000 warrants
to purchase our common stock at $1.50 per share. Mr. Benson also received a
cash signing bonus of $150,000. The warrants are exercisable at any time and
expire on the fifth anniversary of issuance, and upon exercise, we are
obligated to pay 50% of the exercise price. In connection with the closing of
the MAF acquisition, Mr. Bensons employment agreement was amended to extend
the term through November 2005. Pursuant to the terms of his employment
agreement, Mr. Benson will receive $140,000 per annum during the first year;
$160,000 per annum during the second year and $180,000 per annum during the
third year. Mr. Benson is also eligible to participate in our profit
participation plan.

If Messrs. Edson, Coppell or Bensons employment is terminated without
cause, we are obligated to pay such employee, within 30 days of such
termination, the remaining balance of the base compensation for the remainder
of their respective terms. Additionally, with respect to Mr. Coppel, if there
is a termination without cause, we are obligated to repay any indebtedness
relating to that SBA loan and Boulder Notes unless we are, at the time of such
termination, current (and we remain current) in the obligations owing
thereunder. The term current means that we have paid, and continue to pay
the obligations relating to such debt as they mature or within any applicable
grace period. There is no intention or obligation on our part to accelerate the
payment structure in the event of termination of Mr. Coppel for cause. We
have agreed to indemnify and hold harmless Mr. Coppel for all costs and
expenses reasonably incurred in the event any obligee on the Boulder Notes or
the Commerce Bank SBA loan brings an action or seek collecting of any such sums
from Mr. Coppel.

EQUITY COMPENSATION PLAN INFORMATION

|                                                       |  |                      |           |                   |  |                                     |      |  |  |  |           | 
|------------------------------------------------------ |  | -------------------- | --------- | ----------------- |  | ----------------------------------- | ---- |  |  |  | --------- | 
|                                                       |  |                      |           |                   |  | Weighted-average                    |      |  |  | 
|                                                       |  | Number of Securities |           | exercise price of |  |                                     |      | 
|                                                       |  | To be issued         |           | outstanding       |  |                                     |      | 
|                                                       |  | Upon exercise of     |           | options           |  | Number of securities remaining     
|                                                       |  | outstanding options  |           | warrants and      |  | available for future issuance under
|Plan category                                          |  | warrants and rights  |           | rights            |  | equity compensation plans          
|                                                       |  |                      |           |                   |  |                                    
|Equity Compensation
plans approved by
security
holders |  |                      | 3,385,000 |                   |  | $                                   | 0.87 |  |  |  | 1,115,000 | 






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

The following table sets forth, as of March 27, 2003, the ownership of our
common stock by (i) each person who is known by us to own of record
beneficially more than 5% of the common stock, (ii) each of our directors and
executive officers, and (iii) all directors and executive officers as a group.
Except as otherwise indicated, the shareholders listed on the table have sole
voting and investment power with respect to the shares indicated.

|                                                        |  |           |           |                    |  |  |       |  
|------------------------------------------------------- |  | --------- | --------- | ------------------ |  |  | ----- | -
|Name of Beneficial                                      |  |           |           |                    |  |  |       |  
|Owner(2)                                                |  | Number of |           | Percent(3)        
|And Post                                                |  | Shares    |           | Beneficially Owned
|                                                        |  |           |           |                   
|Bradley D. Edson,(4) CEO, Director                      |  |           | 3,738,050 |                    |  |  | 14.78 | %
|William Coppel, President and COO, Director             |  |           | 773,069   |                    |  |  | 3.18  | %
|Martin J. Gerst(5)                                      |  |           | 3,238,050 |                    |  |  | 13.06 | %
|William Vreeland, Chief Financial Officer               |  |           | 25,000    | (1)                |  |  |      |  
|Kenneth F. Lind (6) Former President                    |  |           | 1,000,000 |                    |  |  | 4.08  | %
|Eric Anderson(7) Vice President of Business Development |  |           | 200,000   | (1)                |  |  |      |  
|Stuart A. Benson(8), Executive Vice President           |  |           | 1,340,000 |                    |  |  | 5.23  | %
|Robert Eide(9),Director                                 |  |           | 85,000    | (1)                |  |  |      |  
|Donald C. Hannah(10),Director                           |  |           | 530,000   |                    |  |  | 2.18  | %
|Stephen Songsheng Chen,(11)                             |  |           | 1,400,000 |                    |  |  | 5.72  | %
|Leslie Quick(12), Director                              |  |           | 495,830   |                    |  |  | 2.04  | %
|Carson Beadle, Director                                 |  |           | 25,000    | (1)                |  |  |      |  
|All Directors and Officers As a Group (seven)           |  |           | 7,011,949 |                    |  |  | 26.29 | %

36



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|(1)  |  | Less than 1%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | As used in this table, beneficial ownership means the sole or shared power to vote, or to direct the voting of a
security or the sole or shared investment power with respect to common stock, (i.e., the power to dispose of, or to
direct the disposition of a security). The address of each person is care of the Company, 5080 North 40th Street,
Suite 105, Phoenix, Arizona.                                                                                                                
|    
|    
|    
|    
|(3)  |  | Based on 24,289,616 shares outstanding, which number includes (i) 17,842,616 shares outstanding as of March 27, 2003
and (ii) assumes the conversion of 3,712,000 shares of Series A Preferred Stock outstanding as of March 27, 2003 into
a like number of shares of common stock and (iii) assumes the issuance of all of the shares of common stock
underlying the Series B Warrants and Series C Warrants, but excludes any other shares issuable upon the exercise of
other options or warrants.
|    
|    
|    
|    
|(4)  |  | Includes 1,000,000 warrants to purchase shares of common stock at $0.35 per share. Does not include 150,000 shares,
65,000 shares and 385,000 shares of common stock held by Michael Edson, Daryl Edson and Thelma Edson, respectively,
who are the brothers and mother of Bradley D. Edson. Mr. Edson disclaims beneficial ownership of such shares.                                                                                                                                                
|    
|    
|    
|    
|(5)  |  | Includes 500,000 warrants to purchase shares of common stock at $1.50 per share.                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|    
|    
|    
|(6)  |  | Terminated effective December 1, 2002. Includes 250,000 warrants to purchase shares of common stock at $0.35 per
share.                                                                                                                                                                                                                                                                                                                                                                              
|    
|    
|    
|    
|(7)  |  | Includes 200,000 warrants to purchase shares of common stock at $0.35 per share.                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|    
|    
|    
|(8)  |  | Includes 1,340,000 warrants to purchase shares of common stock at $1.50 per share. Does not include 50,000 shares
and 25,000 shares, respectively, of Series A Preferred Stock owned by Gladys R. Benson and Mitchell Benson, the wife
and brother of Stuart Benson. Mr. Benson disclaims beneficial ownership of such shares.                                                                                                                                                                       
|    
|    
|    
|    
|(9)  |  | Includes 30,000 shares of restricted stock received as a director, 10,000 shares of which are immediately vested with
the balance of the shares subject to vesting over a two year period. Includes 50,000 shares of common stock owned by
Aegis Capital (Aegis). Robert Eide is President and CEO of Aegis.                                                                                                                                                                                       
|    
|    
|    
|    
|(10) |  | Includes 30,000 shares of restricted common stock received as a director, 10,000 shares of which are immediately
vested with the balance of the shares subject to vesting over a two year period. Does not include 25,000 shares of
Series A Preferred Stock owned by Mr. Hannahs son. Does not include 200,000 shares of Series A Preferred Stock
which Mr. Stephen S. Chen has agreed to transfer to Mr. Hannah upon Mr. Hannahs written request.                                                
|    
|    
|    
|    
|(11) |  | Mr. Chen owns 1,200,000 shares of Series A Preferred Stock, which are convertible into a like number of shares of
common stock; 200,000 shares of which Mr. Chen has agreed to transfer to Mr. Hannah upon Mr. Hannahs written
request. Includes 200,000 options to purchase shares of common stock at $3.00 per share.                                                                                                                                                                             
|    
|    
|    
|    
|(12) |  | Does not include 200,000
shares of common stock owned by Thomas Quick, which Leslie Quick disclaims beneficial
ownership of.                                                                                                                                                                                                                                                                                                                                                                         




ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On May 21, 2001, Bradley D. Edson, Martin J. Gerst, Donald C. Hannah, and
Kenneth F. Lind, principal stockholders, directors and officers, entered into a
lock up agreement, which lock up agreement was amended June 19, 2001 at the
request of the Securities Administrator for the State of Nevada. Pursuant to
the amendment to the lock up agreement, the parties collectively agreed to a
lock up of their shares until the earlier of (i) a period of three years from
June 2001; (ii) when our common stock is traded on the NASD OTC:BB at an
average share price of greater than $0.28 for a minimum of three months; (iii)
the common stock is listed on The NASDAQ Small Cap or higher market; or (iv) we
have paid the initial purchase price back to the purchasing shareholders in the
Regulation D, Rule 504 Registration filed with the State of Nevada in June of
2001. In connection with the settlement of Mr. Linds employment agreement,
the lock-up agreements were effectively extended through the

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earlier to occur
of (a) 120 days following the effective date of a Registration Statement on
Form SB-2, which is currently pending or (b) November 20, 2003

Prior to June 1, 2002, for a period of 13 months, we leased our executive
offices and related storage space at 2800 S. Rural Road, Tempe, Arizona from
Camper Clubs of America, Inc., a company founded and owned by Mr. Edson and Mr.
Gerst, who were our directors and founders. Total amounts paid for rent and
office costs were $51,095. The terms and conditions of the lease were deemed
to be at market rates. As of June 1, 2002 we have procured new office space
from an unaffiliated party.

Effective as of August 1, 2001, we entered into a Consultant Agreement
with Michael Edson. Michael Edson is the brother of our CEO, Bradley D. Edson.
Mr. Edsons responsibilities include the prospecting, establishing and
servicing of various complementary and alternative practices as well as other
proprietary distribution channels. To date he has initiated selling agreements
with over 100 physician offices and specialty health food stores. Mr. Edson
has worked for us since our inception for no compensation, and since May 7,
2001 has applied the majority of his time to our operation. A consulting
agreement was formalized with Mr. Edson on August 1, 2001. The 12 month
agreement calls for total compensation of $75,000 and runs from August 1, 2001
to July 31, 2002, at which time it expired pursuant to its terms.

We had a receivable from Camper Club of America, Inc., CCA Products, Inc.,
and a corporation previously doing business as Vital Living totaling $37,372
that was written off. These entities were controlled by Messrs. Edson and
Gerst, founders, officers and directors. We previously advanced an aggregate
of $52,500 to Messrs. Edson and Gerst with interest accruing on such advances
at 6%. These sums were paid back by Mr. Gerst and Mr. Edson in cash. Mr.
Edson and Mr. Gerst worked for the Company through October 2001 without
compensation, and Mr. Gerst and Mr. Edson waived any rights to compensation
during this time period.

We had an unsecured demand note payable to Bradley D. Edson totaling
$43,500. Interest accrued at 10%. We also had payables to officers totaling
$147,926 for unpaid salaries and other reimbursable expenses, which were
divided as follows: $57,926 to Bradley D. Edson, $64,500 to Kenneth Lind, and
$25,000 to Eric Anderson. All such obligations have been paid in full during
2002. In connection with the termination of Mr. Linds employment in December
2002, we paid approximately $67,500 in severance compensation to him, as
provided by the terms of his since terminated employment agreement.

We utilized consulting and professional services from officers, entities
owned by officers and consultants affiliated with us totaling $164,250. These
agreements were entered into prior to our entering into formal employment
agreements with such individuals.

We are party to two consulting agreements; one with a current director and
one with a former director. On April 4, 2002, we entered into a three year
consulting agreement with Martin Gerst, formerly our Secretary, Treasurer and a
director. Under the terms of the agreement, Mr. Gerst, in addition to monthly
payments of $2,000, received warrants to purchase 500,000 shares of common
stock at a price of $1.50 per share. The warrants are fully vested. Pursuant
to the terms of the agreement, Mr. Gerst provides services relative to capital
formation, strategic relationships and helping brand our products. This
agreement was terminated by the parties.

The second agreement is with Robert Eide, one of our current directors,
who is also a principal of Aegis Capital Corp. Aegis received a fee of $60,000
and 50,000 shares of common stock for investment banking activities
in connection with the MAF acquisition, as well as a fee of $40,000 in respect
of commissions in the related private placement.

Stephen S. Chen, the
owner of approximately 5.72% of our outstanding stock
(assumes a conversion of the Series A Preferred Stock that he owns), is a
consultant relative to our activities in China. Mr. Chen has options to
acquire 200,000 shares of common stock, subject to vesting requirements, at
$3.00 per share.

We believe that of all of the transactions were arms-length transactions
and on terms no more favorable than would have been negotiated from
unaffiliated third parties.

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ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K.

(a)

|        |  |                                                                                                                                                                                                                                                                             
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                             
|Number  |  | Description                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                             
|2.1     |  | Agreement and Plan of Merger between Vital Living, Inc. and VCM Technology Limited(1)                                                                                                                                                                                       
|2.2     |  | Stock Purchase Agreement dated as of October 23, 2002 by and among Vital Living,
Inc., MAF BioNutritionals, LLC, a New Jersey limited Liability company, William A.
Coppel, Kenneth Martin, Phillip B. Maffetone, Leslie C. Quick, III, Thomas C. Quick
and Kenneth Glah (3)
|3.1     |  | Certificate of Merger between Vital Living, Inc. and VCM Technology Limited(1)                                                                                                                                                                                              
|3.2     |  | Amended and Restated Articles of Incorporation for Vital Living, Inc.(1)                                                                                                                                                                                                    
|3.3     |  | Amended and Restated Bylaws for Vital Living, Inc. (1)                                                                                                                                                                                                                      
|4.1     |  | Form of Subscription Agreement(3)                                                                                                                                                                                                                                           
|4.2     |  | Form of Registration Rights Agreement(3)                                                                                                                                                                                                                                    
|4.3     |  | Form of Series A Warrant(4)                                                                                                                                                                                                                                                 
|4.4     |  | Form of Series B Warrant(3)                                                                                                                                                                                                                                                 
|4.5     |  | Form of Series C Warrant(3)                                                                                                                                                                                                                                                 
|4.6     |  | Certificate of Determination of Series A Preferred(4)                                                                                                                                                                                                                       
|4.7     |  | Voting Agreement(3)                                                                                                                                                                                                                                                         
|10.1    |  | Agreement with Arizona Heart Institute dated August 21, 2001(5)                                                                                                                                                                                                             
|10.2    |  | Agreement with AHI Management Hong Kong, Ltd., Ltd. Dated August 21, 2001(5)                                                                                                                                                                                                
|10.3    |  | Employment agreement with Bradley D. Edson(5)                                                                                                                                                                                                                               
|10.4    |  | Employment agreement with Eric Anderson(5)                                                                                                                                                                                                                                  
|10.5    |  | Consulting agreement with Howard Wernick(5)                                                                                                                                                                                                                                 
|10.6    |  | Lock up Agreement with Brad Edson, Martin Gerst, Donald C. Hannah
Kenneth Lind(5)                                                                                                                                                                                           
|10.7    |  | Amended Lock Up Agreement(9)                                                                                                                                                                                                                                                
|10.8    |  | Tempe, Arizona Property Lease(5)                                                                                                                                                                                                                                            
|10.9    |  | Amendment to Agreement with AHI Management Hong Kong, Ltd., Ltd. dated February 26,
2002 (6)                                                                                                                                                                                
|10.10   |  | Consulting Agreement with Leslie D. Michelson (7)                                                                                                                                                                                                                           
|10.11   |  | Consulting Agreement with Brian C. Smith (7)                                                                                                                                                                                                                                
|10.12   |  | Consulting Agreement with Michael H. Davidson (7)                                                                                                                                                                                                                           
|10.13   |  | Clinic Trial Agreement with the Phoenix Fire Department (9)                                                                                                                                                                                                                 
|10.14   |  | Amendment to Employment Agreement with Brad Edson (8)                                                                                                                                                                                                                       
|10.15   |  | Restated Employment Agreement with Stuart A. Benson (8)                                                                                                                                                                                                                     
|10.16   |  | Employment Agreement with William Coppell (8)                                                                                                                                                                                                                               
|10.17   |  | Peck and Gross Consulting Agreement (9)                                                                                                                                                                                                                                     
|10.18   |  | CBH Allied Distribution Agreement (9)                                                                                                                                                                                                                                       
|10.19   |  | Agreement with National Provider Nationwide (9)                                                                                                                                                                                                                             
|10.20   |  | Consulting Agreement with Martin Wallace (9)                                                                                                                                                                                                                                
|10.21   |  | Consulting Agreement with Weil Consulting Corporation(9)                                                                                                                                                                                                                    
|10.22   |  | Consulting Agreement with Mark Behringer (9)                                                                                                                                                                                                                                
|10.23   |  | Consulting Agreement with Robert A. Cooke (9)                                                                                                                                                                                                                               
|10.24   |  | Consulting Agreement with Martin Gerst (9)                                                                                                                                                                                                                                  
|11      |  | Statement of Computation of per share earnings (included herewith)                                                                                                                                                                                                          
|23.1    |  | Consent of Weaver & Martin LLC (included herewith)                                                                                                                                                                                                                          
|99.1    |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.) (included
herewith)                                                                                                     
|99.2    |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.) (included
herewith)                                                                                                     



---

|(1) |  | Filed in Form 8-K on October 1, 2001   
|--- |  | ---------------------------------------
|   
|   
|   
|   
|(2) |  | Filed on Form 8-K on November 20 , 2001

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|(3) |  | Filed on Form 8-K on November 4, 2002                                                                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(4) |  | Filed on Form 8-K on July 2, 2002                                                                                      
|   
|   
|   
|   
|(5) |  | Filed in Form 8-K on February 28, 2002                                                                                 
|   
|   
|   
|   
|(6) |  | Filed on Form 8-K on February 28, 2002                                                                                 
|   
|   
|   
|   
|(7) |  | Filed on From 10-KSB on April 1, 2002 for the year ended December 31, 2001.                                            
|   
|   
|   
|   
|(8) |  | Filed on Form 8-K on December 5, 2002                                                                                  
|   
|   
|   
|   
|(9) |  | Filed as an Exhibits to Amendment No. 1 to the Registration Statement on Form SB-2 filed with the SEC on March 7, 2003.



| | (b) |  | A report on Form 8-K was filed on November 4, 2003 relative to the
execution of a definitive three-year agreement with National Provider
Network, a subsidiary of Medical Resource, Inc., based in Marlton,
N.J., effective September 30th 2002. National Provider Network and its
affiliates, which operate a preferred provider network which consists
of approximately 300,000 physicians, will actively market and
distribute Vital Livings Medical Food product, Essentum and Essentum
N.P., the products marketed and distributed by the PPO relative to
cardiovascular disease. No financial statements relative thereto were
filed.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | A report on Form 8-K was filed on November 14, 2003, and amended on
December 5, 2002 and December 20, 2002 relative to Vital Livings
acquisition of MAF. The December 20, 2003 amendment incorporates the
applicable financial statements for MAF, and the related pro-forma
financial statements, which were filed with the Companys Registration
Statement on Form SB-2 filed with the SEC on December 20, 2002.                                                                                                                                                                                                                         




ITEM 14. CONTROLS AND PROCEDURES

The Companys Chief Executive Officer and its Chief Financial Officer, after
evaluating the effectiveness of the Companys disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a
date within 90 days of the filing date of this annual report (the Evaluation
Date) have concluded that as of the Evaluation Date, the Companys disclosure
controls and procedures were adequate and effective to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them by others within those entities, particularly
during the period in which this annual report was being prepared.

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 are recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commissions rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us
in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect the Companys internal controls
subsequent to the Evaluation Date, nor any significant deficiencies or material
weaknesses in such controls requiring corrective actions. As a result, no
corrective actions were taken.

40



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##### Table of Contents






SIGNATURES

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

Date: March 31, 2003

| |                                           |                       
| | ----------------------------------------- | ----------------------
| | By:                                       | /s/   BRADLEY D. EDSON
| |                                          
| | Bradley D. Edson,
Chief Executive Officer

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

|                                       |  |                                                                  |  |               
|-------------------------------------- |  | ---------------------------------------------------------------- |  | --------------
|SIGNATURE                              |  | CAPACITY                                                         |  | DATE          
|                                       |  |                                                                  |  |               
|                                      
|/s/   BRADLEY D. EDSONBradley D. Edson |  | Chairman of the Board and Chief
Executive Officer                |  | March 31, 2003
|                                      
|/s/   WILLIAM COPPELWilliam Coppel     |  | Chief Operating Officer and Director                             |  | March 31, 2003
|                                      
|/s/   WILLIAM VREELANDWilliam Vreeland |  | Chief Financial Officer                                          |  | March 31, 2003
|                                      
|/s/   STUART A. BENSONStuart A. Benson |  | Vice Chairman, Executive Vice
President, Secretary and Treasurer |  | March 31, 2003
|                                      
|/s/   CARSON BEADLECarson Beadle       |  | Director                                                         |  | March 31, 2003
|                                      
|/s/   DONALD C. HANNAHDonald C. Hannah |  | Director                                                         |  | March 31, 2003
|                                      
|/s/   ROBERT EIDERobert Eide           |  | Director                                                         |  | March 31, 2003
|                                      
|Leslie Quick                           |  | Director                                                         |  |               

41



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##### Table of Contents



Independent Auditors Report

To the Board of Directors and
Stockholders of Vital Living, Inc.

We have audited the accompanying consolidated balance sheet of Vital Living,
Inc. and subsidiary as of December 31, 2002 and the related statements of
operations, stockholders equity, and cash flows for the year 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides 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 Vital Living, Inc. and
subsidiary as of December 31, 2002 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has suffered recurring losses from
operations, has a working capital deficit and has sustained operations to date
through funding from the issuance of common stock and other equity securities,
all of which raise substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are also described in
note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/   Pannell Kerr Forster of Texas, P.C.

Houston, Texas
March 13, 2003

F-1



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##### Table of Contents



Independent Auditors Report

To the Board of Directors and
Stockholders of Vital Living, Inc.

We have audited the balance sheet of Vital Living, Inc. as of December 31, 2001
and the related statements of operations, stockholders equity, and cash flows
for the period from inception (January 22, 2001) to December 31, 2001. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides 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 Vital Living, Inc. at December
31, 2001 and the results of its operations and its cash flows for the period
from inception (January 22, 2001) to December 31, 2001 in conformity with
accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has no established source of revenue. This
raises substantial doubt about its ability to continue as a going concern.
Managements plans in regard to these matters are also described in note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

/s/   Weaver & Martin, LLC

Kansas City, Missouri
April 1, 2002

F-2



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##### Table of Contents



VITAL LIVING, INC.

Consolidated Balance Sheets

|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |         |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------- | --------- | ------------ | --------- | ---------- | ------- | - | ------- | -
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           | December 31,
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |             
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           | 2002         |           | 2001      
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |           
|Assets                                                                                                                                                                   
|Current assets                                                                                                                                                            |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          | Cash and cash equivalents                                        |                                                                                                                    | $                                                    | 1,416,073 |              |           | $          | 179     |  
|                                                                                                                                                                          | Accounts receivable                                              |                                                                                                                    |                                                      | 68,234    |              |           |            | 9,214   |  
|                                                                                                                                                                          | Due from affiliates                                              |                                                                                                                    |                                                      |          |              |           |            | 37,372  |  
|                                                                                                                                                                          | Due from employees                                               |                                                                                                                    |                                                      |          |              |           |            | 52,500  |  
|                                                                                                                                                                          | Inventory                                                        |                                                                                                                    |                                                      | 273,361   |              |           |            | 1,887   |  
|                                                                                                                                                                          | Prepaid expense and other assets                                 |                                                                                                                    |                                                      | 25,833    |              |           |            | 23,833  |  
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          |                                                                  |                                                                                                                    | Total current assets                                 |           |              | 1,783,501 |            |         |   | 124,985 |  
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|Noncurrent assets                                                                                                                                                         |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          | Office machinery and equipment, net                              |                                                                                                                    |                                                      | 172,295   |              |           |            | 73,757  |  
|                                                                                                                                                                          | Goodwill                                                         |                                                                                                                    |                                                      | 4,893,517 |              |           |            |        |  
|                                                                                                                                                                          | Intangible assets                                                |                                                                                                                    |                                                      | 330,305   |              |           |            | 19,239  |  
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          |                                                                  |                                                                                                                    | Total noncurrent assets                              |           |              | 5,396,117 |            |         |   | 92,996  |  
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          |                                                                  |                                                                                                                    | Total assets                                         |           | $            | 7,179,618 |            |         | $ | 217,981 |  
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|Liabilities and Stockholders Equity (Deficit)                                                                                                                           
|Current liabilities                                                                                                                                                       |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          | Accounts payable, trade                                          |                                                                                                                    | $                                                    | 428,287   |              |           | $          | 104,271 |  
|                                                                                                                                                                          | Accounts payable to officers                                     |                                                                                                                    |                                                      | 22,500    |              |           |            | 191,426 |  
|                                                                                                                                                                          | Accrued liabilities                                              |                                                                                                                    |                                                      | 257,321   |              |           |            | 5,410   |  
|                                                                                                                                                                          | Current portion of long-term debt                                |                                                                                                                    |                                                      | 291,688   |              |           |            |        |  
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          |                                                                  |                                                                                                                    | Total current liabilities                            |           |              | 999,796   |            |         |   | 301,107 |  
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|Long-term debt                                                                                                                                                            |                                                                  |                                                                                                                    | 521,494                                              |           |              |           |           |        
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          |                                                                  |                                                                                                                    | Total liabilities                                    |           |              | 1,521,290 |            |         |   | 301,107 |  
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|Commitments and contingencies                                                                                                                                             |                                                                  |                                                                                                                    |                                                     |           |              |           |           |        
|Stockholders equity                                                                                                                                                      |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          | Preferred stock, $0.001 par value,
50,000,000 shares authorized: |                                                                                                                    |                                                      |           |              |           |            |         |  
|                                                                                                                                                                          |                                                                  | Preferred stock  Series A
$0.001 par value, 10,000,000 shares authorized,
3,712,000 shares issued and outstanding |                                                      |           | 3,712        |           |            |         |  |        
|                                                                                                                                                                          |                                                                  | Preferred stock  Series B
$0.001 par value, 10,000,000 shares authorized,
no shares issued                        |                                                      |           |             |           |            |         |  |        
|Additional paid-in capital  preferred                                                                                                                                    |                                                                  |                                                                                                                    | 12,049,845                                           |           |              |           |           |        
|Discount on preferred stock                                                                                                                                               |                                                                  |                                                                                                                    | (2,875,195                                           | )         |              |           |           |        
|Common stock, $0.001 par value, 100,000,000 shares authorized,
17,842,616 shares and 13,626,554 shares issued and
outstanding at December 31, 2002 and 2001, respectively |                                                                  |                                                                                                                    | 17,843                                               |           |              |           | 13,627     |        
|Additional paid-in capital  common                                                                                                                                       |                                                                  |                                                                                                                    | 8,021,453                                            |           |              |           | 946,159    |        
|Restricted common stock issued for services, unamortized                                                                                                                  |                                                                  |                                                                                                                    | (249,085                                             | )         |              |           |           |        
|Warrants and options issued for services, unamortized                                                                                                                     |                                                                  |                                                                                                                    | (732,883                                             | )         |              |           |           |        
|Retained deficit                                                                                                                                                          |                                                                  |                                                                                                                    | (10,577,362                                          | )         |              |           | (1,042,912 | )      
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          |                                                                  |                                                                                                                    | Total stockholders equity (deficit)                 |           |              | 5,658,328 |            |         |   | (83,126 | )
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        
|                                                                                                                                                                          |                                                                  |                                                                                                                    | Total liabilities and stockholders equity (deficit) |           | $            | 7,179,618 |            |         | $ | 217,981 |  
|                                                                                                                                                                          |                                                                  |                                                                                                                    |                                                      |           |              |           |            |        

See accompanying notes to consolidated financial statements.

F-3



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##### Table of Contents



VITAL LIVING, INC.

Consolidated Statements of Operations

|                                                                                 |                                     |                                              |            |              |            |                    |            |             |            |  
|-------------------------------------------------------------------------------- | ----------------------------------- | -------------------------------------------- | ---------- | ------------ | ---------- | ------------------ | ---------- | ----------- | ---------- | -
|                                                                                 |                                     |                                              |            |              |            |                    |            | Period from
|                                                                                 |                                     |                                              |            |              |            |                    |            | Inception  
|                                                                                 |                                     |                                              |            | Year Ended   |            | (January 22, 2001)
|                                                                                 |                                     |                                              |            | December 31, |            | to December 31,   
|                                                                                 |                                     |                                              |            | 2002         |            | 2001              
|                                                                                 |                                     |                                              |            |              |            |                   
|Sales                                                                            |                                     | $                                            | 260,844    |              |            | $                  | 90,291     |            
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|Cost of sales                                                                    |                                     |                                              | 193,032    |              |            |                    | 43,402     |            
|Inventory write down to market value                                             |                                     |                                              |           |              |            |                    | 262,626    |            
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|Gross profit (loss)                                                              |                                     |                                              | 67,812     |              |            |                    | (215,737   | )          
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|Administrative expenses                                                          |                                     |                                              |            |              |            |                    |            |            
|                                                                                 | Payroll and other labor costs       |                                              |            | 1,341,103    |            |                    |            | 232,173     |           
|                                                                                 | Organization costs                  |                                              |            |             |            |                    |            | 150,000     |           
|                                                                                 | Professional fees                   |                                              |            | 1,607,621    |            |                    |            | 184,428     |           
|                                                                                 | Office and equipment rent           |                                              |            | 151,148      |            |                    |            | 48,624      |           
|                                                                                 | Selling, general and administrative |                                              |            | 411,824      |            |                    |            | 171,836     |           
|                                                                                 | Research and development            |                                              |            | 510,436      |            |                    |            | 37,500      |           
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|                                                                                 |                                     | Total administrative expenses                |            |              | 4,022,132  |                    |            |             | 824,561    |  
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|                                                                                 |                                     | Operating loss                               |            |              | (3,954,320 | )                  |            |             | (1,045,526 | )
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|Other income (expenses)                                                          |                                     |                                              |            |              |            |                    |            |            
|                                                                                 | Interest income                     |                                              |            | 13,077       |            |                    |            |            |           
|                                                                                 | Interest expense                    |                                              |            | (8,652       | )          |                    |            | (2,614      | )         
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|                                                                                 |                                     | Net loss                                     |            |              | (3,949,895 | )                  |            |             | (1,042,912 | )
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|Deemed dividend associated with beneficial conversion
feature of preferred stock |                                     |                                              | (5,584,555 | )            |            |                    |           |            
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|                                                                                 |                                     | Net loss attributable to common stockholders |            | $            | (9,534,450 | )                  |            | $           | (1,042,912 | )
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|Basic and diluted loss per share                                                 |                                     | $                                            | (0.28      | )            |            | $                  | (0.08      | )          
|Deemed dividend associated with beneficial conversion
feature of preferred stock |                                     |                                              | (0.39      | )            |            |                    |           |            
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|Basic and diluted loss per common share                                          |                                     | $                                            | (0.67      | )            |            | $                  | (0.08      | )          
|                                                                                 |                                     |                                              |            |              |            |                    |            |            
|Basic and diluted weighted average
number of common shares outstanding           |                                     |                                              | 14,278,129 |              |            |                    | 12,917,693 |            
|                                                                                 |                                     |                                              |            |              |            |                    |            |            

See accompanying notes to consolidated financial statements.

F-4



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##### Table of Contents



VITAL LIVING, INC.

Consolidated Statements of Stockholders Equity



|                                                                                  |  |                 |           |              |  |                 |       |          |  |            |            |           |  |         |            |   |  |  |            |  |  |   |        |         |  |            |           |  
|--------------------------------------------------------------------------------- |  | --------------- | --------- | ------------ |  | --------------- | ----- | -------- |  | ---------- | ---------- | --------- |  | ------- | ---------- | - |  |  | ---------- |  |  | - | ------ | ------- |  | ---------- | --------- | -
|                                                                                  |  | Preferred Stock |           | Common Stock
|                                                                                  |  |                 |           |             
|                                                                                  |  |                 |           |              |  |                 |       |          |  |            |            |           |  |         |            |   |  |  |            |  |  |   |        |         |  | Additional
|                                                                                  |  |                 |           |              |  |                 |       |          |  | Additional |            |           |  |         |            |   |  |  |            |  |  |   |        | Paid-in
|                                                                                  |  | Shares          |           | Par Value    |  | Paid-in Capital |       | Discount |  | Shares     |            | Par Value |  | Capital
|                                                                                  |  |                 |           |              |  |                 |       |          |  |            |            |           |  |        
|Inception (January 21, 2001)                                                      |  |                 |          |              |  | $               |      |          |  | $          |           |           |  | $       |           |   |  |  | 155,000    |  |  | $ | 155    |         |  | $          | 15,345    |  
|Common stock issued for cash                                                      |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  | 195,149    |  |  |   | 195    |         |  |            | 6,766     |  
|Common stock issued for assets                                                    |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  | 11,176,405 |  |  |   | 11,177 |         |  |            | 387,440   |  
|Common stock issued for cash                                                      |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  | 2,100,000  |  |  |   | 2,100  |         |  |            | 536,608   |  
|Net loss                                                                          |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  |           |  |  |   |       |         |  |            |          |  
|                                                                                  |  |                 |           |              |  |                 |       |          |  |            |            |           |  |         |            |   |  |  |            |  |  |   |        |         |  |            |           |  
|Balance, December 31, 2001                                                        |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  | 13,626,554 |  |  |   | 13,627 |         |  |            | 946,159   |  
|                                                                                 
|Options and warrants issued for
services                                          |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  |           |  |  |   |       |         |  |            | 1,210,158 |  
|Options issued for services                                                       |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  |           |  |  |   |       |         |  |            | 17,242    |  
|Restricted common stock issued
for services                                       |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  | 241,000    |  |  |   | 241    |         |  |            | 341,629   |  
|Common stock issued for services                                                  |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  | 102,500    |  |  |   | 102    |         |  |            | 213,023   |  
|Common stock issued for cash,
net of offering cost of $170,385                    |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  | 1,367,500  |  |  |   | 1,368  |         |  |            | 1,195,747 |  
|Common stock issued for the
acquisition of VCM                                    |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  | 5,062      |  |  |   | 5      |         |  |            | (5        | )
|Common stock issued for the
acquisition of MAF                                    |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  | 2,500,000  |  |  |   | 2,500  |         |  |            | 4,097,500 |  
|Preferred stock issued for cash,
net of offering cost of $118,193                 |  |                 | 3,712,000 |              |  |                 | 3,712 |          |  |            | 3,590,095  |           |  |         |           |   |  |  |           |  |  |   |       |         |  |            |          |  
|Amortization of restricted common
stock, options and warrants
issued for services |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  |           |  |  |   |       |         |  |            |          |  
|Beneficial conversion feature of
preferred stock                                  |  |                 |          |              |  |                 |      |          |  |            | 8,459,750  |           |  |         | (8,459,750 | ) |  |  |           |  |  |   |       |         |  |            |          |  
|Amortization of beneficial
conversion feature                                     |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         | 5,584,555  |   |  |  |           |  |  |   |       |         |  |            |          |  
|Net loss                                                                          |  |                 |          |              |  |                 |      |          |  |            |           |           |  |         |           |   |  |  |           |  |  |   |       |         |  |            |          |  
|                                                                                  |  |                 |           |              |  |                 |       |          |  |            |            |           |  |         |            |   |  |  |            |  |  |   |        |         |  |            |           |  
|Balance, December 31, 2002                                                        |  |                 | 3,712,000 |              |  | $               | 3,712 |          |  | $          | 12,049,845 |           |  | $       | (2,875,195 | ) |  |  | 17,842,616 |  |  | $ | 17,843 |         |  | $          | 8,021,453 |  
|                                                                                  |  |                 |           |              |  |                 |       |          |  |            |            |           |  |         |            |   |  |  |            |  |  |   |        |         |  |            |           |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                  |  |             |          |             |  |          |            |           |  |               |             |   |  |   |            |  
|--------------------------------------------------------------------------------- |  | ----------- | -------- | ----------- |  | -------- | ---------- | --------- |  | ------------- | ----------- | - |  | - | ---------- | -
|                                                                                  |  |             |          |             |  | Warrants |            |           |  |               |             |   |  |  
|                                                                                  |  | Restricted  |          | and         |  |          |            |           |  | Stockholders'
|                                                                                  |  | Stock       |          | Options     |  | Retained |            | Equity   
|                                                                                  |  | Unamortized |          | Unamortized |  | Deficit  |            | (Deficit)
|                                                                                  |  |             |          |             |  |          |            |          
|Inception (January 21, 2001)                                                      |  | $           |         |             |  | $        |           |           |  | $             |            |   |  | $ | 15,500     |  
|Common stock issued for cash                                                      |  |             |         |             |  |          |           |           |  |               |            |   |  |   | 6,961      |  
|Common stock issued for assets                                                    |  |             |         |             |  |          |           |           |  |               |            |   |  |   | 398,617    |  
|Common stock issued for cash                                                      |  |             |         |             |  |          |           |           |  |               |            |   |  |   | 538,708    |  
|Net loss                                                                          |  |             |         |             |  |          |           |           |  |               | (1,042,912  | ) |  |   | (1,042,912 | )
|                                                                                  |  |             |          |             |  |          |            |           |  |               |             |   |  |   |            |  
|Balance, December 31, 2001                                                        |  |             |         |             |  |          |           |           |  |               | (1,042,912  | ) |  |   | (83,126    | )
|                                                                                 
|Options and warrants issued for
services                                          |  |             |         |             |  |          | (1,210,158 | )         |  |               |            |   |  |   |           |  
|Options issued for services                                                       |  |             |         |             |  |          | (17,242    | )         |  |               |            |   |  |   |           |  
|Restricted common stock issued
for services                                       |  |             | (341,870 | )           |  |          |           |           |  |               |            |   |  |   |           |  
|Common stock issued for services                                                  |  |             |         |             |  |          |           |           |  |               |            |   |  |   | 213,125    |  
|Common stock issued for cash,
net of offering cost of $170,385                    |  |             |         |             |  |          |           |           |  |               |            |   |  |   | 1,197,115  |  
|Common stock issued for the
acquisition of VCM                                    |  |             |         |             |  |          |           |           |  |               |            |   |  |   |           |  
|Common stock issued for the
acquisition of MAF                                    |  |             |         |             |  |          |           |           |  |               |            |   |  |   | 4,100,000  |  
|Preferred stock issued for cash,
net of offering cost of $118,193                 |  |             |         |             |  |          |           |           |  |               |            |   |  |   | 3,593,807  |  
|Amortization of restricted common
stock, options and warrants
issued for services |  |             | 92,785   |             |  |          | 494,517    |           |  |               |            |   |  |   | 587,302    |  
|Beneficial conversion feature of
preferred stock                                  |  |             |         |             |  |          |           |           |  |               |            |   |  |   |           |  
|Amortization of beneficial
conversion feature                                     |  |             |         |             |  |          |           |           |  |               | (5,584,555  | ) |  |   |           |  
|Net loss                                                                          |  |             |         |             |  |          |           |           |  |               | (3,949,895  | ) |  |   | (3,949,895 | )
|                                                                                  |  |             |          |             |  |          |            |           |  |               |             |   |  |   |            |  
|Balance, December 31, 2002                                                        |  | $           | (249,085 | )           |  | $        | (732,883   | )         |  | $             | (10,577,362 | ) |  | $ | 5,658,328  |  
|                                                                                  |  |             |          |             |  |          |            |           |  |               |             |   |  |   |            |  

See accompanying notes to consolidated financial statements.

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##### Table of Contents



VITAL LIVING, INC.

Consolidated Statement of Cash Flows

|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                    |         |             |          |  
|------------------------------------------ | -------------------------------------------------------------------------- | -------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------------------------------------- | --------- | ------------ | ---------- | ------------------ | ------- | ----------- | -------- | -
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                    |         | Period from
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                    |         | Inception  
|                                           |                                                                            |                                                                |                                                |                                                                                   |           | Year Ended   |            | (January 22, 2001)
|                                           |                                                                            |                                                                |                                                |                                                                                   |           | December 31, |            | to December 31,   
|                                           |                                                                            |                                                                |                                                |                                                                                   |           | 2002         |            | 2001              
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|Operating activities                       |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|                                           | Net loss                                                                   |                                                                | $                                              | (3,949,895                                                                        | )         |              | $          | (1,042,912         | )      
|                                           | Adjustments to reconcile net loss to net cash used in
operating activities |                                                                |                                                |                                                                                   |           |              |            |                    |        
|                                           |                                                                            |                                                                |                                                | Depreciation and amortization                                                     |           |              | 52,959     |                    |         |             | 10,937   |  
|                                           |                                                                            |                                                                |                                                | Write down of inventory to market                                                 |           |              |           |                    |         |             | 262,626  |  
|                                           |                                                                            |                                                                |                                                | Common stock issued for services                                                  |           |              | 145,125    |                    |         |             |         |  
|                                           |                                                                            |                                                                |                                                | Amortization of restricted common stock, options
and warrants issued for services |           |              | 587,302    |                    |         |             |         |  
|                                           |                                                                            |                                                                |                                                | Change
in assets and liabilities, net of acquisition of MAF                       |           |              |            |                    |         |             |          |  
|                                           |                                                                            |                                                                |                                                | Accounts receivable                                                               |           |              | (20,286    | )                  |         |             | (9,214   | )
|                                           |                                                                            |                                                                |                                                | Due from affiliates                                                               |           |              | 37,372     |                    |         |             | (37,372  | )
|                                           |                                                                            |                                                                |                                                | Due from employees                                                                |           |              | 52,500     |                    |         |             | (52,500  | )
|                                           |                                                                            |                                                                |                                                | Inventory                                                                         |           |              | (164,689   | )                  |         |             | 39,325   |  
|                                           |                                                                            |                                                                |                                                | Prepaid expense and other current assets                                          |           |              | 9,897      |                    |         |             | (23,833  | )
|                                           |                                                                            |                                                                |                                                | Accounts payable                                                                  |           |              | 81,842     |                    |         |             | 104,271  |  
|                                           |                                                                            |                                                                |                                                | Accrued liabilities                                                               |           |              | 193,821    |                    |         |             | 5,410    |  
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|                                           |                                                                            |                                                                |                                                | Cash used in operating activities                                                 |           |              | (2,974,052 | )                  |         |             | (743,262 | )
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|Investing activities                       |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|                                           |                                                                            | Purchase of office machinery and equipment                     |                                                |                                                                                   | (126,811  | )            |            |                    | (9,154  | )          
|                                           |                                                                            | MAF acquisition costs, net of cash acquired of $78,091         |                                                |                                                                                   | (54,287   | )            |            |                    |        |            
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|                                           |                                                                            |                                                                |                                                | Cash used in investing activities                                                 |           |              | (181,098   | )                  |         |             | (9,154   | )
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|Financing activities                       |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|                                           |                                                                            | Note and payables to Officers                                  |                                                |                                                                                   | (208,926  | )            |            |                    | 191,426 |            
|                                           |                                                                            | Payment of long term debt                                      |                                                |                                                                                   | (10,952   | )            |            |                    |        |            
|                                           |                                                                            | Sale of common stock                                           |                                                |                                                                                   |           |              |            |                    |         |            
|                                           |                                                                            |                                                                | Inception                                      |                                                                                   |           |             |            |                    |         | 15,500      |         
|                                           |                                                                            |                                                                | Asset purchase                                 |                                                                                   |           |             |            |                    |         | 6,961       |         
|                                           |                                                                            |                                                                | Stock sale                                     |                                                                                   |           | 1,197,115    |            |                    |         | 538,708     |         
|                                           |                                                                            |                                                                | Sale of preferred stock, net of offering costs |                                                                                   |           | 3,593,807    |            |                    |         |            |         
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|                                           |                                                                            |                                                                |                                                | Cash provided by financing activities                                             |           |              | 4,571,044  |                    |         |             | 752,595  |  
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|                                           |                                                                            |                                                                |                                                | Increase in cash                                                                  |           |              | 1,415,894  |                    |         |             | 179      |  
|                                          
|Cash at beginning of period                |                                                                            | $                                                              | 179                                            |                                                                                   |           | $            |           |                   
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|Cash at end of period                      |                                                                            | $                                                              | 1,416,073                                      |                                                                                   |           | $            | 179        |                   
|                                           |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|Noncash investing and financing activities |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|                                           |                                                                            | Common stock issued for assets                                 |                                                | $                                                                                 |          |              |            | $                  | 398,617 |            
|                                           |                                                                            | Warrants and options issued for services                       |                                                | $                                                                                 | 1,227,400 |              |            | $                  |        |            
|                                           |                                                                            | Restricted common stock issued for services                    |                                                | $                                                                                 | 341,870   |              |            | $                  |        |            
|                                           |                                                                            | Acquisition of net liabilities for common stock                |                                                | $                                                                                 | (593,139  | )            |            | $                  |        |            
|                                           |                                                                            | Common stock issued for services related to acquisition of MAF |                                                | $                                                                                 | 68,000    |              |            | $                  |        |            
|                                           |                                                                            | Common stock issued for acquisition of MAF                     |                                                | $                                                                                 | 4,100,000 |              |            | $                  |        |            
|                                          
|Supplemental cash flow information         |                                                                            |                                                                |                                                |                                                                                   |           |              |            |                   
|                                           |                                                                            | Cash paid for interest                                         |                                                | $                                                                                 | 3,786     |              |            | $                  |        |            

See accompanying notes to consolidated financial statements.

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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 1    |  | Organization and Description of Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Vital Living, Inc. (the Company or Vital Living) was
incorporated in the state of Nevada on January 22, 2001. The
Company develops and markets nutraceuticals formulated by
physicians for distribution through physicians. The Company is
developing and testing nutraceuticals in collaboration with
medical experts based on the best available scientific evidence.
Nutraceuticals are designed to be incorporated by physicians into
a standard physician/patient program, supported by a specially
designed compliance regimen.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          
|           |  | On November 20, 2002 the Company completed the acquisition of MAF
BioNutritionals, LLC. (MAF) (see note 3), an innovative
nutraceutical company engaged in the design, formulation,
marketing and distributions of a variety of organic and all
natural products to health conscience consumers and practitioners
nationwide.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          
|Note 2    |  | Summary of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          
|           |  | Basis of financial statement presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          
|           |  | The consolidated financial statements include the accounts of the
Company and MAF, its wholly owned subsidiary. The accounts of MAF
are included for the period from November 22, 2002 (the date of
acquisition) through December 31, 2002. Intercompany transactions
and accounts have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          
|           |  | Going concern                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|          
|           |  | The accompanying consolidated financial statements have been prepared
assuming the Company will continue on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has
suffered recurring losses from operations during its operating
history. Although management believes that the aggregate net proceeds
of approximately $4.8 million from the two private offerings in 2002,
together with funds from operations, will be sufficient to cover
anticipated cash requirements for the near term, management will be
required to raise additional capital through an offering of securities
to fund the Companys operations, and will attempt to continue raising
capital resources until such time as the Company generates revenues
sufficient to maintain itself as a viable entity. Management is in
the process of acquiring and developing products for sale which would
generate revenue to sustain the operations of the Company. If
successful, these actions will serve to mitigate the factors which
have raised substantial doubt about the Companys ability to continue
as a going concern and increase the availability of resources for
funding of the Companys current operations and future market
development. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded assets liabilities that might be necessary should the Company
be unable to continue as a going concern. No assurance can be given
that such financing will be available or, if available, that it will
be on commercially favorable terms. Moreover, available financing may
be dilutive to investors.
|          
|           |  | Reclassifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          
|           |  | Certain reclassifications of prior year amounts have been made to
conform to current year presentation. These reclassifications had no
effect on 2001 net loss or stockholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-7



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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 2    |  | Summary of Significant Accounting Policies (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Statement of cash flows                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          
|           |  | The Companys cash equivalents consist principally of any
financial instrument with maturities of three months or less and
cash investments with high quality financial institutions. The
Companys investment policy limits the amount of credit exposure
to any one financial institution.                                                                                                                                                                                                                                                                                                                                                                                                 
|          
|           |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          
|           |  | Inventories are stated at the lower of cost (first-in, first-out
method) or market. Inventory consists of products available for
sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          
|           |  | During 2001 the Company wrote its inventory down by $262,626 to
its estimated market value. The write down resulted from certain
items carried in inventory that were not deemed to be salable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          
|           |  | Office machinery and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          
|           |  | Office machinery and equipment consists of office furniture and
equipment including computer software and is recorded at cost.
Depreciation is provided on a straight-line basis over estimated
useful lives ranging from 5 to 7 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          
|           |  | Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          
|           |  | Goodwill represents the excess of the aggregate price paid by the
Company over the value of the net equity acquired in the
acquisition of MAF. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets,,management is no longer required to amortize
goodwill but is required to review goodwill for impairment
whenever events indicate that the carrying amount of the asset may
not be recoverable in accordance with SFAS No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets.For the year
ended December 31, 2002, no such events had occurred that would
indicate that goodwill had been impaired.
|          
|           |  | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          
|           |  | The Companys intangibles include trademarks, distribution and
customer lists and formulations. The Company capitalizes legal
expenses incurred for the development of trademarks. Such costs
are being amortized on a straight-line basis over 3 to 5 years.                                                                                                                                                                                                                                                                                                                                                                                                                                
|          
|           |  | Long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          
|           |  | Long-lived assets and identifiable intangibles to be held and used
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Goodwill arising from acquisition of MAF is
evaluated for impairment on an annual basis. Impairment is
measured by comparing the carrying value of the long-lived asset
to the estimated undiscounted future cash flows expected to result
from use of the assets and their eventual disposition. The
Company determined as of December 31, 2002, there had been no
impairment in the carrying value of long-lived assets.                                                              

F-8



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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 2    |  | Summary of Significant Accounting Policies (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Accounting estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          
|           |  | The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Some of the more
significant estimates required to be made by management include
the valuation of inventory, intangible assets and equity based
transactions. Actual results could differ from those estimates.
|          
|           |  | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          
|           |  | The Company accounts for income taxes in accordance with SFAS No.
109, Accounting for Income Taxes. Under the asset and liability
approach specified by SFAS No. 109, a deferred tax asset or
liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as
measured by the enacted rates which will be in effect when these
differences reverse. Deferred tax assets are recorded at their
likely realizable amounts.                                                                                                      
|          
|           |  | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          
|           |  | Revenue is recognized when products are shipped to customers. The
Companys return policy provides for an unconditional guarantee to
its customers for a full refund of any unused product including
product that has exceeded its expiration date. All returns are
subject to quality assurance reviews prior to acceptance. The
Company offers, from time to time, volume and promotional
discounts on the products it sells. These discounts are recorded
as a reduction of revenue.                                                                                                    
|          
|           |  | Research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          
|           |  | Research and development costs relating to both present and future
products are expensed when incurred. Research and development
costs amounted to $510,436 and $37,500 for the periods ended
December 31, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                    
|          
|           |  | Estimated fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          
|           |  | Carrying amounts reported in the consolidated balance sheet for
cash, accounts receivable, accounts payable and notes payable
approximate their fair value due to their short maturity.                                                                                                                                                                                                                                                                                                                                                                                                    
|          
|           |  | Concentrations of credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          
|           |  | Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At
various times during the year, the Companys cash balances may be
in excess of federally insured limits. The Company maintains its
cash, which consists primarily of demand deposits, with high
quality financial institutions, which the Company believes, limits
risk.                                                                                                                                                                                       

F-9



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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 2    |  | Summary of Significant Accounting Policies (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Net loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|          
|           |  | The Company accounts for its earnings per share (EPS) in
accordance with SFAS No. 128, Earnings Per Share, which
establishes the requirements for presenting EPS. SFAS No. 128
requires the presentation of basic and diluted EPS on the face
of the income statement. Basic earnings per common share amounts
are calculated using the average number of common shares
outstanding during each period presented. Diluted earnings per
share assumes the exercise of all stock options and warrants
having exercise prices less than the average market price of the
common stock using the treasury stock method. During the periods
ended December 31, 2002 and 2001, the Company incurred a net loss,
thus the effects of dilutive securities are anti-dilutive.
Convertible preferred stock, warrants and options to purchase
common stock are included as common stock equivalents only when
dilutive.                          
|          
|           |  | Stock based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          
|           |  | The Company accounts for its stock option plan in accordance with
the provisions of SFAS No. 123, Accounting for Stock Based
Compensation". SFAS No. 123 permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to apply the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and provide pro forma net
income and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to apply
the provisions of APB No. 25 and when required provide the pro
forma disclosure provisions of SFAS No. 123.                                                                                                    
|          
|           |  | Recent accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          
|           |  | In November 2002, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others.FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. The disclosure
provisions of FIN 45 are effective for financial statements of
interim or annual periods that end after December 15, 2002. The
provisions for initial recognition and measurement are effective
on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantors year end.
The adoption of FIN 45 by the Company during the quarter ended
March 31, 2003 will not have a material impact on its current
financial position and results of operations.

F-10



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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 2    |  | Summary of Significant Accounting Policies (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Recent accounting pronouncements (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          
|           |  | In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation, Transition and Disclosure, an Amendment
of FAS No. 123.SFAS No. 148 provides additional transition
guidance for those entities that elect to voluntarily adopt the
accounting provisions of SFAS No. 123. SFAS No. 148 also requires
that entities that continue to account for stock-based
compensation awards using the intrinsic value method of APB No. 25
will be required to provide more prominent disclosures than
currently required by SFAS No. 123, including disclosures in
interim financial statements. The transition and annual disclosure
provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The new interim disclosure provisions are
effective for the first interim period beginning after December
15, 2002. The Company will continue to account for employee
stock-based compensation under APB No. 25 and related
interpretations. The Company will adopt the annual disclosure
requirements in its financial statements for the year ending
December 31, 2003, and the interim disclosure requirements
beginning in its financial statements for the quarter ending March
31, 2003.
|          
|Note 3    |  | Mergers and Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          
|           |  | On November 5, 2002, the Company entered into a definitive
agreement to acquired 100% of the equity of MAF in exchange for
2,500,000 shares of restricted common stock and provided a
guarantee of approximately $864,000 in MAF debt obligations. The
transaction closed on November 22, 2002. The MAF assets acquired
and obligations assumed as of the closing of the transaction are
summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                              |  |   |          |  
|--------------------------------------------- |  | - | -------- | -
|Working capital assets and (liabilities), net |  | $ | (64,758  | )
|Office machinery and equipment                |  |   | 8,232    |  
|Intangibles                                   |  |   | 327,520  |  
|                                              |  |   |          |  
|                                              |  |   | 270,994  |  
|Less  Debt obligations assumed               |  |   | 864,133  |  
|                                              |  |   |          |  
|Net obligations assumed                       |  | $ | (593,139 | )
|                                              |  |   |          |  



| |  | The acquisition purchase price is comprised of the value of the
2,500,000 shares of the Companys common stock value at $1.64 per
share (the fair market value per share of the Companys common stock
on the measurement date which was November 5, 2002), or $4,100,000,
and other acquisition costs of $200,378. The excess of the purchase
consideration over the net obligations assumed of $4,893,517 has been
recorded as goodwill.                                                                                                                                                                                                                                 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The recording of the MAF acquisition is based on a preliminary
purchase price allocation. Actual adjustments will be based on final
appraisals and other analysis of fair values of acquired identifiable
tangible and intangible assets, deferred tax assets and liabilities
and acquired contracts, which will be completed after the Company
obtains third party appraisals and reviews all available data.
Differences between preliminary allocations of the purchase price, as
presented herein, and the final allocation could have a significant
impact on the accompanying unaudited pro forma financial statements,
results of operations and financial position.

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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 3    |  | Mergers and Acquisitions (Continued)                                                                                           
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Presented below is the unaudited pro forma consolidated results of
operations for the periods ended December 31, 2002 and 2001:

|                                                    |              |   |            |         |      |   |            |         | 
|--------------------------------------------------- | ------------ | - | ---------- | ------- | ---- | - | ---------- | ------- | 
|                                                    |              |   | 2002       |         | 2001
|                                                    |              |   |            |         |     
|Revenue                                             |              | $ | 1,794,382  |         |      | $ | 1,917,989  |        
|Cost of sales                                       |              |   | 938,396    |         |      |   | 1,384,580  |        
|                                                    |              |   |            |         |      |   |            |        
|                                                    | Gross profit |   |            | 855,986 |      |   |            | 533,409 | 
|Operating expenses and other                        |              |   | 5,103,022  |         |      |   | 2,456,290  |        
|                                                    |              |   |            |         |      |   |            |        
|Net loss                                            |              |   | (4,247,036 | )       |      |   | (1,922,881 | )      
|                                                    |              |   |            |         |      |   |            |        
|Beneficial conversion                               |              |   | (5,584,555 | )       |      |   |           |        
|                                                    |              |   |            |         |      |   |            |        
|Net loss to common shareholders                     |              | $ | (9,831,591 | )       |      | $ | (1,922,881 | )      
|                                                    |              |   |            |         |      |   |            |        
|Basic and diluted loss per share                    |              | $ | (0.26      | )       |      | $ | (0.13      | )      
|Beneficial conversion                               |              | $ | (0.34      | )       |      |   |           |        
|                                                    |              |   |            |         |      |   |            |        
|Basic and diluted loss per common share             |              | $ | (0.60      | )       |      | $ | (0.13      | )      
|                                                    |              |   |            |         |      |   |            |        
|Weighted average shares of
common stock outstanding |              |   | 16,497,307 |         |      |   | 15,417,693 |        
|                                                    |              |   |            |         |      |   |            |        



| |  | The unaudited pro forma consolidated results of operations have been
prepared assuming the acquisition of MAF and the corresponding
issuance of the 2,500,000 shares of common stock had occurred as of
January 1, 2001 and includes the following entities and periods of
operation:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Vital Living, Inc. for the year ended December 31, 2002
and for the period from inception (January 22, 2001) through
December 31, 2001.                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | MAF for the period from January 1, 2002 through
November 22, 2002 (the date of acquisition by Vital Living, Inc.
a Nevada Corporation) and for the year ended December 31, 2001.
|
| |  |  | Boulder Endurance Co., Inc. (Boulder) for the period
from January 1, 2002 through April 4, 2002 (the date of
acquisition by MAF) and the year ended December 31, 2001.        
|
| |  |  | Vital Living, Inc. (a Delaware Corporation) for the
period from January 1, 2001 through May 7, 2001 ( the date of
acquisition by Nutritional Systems, Inc.).                    



| |  | Operations for periods subsequent to the acquisition dates of each
entity are included within the respective operations of the entity
that acquired them.                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On May 7, 2001, the Company, then known as Nutritional Systems Inc.,
acquired assets of Vital Living, Inc., a Delaware Corporation. The
fair market value ($405,578) of assets acquired was based on actual
cost less any depreciation or amortization. In consideration for the
assets the Company issued 11,371,554 common shares restricted by Rule
144. The assets acquired are summarized as follows:

F-12



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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002

Note 3   Mergers and Acquisitions (Continued)

|                                                   |  |   |         | 
|-------------------------------------------------- |  | - | ------- | 
|Cash                                               |  | $ | 6,961   | 
|Inventory                                          |  |   | 303,839 | 
|Equipment                                          |  |   | 55,448  | 
|Computer software                                  |  |   | 19,180  | 
|Intangible asset, legal fees relating to trademark |  |   | 20,150  | 
|                                                   |  |   |         | 
|                                                   |  | $ | 405,578 | 
|                                                   |  |   |         | 



|           |  | The Company also received the right to the name Vital Living and
other product names. Nutritional Systems, Inc. subsequently changed
its name to Vital Living, Inc. There was no value assigned to the
goodwill and other proprietary items obtained in the acquisition.                                                                                                                                                                                        
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | On August 16, 2001, the Company merged with VCM Technology Limited
(VCM) in a reverse acquisition merger. VCM was a reporting public
shell with no material assets or liabilities and no operations.
Pursuant to Rule 12g 40 Section 3(b) of the Securities Act and
Regulation D promulgated 3(a) of the Securities Exchange Act of 1934,
the Company is the successor issuer to VCM for reporting purposes
under the Securities Exchange Act of 1934, as amended.
|          
|           |  | The Company agreed to exchange 5,062 shares of common stock to the
sole stockholder of VCM in exchange for 100% of the issued and
outstanding stock VCM. The shares were issued in 2002.                                                                                                                                                                                                                                                                          
|          
|Note 4    |  | Office Machinery and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          
|           |  | Office machinery and equipment consists of the following at December 31,:                                                                                                                                                                                                                                                                                                                                                                                         

|                                |                             |   |         |         |      |   |         |        | 
|------------------------------- | --------------------------- | - | ------- | ------- | ---- | - | ------- | ------ | 
|                                |                             |   | 2002    |         | 2001
|                                |                             |   |         |         |     
|Machinery and equipment         |                             | $ | 63,705  |         |      | $ | 75,443  |       
|Furniture and fixtures          |                             |   | 91,355  |         |      |   |        |       
|Computer software               |                             |   | 103,334 |         |      |   | 23,350  |       
|Leasehold improvements          |                             |   | 11,072  |         |      |   |        |       
|                                |                             |   |         |         |      |   |         |       
|                                |                             |   | 269,466 |         |      |   | 98,793  |       
|Less  accumulated depreciation |                             |   | (97,171 | )       |      |   | (25,036 | )     
|                                |                             |   |         |         |      |   |         |       
|                                | Property and equipment, net |   | $       | 172,295 |      |   | $       | 73,757 | 
|                                |                             |   |         |         |      |   |         |       



|           |  | Depreciation and amortization expense was $52,959 and $10,937 for the
periods ended December 31, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|Note 5    |  | Long-Term Debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          
|           |  | In connection with the MAF acquisition, the Company assumed its
outstanding debt obligations and provided a guaranty of approximately (i)
$242,000 of debt comprised of two notes incurred in connection
with MAFs acquisition in early 2002 of Boulder Bar. The Company
also guaranteed a loan obligation of MAF of $582,000 that relates
to a loan facility from Commerce Bank NA of Flemington, NJ. This
obligation, which bears interest at the prime rate plus 1.5% and matures
in 2008, is 75% guaranteed by the U.S. Small Business
Administration.

F-13



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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 5    |  | Long-Term Debt (Continued)                                        
|---------- |  | ------------------------------------------------------------------
|          
|           |  | Long-term debt consisted of the following as of December 31, 2002:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                |   |          |         | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | - | -------- | ------- | 
| | $275,000 note payable to a former
owner of Boulder due April 8,
2004. The note bears interest at
the rate of 7% percent per annum
to be paid on April 8, 2003 and
2004. Principal is in quarterly
installments of $25,000 beginning
September 9, 2002 and continuing
through January 8, 2003. A
principal payment of $75,000 is
due on April 8, 2002 and
principal payments of $10,417 are
due monthly thereafter until paid
in full. The loan is guaranteed
by an officer of the Company and
is secured by the inventory,
accounts receivable, general
intangibles and equipment of the
Company. |                | $ | 225,000  |        
|
| | $40,935 note payable to a former
owner of Boulder due April 8,
2003. The note is non interest
bearing and requires monthly
principal payments of $3,411
The loan is guaranteed by an
officer of the Company and is
secured by the inventory,
accounts receivable, general
intangibles and equipment of the
Company                                                                                                                                                                                                                                                                                |                |   | 13,645   |        
|
| | $650,000 note payable to a bank
due December 14, 2008. The note
requires monthly principal and
interest payments of $9,970 with
interest at the rate of prime
plus 1.5% per annum (5.75% at
December 31, 2002). The loan is
guaranteed by certain officers of
the Company and is secured by the
inventory, accounts receivable,
general intangibles and equipment
and machinery of the Company                                                                                                                                                                                                    |                |   | 574,537  |        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                |   |          |        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                |   | 813,182  |        
| | Less: current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                |   | (291,688 | )      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                |   |          |        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Long-term debt |   | $        | 521,494 | 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                |   |          |        



| |  | Aggregate maturities of long term debt for years after December 31,
2002 are as follows:
| |  | ----------------------------------------------------------------------------------------

|             |  |   |         | 
|------------ |  | - | ------- | 
|Year Ending  |  |   |         | 
|December 31, |  |   |         | 
|             |  |   |         | 
|2003         |  | $ | 291,688 | 
|2004         |  |   | 141,967 | 
|2005         |  |   | 106,221 | 
|2006         |  |   | 112,492 | 
|2007         |  |   | 119,133 | 
|Thereafter   |  |   | 41,681  | 
|             |  |   |         | 
|             |  | $ | 813,182 | 
|             |  |   |         | 

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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 6    |  | Income Taxes                                                                             
|---------- |  | -----------------------------------------------------------------------------------------
|          
|           |  | The components of the deferred tax asset (liabilities) as of December 31, are as follows:

|                                 |  |      |            |      |  |   |          |  
|-------------------------------- |  | ---- | ---------- | ---- |  | - | -------- | -
|                                 |  | 2002 |            | 2001
|                                 |  |      |            |     
|Net operating loss carryforwards |  | $    | 1,706,886  |      |  | $ | 417,000  |  
|Goodwill                         |  |      | (9,332     | )    |  |   |         |  
|                                 |  |      |            |      |  |   |          |  
|                                 |  |      | 1,697,554  |      |  |   | 417,000  |  
|Valuation allowance              |  |      | (1,697,554 | )    |  |   | (417,000 | )
|                                 |  |      |            |      |  |   |          |  
|Net deferred tax asset           |  | $    |           |      |  | $ |         |  
|                                 |  |      |            |      |  |   |          |  



|           |  | Sufficient uncertainty exists regarding the realizability of these
operating loss carry forwards and, accordingly, a full valuation
allowance has been established.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | SFAS No. 109 requires an asset and liability approach for computing
deferred income taxes. As of December 31, 2002, the Company has net
operating loss carry forwards for Federal income tax reporting
purposes amounting to approximately $5,020,253, which expire through
2022. The utilization of such operating losses may be limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          
|Note 7    |  | Stockholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|          
|           |  | Common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          
|           |  | In July 2001, the Company completed a public offering that was
offered without registration under the Securities Act of 1933, as
amended (The Act), in reliance upon the exemption from
registration afforded by Section 3(b) of the Securities Act and
Regulation D promulgated there under. On June 26, 2001 the
Company received a letter of effectiveness for its registration
filed under NRS 90.490 with the State of Nevada Securities
Division. The registration pertained to 2,100,000 shares of
common stock at a price of $0.28 per share for a total amount of
$588,000. Pursuant to the registration, the Company raised the
full amount of $588,000. This amount and any prior securities
sold by the Company in the prior 12 months did not exceed $1.0
million. The securities were sold pursuant to Nevada regulations
utilizing a Series 63 agent, with a fee paid of 2% of the total
funds raised in Nevada for handling prospectus delivery,
subscription monitoring and handling the bank impound account.
|          
|           |  | On August 14, 2001, the Company amended its Articles of
Incorporation to increase the authorized capitalization to
100,000,000 shares of common stock with par value of $0.001 and
50,000,000 shares of preferred stock with a par value of $0.001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          
|           |  | On October 22, 2002, the Company completed a private placement
offering of 1,367,500 shares of its common stock at $1.00 per
share resulting in cash proceeds of $1,197,115, net of offering
costs of $170,385.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 7    |  | Stockholders Equity (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Common stock issued for services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          
|           |  | From time to time, in order to fund operating activities of the
Company, common stock is issued for cash or in exchange for goods
or services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          
|           |  | On November 20, 2002, the Board of Directors approved the issuance
of 50,000 shares for common stock to Aegis Capital Corp. as
compensation for consulting work performed in the acquisition of
MAF. The stock was valued at $68,000 and was capitalized into the
cost of the MAF acquisition.                                                                                                                                                                                                                                                                                                                                                                  
|          
|           |  | Effective November 5, 2002, the Board of Directors ratified three
consulting agreements. The agreements provide for the issuance of
133,000 shares of restricted common stock. Of these shares,
85,000 vest upon issuance and the remainder vest at 4,000 per
month beginning November 1, 2002. The value of the common stock
is $158,270 of which $49,434 has been amortized into expense for
2002.                                                                                                                                                                                                                                                            
|          
|           |  | On July 31, 2002, the Board of Directors approved the issuance of
30,000 shares of restricted common stock each to two Directors as
compensation for performing as independent Directors for the
Company. Of these shares, 10,000 vest upon issuance and 10,000
shares would vest on the first two anniversaries of service.
Additionally, the Board of Directors approved annual director
compensation of $24,000 per director or $6,000 per quarter. The
value of common stock was $102,000 of which $12,750 has been
amortized into expense during 2002. The Directors have agreed to
waive cash compensation for fiscal year 2003.                          
|          
|           |  | On August 12, 2002, Vital Living entered into a twelve (12) month
financial advisory agreement with HCFP/Brenner Securities, LLC
pursuant to which the Company paid a non-refundable fee of $60,000
and issued 48,000 shares of common stock to HCFP/Brenner. In
addition to the investment banking services provided to the
Company, HCFP/Brenner served as the placement agent for the
Companys private offering in November 2002. The shares were
issued without registration based upon the relationship between
HCFP/Brenner and the Company. The value of common stock was
$81,600 of which $30,600 has been amortized into expense during
the 2002 year.
|          
|           |  | On May 14, 2002, the Company entered into an agreement with Prima
Consulting Group for a minimum of 30 days. Prima received a
payment of $25,000 and 50,000 shares of 144 restricted common
stock. The stock was valued at $140,000 and was expensed in the
quarter ended June 30, 2002. Payments under the agreement ceased
on November 1, 2002 and no further payments are required.                                                                                                                                                                                                                                                                          
|          
|           |  | On April 10, 2002, the Company entered into an agreement with
Donner Corp. International to provide the Company with analyst
coverage. The initial fee was $7,000, 2,500 shares of 144
restricted common stock and 30,000 warrants to purchase common
stock at $2.05 per share. The value calculated for the common
stock was $5,125. The value calculated using the Black Scholes
pricing model for the options was $17,242. All amounts were
expensed in 2002. Paid-in capital was increased by $17,242 for
the value of the warrants issued. The warrants were cancelled
during 2002.                                                                        

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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 7    |  | Stockholders Equity (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Preferred stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          
|           |  | During the year ended December 31, 2002 the Company sold 3,712,000
shares of non-voting convertible Series A Preferred Stock
(Preferred Stock) generating proceeds of $3,593,807, net of
offering cost of $118,193. The Preferred Stock has a 10%
cumulative dividend paid in shares of preferred stock payable
semi-annually. There is a liquidation preference over the common
shares. The Company may elect to redeem the preferred stock at
any time prior to the first anniversary of issuance at a price of
150% of the original purchase price or $1.50 per share. The
shareholder will have 30 days from the date of the Companys
decision to redeem to choose to exercise the option to convert to
common shares.                                                                                                                                                                    
|          
|           |  | Conversion to common shares may be done following the first
anniversary of issuance and the conversion price per share shall
be equal to the original purchase price if the shares are
converted within the first 60 days after the anniversary of the
purchase of the preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          
|           |  | If following the fifteenth (15th) month from the date of issuance the
Companys common stock is publicly traded on NASDAQ, Over-the-Counter
Bulletin Board or other national stock exchange, the conversion price
shall be 60% of the average closing price of the common stock for the
30 days prior to the date of conversion (trading conversion price),
however, in no event shall the conversion price be less than the
original purchase price. If the Companys common stock is not traded
on an exchange, the conversion price shall be equal to the original
purchase price.                                                                                                                                                                                                                                                                                                          
|          
|           |  | For purposes of calculating the Rule 144 holding period, all preferred
shares converted to common shall include the original holding period
of the preferred shares and will be eligible for sale pursuant to the
terms and conditions of Rule 144, after one year from the date of the
original purchase of the preferred shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|          
|           |  | All the Preferred Stock will be automatically converted into common
stock on the first day of the 18th month following the original issue
date of the Preferred Stock, at a conversion price equal to the
greater of the trading conversion price or the original purchase
price.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          
|           |  | For every five shares of Preferred Stock converted to common stock the
Company will grant the stockholder one warrant, or 742,400 warrants if
all Preferred Stock is converted. All warrants are exercisable after
one year from the date of grant at a price of $2.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|          
|           |  | The price per share of Preferred Stock sold was $1.00. Using the
Black-Scholes pricing model, the fair value of the warrants at various
grant dates was determined. The market value of the Companys common
stock on the dates preferred stock was sold had a range of $1.25 -
$3.40 per common share. In accordance with EITF 00-27, this created a
beneficial conversion to holders of the Preferred Stock and a discount
of $8,459,750 was recorded by the Company within shareholders equity
with a corresponding amount recorded to additional paid-in capital.
The Preferred Stock discount will be amortized into equity over a
one-year period from the issuance date of the Preferred Stock. A
total of $5,584,555 of the Preferred Stock discount was amortized
during the year ended December 31, 2002 with the remaining balance of
$2,875,195 to be amortized over future periods.

F-17



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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 7    |  | Stockholders Equity (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Stock option plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          
|           |  | On August 1, 2001, the Board of Directors adopted the Companys
2001 Stock Option Plan (the 2001 Plan) pursuant to which
incentive stock options or nonstatutory stock options to purchase
up to 2,500,000 shares of common stock can be granted to
employees, officers, directors, consultants and independent
contractors or other service providers. On May 3, 2002, the Board
of Directors adopted the Companys 2002 Stock Option Plan (the
2002 Plan) pursuant to which incentive stock options or
nonstatutory stock options to purchase up to 2,000,000 shares of
common stock can be granted to employees, officers, directors,
consultants, independent contractors or other service providers.                                                                                                                                                                   
|          
|           |  | Warrants and options issued for services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          
|           |  | During the year ended December 31, 2002, the Company issued
1,730,000 options and warrants to non-employees. The value of each option was
calculated using the Black-Scholes pricing model. The initial
recording of the transaction is as paid in capital and offset in
stockholders equity in an account titled warrants and options
issued for services. During the year ended December 31, 2002,
$1,210,158 was recorded as the fair value for the options issued
for services. The options issued for services account is being
amortized as consulting fee expense over the term of the
respective contracts. Total expense for the 2002 year was
$494,517.                                                                                                                                                                                                              
|          
|           |  | Options and warrants granted during the year ended
December 31, 2002 were comprised of 1,670,000 granted to
various third-party consultants to acquire
common stock at exercise prices ranging from
$1.00 to $3.00 per share in exchange for services. The exercise
period for the options range from between two and five years. The
fair value of the options was calculated using the Black-Scholes
pricing model and was determined to be $1,139,711.                                                                                                                                                                                                                                                                                                                                                                                                                       
|          
|           |  | Additionally, during the year ended December 31, 2002, the Company entered into
agreements with four doctors to serve on a Scientific Advisory
Board for a three year period. Each doctor will receive a payment
of $1,250 per meeting attended and each received an option to
purchase 15,000 shares of common stock (or a total of 60,000
options) at $2.80 per share. Each quarter 1,250 options (each)
will vest beginning in August, 2002 and $1,250 (each) every
quarter thereafter. The fair value of the options was calculated
using the Black-Scholes pricing model and was determined to be
$70,447.                                                                                                                                                                                                                                                                 
|          
|           |  | Effective September 30, 2002, Martin Wallace was granted the right
to receive nonqualified stock options (the Options) to acquire
up to 500,000 shares of the Companys common stock at an exercise
price equal to $1.50. Such Options vest at a rate equal to two
times the number of Units of paid in full orders for the Product
from Conforming Contracts during the 12 month period extending
through September 30, 2003. A Conforming Contract is a contract
with a Medical Service Provider who, among other conditions,
agrees to actively endorse and promote the Companys products and
who contractually agrees that the products will be the exclusive
products endorsed and promoted by them relative to the particular
disease for which the product is intended. No value has been
assigned to these options as they are contingent on certain future
events.

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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 7    |  | Stockholders Equity (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Warrants and options issued for services (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|          
|           |  | On August 21, 2001, the Company entered into a five year
distribution agreement with AHI Hong Kong, Ltd., an affiliate of
AHI, whereby the Companys products are to be marketed in China.
In consideration for the services performed the Company issued
1,000,000 options. The exercise price is $0.35 per option and the
options have a five year life. At the execution of the agreement,
300,000 options were vested, provided that the options are subject
to recall if the distributor does not have $2,000,000 of gross
aggregate sales in a 30-month period. The remaining options vest
as follows: 100,000 vest at aggregate sales of $5,000,000; 200,000
vest at aggregate sales of $8,000,000; 200,000 vest at aggregate
sales of $12,000,000; and 200,000 vest at aggregate sales of
$15,000,000. AHI will also receive a 12% royalty on net revenue
of sales to AHI patients and a 6% royalty on net revenues of sales
to competitive heart institutes.
|          
|           |  | On August 21, 2001, the Company entered into an agreement with the
Arizona Heart Institute (AHI) whereby the Companys products
will be endorsed and a logo identifying the developer will be put
on the products. In consideration for the services the Company
issued 1,000,000 options. The exercise price is $0.35 per share
and the options have a two-year life from the date the options
become vested. 600,000 options are issued upon agreeing to the
contract. An additional 200,000 options will vest when AHIs
aggregate sales of the Companys products reach $1,000,000 and an
additional 200,000 options vest when aggregate sales reach
$1,500,000.                                                                                                                                                                                                                                                                                               
|          
|           |  | On August 1, 2001, the Company issued 45,000 options each to four
individuals for marketing. The options vest quarterly over three
years and are exercisable at a price of $.35 per share. The
options are for a three year period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          
|           |  | Employee stock issuances, options and warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          
|           |  | On July 17, 2002, the Company granted 30,000 options to an
employee. The exercise price is $2.40 and the options vest
quarterly over a three year period commencing October 17, 2002.
The options were cancelled in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          
|           |  | On April 1, 2002, the Company entered into an employment agreement
with an individual, which became effective in June 2002. The term
of the agreement is three years; the individual will receive a
base salary of $80,000 per year increasing to $120,000 after the
first year. Additionally, the agreement provided that the Company
issue 1,340,000 warrants to purchase common stock at $1.50 per
share and a $150,000 signing bonus. As of December 31, 2002, the
1,340,000 warrants have been issued and $140,000 of the bonus
obligation has been paid with the remaining unpaid amount of
$10,000 payable on demand.                                                                                                                                                                                                                                                                                                                                         
|          
|           |  | On January 1, 2002, the Company issued 125,000 options to an
employee under the Companys 2001 Stock Option Plan. The options
allow the employee to purchase stock at a price of $1.00 per share
and expire in four years. The options vest quarterly, for a total
of 40,000 in the first year, 45,000 in the second year and 40,000
in the third year. The fair value of the options based on the
Black-Scholes pricing model was determined to be zero.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 7    |  | Stockholders equity (Continued)                                                                                                                                                                                                                                                                                                                                                                
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Employee stock issuances, options and warrants (continued)                                                                                                                                                                                                                                                                                                                                      
|          
|           |  | On October 1, 2001 the Company entered into employment agreements
with certain officers of the Company. In conjunction with these
agreements, the Company issued warrants to purchase stock at an
exercise price of $0.35 per share exercisable for three years.
The total number of warrants issued was 1,750,000. The value of
the warrants based on the Black-Scholes pricing model was zero.
|          
|           |  | At December 31, 2002, the Company has granted 3,385,000 options
with a weighted average exercise price of $0.87 per share of which
there were 1,266,147 options vested with a weighted average
exercise price of $0.71 per share.                                                                                                                                                               
|          
|           |  | At December 31, 2002, the Company has issued 6,975,000 warrants
with a weighted average exercise price of $1.32 per share of which
there were 6,686,120 warrants vested with a weighted average
exercise price of $1.33 per share.                                                                                                                                                              
|          
|           |  | A summary of stock option activity for the periods ended December
31, 2002 and 2001 is as follows:                                                                                                                                                                                                                                                                                              

|                                   |  |              |           |       |  |              |      |       |  |  |           |  |  |   |      | 
|---------------------------------- |  | ------------ | --------- | ----- |  | ------------ | ---- | ----- |  |  | --------- |  |  | - | ---- | 
|                                   |  | 2002         |           | 2001 
|                                   |  |              |           |      
|                                   |  | Number of    |           | Price |  | Number of    |      | Price
|                                   |  | Common Stock |           | per   |  | Common Stock |      | per  
|Options                            |  | Options      |           | Share |  | Options      |      | Share
|                                   |  |              |           |       |  |              |      |      
|Outstanding at beginning of period |  |              | 2,180,000 |       |  | $            | 0.35 |       |  |  |          |  |  | $ |     | 
|Granted                            |  |              | 1,235,000 |       |  | $            | 1.82 |       |  |  | 2,180,000 |  |  | $ | 0.35 | 
|Cancelled                          |  |              | (30,000   | )     |  | $            | 2.40 |       |  |  |          |  |  | $ |     | 
|Exercised                          |  |              |          |       |  | $            |     |       |  |  |          |  |  | $ |     | 
|                                   |  |              |           |       |  |              |      |       |  |  |           |  |  |   |      | 
|Outstanding at end of
period       |  |              | 3,385,000 |       |  | $            | 0.87 |       |  |  | 2,180,000 |  |  | $ | 0.35 | 
|                                   |  |              |           |       |  |              |      |       |  |  |           |  |  |   |      | 
|Exercisable at end of
period       |  |              | 1,266,147 |       |  | $            | 0.71 |       |  |  |          |  |  | $ | 0.35 | 
|                                   |  |              |           |       |  |              |      |       |  |  |           |  |  |   |      | 



| |  | A summary of warrant activity for the periods ended December 31, 2002
and 2001 is as follows:
| |  | ---------------------------------------------------------------------------------------------

|                                   |  |              |           |       |  |              |      |       |  |  |           |  |  |   |      | 
|---------------------------------- |  | ------------ | --------- | ----- |  | ------------ | ---- | ----- |  |  | --------- |  |  | - | ---- | 
|                                   |  | 2002         |           | 2001 
|                                   |  |              |           |      
|                                   |  | Number of    |           | Price |  | Number of    |      | Price
|                                   |  | Common Stock |           | per   |  | Common Stock |      | per  
|Warrants                           |  | Warrants     |           | Share |  | Warrants     |      | Share
|                                   |  |              |           |       |  |              |      |      
|Outstanding at beginning of period |  |              | 1,750,000 |       |  | $            | 0.35 |       |  |  |          |  |  | $ |     | 
|Granted                            |  |              | 5,255,000 |       |  | $            | 1.65 |       |  |  | 1,750,000 |  |  | $ | 0.35 | 
|Cancelled                          |  |              | (30,000   | )     |  | $            | 2.05 |       |  |  |          |  |  | $ |     | 
|Exercised                          |  |              |          |       |  | $            |     |       |  |  |          |  |  | $ |     | 
|                                   |  |              |           |       |  |              |      |       |  |  |           |  |  |   |      | 
|Outstanding at end of
period       |  |              | 6,975,000 |       |  | $            | 1.32 |       |  |  | 1,750,000 |  |  | $ | 0.35 | 
|                                   |  |              |           |       |  |              |      |       |  |  |           |  |  |   |      | 
|Exercisable at end of
period       |  |              | 6,686,120 |       |  | $            | 1.33 |       |  |  | 1,750,000 |  |  | $ | 0.35 | 
|                                   |  |              |           |       |  |              |      |       |  |  |           |  |  |   |      | 

F-20



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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 7    |  | Stockholders Equity (Continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | Employee stock issuances, options
and warrants (continued)The weighted average fair value of
options and warrants granted during 2002 was $1.68 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          
|           |  | In accordance with the provisions of SFAS No. 123, the Company applies
APB No. 25 and related interpretations in accounting for its stock
option plans. Accordingly, no compensation expense has been recognized
for any stock options or warrants granted to employees. If the
Company had elected to recognize compensation cost based on the fair
value of the options at grant date as prescribed by SFAS
No. 123. For the year ended December 31, 2002, the
net loss would have increased by $31,157 thus the pro forma net
loss and basic and diluted loss per share would have been $(3,956,560)
and $(0.28), respectively. For the year ended December 31, 2001,
the pro forma net loss and basic and diluted loss per share would
have been the same
as what has been reported.
|          
|           |  | A summary of the Companys stock options categorized by class of grant at
December 31, 2002 is presented below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|              |  |                     |           |             |  |           |      |             |  |          |      |  |  |          |           |  |  |   |      | 
|------------- |  | ------------------- | --------- | ----------- |  | --------- | ---- | ----------- |  | -------- | ---- |  |  | -------- | --------- |  |  | - | ---- | 
|All Options   |  | Options Exercisable
|              |  |                    
|              |  |                     |           |             |  | Weighted  |      |             |  |          |      |  |  |          |           |  |  |  
|              |  |                     |           |             |  | Average   |      | Weighted    |  |          |      |  |  | Weighted
|Range of      |  |                     |           |             |  | Remaining |      | Average     |  |          |      |  |  | Average 
|Exercise      |  | Shares              |           | Contractual |  | Exercise  |      | Shares      |  | Exercise
|Price         |  | Outstanding         |           | Life        |  | Price     |      | Exercisable |  | Price   
|              |  |                     |           |             |  |           |      |             |  |         
|$0.35 - $1.00 |  |                     | 2,505,000 |             |  |           | 2.23 |             |  | $        | 0.43 |  |  |          | 1,126,120 |  |  | $ | 0.44 | 
|$1.50         |  |                     | 500,000   |             |  |           | 2.75 |             |  | $        | 1.50 |  |  |          |          |  |  | $ |     | 
|$2.05 - $3.00 |  |                     | 380,000   |             |  |           | 4.38 |             |  | $        | 2.91 |  |  |          | 140,027   |  |  | $ | 2.92 | 



| |  | The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for the periods ending December 31,:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |  |         |             |         |  |  |       |  
|------------------------------ |  | ------- | ----------- | ------- |  |  | ----- | -
|                               |  | 2002    |             | 2001   
|                               |  |         |             |        
|Expected dividend yield        |  |         | 0           | %       |  |  | 0     | %
|Volatility                     |  |         | 30          | %       |  |  | 32.75 | %
|Weighted average expected life |  | 4 years |             | 3 years
|Risk-free interest rate        |  |         | 1.77% - 1.8 | %       |  |  | 3.76  | %



|           |  | The weighted average fair value of
options and warrants granted during 2002 was $1.68 per share.                                                                                                                                                                                             
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|Note 8    |  | Commitments                                                                                                                                                                                                                                                                                  
|          
|           |  | The Company leases office space in New Jersey under a lease, which
expired in February 2003. They currently rent space on a month to
month basis. Rent expense for the period ended December 31, 2002
amounted to $2,123.                                                                    
|          
|           |  | The Company leases office space in Phoenix, Arizona under a
sub-lease, which October 2003. The Company also leases various
office equipment and furniture which expire throughout 2003. Rent
expense for the year ended December 31, 2002 and 2001 was to
$151,148 and $48,624, respectively.

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##### Table of Contents



VITAL LIVING, INC.

Notes to Consolidated Financial Statements

December 31, 2002



|Note 8    |  | Commitments (Continued)                                                                                                                                                                                                                                                                                                             
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|           |  | The Company has entered into various consulting agreements with
terms that range from six months to three years. These agreements
are cancelable upon give written notice at any time. Should these
consulting agreements continue in effect until they expire, annual
commitments for years after December 31, 2002 are as follows:

|             |  |   |         | 
|------------ |  | - | ------- | 
|Year Ending  |  |   |         | 
|December 31, |  |   |         | 
|             |  |   |         | 
|2003         |  | $ | 198,900 | 
|2004         |  |   | 130,400 | 
|2005         |  |   | 30,600  | 
|             |  |   |         | 
|             |  | $ | 359,900 | 
|             |  |   |         | 



|           |  | During 2001 and 2002, the Company entered into employment agreements
with three officers. For the years following December 31, 2002, the
agreements provide for base salaries of $598,666 for 2003; $656,668
for 2004, and $566,500 for 2005.                                                                                                                                                       
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          
|Note 9    |  | Related Party Transactions                                                                                                                                                                                                                                                                                                                                                                          
|          
|           |  | At December 31, 2001, the company has a receivable from Camper Club of
America, Inc., CCA Products, Inc. and a corporation previously doing
business as Vital Living totaling $37,372. Interest is at 6%. During
the year ended December 31, 2001, the Company advanced $52,500 to two
officers. Interest is at 6%. These amount were repaid to the Company
during the year ended December 31, 2002.
|          
|           |  | At December 31, 2001, the Company has an unsecured demand note payable
to the chief executive officer totaling $43,500. Interest is at 10%.
This note payable was repaid during the year ended December 31, 2002.
At December 31, 2002 and 2001, the Company had payables to officers
totaling $22,500 and $147,926, respectively.                                                                  
|          
|           |  | During the year ended December 31, 2002 and 2001, the Company rented
office and warehouse space from an affiliate company and reimburses
that company for out-of-pocket supplies and miscellaneous items.
Total amounts paid for rent and office costs for the years ended
December 31, 2002 and 2001 was $10,500 and $51,095, respectively.                                                        
|          
|           |  | The Company utilized consulting and professional services from
officers, entities owned by officers and consultants affiliated with
the Company which amounted to $151,491 and $164,250 for the years
ended December 31, 2002 and 2001, respectively.                                                                                                                                               

F-22